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Please refer to Disclosures and Disclaimers at the end of the Research Report.

Bharat Forge Leveraged play on global revival AUTOMOBILES: Initiating Coverage 5 February 2014

PhillipCapital (India) Pvt. Ltd.

Bharat Forge, one of the world’s largest forgings company, has admirably maintained profitability in an elongated global downturn. With signs of a revival (particularly in the USA and Europe), we expect BHFC to benefit enormously from its high operating and financial leverage. Its improving product mix along with consolidation at the foreign subsidiaries will also boost profitability. These factors drive our above consensus expectations of an EPS CAGR of 41% between FY13‐16. With improved free cash flows and a consequent fall in debt, balance sheet concerns (that were a key drag) should ease. Initiate coverage with a BUY rating and a TP of Rs415.

Operating leverage benefits, capacity utilization to improve. BHFC’s operating and financial leverage remains high — we estimate that a 100bps improvement in utilization levels could lead to PAT rising by ~4‐5%. The impact of BHFC’s measures to improve productivity is also likely to be more visible once utilization levels improve—we expect them to rise from 44% in FY13 to 54% in FY16 as:

• US/UK bottoming out and likely to recover: Data points (including lead indicators and GDP growth rates) suggest that the US and Europe are bottoming out. In the past two quarters, orders in the USA for class‐8 type trucks are up sharply – an indication of a potential demand pickup next year.

• New products, new customers driving growth: BHFC has been aggressively expanding its product and customer base—while its automobile segment has focused on deepening relationships with existing clients, its non‐auto business is looking at enhancing its product and customer base.

Product mix significantly improving: We expect three changes in BHFC’s product portfolio over FY14‐16 – (a), an increase in the proportion of high‐margin machined products, particularly within the non‐automotive business, (b), higher share of exports as US/Europe recover faster than the Indian market in FY15, and (c), an increased share from the new facilities which manufactures complex and larger forgings. The full benefit of INR depreciation is also yet to flow through to the bottom line.

Subsidiary consolidation is a positive: In the past year, BHFC has sold its stake in two loss making subsidiaries – Bharat Forge America and FAW ‐ Bharat Forge China. These stake sales showcase the management’s intent to consolidate its subsidiaries. We now expect the subsidiaries to add Rs2.3 to BHFC FY15 EPS (compared to a loss of Rs 2.9 in FY13).

Above consensus earnings; FCF generation is a positive. With no major capex and an improvement in the business environment, we see a reduction in debt (D/E of 0.3x by FY16); consequently, balance sheet concerns should ease. We expect FY13‐16 EPS CAGR at 41%, which is 10% above consensus.

Valuations are reasonable, initiate with a BUY. BHFC currently trades ~15% below its average earnings multiple. However, given that (a), the current cycle (at least in export markets) has likely bottomed implying earnings could be consistently upgraded over the next few quarters, and (b), an expected easing of balance sheet concern (improvement in the D/E ratios), we believe the lower valuations are not justified. Initiate with a BUY and a target price of Rs415/share.

BUY BHFC IN | CMP RS 339

TARGET RS 415 (+22%) Company Data

O/S SHARES (MN) : 233MARKET CAP (RSBN) : 79MARKET CAP (USDBN) : 1.352 ‐ WK HI/LO (RS) : 353 / 186LIQUIDITY 3M (USDMN) : 2.5FACE VALUE (RS) : 2

Share Holding Pattern, %

PROMOTERS : 46.7FII / NRI : 13.8FI / MF : 17.5NON PROMOTER CORP. HOLDINGS : 7.6PUBLIC & OTHERS : 14.3

Price Performance, % 1mth 3mth 1yr

ABS 5.8 14.0 51.5REL TO BSE 8.9 18.9 49.2

Price Vs. Sensex (Rebased values)

0

40

80

120

160

200

Apr‐10 Apr‐11 Apr‐12 Apr‐13Bharat Forge BSE Sensex

Source: Bloomberg, Phillip Capital Research

Other Key Ratios

Rs mn FY14E FY15E FY16E

Net Sales 59,170 59,525 66,163EBITDA 10,228 11,528 13,069Net Profit 4,204 5,357 6,440EPS, Rs 18.1 23.0 27.7PER, X 18.8 14.7 12.3EV/EBIDTA, x 9.3 7.9 6.8EV/Net Sales, x 3.1 2.7 2.4ROE, % 16.5 18.4 19.3Debt/Equity, % 90.3 71.8 58.3Source: PhillipCapital India Research Est. Deepak Jain (+ 9122 6667 9758) [email protected] Priya Ranjan (+ 9122 6667 9965) [email protected]

– 2 of 34 –

5 February 2014 / INDIA EQUITY RESEARCH / BHARAT FORGE INITIATING

Table of Contents

Focus Charts ............................................................................... 3

Investment summary ................................................................. 4

