bharat forge -...

Primed for recovery

Bharat Forge

Initiating Coverage | 17 June 2014Sector: Automotive

Chirag Jain ([email protected]) + 91 22 3982 5418

Jinesh Gandhi ([email protected]) + 91 22 3982 5416

Bharat Forge

17 June 2014 2

Bharat Forge: Primed for recovery

Page No.

Summary ........................................................................................................ 3-4

Stronger, leaner and healthier ...................................................................... 5-9

Auto business – awaiting CV cycle recovery ............................................ 10-17

Non-auto business – play on investment cycle recovery ....................... 18-24

Overseas subsidiaries of strategic value ................................................... 25-27

Multiple levers to support/improve profitability ................................... 28-29

Valuations attractive for global leader in forgings ........................................ 30

Financials and valuation ........................................................................... 31-32

Investors are advised to refer through disclosures made at the end of the Research Report.

17 June 2014 3

Initiating Coverage | Sector: Automotive

Bharat Forge CMP: INR 579 TP: INR 710 Buy

Primed for recovery Earnings growth to accelerate with ~27% CAGR (FY14-17E) Bharat Forge (BHFC) has emerged stronger, leaner and healthier from the

downcycle, driven by its proactive strategic shift towards a stable, broad-based and greater value-adding business model. It is now one of India’s largest engineering exporters.

It is primed for recovery in the global investment cycle. This, coupled with an expanded product/market mix, would drive strong revenue CAGR of 16% CAGR over FY14-17. EPS would grow at a CAGR of ~27%, aided by robust margin expansion.

While the stock has outperformed over the last six months, there are several triggers for continued outperformance. These include: (a) volume recovery led benefit of operating leverage, (b) improving segment mix, (c) balance sheet deleveraging, and (d) improvement in capital efficiencies.

Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR32/INR39 are attractive for a global leader in forgings and at a discount to the 5/10 year average of 22x/26x. We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS) suggests an upside of ~23%.

Stronger, leaner and healthier BHFC has broadened its revenue stream by entering new segments (non-auto) and global markets. The share of auto business has declined from ~80% in FY07 to ~60% in FY13 and the share of India has reduced from ~60% to ~48% in standalone operations. Further, it has increased value-addition by focusing on machined components, the contribution of which has increased to ~51% in FY13, boosting realizations and margins. Lastly, it has improved its balance sheet by focusing on controlling debt through lower capex, resulting in fall in net debt-equity to ~0.3x/0.2x by FY15/FY16. Auto business – awaiting CV cycle recovery; focusing on PVs Benefit of US Class-8 demand improvement, driven by pre-buying before emission norm changes and gradual recovery in the EU would reflect in FY15/FY16. BHFC is a clean play on the expected domestic CV cycle recovery from 2HFY15, with over 60% market share in M&HCV components. The PV segment is a focus area for BHFC and could be an important growth driver. This segment offers an opportunity size 4x that of CVs. Non-auto business – play on investment cycle recovery The non-auto segment offers significant growth potential, as it is much larger than the auto segment. BHFC is targeting ~60% of its standalone revenues from the non-auto segment, up from the current ~40%. Its partnerships with global players (Alstom, Areva, David Brown, etc) bear testimony to its globally cost

BSE Sensex S&P CNX 25,190 7,534

Stock info Bloomberg BHFC IN

Equity Shares (m) 232.8

52-Week Range (INR) 586/186

1, 6, 12 Rel. Per (%) 22/65/127

M.Cap. (INR b) 129.7

M.Cap. (USD b) 2.2

Financial Snapshot (INR b) Y/E March 2015E 2016E 2017E

Sales 71.9 85.7 99.3

EBITDA 12.0 15.3 18.0

NP 5.2 7.5 9.1

EPS (INR) 22.5 32.3 38.9

EPS Gr. (%) 19.4 43.7 20.4

BV/Sh. (INR) 131.9 157.2 187.9

P/E (x) 25.7 17.9 14.9

P/BV (x) 4.4 3.7 3.1

EV/EBITDA (x) 12.8 9.8 8.0

EV/Sales (x) 2.1 1.7 1.5

RoE (%) 18.2 22.4 22.6

RoCE (%) 18.5 23.1 25.5

Shareholding pattern (%)

As on Mar-14 Dec-13 Mar-13

Promoter 46.7 46.7 42.1

Dom. Inst 14.5 17.5 19.0

Foreign 16.3 13.8 9.7 Others 22.5 21.7 29.3

Stock Performance (1-year)

Bharat Forge

17 June 2014 4

competitive engineering/manufacturing capabilities. BHFC’s increasing penetration with existing and new customers, coupled with economic stability in the international market and investment cycle recovery in India, would drive ~24% revenue CAGR in the non-auto segment. Increasing contribution of non-auto to consolidated revenues augurs well for profitability and capital efficiencies, given the segment’s higher realizations, margins and asset turns. Multiple levers to support/improve profitability We expect consolidated revenues to grow at a CAGR of ~16% over FY14-17 (adjusted for FAW JV exit), driven by 22% CAGR in India revenues and 12% CAGR in international revenues. EBITDA margin should expand ~290bp to 18.2%, driven by higher exports from India, rising contribution from non-auto business and machined components, and operating leverage. BHFC has sufficient capacities to drive over 25% revenue CAGR over the next two years, necessitating maintenance capex of INR1.5b-1.8b per year. We estimate cumulative FCF generation of ~INR21b during FY15-17, enabling reduction of net debt to ~INR7b (net debt-equity of 0.2x) from ~INR13.4b (net debt-equity of 0.8x). Improving asset turns and profitability would drive improvement in consolidated RoE to ~22.6% in FY17 from 17.9% in FY14 – the highest RoE since FY07. Valuations attractive for global leader in forgings; Buy BHFC is primed for recovery in the global investment cycle. While the stock has outperformed over the last six months, there are several triggers for continued outperformance. These include: (a) volume recovery led benefit of operating leverage, (b) improving segment mix, (c) balance sheet deleveraging, and (d) improvement in capital efficiencies. Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR32/INR39 are attractive for a global leader in forgings and at a discount to the 5/10 year average of 22x/26x. We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS) suggests an upside of ~23%.

Bharat Forge

17 June 2014 5

Stronger, leaner and healthier Diversified revenues I Lower fixed costs I Declining debt-equity

BHFC has broadened its revenue stream by entering new segments (non-auto) and

global markets. The share of auto business has declined from ~80% in FY07 to ~60% in

FY13 and the share of India has reduced from ~60% to ~48% in standalone operations.

Further, it has increased value-addition by focusing on machined components, the

contribution of which has increased to ~51% in FY13, boosting realizations and

margins.

BHFC has worked on lowering its breakeven utilization in India (from 35% to 30%) as

well as in its wholly owned subsidiaries (from 60% to 50%).

Lastly, it has improved its balance sheet by focusing on controlling debt through lower

capex, resulting in fall in net debt-equity to ~0.3x by FY15.

Strategic changes to lend stability to business model During the global credit crisis, BHFC formulated a revised business strategy to tide over the volatility in the business and elevate itself to the next level.

