Professional Documents
Culture Documents
Bharat Forge Limited (BFL), the flagship company of the USD 2.4 billion Kalyani
Group, manufactures various forged and machined components for the
automotive and non-automotive sector.
Bharat Forge customers include the top five Passenger Car & top five
Commercial Vehicle Manufacturers in the world. The company derives its income
from both the domestic market and export market. Some of the well known
domestic clients are TATA Motors, Maruti, M&M, Larsen and Toubro, Escorts,
Ashok Leyland, BHEL etc. Some of the well known global clients are General
Motors, BMW, Volvo, Daimler Chrysler, Ford, Toyota, Honda etc.
The Indian forging industry can be categorized into large, medium, small and tiny
sectors. A major portion of this industry is made up of small and medium
units/enterprises (SMEs). Only about 5% is made up by the large enterprises in
terms of number. BFL is the leading forging company in India and is at number
two at the global level in providing forged and machined parts for automotive
sector. The domestic competitors for BFL are Sundaram Fasteners Limited, MM
Forgings, Mahindra forgings etc. The global competitors for BFL are Sona
okegawa precision forgings, Unison etc.
Bharat forge has been growing at a tremendous pace in the last few years
through both organic and inorganic means. The vision of the company is to
become the leading forging company in the world. The strategy of the company
is increased diversification into non-automotive space, which it started a few
years ago and in the process also de-risk its business, from the sluggishness of a
particular industry. The company sees big opportunities in the capital goods
sector and has also recently tied up with NTPC Ltd. that envisages setting up a
joint venture company to manufacture large forgings and castings for high value,
critical components such as rotor shafts, components for turbo generators and
other capital goods, which currently constitute strategic bottlenecks from a
national capacity building point of view causing slow down in execution of several
large projects. With its firm strategy of diversification in key non-automotive
industries, the company is investing close to Rs.500 crores on the capacity
expansion.
1. FINANCIAL ANALYSIS
Given below are the financial statements of India operations of BFL.
Analysis
The share capital reduction is mainly because of the reduction in the preferential
shares. The reserves and surplus increased resulting in the increase in value of
shareholders’ fund. While the secured loans increased, the company reduced its
unsecured loans significantly, thus reducing the total debts.
There was an increase in the investments made by the company from Rs 450.71
Cr. to Rs. 593.67Cr. This is due to investments made in acquisitions and loans to
subsidiary companies during the year.1
1
Refer Section B of the Cash Flow Statement in 2007-08 Annual Report of BFL
There was also an increase in fixed assets component in FY2008. This is in line
with the capital expansion strategy of BFL. The fixed assets increased mainly
because of purchase of plant and machinery (Rs 149.90 Cr.) and vehicles and
Aircraft (Rs 188.29 Cr)2
There is a significant increase in the capital work in progress (Rs 427.13 Cr.
Compared to Rs 274.8 Cr. in FY2007). There is again in line with the BFL
strategy of capital expansion and diversification into non-auto and capital goods
sector. However, it would be interesting to see where the company is sourcing its
funds for the capital expansion. There is no increase in the share capital over the
previous year. The cash flow from investing operations indicates a major portion
of this expenditure as capital expenditure. The remaining portion is sourced from
borrowings from banks3
The current assets have reduced by Rs.223Cr. in absolute terms in FY2008 over
FY2007. The cash has gone down by a significant margin (Rs.164.99 Cr
compared Rs.736.28Cr. in FY2007). The loans and advances increased. The
account receivables also increased but since the BFL have reputed customers,
this may not be an issue. Moreover, the account payables in the current liabilities
also increased, which means that BFL were able to delay the payments to their
suppliers as well.
The net current assets, which is also the working capital decreased significantly
by almost 45% over the previous year, due to decrease in current assets and
significant increase in the current liabilities.
The current ratio4 in FY2008 is 1.38, which is higher than the current ratio of
1.16 in FY2007.5 But it is still above the industry average of 1.19 for 2007.
The Quick ratio6 is 1.10, which conveys the information that the company should
be able to meet its short term needs and hence there is no liquidity problem for
the company. It would be interesting to see days’ cash availability for the
company (derived from P&L account) since the cash has significantly reduced.
The days’ cash7 is 35 days, which is good.