Operating leverage benefits ‐ utilization to improve ................. 7

Product‐mix improving .............................................................. 15

Subsidiary consolidation signals focus on bottomline ............... 18

Balance sheet to strengthen ...................................................... 20

Earnings – strong growth expected ........................................... 23

Valuations ................................................................................... 28

Risks ............................................................................................ 29

Appendix – Company Profile ...................................................... 30

Financials .................................................................................... 32

– 3 of 34 –


Focus Charts Capacity utilization set to rise Debt‐equity to decline

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EBITDA margins to show a sharp improvement Share of higher realization new non‐auto business rising

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New Non Auto/Non‐Auto

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EPS contribution from subsidiaries to rise Trading below historical levels

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FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

EPS contribution from subsidiaries

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Apr‐07 Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14

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25x

Source: Company, PhillipCapital India Research

– 4 of 34 –


Investment summary

Despite an elongated downturn, Bharat Forge, one of the world’s largest forgings companies, has been able to maintain its profitability levels. Benefits of the productivity boosting measures that BHFC has taken in the past will kick in as developed economies emerge out of the downturn. Its high operating and financial leverage has the potential to lead to an earnings surprise. Easing balance sheet concerns coupled with a consolidation of subsidiaries adds to our comfort. Our above‐consensus earnings expectations of an EPS CAGR of 41% between FY13‐16 reflect these factors. Initiate coverage with a BUY rating and a TP of Rs415.

Utilization levels likely to improve – leverage benefits to kick in Forging remains a capital‐intensive industry with low asset‐turnover ratios. BHFC’s financial leverage also remains high, leading to a high operational leverage – we estimate that a 1% improvement in the utilization levels can lead to a 4‐5% higher PAT. Also, the company’s cost cutting measures during the downturn could aid margin improvement. Over the FY13‐16 period we expect BHFC’s utilization levels to rise from 44% to 54% on an improvement in the global economy (USA and Europe in FY15); the Indian CV market could show growth only in FY16.

Capacity utilization to rise going forward

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Note: Utilisation levels include non‐auto utilisations

US/UK bottoming out; India could deliver in FY16: Initial data from developed countries (including the composite leading indicators from OECD) seems to suggest a turnaround in the coming year—USA’s orders for the class‐8 type trucks could report a growth of 10% in CY14. While Europe’s heavy truck market could remain flat despite pre‐buying in CY13 on account of emission norms, however, the same norms (which require more complex forgings) imply that realization per tonne could rise. India replacement demand could drive growth in FY16. The Indian CV market remains in a downturn given the weak economic situation. While it is difficult to predict the exact timing of a recovery, we note that truck volumes in FY14 are very similar to sales in FY05. Given that the average life of a truck on the long‐distance route is ~10 years, it means that even replacement demand is not being met. This should lead to a sudden jump in demand once the economy improves.

USA’s orders for the class‐8 type trucks could report a growth of 10% in CY14

A 1% improvement in the utilization levels can lead to a 4‐5% higher PAT

– 5 of 34 –


BHFC gaining market share—new products, new customers driving growth: BHFC has aggressively expanded its product and customer base; while its automobile segment has focused on deepening relationships with existing clients, its non‐auto business is looking at enhancing its product and customer base.

Lead indicators signal a turnaround in the economy for USA/Europe

Source: OECD, PhillipCapital India Research

Product mix improving significantly BHFC’s product mix is likely to improve in the coming quarters on three counts: (a), the share of high‐margin machined components (mainly in the non‐automotive segment) has been rising over the past few quarters; (b), share of exports in the standalone entity could rise from 51% currently to 55% in FY15 (with the recent INR devaluation, exports margins have risen sharply); and (c), BHFC’s new facilities at Baramati are to cater to more complex forging products and as output from this unit rises, margins will improve.

Share of machined components rising; new non‐automotive business gaining traction

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FY07 FY08 FY09 FY10 FY11 FY12 FY13

Machined component (% of sales)

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Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q313 Q114




Focus on improving productivity at subsidiaries BHFC’s management seems focused on improving the profitability of its subsidiaries even if it involves retracting the global footprint. The recent sale of two loss‐making subsidiaries (Bharat Forge America and FAW‐Bharat Forge China) is a clear step in that direction. Consequently, we expect subsidiaries to report EBITDA margins of ~7.2% in FY14 as against 5.2% in FY13 largely on operating leverage/cost cutting measures.