Strategic changes: The focus areas

Source: MOSL

The benefits of these strategic changes are visible in BHFC’s financials in the current downturn. We believe BHFC is now well placed to emerge much stronger, driven by recovery in the investment cycle in India and globally. We discuss below the company’s key initiatives that have helped it to emerge leaner and stronger. 1. Broadening of revenue base

Considering the deep cyclicality in the commercial vehicle (CV) business, BHFC decided to diversify its revenue stream by increasing the share of personal vehicle (PV) and non-automotive businesses. Geographical diversification to US, Europe and RoW has helped protect BHFC against concurrent CV cycles in key markets, globally. Its presence across segments and markets has helped to largely insulate BHFC from cyclicality in the automotive business, resulting in 4% CAGR in consolidated revenue CAGR over FY08-13 (from peak to trough).

Diversification Efficiency

Cost

reduction Lower

breakeven

Optimization

and rightsizing

of operations

Fiscal prudence

Freeze on

capacity

Focus on

cash

Debt reduction Reduce

working

capital

New

markets New

customers

New

sectors/businesses

Bharat Forge

17 June 2014 6

BHFC’s revenue mix getting more diversified

Source: Company, MOSL

New non-auto segments

The non-automotive forgings space, including conventional and non-conventional energy, power, rail and marine, oil and gas exploration, metals and mining, and aerospace offers a much larger market than the global automotive forgings space. In FY06, BHFC started aggressively developing its industrial components business and invested in large dedicated facilities in Baramati, Satara and Pune. It targeted five key verticals – oil & gas, construction and mining equipment, railways, marine engines and components, and aerospace. Typically, these non-auto components are more complex and have higher contribution levels per unit of sale. The non-auto segments contributed ~28% of consolidated revenues in FY13 against 18% in FY08.

Non-auto revenue contribution has increased meaningfully (%)


New markets, segments and customers within auto:

The auto industry follows the cycles of emission technology changes every four years or so. To reduce the impact of cyclicality, BHFC decided to diversify into the PV segment and to have a presence across three continents – North America, Europe and Asia. It is focused on creating a larger presence in PVs, as this segment is much larger than CVs. Supply to the PV segment has begun to gain traction, as stricter emission norms will drive a shift to high performance parts and from larger to smaller-yet-powerful fuel-efficient engines, in turn driving the shift from castings to forgings. In the auto segment, BHFC consolidated its position by increasing its customer base and penetrating deeper into global markets through its Indian and overseas operations.

14 15 8 17 15 12 11 7

45 45 49 38 43 5141 41

3 3 2 4 33

4 3

21 19 19 21 14 716

12

5 5 7 9 11 10 108

12 13 14 11 14 17 1829

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

CVs - Dom CVs - Intl PVs - Dom PVs - Intl Non-Autos - Dom Non-Autos - Intl

1821 20

25 27 28

37

20

32 3036

39 40 41

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Consol Standalone

Bharat Forge

17 June 2014 7

Significant increase in contribution from international markets (% of standalone revenues)

60 56 51 62 59 53 50 46

2622

2122 20 22 28 27

13 20 2415 18 21 19 23

1 2 4 1 4 4 3 4


India USA Europe Others


Trend in PV contribution (% of sales)


Increasing share of exports from India (% of sales)


Why forgings v/s castings in PVs? Forged components make possible designs that accommodate the highest loads, operating temperatures and stresses. Economically, forged products are attractive because of their inherent superior reliability, improved tolerance capabilities, and the higher efficiency with which forgings can be machined and further processed by automated methods. The degree of structural reliability achieved in forging is unexcelled by any other metalworking process. There are no internal gas pockets or voids that could cause unexpected failure under stress or impact. To the designer, the structural integrity of forgings means safety factors based on material that will respond predictably to its environment without costly special processing to correct internal defects. 2. Focus on value addition BHFC has evolved from (1) a supplier of forged components to (2) a supplier of

finished components to (3) a development partner for both auto and non-auto industries. The movement up the value chain has accelerated over the past few years across automotive and non-automotive components. This has been achieved as a result of BHFC’s strong technological relationship and close collaboration with major customers. Machining is the process of removing excess material from the forging to meet the dimensions required by customers, converting a forged part into a fully finished and ready-to-assemble component. Focus on higher value addition has resulted in an increase in the contribution of machined components to ~51% of standalone revenues from ~40% in FY08.

1613

16

8 79

8

22 2225

17

10

20

15


Standalone Consol

23 19 22 22 23 26 29 32 29 32 32 33

45 42 46

52

41 44 50 52

57 58 56 55

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Consol Standalone

Bharat Forge

17 June 2014 8

More importantly, machined components offer higher profitability and have lower capital intensity.

Increasing value addition evident in higher revenue contribution from machined components and…

9 8 7 13 18 16

40 41 40 4347

51

19 18 22 25 28 29

FY08 FY09 FY10 FY11 FY12 FY13

M/Cing Revenues (INR b) % of S/A Revenues % of Consol Revenues


…reflecting in higher realizations and gross margins (%)

116,

874

153,

908

145,

556

156,

617

168,

038

183,

179

194,

457


S/A Realizations (INR/ton)


55

52

56 55 5657

60

53

5051

5254

57

63


Standalone Consolidated


3. Leaner cost structure

In the last few years, BHFC has focused on reducing its fixed costs and bringing down breakeven utilization at its domestic as well as international subsidiaries. It has achieved this through restructuring of manufacturing facilities, rightsizing of manpower in EU operations and optimizing fixed costs. BHFC has closed its operations at Scottish Stampings and BF America, and is exiting the China JV. As a result, it has been able to reduce breakeven utilization in India to 30% in FY13 (from 35% in FY08) and in Europe to 50% (from 60%).

Bharat Forge

17 June 2014 9

Restructuring of manufacturing operations led to closure of Scottish and American subsidiaries, and exit from China JV

340 365 365 380 380

200 200 180 180 180

60 60 60 0

135 135 135135

0

FY10 FY11 FY12 FY13 FY14

India Europe US China


Trend in fixed cost

21.2 21.222.0

23.3

19.018.3

20.8


Fixed Cost (% of consol sales)


Trend in breakeven utilization


Goals for next five years For the next five years, BHFC has set the following goals: Increase presence in PVs through new product development and customer

penetration. Enhance market share in the industrial sector and create presence in the

aerospace sector. Nurture the JV with Alstom to become a world class, cost competitive power

equipment manufacturer. Focus on becoming a net debt-free company, improving return ratios and

generating cash flows.

35

60

30

50

India Europe

FY08 FY13

Bharat Forge

17 June 2014 10

Auto business – awaiting CV cycle recovery Focusing on PVs, offering 4x the opportunity size of CVs

Benefit of US Class-8 demand improvement, driven by pre-buying before emission

norm changes and gradual recovery in the EU would reflect in FY15/FY16.

BHFC is a clean play on the expected domestic CV cycle recovery from 2HFY15, with

over 60% market share in M&HCV components.

The PV segment is a focus area for BHFC and could be an important growth driver. This

segment offers an opportunity size 4x that of CVs.

Stricter emission norms would not only drive higher realizations for BHFC but also

improve its competitive positioning.