2
Refer Schedule E of the Annual Report for FY2008, available at
http://www.bharatforge.com/investers/bf_whole_ar_file_0708.pdf
3
Refer Section C of the Cash Flow Statement in 2007-08 Annual Report of BFL
4
Refer formulae in Appendix A
5
Refer Table 1-11 for Ration Analysis Chart for BFL.
6
Quick Ratio = (Current assets –inventories)/(Current Liabilities + Short term Debts). Refer
Appendix B for the ratios.
7
Days’ cash = cash/(total expenditures % 365)
The YoY sales increase in FY 2008 over FY 2007 was 16.25%. The operating
profit increased by 18.4% over the previous year. This is mainly because of the
YoY increase in other income by 57% while the YoY increase of the total
expenditure by approximately 18.4% pulled it down. The reported net profit for
the period ending FY 2008 increased 13.5% over the previous FY 2007. The
decreased rate of the YoY reported net profit against the YoY sales is due to the
increase in YoY expenditure by approximately 18% which is higher than the YoY
% sales increase.
To analyze the profitability of the company, the common size profit and loss
account is given in Table 1-4.
Analysis of the common size profit and loss account shows no major change in
the composition of income except that the contribution of the other income had
increased to 7.63% from 5.61% to the total income. There was also reduction in
the excise duty.
There was no major change in the composition of the expenditure as well. Except
for the rise in employee cost and SG&A, expenditure of all other components
marginally decreased. The overall expenditure component marginally increased
over the previous year. Hence the operating profit was also not affected and
remained almost the same over the years being compared.
However, due to the increase in depreciation and interest being paid by the
company, the Profit before tax has reduced from 18.26% to 16.99%, a reduction
of 1.27% over FY2007.
The tax paid and the deferred tax component is lower than the previous year and
the deferred tax liability in the balance sheet is also increased. This partially
offsets the increase in depreciation and interest and hence the reported net profit
is only 0.53% lower than the previous year.
The profit margins are analyzed more in detail during ratio analysis in section 1.5.
The closing cash availability for FY2008 has decreased significantly to Rs 164.98
Cr. compared to the opening balance of Rs. 736.27 Cr. at the beginning of the
financial year. The significant decrease is mainly due to investment in capital
expansion in cash without adding further debt to the company. This might be
because the company is already having high debts (Total debt to equity ratio or
the financial risk of 1.14 at the beginning of FY20088) and is looking forward to
also reduce the financial risk. Since the company had excess cash in the bank, it
would as well put that in business investments that can give better returns
against the bank.
The company also paid back some of the borrowings in addition to some fresh
borrowings, with the overall net being in the negative. This has reduced their
financial risk or total debt to equity ratio to 0.95
8
Refer Table 1-11 and the attached Dupont model worksheet for BFL
The reserves and surplus of the company had decreased in the first few years.
This could be because the industry being capital intensive, most of the income
would have been re-invested in capital expansion. But, in the last five years, the
reserves have increased by nearly 8 times. This is due to the increased
profitability over the period from FY2004 to FY2006
There was also a greater than 3x increase in total debts. This is seen in greater
than 4x increase in fixed assets. The last 4 years have seen tremendous
increase in addition of fixed assets (almost doubled) and increased spending in
capital WIP. This is in line with the diversification strategy of the company into
non-automotive space and its increased focus on capital goods sector as well.
Less : Current
Liabilities and Provisions
Current Liabilities 516 469 416 351 275 178 123 111 133 100
Provisions 107
3 736 860 612 354 183 101 86 107 100
Total Current Liabilities 658 537 529 418 295 180 117 105 126 100
Net Current Assets 203 362 249 36 11 40 38 41 80 100
Miscellaneous
Expenses not written off 0 12 64 219 415 587 551 581 58 100
Deferred Tax Assets 530 189 178 109 115 100 0 0 0 0
Deferred Tax Liability 170 147 127 104 104 100 0 0 0 0
Net Deferred Tax 152 145 124 104 103 100 0 0 0 0
Total Assets 343 339 268 107 67 62 69 70 101 100
Contingent Liabilities 360 322 265 225 237 263 226 179 113 100
The profit and loss account trend analysis shows greater than 5x improvement in
total income while the reported net profits are at 7.33 times the base value.
Taking a closer look, the operating profits have not increased as much as
reported net profits and in fact is more proportional to the increase in total
income. The higher growth of reported net profits as compared to total income is
not due to increased efficiency from operations but mainly due to the increased
leverage of its debt and better tax management.