Return ratios to rise on improved free cash flows leading to lower debt

Share of high‐margin machined components has been rising over the past few quarters, particularly in the non‐automotive segment

– 6 of 34 –


Balance sheet strengthening; earnings likely to surprise Balance sheet concerns that were a key drag on the stock are likely to recede. With improved free cash flows and a consequent improvement in debt levels, we expect return ratios to register a sharp improvement. Driven by a recovery in demand, benefit from the INR depreciation, an improved product mix and a reduction in interest costs, we expect BHFC’s standalone earnings to report earnings CAGR of 22% between FY14‐16 and consolidated EPS to grow by a CAGR of 24% –this is 2% and 10% above consensus. Valuations are reasonable, initiate with a BUY. We value BHFC at Rs415, discounting our FY15 earnings by 18x. Our target multiple is slightly below the historical median multiple. We prefer a mid‐cycle valuation rather than assigning a recovery multiple, given that there are few signs of an improvement in the domestic market as of now. Nonetheless, earnings upgrades are possible over the next few quarters. Our target price implies an upside of around 22% from current levels. BUY. 1yr forward P/E chart – valuations below mean

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P/E band

(Rs)25x


Lots of scope for positive surprises — earnings upgrades could happen over the next few quarters

– 7 of 34 –


Operating leverage benefits ‐ utilization to improve The inherent capital‐intensive nature of BHFC’s business implies a high degree of leverage. The impact is magnified because of the company’s high debt‐equity ratio. Consequently, we estimate that a 1% change in the utilization levels could lead to a 5% difference to the bottom line. Given that we expect utilization levels to rise from 44% to 54% over FY15‐16, earnings could surprise on the upside. The full impact of cost cutting measures that the company has undertaken in the past few years is likely to be an additional trigger for margins to improve. Capacity utilization set to rise

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Note: Utilisation levels include non‐auto utilisations

Our optimism on growth comes from two factors: (a), a clear improvement in the US and Europe, which will lead to an improvement in both the standalone business and subsidiaries, and (b), BHFC is looking at entering new product segments in both the automotive and non‐automotive segments. Impact of cost‐cutting measures visible It is clear that Bharat Forge has been taking a number of steps to improve its cost efficiency while improving productivity. In the last few quarters, it has not just managed to keep its employee costs in check, but has also substantially curtailed manufacturing expenses. It is noteworthy that manufacturing expenses in Q1 and Q2 have declined to ~17% of net sales – this is the lowest level since Q4FY11 when shipped tonnage was ~20% higher. While cost cutting has led to margins sustaining at high levels, it is likely to aid margin growth once demand recovers.

After rising over FY10‐12, utilization levels fell sharply and are currently below 50%

Manufacturing expenses have fallen sharply despite lower tonnage

– 8 of 34 –


Manufacturing costs as a percentage of sales declining despite lower tonnage

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Manufacturing expenses (% of net sales)

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USA/ Europe on a turnaround, India could grow in FY16 There is a widespread expectation of USA’s and Europe’s economies turning the corner in CY14. In fact, indicators such as the consolidated lead indicators from OECD, seems to indicate that while the developed world is likely to turn the corner shortly, the developing world might be headed in the other direction.

USA/Europe clearly showing signs of a recovery; GDP growth likely to be positive

‐1

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2012 2013 2014E 2015E

Advanced Economies United States Euro Area

Source: OECD, IMF

– 9 of 34 –


There is a strong link between GDP growth and CV sales

Source: IMF, World Bank, IMC Automotive

As we see in the following graphs, the CV production/demand is closely linked to the revival in the economies. In fact, data suggests that the correlation is clearly stronger for the OECD countries than for developing countries. USA – orders rising, volumes of class‐8 trucks to rise by 10% There are clear signs that the USA class‐8 truck market that drives demand for BHFC is showing signs of a revival – the orders received in the past few months have shown a sharp uptrend. This should translate in higher volumes in Q1CY14. The ACT expects volumes of class 8 trucks to rise by 10% in CY14E. The average fleet age of the USA class‐8 truck market has risen substantially in the last few years, indicating that replacement demand should also be strong once the economy recovers. Demand will likewise benefit from a certain degree of pre‐buying as emission norms change in FY16.

USA Class‐8 trucks to show growth Orders have been rising in the past two quarters

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2006 2007 208 209 2010 2011 2012 2013E 2014E

US Class 8 trucks volumes ('000)

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Class 8 truck ordersY‐o‐Y Growth (%)

Source: ACT, PhillipCapital India Research

The US is likely to lead BHFC’s overseas market revival

– 10 of 34 –


USA: Rising average fleet age of trucks: an opportunity for replacement demand

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Avg fleet age ‐US class 8 active population

Source: ACT, PhillipCapital India Research

Europe – positive despite pre‐buying impact While the economic environment in Europe is likely to improve, the overall effect may be diminished by the 2013 pre‐buying on a change in emission norms. However, the impact of pre‐buying has been much more muted compared to previous emission norm rollovers. Hence, the loss of volumes in CY14 may not be as much – and with the economy likely to improve, European volumes could show a sharp uptick in CY15. Initial forecasts from industry sources seem to suggest that CY14 truck volumes could be flat despite the pre‐buying effect in 2013. Additionally, the shift to new emission norms will require a modification of existing products – this could help improve BHFC’s realizations and profitability. The global luxury car market outlook continues to remain extremely strong and within cars, BHFC primarily supplies to the luxury segment. An improvement in the European economy augurs well for BHFC’s non‐automotive business. India: replacement cycle could play out in FY16 Indian M&HCV volumes for FY14 are likely to hit the troughs of FY09. In fact, we estimate heavy‐truck volumes could be the lowest in a decade. India: Truck volumes indicate replacements being deferred