Highly levered to global and local CV cycles BHFC is a leading global automotive forgings player, with manufacturing presence in India and Europe. The top-5 global OEMs across CV and PV segments are BFL’s customers. It has transformed itself from a supplier of components to a preferred technology and engineering driven development partner for all industries that need forged components. We expect BHFC’s market share to increase further, driven by its full service supply capabilities, enabling it to build strong and sustainable customer relationships. There is a trend towards de-integration of OEM facilities due to emphasis on lower capital intensity, resulting in increased scope for outsourcing components. On a steady state basis, the CV segment contributes ~58% of consolidated revenues (~45% from international markets and ~13% from domestic markets).

Trend in HCV volumes and consolidated revenue growth

-40.0

-20.0

0.0

20.0

40.0

60.0


HCV Vol Growth (%) Consol Revenue Growth (%)

* HCV volume growth for India, EU & US Source: Industry, Company, MOSL

CV segment contributes ~55% to steady-state consolidated revenues


45 45 4938 43

5141 41

14 15 817

1512

11 7


CVs - Intl CVs - Dom

Bharat Forge

17 June 2014 11

BHFC’s full service capabilities enable it to engage with OEMs right from development stage


Bharat Forge

17 June 2014 12

International CV business outlook improving BHFC is one of the global leaders in forged components for CVs, with strong relations with key OEMs across the globe. Through several strategic acquisitions, it has established manufacturing presence in Germany and Sweden and developed dual-shore manufacturing capacities, giving it the ability to cater to the needs of customers from multiple locations. The international CV business contributes ~45% of its consolidated revenues. Exports of CV components from India account for ~30% of total international CV revenues (~20% in FY10) and have been increasing post the closure of American operations in November 2012. Offshoring from India for international CV business to increase (% of international CV business revenues)

80 79 77 80 75 74 69

20 21 23 20 25 26 31


From other operations From India operations


US Class-8 CV volumes to pick up on pre-buys before emission norm change in CY15 BHFC is largely focused on Class-8 trucks (HCVs) and light trucks. It has strong relationships in the US CV market and has significantly increased its auto exports to USA on the back of supplies to the M&HCV segment. Based on outlook given by various OEMs, US Class-8 trucks are expected to grow 6-12% in CY14, driven by replacement demand and economic recovery. Replacement of aging trucks continues to be the primary driver of new purchases, with a near-record average fleet age of 9.57 years. Trucks bought in the last peak in 2004-06 are now 8-10 years old, supporting solid replacement demand. Repair costs ramp up after 4-5 years, further driving replacement of trucks. Freight growth and regulatory changes should encourage replacement of older equipment. Further, Class-8 truck cancellations at 5.2% of gross orders, is below the 10-year average of 9.1%. Cancellations have been below 10% for the past 14 months, a positive indicator of fleet sentiment. US/NAFTA Volvo Daimler PACCAR Cummins CY14 Growth (%) 6% upto 10 upto 12% 8% Key comments The construction

market continues to recover and replacement demand remains high

Significant market growth of up to 10% due to the increasingly dynamic economy

Ongoing fleet replacement and some expansion of industry fleet capacity reflecting modest overall

i h


Bharat Forge

17 June 2014 13

US Class-8 volume momentum positive since August 2013

5,000

10,000

15,000

20,000

25,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CY11 CY12 CY13 CY14

Source: Bloomberg, MOSL

North America Class-8 cancellation data indicates positive

fleet sentiment


Trend in Class-8 truck volumes and average fleet age



EU HCV volumes to remain stable after pre-buying in CY13 While BHFC is focused on luxury PVs in the EU, it is increasing its revenues from the HCV segment in the EU through exports and BF Kilsta (Sweden). EU HCV volumes had benefited from pre-buying before emission norm changes to Euro VI from 31 December 2013, registering ~8% growth CY13 (6% de-growth in 9MCY13). While

Average age of 9.6 years for Class-8 trucks coupled with

peak volumes during CY05-08 augurs well for

replacement demand

Bharat Forge

17 June 2014 14

1HCY14 HCV volumes would be sluggish due to the impact of pre-buying, OEMs expect up to 5% de-growth in CY14, depending on sustenance of economic stability and quantum of replacement demand. All leading indicators suggest stability in the Euro zone economies, auguring well for recovery in HCV volumes in 2HCY14. OEMs expect HCV demand to be sluggish in 1HCY14 due to pre-buying in 4QCY13 Europe Volvo Daimler PACCAR Scania CY14 Growth (%) -4 slightly negative 0 to -10% Key comments Demand in

Europe is expected to be slow in the beginning of the year and then gradually improve.

Developments during the rest of 2014 will depend in particular on the extent to which the economic revival in Europe can offset the negative impact of the purchases brought forward

Some customers are purchasing Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014

Pre-buys in Europe during 2013 will impact the first half of 2014 while Scania’s assessment is that economic activity in Europe has stabilised and that there is a replacement need


EU HCV volumes still well below peak of CY05-08 and near

CY02 levels

233,

840

214,

854

233,

779

250,

892

261,

443

267,

888

263,

748

162,

642

178,

053 24

2,80

9

221,

688

239,

271

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13


EU HCV volumes expected to be stable, despite 8% growth in

CY13 due to pre-buying

5,000

11,000

17,000

23,000

29,000

35,000

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

Oct

Nov De

c

CY11 CY12 CY13 CY14


Euro zone manufacturing PMIs indicate improving confidence

30

40

50

60

Apr-

08Au

g-08

Dec-

08Ap

r-09

Aug-

09De

c-09

Apr-

10Au

g-10

Dec-

10Ap

r-11

Aug-

11De

c-11

Apr-

12Au

g-12

Dec-

12Ap

r-13

Aug-

13De

c-13

Apr-

14

EU PMI


Euro zone industrial production indices showing sustained recovery over last nine months

-4

-2

0

2

4

6

1QCY

11

2QCY

11

3QCY

11

4QCY

11

1QCY

12

2QCY

12

3QCY

12

4QCY

12

1QCY

13

2QCY

13

3QCY

13

4QCY

13

1QCY

14

Industrial Production Indices (YoY %)


Bharat Forge

17 June 2014 15

Domestic CV cycle to recover from 2HFY15; BHFC best play on CV cycle recovery After declining at a rate of ~25% over FY12-14, we expect domestic CV volumes to recover from 2HFY15, driven by clarity on the new government-led kick-starting of the investment cycle. We estimate 10%/23%/22% growth in CV volumes in FY15/FY16/FY17. Given its strong positioning with key OEMs (including new entrants), we believe BHFC is the best play on CV cycle recovery. BHFC enjoys over 60% market share for forged and machined automotive chassis and engine components. Further, shift towards multi-axle vehicles and new generation trucks would drive an increase in usage of forged parts, auguring well for BHFC. The domestic CV segment contributes ~15% of consolidated revenues and ~25% of standalone revenues. We expect BHFC’s domestic CV revenues to grow at a CAGR of ~21% over FY14-17E. Domestic CV revenues (as a % of standalone and consolidated revenues)


Trend in domestic M&HCV volumes


82 93 90 111 71 80

62 75

60

56

45 64 58

6.5 6.5 11.73.7

-12.6-14.3

-31.6-32.5

-16.2

-30.1-27.9

-14.6

-3.5

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15E

M&HCV ('000 units) Growth (%)