Depreciation 477 343 251 180 157 143 136 136 103 100
Profit Before Tax 952 861 754 594 434 271 82 86 142 100
Tax 2237 2283 2019 1951 1219 638 61 70 228 100
Deferred Tax 176 155 148 6 25 38 100
Reported Net
Profit 733 646 555 433 335 217 57 87 132 100
The cash flow trend shows significant increase in the investing activities and
financing activities over the period of last ten years. This is mainly because of the
rapid growth of the organization through acquisitions over the period.9
9
Refer http://www.bharatforge.com/company/history.asp
The industry average ratios are displayed in Table 1-10 and Ratio analysis for
BFL is shown in Table 1-11
Return on Assets
17.44% 15.54%
Asset Turnover
Ratio (ATO) Profit Margin
0.81 0.69 21.49% 22.43%
Employee cost
Current ratio Inventorry TO to COGM
1.38 1.16 4.64 4.35 7.47% 6.69%
Inventory
holding Period
(Days)
Payment
Period Mfg, adm, SGA
(Months) 78.72 83.98 to COGM
7.77 8.30 29.45% 30.25%
Debtors TO
DSCR Interest to
–1 6.01 7.23 COGM
Collection
3.31 1.77 Period (Days) 5.41% 5.10%
60.72 50.51
DSCR
–2
-0.13 0.00
Analysis
The impact of leverage is also pretty high and so is the financial risk. But the
financial risk has reduced from 1.14 to 0.95, largely due to repayment of some
borrowings and using the cash reserves for investing rather than fresh
borrowings.
The Return on Total Assets increased from 15.54% to 17.44%. While the Asset
Turnover Ratio improved from 0.69 to 0.81, resulting in the increase in RoA, the
PBITM (Profit before Income and Taxes margin) decreased from 22.43% to
21,49%, thus offsetting some of the positive impact due to increase in ATO ratio.
But overall, the company’s RoA of FY2007 15.54% is lower than the industry
average of 16.08%. This could be because of the lower ATO in FY2007, which
BFL identified and improved in FY2008.
Overall, while the company beats most of the parameters compared to the
industry average, especially in cost and leverage management, which can be
seen by comparing the ratios corresponding to these against the industry
averages, there is more scope of improvement on the asset management front.
The company should focus more on the following to improve its Asset Turnover
Ratio, which would in turn improve the Return on Investments.
1. Inventory Turnover Ratio: As of FY2007 closure, this was at 4.35 while the
industry average was 6.88. This improved to 4.64 in FY2008
2. Debtors Turnover Ratio: As of FY2007 closure, this was at 7.23 compared
to the industry average of 8.73. This deteriorated further to 6 at the closure of
FY2008
Otherwise, the company is set for growth through diversification and is investing
heavily in the sectors that have high potential for growth. The last two years have
been soft largely due to economic slowdown and slowdown in the automobile
sector. Though this is not reflected in the balance sheets of FY2007 and FY2008,
the rising input costs of steel and other raw materials will have an impact in the
earnings on FY2009.
10
Compare the industry average ratios with BFL ratios of FY 2007
11
Refer table 1-10 for Industry averages
Return on
Deferred tax to Networth Impact of Tax
total funds (ROE*) Planning
Deferred
Tax/Total [PAT/SH.FUND ROE* - ROE *
Funds ] (1-tax rate)
Return on
Impact of Networth Leverage /
leverage (ROE) Financial risk
ROA - Cost of [PBT/SH.FUND Debt /
Debt x D/E ] Equity or NW
Return on
Assets
[PBIT/TOT
AL ASSETS]
Asset Turnover
Ratio (ATO) Profit Margin
Total
Income/Total PBIT/Total
Assets Income
Raw Material
Fixed Asset TO Current Asset TO to COGM
[Sales+op [Sales/Net CA RM/C
income/NFA] or Gross CA] OGM
Employee
Current ratio Inventorry TO cost to COGM
CA/[CL+Short- COGS/Inv Employee
term Loan] entory Cost/COGM
Inventory holding
Period (Days)
Payment Inventory / Mfg, adm,
Period (Months) [COGS/365] SGA to COGM
Creditors/Month Mfg, adm,
ly Purchases SGA / COGM
Debtors TO
DSCR - Sales/Sundry Interest to
1 Debtors COGM
PBDIT/Interest+ Collection Period Interest /
References
www.capitaline.com
www.bharatforge.com
www.nseindex.com