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M&HCV replacement demand

Replacement demand (% of sales) RHS

Source: SIAM, PhillipCapital India Research

In Europe, pre‐buying has been much more muted; therefore, loss of volumes in CY14 may not be as much

In India, the probability of a recovery in truck volumes in FY16 is very high

– 11 of 34 –


The useful life of a truck on the national highway is estimated to be around 10 years (after which these trucks are typically relegated to intra‐state routes). Since volumes in FY15 are likely to be lower than the sales in FY05, we infer that even the truck replacement demand has been deferred. Therefore, truck volumes could show an upward trend even if the economy reports a moderate recovery. We believe that the probability of a recovery in FY16 (if not FY15) is very high. New products and customers driving growth Over the past few years, BHFC has clearly been looking to diversify its revenue stream—one manifestation is the rising share of its non‐automotive business (up from 20% of revenues in FY08 to ~40% currently) and another is its foray into the capital goods space (with JVs with Alstom and MoUs with NTPC). The company is simultaneously attempting to increase its wallet share within the automobile space and seems to have recently gained domestic market share.

Share of the new non‐automobile business has been rising New non‐automobile segments have higher realizations

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Rs '000New Non‐Auto Average Realisations)Total Average realisation


Non‐automotive segment – continuously ramping up This segment contributed 40% of revenues in FY13 from 20% of total revenues in FY08. BHFC expects the non‐automotive segment to eventually contribute to 60% of total revenues. The company plans to enter new segments and add new products to its existing product spaces. New areas being explored We estimate that over 2/3rd of its non‐automotive business comes from just two segments—oil and gas and construction and mining. This implies that a large number of segments—notably railways, power and aerospace—offer huge growth potential and are areas the company is likely to focus on.

Non‐automotive segment will eventually be 60% of total revenues

Railways offer huge growth potential in the non‐auto segment

– 12 of 34 –


BHFCs Segments – present across a number of segments Industry/segments Products

Automotive segment

CV and Passenger vehicles

Power train component (crankshaft, connecting rods), chassis component (front axles, steering knuckles), transmission parts

Oil and Gas Valves, drill bits, surface flow and sub‐sea equipment, machined crankshaft for pumps

Construction and mining Machined crankshaft, tracklink and front spindle for construction products

Power Rotor, forged blades turbine, shaft, crane wheel, rings transmissions

Marine Crankshafts, connecting rods and propeller shafts.

Locomotive Wheel sets, crankshafts axles, connecting rods, claw lock and piston

Non‐automotive

Aerospace Wheel lever forging, fan forging, main‐leg forging


In a recent interview, the management indicated that it expects to enter 5‐6 new areas in the coming years, of which railways is a key one. BHFC has developed a new crankshaft for the Indian Railways (that was previously imported); it has already received initial orders from the railways and expects the business to grow to ~USD 100mn, or ~60% of the company’s FY13 non‐automobile business. The company has also indicated that it could look at partnerships to manufacture diesel and electrical locomotive engines. It eventually aims at becoming one of the top‐three railway component suppliers globally. Railways outlay ‐ rising

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Railway Capex (Rs bn)

Source: Ministry of Railways, Planning Commission, Phillip Capital Research

Long‐term outlook on some segments seems positive The outlook on some existing segments seems to be promising. For instance, in the oil and gas space, capex from global majors is likely to rise in the coming years despite concerns on their cash flows. This should drive the shift towards lower cost, high‐quality manufacturers – implying gains for BHFC. An improvement in the construction market in the US could also revive demand.

Within new target segments, railways will be a key focus area

– 13 of 34 –


Survey indicates ~70% of correspondents expect oil and gas capex to rise in CY14

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Source: Oil and Gas Journal

Automotive business – deepening relationships Even in the cyclical nature of the automotive business, BHFC has been trying to gain market share. In fact, the downturn has facilitated the deepening of relationships, particularly in the domestic market. Domestic market share seems to be rising Over the last two quarters, the CV market has shown a substantial dip of ~25%. However, BHFC’s revenue decline has been much lower at just about 9% (refer table below), indicating that it has actually gained market share. This is mainly because the prolonged downturn put stress on the financial health of many vendors supplying smaller forging parts, making BHFC, with its strong financials and scale, an attractive alternative for OEMs. If the downturn continues, it could help BHFC consolidate its position further and the benefits will be visible when the industry rebounds. In addition, BHFC has received orders for products based on completely new platforms. The rollout of these trucks has increased BHFC’s market share. Further, the company has made conscious efforts to enter new segments such as paasenger – this could make an impact in FY16.