PV segment a focus area; could be an important growth driver The global PV market is four times larger than the CV market, but contributes just ~20% to BHFC’s consolidated revenues. While international PVs contribute ~16% to consolidated revenues, the contribution of domestic PVs is just ~4%. We believe the PV segment offers significant headroom to grow through increased penetration by BHFC, benefiting from vendor consolidation in international business and emission norm-led shift from castings to forged components. In international PVs, BHFC recently bagged large multi-year orders for EUR250m from a German OEM, in addition to multi-years orders from Ford and Daimler

0

7

14

21

28

35


% of S/A revenues % of Consol revenues

276 274

184

245 323 347 268

200

220 271 330

33.1

-0.7

-33.0

33.3 31.9

7.5

-22.7

-25.5

10.0

23.022.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

M&HCV ('000 units) Growth (%)

Bharat Forge

17 June 2014 16

Chrysler. While Ford Motor USA has initiated development of crankshaft forgings with BHFC, Daimler Chrysler has chosen it to supply crankshafts and camshaft forgings for its car engines in Germany. BHFC has also won an order to supply control arm forgings to a global passenger car company in Australia. In addition, it has bagged a new multi-year order to supply steering knuckle forgings to Dana (US). It has also begun supplying to its second Chinese customer, while exports to Renault are being scaled. It has won a USD100m order in Europe, which will be executed over the next five years. The management has indicated that BHFC will target to supply ~1m crankshafts in the European passenger car market by FY18.

Global luxury cars witnessing strong growth

200,000

300,000

400,000

500,000

600,000

Jan

Feb

Mar Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

CY11 CY12 CY13 CY14


International PV contribution expected to increase


In India, passenger cars have traditionally used castings. The contribution of the domestic PV segment to BHFC’s consolidated revenues is, therefore, small. Progressively, with stricter emission norms and advanced turbocharged engines, more forgings are being used. BHFC has been working with OEMs on their platform development and will benefit when they launch new products using high performance forged components.

Domestic PV revenue growth linked to industry fortunes


Domestic PV business contribution to revenues


9,046 9,124 9,303

7,028

7,034

4,363

9,265

2119 19

21

14

7

16


PVs % of total

-26

-13

0

13

26

39

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

PV Vol Gr (%) Dom. PV revenue growth (%)

0

11

22

33


% of S/A revenues % of Consol revenues

Bharat Forge

17 June 2014 17

Trend in domestic PV volumes


724 731 722 948 776 745 817 860 739 763 767 814 687

9.2

0.6

-0.1

13.67.1

1.9

13.1

-9.3-4.8

2.4

-6.0 -5.3 -7.0

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15E

PV ('000 units) Growth (%)


Stricter emission norms to drive higher realizations, improve competitive positioning Emission norm changes have meaningful implications for the auto industry. To adhere to reduced particulate emission, engines require significant changes. The global introduction of Euro VI regulations required advanced powertrain solutions, driving the shift towards high performance parts. According to Meritor, trucks complying with Euro VI regulations command a price premium of ~EUR5,000 over trucks complying with Euro V regulations. Such regulatory changes provide an opportunity for BHFC to increase its presence in the global PV industry, driven by technological shift from castings to forgings. Suppliers that emerge as preferred partners for OEMs may be able to leverage their global scale to further reduce technology costs and increase their industry influence. We expect BHFC to benefit from the trend of vendor consolidation.

Source: Cummins Inc, MOSL

Source: Cummins Inc, MOSL

1,57

8

1,76

5

1,88

8

2,39

7

2,94

6

3,13

5

3,18

7

3,08

3

3,39

2

3,90

1

4,48

6

19.7

11.87.0

27.022.9

6.41.7

10.0

15.0 15.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

PV ('000 units) Growth (%)

Bharat Forge

17 June 2014 18

Non-auto business – play on investment cycle recovery To benefit from increasing market/customer penetration

The non-auto segment offers significant growth potential, as it is much larger than the

auto segment. BHFC is targeting ~60% of its standalone revenues from the non-auto

segment over next few years, up from the current ~40%.

Its partnerships with global players (Alstom, Areva, David Brown, etc) bear testimony

to its globally cost competitive engineering/manufacturing capabilities.

BHFC’s increasing penetration with existing and new customers, coupled with

economic stability in the international market and investment cycle recovery in India

would drive ~23% revenue CAGR in the non-auto segment.

Increasing contribution of non-auto to consolidated revenues augurs well for

profitability and capital efficiencies, given the segment’s higher realizations, margins

and asset turns. BHFC’s international non-auto business is largely serviced by its more

efficient Indian operations.

Non-auto segment drives diversification, growth and superior profitability Non-automotive forgings, including conventional and non-conventional energy, power, rail and marine, oil and gas exploration, metals and mining, and aerospace, offer a global market much larger than automotive forgings. In FY06, BHFC set out on a new growth path, where it focused on aggressively developing its industrial sector components business and chalked out a large investment plan to develop dedicated facilities in Baramati, Satara and Pune. It has developed and built strong relationships with customers in the non-automotive space, with the number of non-automotive customers more than doubling over the last 5-6 years. While existing non-auto business can be broadly divided into three verticals – (1) energy, (2) transportation, and (3) mining and construction, it is also exploring areas like aerospace that have long lead times. It plans to venture into 5-6 new sectors in the coming 5-7 years, and make each of these new verticals USD100m businesses. Non-automotive forgings are more complex and have higher contribution levels.

Broad overview of BHFC’s non-auto business


BHFC plans to venture into 5-6 new sectors in the

coming 5-7 years, and make each of these new verticals

USD100m businesses.

Bharat Forge

17 June 2014 19

Non-auto segment capacity in place for further scale-up

Facilities Location Capacity Products Industry

Centre for Advanced Manufacturing 80mtr Ton Hammer Baramati 40,000 TPA Large closed Die

forgings upto 2.5T and 4.5m long

Energy sector, Hydro carbon exploration sector, transportation including Aerospace, Railways and Marine sector

Machining Shop Baramati 12,000 nos Machined components supply

Locomotives, Marine and power generation

Ring rolling facility Baramati 25,000 TPA Large rings, Gear blanks, connectors, bearings, Valves

Wind sector, Oil and gas sector

Heavy forge division 4,000T press

Pune 60,000 TPA Forge ingots upto 70T Wind turbine components, Hydro, Gas and steam turbine components and components for Mining, Metal Industry and General engineering applications

Machining facility for Heavy forge division

Satara 1,400 nos Machined components supply

Wind sector


JVs with global capital goods players testimony of its capabilities BHFC has entered into JVs with global players like Alstom (for turbines in super critical thermal power plants), Areva (heavy forgings for nuclear power plants), David Brown (for industrial gear boxes) and NTPC (BOP equipment for power sector). These JVs are a testimony to BHFC’s manufacturing/engineering capabilities and inspire confidence in its ability to significantly scale-up the non-auto business globally. To benefit from eventual investment cycle recovery in both local and global markets The non-auto business is linked to the investment cycle, since it caters to infrastructure development – energy, transportation, and construction and mining. BHFC’s non-auto business revenues were impacted in FY13 due to macro headwinds in both India and global markets, resulting in 5% de-growth in non-auto segment revenues despite increasing traction with new customers/new segments. While the economic outlook for the US and EU is stabilizing, the Indian economy seems to have bottomed out with recovery expected from 2HFY15. International non-auto revenues contribute ~19% of consolidated revenues, whereas domestic non-auto revenues contribute ~9%.

Trend in non-auto business market mix


Non-auto market mix


2,075 2,202 3,525 3,095 5,450 6,661 5,102 5,6065,195 6,319

6,7353,603

7,35410,478

9,638

19,454


Domestic International

0%

25%

50%

75%

100%


International India

Bharat Forge

17 June 2014 20

International market outlook stabilizing Modestly improving economic growth in most developed markets should help improve business prospects. Demand for capital goods is sensitive to changes in business confidence and is correlated with economic swings. Key industry indicators such as industrial production and non-residential construction point to a modest uptick in growth for the global capital goods business. Revenues of global industrial players also suggest that the pace of revenue decline has moderated. The CY14 outlook reflects cautious optimism, suggesting possibility of a gradual recovery in the global investment cycle. Based on the outlook given by its key customers, the oil and gas segment is expected to grow 8-10%, while power and mining and construction are expected to remain stable. Currency movements have increased the competitiveness of Indian manufacturing and created opportunities for export-led business models. International non-auto revenues

1,315 1,826 2,490 2,0814,320

6,529 6,3533,8804,493 4,245

1,522

3,034

3,949

4,768

17 15 14

8

22 21

18


From India From Europe % of Consol revenues


Manufacturing PMIs point to modest uptick

30

40

50

60

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

EU PMI



30

40

50

60

Apr-

08A

ug-0

8D

ec-0

8Ap

r-09

Aug-

09D

ec-0

9A

pr-1

0Au

g-10

Dec

-10

Apr-

11A

ug-1

1D

ec-1

1Ap

r-12

Aug-

12D

ec-1

2Ap

r-13

Aug-

13D

ec-1

3Ap

r-14

US PMI

Bharat Forge

17 June 2014 21

Snapshot of comments by global capital goods companies Segment Company Commentary Power Alstom Demand in a number of markets is weak and should remain so in the short term and the level of

turnkey and equipment contracts booked is substantially lower than expected in Thermal Power. Energy & Marine Wartsila Our market outlook for 2014 remains cautious, although a slight improvement may be seen in

certain areas. Based on our current order book and project pipeline we expect some growth in net sales during 2014 and profitability to remain at a similar level to that of 2013.

Mining, Construction & Power

Caterpillar There are encouraging signs in the world economy and we're seeing some in our own business, and that gives us optimism for sales in our Construction and Power Systems segments and we think they'll each be up about 5% in 2014.

Oil & Gas Aker Solutions The underlying global economic outlook will support a strong market, with spending on offshore exploration and production growing 8 percent to 10 percent annually through 2017. Aker Solutions expects several offshore drilling rigs and floating production facilities to be ordered over the next 12 to 18 months.

Diversified Industrials

Andritz We do not anticipate any significant recovery in the global economy in 2014 and thus expect practically unchanged investment and project activity compared to 2013 in the markets served by ANDRITZ, with some major projects likely to be awarded in the hydro and pulp sectors.

Power & Automation

ABB In the short term, there are some positive early-cycle macroeconomic signs, such as strengthening growth in the US and the more encouraging growth in many parts of Europe. However, there are also some uncertainties related to the impacts of quantitative easing and the speed and strength of economic development in the emerging markets, especially China.

Power & Engines Cummins Inc In North America, we expect our truck business to grow in 2014. We are forecasting that the 2014 market size for heavy-duty trucks to increase 8% YoY. While GDP is expected to grow in the eurozone in 2014 for the first time in three years, we expect our revenues to be relatively flat. Demand from our European-based Power Generation customers will remain weak in 2014, given that most of these products are shipped to developing markets.

Diversified Industrials

Siemens AG Despite the generally positive forecasts for the global economy, we continue to assume that noticeable impulses will first be felt toward the end of the year. Well, our estimates and we're conservative and if business picks up as it already has been indicated and has been forecasted, we are prepared for taking benefit from this and so we can meet expectations.

Diversified Industrials Honeywell While we think it's prudent to remain cautious on the global economy at this time, we're increasingly confident in our 2014 outlook based on the momentum from the fourth quarter.


Oil & Gas spending is expected to grow at 11% CAGR

Source: Wood Mackenzie, MOSL

Order backlog for GE at all-timehigh levels (USD b)

129 147 152 153 157 160 166 168 180 181

4653 52 50 53 56 57 61 64 64175

200 204 203 210 216 223 229 244 245

CY10

CY11

1HCY

12

3QCY

12

4QCY

12

1QCY

13

2QCY

13

3QCY

13

4QCY

13

1QCY

14

Services Equipment Total

Source: GE, MOSL

Domestic non-auto segment play on investment cycle recovery A strong decisive mandate in the recent Elections has re-kindled the expectations of an uptick in India's investment cycle. In our opinion, India's capex J-Curve will be kick-started by (1) reorientation of fiscal expenditure which could accelerate spending on flagship projects, and (2) government's attempt to address the

Bharat Forge

17 June 2014 22

contentious issues in several sectors, leading to increased capex by CPSUs. This phase will be followed with revival in industrial cycle culminating with traction in greenfield projects. Projects completed (as a % of projects under implementation) have touched abysmally low levels of 3.4%, and impacted the virtuous cycle of cash flow generation in the system. The initial round of demand improvement will be catered to by fast tracking these projects. Cabinet Committee on Investments has already cleared projects worth ~INR20t (~25% of the projects under implementation in the economy) and with more last-mile push, attempt should be to expedite implementation. Order finalization during May 2014 (ttm basis) stands at INR1.9t, and is up 29% YoY. Order awards on a ttm basis have gradually inched up from lows of INR1.4t in June 2013 to INR1.9t currently. Domestic non-auto revenues impacted by economic slowdown


Outstanding Project Investments (% YoY): Phases of Investment cycle slowdown

Source: CMIE, MOSL

Projects completed at low levels as economic viability poor, impacting cash generation cycle

Source: CMIE, MOSL

2,075 2,202 3,525 3,095 5,450 6,661 5,102 5,606

13 12 16 15

29

23

14 18

7 5 8 6

16 13

8 11


Domestic Non-Autos % of S/A revenues % of Consol revenues

-10

0

10

20

30

40

50

60Sep-96

Dec-97

Mar-99

Jun-00

Sep-01

Dec-02

Mar-04

Jun-05

Sep-06

Dec-07

Mar-09

Jun-10

Sep-11

Dec-12

Mar-14

2.5%

4.5%

6.5%

8.5%

10.5%

12.5%

Jun-

00

May

-01

Apr-

02

Mar

-03

Feb-

04

Jan-

05

Dec

-05

Nov

-06

Oct

-07

Sep-

08

Aug-

09

Jul-1

0

Jun-

11

May

-12

Apr-

13

Mar

-14

Projects Completed ttm, as % of Prj under ImplExecution impacted given regulatory, financing and viability constraints

Projects completed had consistently remained at 7%+ of projects under implementation

Bharat Forge

17 June 2014 23

Few pockets of hope: Geographic diversification, cost optimization, new products, etc Company Management Comments

Voltas Business prospects are somewhat brighter in certain Middle East geographies, with a clear-cut

investment thrust, especially in infrastructure and construction. This is more pronounced in Qatar, KSA

and most recently Dubai.

Elgi Equipments The company expects to end the financial year with a marginal organic growth largely contributed by

international markets as the domestic market continues to remain sluggish.