BHFCs seems to be gaining share in the domestic market BHFC’s domestic auto sales has declined less than M&HCV’s

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M&HCV Volume Decline BHFC Domestic Auto Revenue Decline


The downturn put pressure on small vendors, making BHFC an attractive alternate for OEMs

– 14 of 34 –


Supplying new products overseas BHFC has been trying to raise the scope of its product offerings in Europe by providing aluminum‐based products to higher‐end luxury cars and the management has indicated that newer automobile products are also on the cards. Alstom JV could add value over the medium term Bharat Forge and Alstom entered into a JV in 2011 to manufacture turbines. Their arrangement involves setting up of two JV companies – one for manufacturing of steam turbines and generators and the other for manufacturing of all the auxiliaries. While the steam turbine JV began work on a plant in 2012 at Mundra, Gujarat, to manufacture 300‐800MW turbines with an annual capacity of 5,000MW, the plans were delayed due to environmental clearances. It has shifted the plant to another location (Sanand) within Gujarat. Construction has already started and production is likely to begin by 2015. The JV has an order backlog of ~Rs45bn – this includes an order from NTPC for three 660MW supercritical turbines. With Alstom’s strong technological backing, once the plant is operational, new orders should flow in. Alstom Bharat Forge JV: Timeline FY10 Established JV with Alstom with plant to be established in Mundra FY13 Mundra (Gujarat) plant construction stopped due to environmental issues FY13 Received orders for two supercritical 660MW turbine from NTPC worth Rs15.7bn FY14 JV decided to shift the plant to Sanand, Gujarat FY14 Received orders for three supercritical 660MW turbine from NTPC worth Rs22.5bn FY15 Plant is likely to commence production by February 2015


India’s power capacity to increase

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25,000

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Power capacity addition (MW)

Source: Planning Commission, Phillip Capital Research

BHFC’s steam turbine JV with Alstom could begin production from 2015 — it already has an order backlog of Rs 45bn

We do not build in any benefits from the Alstom JV

– 15 of 34 –


Product‐mix improving We expect three changes in BHFC’s product portfolio over FY14‐16 – (a), an increase in the proportion of machined products particularly within the non‐automotive business, (b), higher share of exports as the US and European economies recover faster than the Indian market at least in FY15, and (c), an increased share of the non‐automotive business. These three trends point to an improvement in profitability. Higher proportion of machined components The proportion of machined components in BHFC’s total sales has consistently improved in the past few quarters to ~54% currently from (~43% two years ago); most of the growth for this has come in the non‐auto segment in which the share of machined components has increased from an estimated 10% in Q1FY12 to ~35% Q1FY14. We believe that this trend is likely to continue in the coming quarters as BHFC increases the depth of its offerings in this relatively new segment. Machined components are typically value‐added products – ensuring higher realizations and margins. We expect the overall share of machined components to increase from 50% of sales in FY13 to ~55% in FY16.

Share of machined components to increase Machined tools as a part of non – automotive space is rising

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Machining (Non Auto ‐share)


The higher‐margin‐earning machined components business should contribute to 55% of overall sales in FY16 from 50% in FY13

– 16 of 34 –


Exports to rise at a faster pace in FY15 We expect BHFC’s export volumes to report a stronger recovery than domestic volumes, largely because we see a global recovery led by USA and Europe while the domestic market could remain subdued even in FY15. We expect export share to rise from 51% in FY13 to 56% in FY15. The management has indicated that BHFC has been able to retain most of the INR depreciation benefits. In the coming quarters, average realizations should improve on higher depreciation (Q2FY14 rupee realizations were at Rs59/USD vs. the current rates of around Rs62/USD).

Exports as a % of revenues to rise in FY15 Higher USD/INR realizations will aid margin growth

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Rupee realisation


Contribution from the new facilities at Baramati to rise In FY11, BHFC commissioned new facilities at Baramati capable of handling heavy/complex forgings, primarily for its non‐automotive business. Production from the facilities has shown a sharp uptick in the past few quarters (now contributing ~35% of the non‐automotive businesses from ~10% in Q1FY12). These new forgings with a higher degree of complexity offer better margins. Facilities at Baramati Facilities Product and Industries Product Dimensions

Heavy Forge Division II – 4,000 MT press and machining capacity

Wind turbine components. Hydro, gas and steam turbine components and components for mining, metal industry and general engineering applications

Max ingot weight up to 70T single piece.

Centre for advanced manufacturing ‐ 80 MT Hammer and machining capacity

Large components for energy sector, transportation including aerospace, railways and marine

Components up to 2.5 tonnes in weight and 4.5 m in length.