ABB India Base orders from a wider spectrum of customers helped offset dearth of large projects in the market.

Exports grew annulling the effect of a contraction in the domestic market opportunities.

Praj Industries We've taken adequate steps to increase our focus further on export markets, not only for Ethanol and

Brewery but also for emerging business.

Greaves Cotton Though our sales have been affected by the overall dismal business environment; we have been

constantly focusing on our product? market growth strategy. The company has stepped up its

investment in R&D activities to develop new products. International business has also been able to

widen its global footprint in South East Asia, East Africa and Middle East markets and has set up a

distribution and aftermarket network.

Thermax There are very limited opportunities in the market which have been available in the last nine months

and in the next, at least two or three quarters, but we have introduced new products in the market and

we have been able to curtail our expenses and costs, whereby we have been able to be competitive,

even though the market margins are lower.

Action Construction Equipments While there is some improvement in the macro environment, the changes are gradual. We are seeing

growth in new order enquires which we are optimistic will translate in the next year. Agri equipment

continues to be a key growth driver and we have commenced work on our in house engine

manufacturing facility and expect to have this operational by end of year.

Elecon Engineering We have a reason to believe that the worst is over as long as gears are concerned and we believe that if

the election shows positive signs, gear is one of the barometers of the economy because our industrial

gearboxes go into all kinds of industries. So we believe that as soon as the economy starts improving,

the demand for this will keep on increasing.

Power Finance Corporation The cash losses of the discoms of the UP, Rajasthan, Haryana, Tamil Nadu have reduced in the range of

42 to 54%, and all these four states are now paying subsidy upfront on a monthly basis. These are the

advantages and these are the turnaround which we are seeing after the implementation of FRP package

in all these four state.

Blue Star There has been some improvement in demand from the hotel, hospital, commercial complex and

industrial segment.


Order finalizations improve (12mma basis, INR B)


2,20

5

2,26

4

2,05

2

1,95

5

1,87

5

1,81

8

1,76

2

1,58

5

1,49

6

1,51

0

1,47

4

1,43

5

1,49

6

1,52

7

1,56

0

1,62

0

1,66

1

1,62

3

1,64

9 1,87

3 1,98

9

1,91

8

-35

-15

5

25

45

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr-

14

May

-14

TTM Orders (INR b) % YoY

Bharat Forge

17 June 2014 24

…with scope of market share gain and new segment driving faster growth In the non-auto segment, BHFC has been focused on (a) new customer additions, (b) higher value addition of critical components, and (c) expansion of product portfolio with existing customers. Going forward, we expect the non-auto business to witness stronger performance on the back of new contracts, improvement in economic conditions and start of commercial supplies after the completion of product validation processes for several ongoing programs. It has developed and built strong relationships with customers in the non-automotive space, with the number of non-automotive customers more than doubling over the last 5-6 years. BHFC plans to venture into 5-6 new sectors in the coming 5-7 years, and make each of these new verticals USD100m businesses. Typically, these products are more complex, have longer lead times for validation and have higher contribution levels. It has recently bagged its first order from the Indian Railways for locomotive crankshafts. This makes BHFC the only indigenous components supplier for the Indian Railways. The company is also executing, for the first time in India, a technology-intensive project involving mechanized laying of tracks within India's upcoming heavy axle load freight corridor. It has developed “demonstrator parts” for the aerospace sector for global players. Defence – next big opportunity With stress on indigenous development, potential defence opportunity of ~INR400b (defence imports in 2013) is being opened up. BHFC has building blocks in place in the defence sector, with JV with Israeli company Elbit Systems focuses on land systems—artillery and infantry equipment and tanks. This JV is developing a 155 mm artillery gun. Further, BHFC also has a strategic alliance with Swedish defence and security company Saab, and has a JV with David Brown catering to defence gearing solutions.

“In all, we are aiming to bag orders worth at least

USD100m from the Railways and this is the

minimum we are targeting. But selling crankshafts

alone won’t do enough, and hence, we are also working on other new products, but

it is too early to say what they might be.”

"Ten years from today, we are very confident that India

is going to emerge as a large exporter of defence

products. Today, we are the largest importer of defence products. And we are going

to be a fairly important player in this." Mr Baba

Kalyani, CMD, Bharat Forge

Bharat Forge

17 June 2014 25

Overseas subsidiaries of strategic value But yet to contribute meaningfully to financial performance

BHFC’s overseas acquisitions were driven by its need for enhanced access to

customers, markets and technology, and to develop a dual-shore manufacturing

model.

Though its overseas subsidiaries are yet to contribute meaningfully to financial

performance, they add strategic value. These subsidiaries contributed ~40%/8%/1% to

FY13 consolidated revenue/EBITDA/PAT.

BHFC’s exports from India have grown at a CAGR of ~25% over FY10-14, benefiting

from the enhanced access to customers and markets provided by these subsidiaries.

Acquisitions add strategic value, but meaningful financial contribution yet to come On realizing the need to be closer to international OEM customers and to widen its reach with global automotive companies, BHFC embarked on a series of acquisitions across geographies. This helped it to establish an international footprint and strengthen long-term relationships with a wider customer base in newer markets while offering greater access to technology. BHFC now has complementary manufacturing capabilities, a diversified product range, strong focus on key markets like India, US and EU. It has developed strong design and engineering capabilities and relationships with more than 35 global OEMs and tier-I automotive customers.

Global acquisitions broaden BHFC’s horizon BHFC CDP BF BF AluTech BF America BF Kilsta FAW BF JV

Year of acquisition

NA Nov-03 Dec-04 Jun-05 Sep-05 Dec-05

Equipment capability

1,600 Ton to 16,000 Ton press lines

4,000 to 8,000 Tons press lines

Aluminum forging presses

4,000 to 6,000 ton press lines

2,500 to 16,000 Tons press lines

1,600 ton to 12,500 ton press lines

Products Full spectrum product capability with major focus on CV engine and chasis components and passenger car engine component

Strong focus on passenger car chassis components

Manufacturer of niche aluminum chassis components

Strong focus on US light truck market

Significant focus on heavy duty engine components and heavy components

Very wide manufacturing capability with complete range of forging equipment

End user industry

Passenger Car, CV and Non automotive business

Passenger car railways, construction equipment

Aluminum components for passenger car industry

Light trucks Heavy commercial vehicles

Passenger car, CV, buses

Regional focus

India, USA, Europe & China

Europe, USA Europe & USA USA Europe China

Current Status

NA Profitable Break-even Closed Profitable Exited


BHFC has been focusing on effectively integrating its global operations and realizing synergies between its global operations through (a) sharing of "best practices" across its facilities, (b) leveraging different customer relationships and offering a wider portfolio of products, (c) integrating R&D activities to enhance the scope of product development and reduce product development time, and (d) cross-fertilizing different plants with enhanced production capabilities. However, its acquisitions are yet to contribute meaningfully to financial performance, with ~40%/8%/1% contribution to FY13 consolidated revenues/EBITDA/PAT.

Bharat Forge

17 June 2014 26

Snapshot of financials of key subsidiaries

CDP BF BF AluTech BF Kilsta

INR m CY08 CY13 CY14E CY15E CY08 CY13 CY14E CY15E CY08 CY13 CY14E CY15E

Net Revenues 10,711 9,794 11,320 13,365 2,810 2,532 2,915 5,176 6,902 5,508 6,358 6,874

EBITDA 617 935 1,215 1,538 290 124 176 650 319 378 588 669

EBITDA Margins (%) 5.8 9.5 10.7 11.5 10.3 4.9 6.0 12.6 4.6 6.9 9.3 9.7

PAT 97 410 589 784 153 -7 30 257 -328 20 162 235


Trend in contribution of subsidiaries to revenues, EBITDA and PAT




Exports from India have benefited from access to markets and customers BHFC’s acquisitions have given its India operations access to customers, markets and technologies, translating into robust export business from India. Its exports from India have grown at a CAGR of ~25% over FY10-14 and contribute ~57%/30% of standalone/consolidated revenues. BHFC is able to cater to customers through a dual-shore model. Its acquisitions are playing a critical role in accelerating the pace of relationship building and business initiation. Across businesses, it has been putting in continuous efforts for upgradation and value addition. It is leveraging global synergies to grow the business in a de-risked manner and move-up the value chain with the global customers by progressively developing the supply partnership to the next level of development partnership.

14,410

23,139 24,558 27,165

14,712

21,399

25,931

20,153


Revenues

1,327 1,787 1,822

1,114

(985)

697 811 760


EBIDTA

432 535 946

(523)

(1,122)

(154)

44

(381)


PAT

Bharat Forge

17 June 2014 27

BHFC is one of India’s largest engineering exporters from India, with a relatively diversified

segment mix

58

13 13 10 10 9 9 7 7 6

Baj

aj A

uto

Bha

rat F

orge

Bal

kris

hna

M &

M

Tata

Mot

ors

ISG

EC H

eavy

AIA

Eng

g.

HEG

Ash

ok L

eyla

nd

Cum

min

s In

dia

Source: CapitalLine, Company, MOSL

Exports from India have grown a CAGR of ~26% over FY10-14…


…reflected in expansion of standalone gross margins


7,109 12,195 17,346 15,837 18,483 21,998 26,248 31,344

35

66 59

43

59 65 66 64

15

37 34 25

36 33 37 37

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Exports from India (INR m) % of S/A % of Consol

54.9

54.9

52.4 55

.7

54.9

55.7 56

.9 59.6

59.5

59.0

58.8

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Bharat Forge

17 June 2014 28

Multiple levers to support/improve profitability Operating leverage I Limited capex I Debt reduction

We expect consolidated revenues to grow at a CAGR of ~16% over FY14-17 (adjusted for FAW JV exit), driven by 22% CAGR in India revenues and 12% CAGR in international revenues.

EBITDA margin should expand ~270bp to 18%, driven by higher exports from India, rising contribution from non-auto business and machined components, and operating leverage.

BHFC has sufficient capacities to drive over 25% revenue CAGR over the next two years, necessitating maintenance capex of INR1.5b-1.8b per year.

We estimate cumulative FCF generation of ~INR20b during FY15-17, enabling reduction of net debt to ~INR7.7b (net debt-equity of 0.2x) from ~INR13.4b (net debt-equity of 0.5x) in FY14.

Improving asset turns and profitability would drive improvement in consolidated RoE to ~22% in FY17 from 17.7% in FY14 – the highest RoE since FY07.

Significant headroom to grow from current capacities

1.6 1.5

1.2

0.8

1.11.3

0.9

1.1 1.1

1.31.5

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Fixed Asset Turnover (x)


Revenues to grow at ~16.6% CAGR over FY14-16


EBITDA margins to improve to new highs (%)

9

15

21

27

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

S/A Consol


Consolidated EPS to grow at 30% CAGR over FY14-16


41,7

83

46,5

23

47,7

51

33,2

76

50,8

69

62,7

91

51,6

66

67,1

61

71,8

71

99,2

80

38

113

-30

5323

-18

30

719

16

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Net Revenues Growth (%)

13.3

14.8

4.8

1.3

12.7

17.7

11.2

19.0

22.5

32.3

38.9

18 11

-67 -72

40

-37

70

19

4420

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

EEPS Growth (%) - RHS

Bharat Forge

17 June 2014 29

Capital efficiencies to improve to highest level since FY07


Improving CFO, minimal capex resulting in strong FCF (INR b)..


…driving meaningful reduction in net debt


Dividend per share to increase steadily


0

9

18

27

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

RoE (%) RoCE (%)

-1.1

-2.2 -2.6

3.5

-0.3

0.5

3.1

6.8 5.8 6.7 8.7

-8

-4

0

4

8

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

CFO Capex FCF

6 10 17 14 12 17 19 14 11 7 2

0.4

0.6

1.0 1.0

0.60.8 0.8

0.50.4

0.20.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

ENet Debt (INR b) Net Debt:Equity (x)

3.5

3.5

1.0

1.0

3.5

4.0

3.4

4.5

5.0

6.0

7.0

31 28 24

91

32 2636

28 26 22 21

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Dividend (INR/Sh) Payout (%)

Bharat Forge

17 June 2014 30

Valuations attractive for global leader in forgings Initiate coverage with Buy rating and target price of ~INR710 BHFC is primed for recovery in the global investment cycle. While the stock has

outperformed over the last six months, there are several triggers for continued

outperformance.

These include: (a) volume recovery led benefit of operating leverage, (b) improving

segment mix, (c) balance sheet deleveraging, and (d) improvement in capital

efficiencies.

Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR29/INR37 are

attractive for a global leader in forgings and at a discount to the 5/10 year average of

22x/26x.

We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS)

suggests an upside of ~23%.

FY16 performance sensitivity to revenue growth

Rev. Growth

(%)

EBITDA Margins

(%)

EPS (INR)

PE (x) TP@22x

PE

5 15.6 22.5 24.8 495

10 16.4 26.0 21.5 571

19 17.8 32.3 17.2 711

20 17.9 32.9 17.0 723

25 18.6 36.3 15.3 799

30 19.2 39.8 14.0 875


BHFC: Ten-year PE band

19.421.6

0

30

60

90A

pr-0

4

Nov

-04

Jun-

05

Jan-

06

Aug

-06

Apr

-07

Nov

-07

Jun-

08

Jan-

09

Sep -

09

Apr

-10

Nov

-10

Jun-

11

Jan-

12

Sep -

12

Apr

-13

Nov

-13

Jun-

14

P/E (x) 5 Yrs Avg (x) 10 Yrs Avg(x)

25.7


BHFC: Five-year EV/EBITDA chart

9.8

10.7

9.4

5

8

11

14

Apr

-09

Aug

-09

Nov

-09

Feb-

10M

ay-1

0Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13M

ay-1

3A

ug-1

3N

ov-1

3Fe

b-14

Jun-

14

EV/EBDITA 10 Yr Avg 5 Yr Avg


BHFC: Five-year P/B chart

3.8

2.9

3.8

0.0

2.0

4.0

6.0

8.0

Apr

-04

Nov

-04

Jun-

05Ja

n-06

Aug

-06

Apr

-07

Nov

-07

Jun-

08Ja

n-09

Sep-

09A

pr-1

0N

ov-1

0Ju

n-11

Jan-

12Se

p-12

Apr

-13

Nov

-13

Jun-

14

P/B (x) 5 Yrs Avg (x) 10 Yrs Avg(x)