Ring Rolling facility Large rings & gears blanks for various sectors like marine, wind and construction equipment

Rings up to 3 tonnes in weight and 4.5m in diameter

Source: Company Presentation, Phillip Capital Research

In FY15, the share of exports in total revenues should rise

The new non‐auto business has higher realizations

– 17 of 34 –


Share of the new non‐automobile business has been rising New non‐automobile segments have higher realizations

0%

10%

20%

30%

40%

50%

60%

70%

Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q313 Q114



0

5

10

15

20

25

30

35

40

Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q313 Q114

Rs '000New Non‐Auto Average Realisations)Total Average realisation


– 18 of 34 –


Subsidiary consolidation signals focus on bottomline With the sale of its subsidiaries – Bharat Forge America and its Chinese JV – BHFC has completed a full circle. From expanding its global manufacturing footprint, it is now focused on improving its free cash flows and the bottomline of its overseas subsidiaries. We expect subsidiaries to report EBITDA margins of ~7% by FY15 vs. ~5% currently, largely on operating leverage and cost cutting measures. Productivity improvements driving European subsidiaries’ profitability In the past few years, Bharat Forge has consolidated its subsidiary operations within Europe. On the one hand it has shut down plants (in Scotland) and on the other, it has rationalized its manpower. These moves seem to indicate a greater degree of flexibility, which has considerably lowered the breakeven point of its operations. With high operating leverage, an improvement in the topline in the past few quarters has raised the profitability of the European operations. We expect the European operations to report an EBITDA margin of 7% and a PAT CAGR of 36% in FY14‐16. European Operations – Likely to post growth Rs mn FY13 FY14E FY15E FY16E

Revenue 11,002 12,522 13,961 14,540 Growth (%) ‐7% 14% 11% 4%EBITDA 586 927 1,136 1,198

CDP GmbH

EBITDA Margin (%) 5.3% 7.4% 8.1% 8.2%

Revenue 2,646 3,106 3,544 3,758 Growth (%) 32% 17% 14% 6%EBITDA 183 224 291 331

Aluminium Technik

EBITDA Margin (%) 6.9% 7.2% 8.2% 8.8%

Revenue 6,791 7,878 8,351 8,852 Growth (%) 0% 16% 6% 6%EBITDA 286 378 433 466

Kilsta

EBITDA Margin (%) 4.2% 4.8% 5.2% 5.3%


Sale of Chinese subsidiary will add to the bottomline BHFC had a 51% stake in a joint venture with FAW. While the strategic intent was compelling (to address the Chinese market with a strong local partner), FAW was losing market share and the CV market was not showing any signs of improvement—therefore, BHFC exited the JV. The stake sale has two positive impacts – (a), it reduces the consolidated debt by ~Rs5bn (or ~18%) and (b), it adds ~Rs2 per share to the consolidated EPS. Basic financials of the Chinese subsidiary Rs mn FY11 FY12 FY13 FY14

Revenue 6,113 6,253 5,580 5,022 EBIT 288 205 (363) 75 PAT 171 27 (643) (233)


European subsidiaries have turned around

Sale of Chinese subsidiary reduces debt and adds to the consolidated bottomline

– 19 of 34 –


Subsidiaries to be EPS accretive With the sale of two loss making entities, subsidiaries should now contribute meaningfully towards BHFC’s bottom line. We expect the subsidiaries to now add Rs1.4‐Rs2.9 in FY14‐16 to the EPS compared with an average reduction of Rs1.5 in FY11‐13. Contribution of subsidiaries to EPS to be positive in FY15/16

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EPS contribution from subsidiaries


– 20 of 34 –


Balance sheet to strengthen Balance sheet concerns that were a key drag on the stock are likely to recede. With improved free cash flows and a consequent improvement in debt levels, we expect return ratios to register a sharp improvement. Free cash flow to be positive Unlike previous downturns (such as 2008), BHFC has been able to remain FCF positive (albeit marginally). With capacity utilization levels remaining low, it also seems like its investment phase is over. Capex is likely to remain low — in the range of Rs2bn in FY15/16 compared with ~Rs6bn in FY10‐12 —and coupled with better operating cash flows, it will lead to a growth in FCF in FY15/16.

FCF and FCF/Equity to show a sharp improvement (Consolidated) (Standalone)

(4,000)

(2,000)

‐

2,000

4,000

6,000

8,000


Free cash‐flow (Rs mn)

(4,000)

(2,000)

‐

2,000

4,000

6,000

8,000


Free cash‐flow (Rs mn)


Capex per annum to stabilize (Consolidated) (Standalone)

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2,000

4,000

6,000

8,000

10,000

12,000


Capex (Rs mn)

‐

1,000

2,000

3,000

4,000

5,000

6,000


Capex (Rs mn)


FCF to improve; debt reduction on the cards

– 21 of 34 –


Debt to decline We expect debt to decline due to higher free cash flows and the sale of its China JV. BHFC has realized Rs 1.75bn (6% of debt) from the sale of its share in the China JV and its share of the JV debt of ~Rs3bn should further bring down the total debt levels in FY14/15. We see debt declining from Rs28bn to Rs20bn by FY16, with consolidated D/E declining to a comfortable 0.3x by FY16.

Balance sheet deleveraging: Debt and D/E to decline

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


Net debt (Rs mn)

‐

0.20

0.40

0.60

0.80

1.00

1.20


Debt to equity (x)


Capital efficiency to improve In a capital intensive industry, one of the key concerns for BHFC has been its low capital efficiency. Its asset turnover ratio has been extremely low (at ~1.2x for the standalone business). However, we expect this ratio to improve to ~2.4x in FY16, based on improved utilization levels and higher realizations. Asset turnover ratios (Standalone) likely to improve

‐

0.5

1.0

1.5

2.0

2.5

3.0


Fixed Asset‐Turnover ratio


With a simultaneous improvement in profitability, return ratios are likely to show a sharp uptick in the coming quarters.

Return ratios improving as capital efficiency rises

– 22 of 34 –


Return ratios to show an improvement Standalone Consolidated

0.0

5.0

10.0

15.0

20.0

25.0


ROE (%) ROCE (%)

0.0

5.0

10.0

15.0

20.0

25.0


ROE (%) ROCE (%)


– 23 of 34 –


Earnings – strong growth expected Driven by a recovery in demand, benefit from the INR depreciation, an improved product mix, and a reduction in interest costs, we expect BHFC’s standalone earnings to report a CAGR of 22% between FY14‐16. Consolidated earnings will benefit from the sale of its loss‐making JV in China and productivity improvements in European subsidiaries. Consolidated EPS to grow by a CAGR of 24% between FY14‐16. Consolidated revenues affected by China stake sale; to grow by 6% We expect consolidated revenues to grow by 6% between FY14‐16 and standalone revenues to report a growth of 13%. Consolidated revenue will be impacted by the sale of the Chinese JV, which had a turnover of Rs6bn in FY13 (~10% of net revenues). Excluding the Chinese JV revenues, we estimate consolidated revenues to be up by 11%. We expect standalone business utilization to improve from ~44% to 54%, driven by strong volume growth in the US and Europe in FY15 and a recovery in the Indian markets in FY16. We expect standalone tonnage to grow at a CAGR of 7% with realizations rising by 4%.

Revenues growth excluding the sale of China to be strong Consolidated Standalone

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0%

10%

20%

30%

40%

50%

60%

‐

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


Revenue (Rs mn) % Growth (rhs)

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0%

10%

20%

30%

40%

50%

60%

70%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000


Revenue Growth (%) (rhs)


Utilization levels to steadily rise

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%



Source: Company, PhillipCapital India Research. Note: Utilisation levels include non‐auto utilisations

Revenue growth to be high on higher tonnage

– 24 of 34 –


EBITDA margins to improve We expect EBITDA margins to rise on: (a), operating leverage improvement on better utilization levels, (b), favorable currency movements, (c), sale of the low‐margin business in China, and (d), an improved product mix (higher share of machined products). Overall, we see EBITDA margins rising from 13% to 20% ‐ an improvement of 640bps over the FY13‐16 period. Average INR FY10‐14 and current rate

0

10

20

30

40

50

60

70

FY10 FY11 FY12 FY13 YTD FY14 Current

INR/USD rate

Source: Bloomberg, PhillipCapital India Research

EBITDA margins (Standalone) (Consolidated)

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

26.0%

27.0%

28.0%


EBITDA margin (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


EBITDA Margin (%)


Financial leverage adds to bottom line – earnings above consensus In addition to the operational performance, we expect BHFC to benefit from its substantial financial leverage and debt reduction. We see interest costs coming down by a CAGR of 10% from Rs1.9bn to Rs1.4bn. Depreciation levels are likely to show only a minor increase as the company’s capex cycle has peaked. With improved operating performance, interest and depreciation costs as a percentage of EBITDA should decline from 50% to 40%—earnings should rise by a CAGR of 24% between FY14‐16.

EBITDA margins could surprise positively

Our earnings estimates are ~10% above consensus

– 25 of 34 –


Earnings and earnings growth to be strong (Consolidated) (Standalone)

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0%

20%

40%

60%

80%

100%

120%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY12 FY13 FY14E FY15E FY16E

PAT (Rs mn) % Growth

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0%

20%

40%

60%

80%

100%

120%

140%

160%

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000


PAT (Rs mn) % Growth


Leverage play: Depreciation +Interest/ EBITDA to decline

‐

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

FY12 FY13 FY14E FY15E FY16E

(Interest + Dep)/EBITDA


Our earnings estimate are ~10% above consensus as we believe the market has not yet factored in the likely operating leverage and revenue upside from the potential recovery in the US and in Europe.