BHFC is trading at a discount to historical

valuations, despite significant transformation

in its business model

Bharat Forge

17 June 2014 31

Financials and valuations

Income statement (INR Million) Y/E March FY12 FY13 FY14 FY15E FY16E FY17E

Net Sales 62,791 51,666 67,161 71,871 85,701 99,280

Change (%) 23.4 -17.7 30.0 7.0 19.2 15.8

Total Expenditure 52,826 43,750 56,890 59,876 70,431 81,231

% of Sales 84.1 84.7 84.7 83.3 82.2 81.8

EBITDA 9,964 7,915 10,271 11,995 15,271 18,049

Margin (%) 15.9 15.3 15.3 16.7 17.8 18.2

Depreciation 3,022 3,195 3,579 3,596 3,802 4,217

EBIT 6,943 4,720 6,693 8,400 11,469 13,833

Int. and Finance Charges 1,860 1,672 1,692 1,615 1,460 1,434

Other Income - Rec. 915 1,121 1,249 1,498 1,556 1,697

PBT bef. EO Exp. 5,998 4,169 6,250 8,283 11,565 14,095

EO Expense/(Income) 0 205 -807 0 0 0

PBT after EO Exp. 5,998 3,964 7,057 8,283 11,565 14,095

Current Tax 1,796 1,529 2,100 3,041 4,035 5,033

Tax Rate (%) 29.9 38.6 29.8 36.7 34.9 35.7

Reported PAT 4,202 2,435 4,957 5,242 7,530 9,062

PAT Adj for EO items 4,202 2,561 4,390 5,242 7,530 9,062

Change (%) 39.1 -39.1 71.4 19.4 43.7 20.4

Margin (%) 6.7 5.0 6.5 7.3 8.8 9.1

Balance sheet (INR Million) Y/E March FY12 FY13 FY14 FY15E FY16E FY17E

Equity Share Capital 466 466 466 466 466 466

Total Reserves 21,373 22,098 26,367 30,246 36,141 43,296

Net Worth 21,839 22,564 26,832 30,712 36,607 43,762

Minority Interest 1,957 1,643 170 170 170 170

Deferred Liabilities 886 1,345 1,645 1,645 1,645 1,645

Total Loans 27,835 28,249 25,612 23,612 21,612 19,612

Capital Employed 52,517 53,800 54,259 56,139 60,034 65,189

Gross Block 49,798 56,452 60,054 63,184 64,934 66,684

Less: Accum. Deprn. 23,270 26,807 30,386 33,982 37,784 42,000

Net Fixed Assets 26,527 29,645 29,668 29,203 27,151 24,684

Capital WIP 5,168 6,324 1,500 1,750 1,750 1,750

Total Investments 4,450 4,160 8,012 8,012 8,012 8,012

Curr. Assets, Loans&Adv. 37,197 34,266 36,165 39,520 47,741 57,595

Inventory 10,961 11,320 10,386 11,814 14,088 16,320

Account Receivables 8,134 6,114 8,660 8,861 10,566 12,240

Cash and Bank Balance 6,337 5,554 4,227 5,049 6,636 9,977

Loans and Advances 11,765 11,278 12,892 13,796 16,451 19,057

Curr. Liability & Prov. 20,825 20,594 21,086 22,346 24,620 26,852

Creditors 11,789 9,511 10,554 11,814 14,088 16,320

Other Current Liabilities 6,462 8,950 7,526 7,526 7,526 7,526

Provisions 2,575 2,133 3,006 3,006 3,006 3,006

Net Current Assets 16,372 13,672 15,079 17,174 23,121 30,743

Appl. of Funds 52,517 53,800 54,259 56,139 60,034 65,189 E: MOSL Estimates

Bharat Forge

17 June 2014 32

Financials and valuations

Ratios Y/E March FY12 FY13 FY14 FY15E FY16E FY17E

Basic (INR) *

EPS 18.0 11.0 18.9 22.5 32.3 38.9

Cash EPS 31.0 24.7 34.2 38.0 48.7 57.0

BV/Share 93.8 96.9 115.2 131.9 157.2 187.9

DPS 4.0 3.4 4.5 5.0 6.0 7.0

Payout (%) 25.8 38.0 24.7 26.0 21.7 21.0

Valuation (x) *

P/E

30.7 25.7 17.9 14.9

Cash P/E

16.9 15.3 11.9 10.2

P/BV

5.0 4.4 3.7 3.1

EV/Sales

2.3 2.1 1.7 1.5

EV/EBITDA

15.2 12.8 9.8 8.0

Dividend Yield (%)

0.8 0.9 1.0 1.2

Return Ratios (%)

RoE 20.0 11.7 17.9 18.2 22.4 22.6

RoCE 17.8 11.6 15.4 18.5 23.1 25.5

Working Capital Ratios

Fixed Asset Turnover (x) 1.3 0.9 1.1 1.1 1.3 1.5

Asset Turnover (x) 1.2 1.0 1.2 1.3 1.4 1.5

Inventory (Days) 64 80 56 60 60 60

Debtor (Days) 47 43 47 45 45 45

Creditor (Days) 69 67 57 60 60 60 Working Capital Turnover (Days) 58 57 59 62 70 76

Growth (%)

Sales 23.4 -17.7 30.0 7.0 19.2 15.8

EBITDA 26.9 -20.6 29.8 16.8 27.3 18.2

PAT 39.8 -37.0 69.8 18.6 43.7 20.4

Leverage Ratio (x)

Current Ratio 1.8 1.7 1.7 1.8 1.9 2.1

Debt/Equity 1.3 1.3 1.0 0.8 0.6 0.4 * Adjusted for treasury stocks

Cash flow statement (INR Million)) Y/E March FY12 FY13 FY14 FY15E FY16E FY17E N P/ (Loss) bfe Tax & EO Items 5,995 3,919 6,693 8,400 11,469 13,833

Depreciation 3,022 3,360 3,579 3,596 3,802 4,217

Direct Taxes Paid -1,710 -1,193 -1,801 -3,041 -4,035 -5,033

(Inc)/Dec in WC -2,307 -385 -2,733 -1,274 -4,360 -4,281

CF from Operations 5,000 5,701 5,737 7,681 6,876 8,735

EO Expense 2,373 2,456 588 1,498 1,556 1,697

CF from Operating incl EO 7,372 8,157 6,325 9,179 8,432 10,433

CF from Investments -10,843 -2,896 -2,606 -3,380 -1,750 -1,750

Inc/(Dec) in Debt 7,902 -454 -2,637 -2,000 -2,000 -2,000

Interest Paid -1,940 -2,111 -1,692 -1,615 -1,460 -1,434

Dividend Paid -1,343 -949 -1,226 -1,362 -1,635 -1,907

CF from Fin. Activity 4,619 -3,513 -5,045 -4,977 -5,095 -5,341

Inc/Dec of Cash 1,148 1,748 -1,326 821 1,587 3,341

Add: Beginning Balance 1,197 2,345 4,093 2,767 3,588 5,175

Closing Balance 2,345 4,093 2,767 3,588 5,175 8,517 E: MOSL Estimates

Bharat Forge

17 June 2014 33

N O T E S

Bharat Forge

17 June 2014 34

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