PC Versus consensus ____________EPS (Rs)____________ __________EBITDA (Rs mn)__________ __________Sales (Rs mn)__________ FY14E FY15E FY16E FY14E FY15E FY15E FY14E FY15E FY16E

PC 18.1 23.0 27.7 10,228 11,528 13,069 59,896 60,353 67,093Consolidated Consensus 15.9 20.9 24.8 9,730 11,173 12,499 61,951 67,922 76,456

Diff (%) 14% 10% 12% 5% 3% 5% ‐3% ‐11% ‐12%PC 16.7 20.7 24.8 8,613 9,801 11,134 34,002 37,616 43,373Standalone Consensus 16 20.3 24.1 8,260 9,526 10,564 32,633 37,606 42,344

Diff (%) 4% 3% 3% 4% 3% 5% 4% 0% 2%

Source: Bloomberg, PhillipCapital India Research

– 26 of 34 –


Abridged P&L‐ Consolidated (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Revenues 46,523 47,751 33,276 50,870 62,791 57,022 59,896 60,353 67,093% change 3% ‐30% 53% 23% ‐9% 5% 1% 1,1%Operating expenses 39,478 43,211 29,936 43,017 52,826 49,328 49,668 48,825 54,024Operating Profit 7,045 4,540 3,340 7,852 9,964 7,694 10,228 11,528 13,069OPM (%) 15% 10% 10% 15% 16% 13% 17% 19% 19%% change ‐36% ‐26% 135% 27% ‐23% 33% 13% 13%Interest 1,269 1,291 1,303 1,534 1,860 1,908 1,835 1,464 1,362Other income 993 675 511 675 915 1,126 1,212 1,395 1,613Depreciation 2,271 2,517 2,451 2,550 3,022 3,360 3,599 3,806 4,119PBT 4,498 1,406 97 4,442 5,998 3,552 6,006 7,653 9,201Tax 1,589 696 119 1,397 1,796 1,728 1,802 2,296 2,760PAT Before Minorities/Associates 2,908 710 ‐22 3,046 4,202 1,824 4,204 5,357 6,440Minority/Associates/Discontinued operations /exc 107 172 130 ‐67 ‐72 286 0 0 0Pre‐exceptional PAT 3015 882 108 2979 4130 2110 4204 5357 6440% change ‐69% ‐93% 4491% 35% ‐41% 69% 27% 20%

Abridged Balance Sheet ‐ Consolidated (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Share holders funds 16,541 16,435 14,642 19,529 21,839 22,564 25,409 29,134 33,399Total loan funds 16,544 21,908 22,527 19,014 27,608 27,845 22,941 20,916 19,464Total Liabilities 35,155 41,140 38,791 41,406 52,289 53,397 51,337 53,038 55,851Net Fixed Assets 23,611 27,902 26,065 26,634 31,695 35,423 33,952 33,504 33,543Investments 2,988 2 2,737 2,614 4,450 4,160 4,660 5,160 5,660Inventories 7,271 7,916 6,575 8,115 10,961 11,320 11,557 11,370 12,603Sundry debtors 6,718 5,313 5,044 7,539 8,134 6,114 6,421 6,460 7,180Cash & Bank Balances 3,183 4,883 5,977 3,964 6,337 5,553 2,893 4,674 5,353Others 7,609 7,203 6,576 7,883 11,765 11,824 12,417 12,492 13,885Total current assets 24,781 25,316 24,171 27,501 37,197 34,812 33,288 34,995 39,020Sundry Creditors 8,910 6,862 7736 7,787 9,754 8,277 8,450 8,313 9,215Acceptances 2,364 1,415 1888 1,922 2,034 1,235 1,260 1,240 1,374Other 87 261 1,540 3,411 6,690 9,353 8,067 8,052 8,097Provisions : 4,865 3,543 3,018 2,222 2,575 2,133 2,785 3,016 3,686Total current liabilities 16,226 12,081 14,182 15,342 21,053 20,998 20,563 20,621 22,372Net current assets 8,556 13,236 9,989 12,159 16,144 13,814 12,725 14,374 16,649Total Assets 35,155 41,140 38,791 41,406 52,289 53,397 51,337 53,038 55,851

Abridged Cash Flow ‐ Consolidated (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Op. Profit before Working Capital Changes 7,587 5,446 2,705 8,064 10,882 9,154 11,068 12,514 14,232 Total Working Capital Changes ‐1,916 ‐2,123 3,210 ‐4,090 ‐2,307 ‐385 ‐1,572 133 ‐1,596 Other ‐1,386 ‐711 ‐494 ‐567 ‐1,710 ‐1,193 ‐1,802 ‐2,296 ‐2,760Net cash flow from operating activities (A) 4,284 2,612 5,422 3,407 6,864 7,576 7,695 10,351 9,876 Purchase of Fixed Assets including CWIP ‐7,599 ‐5,472 ‐1,426 ‐5,089 ‐9,821 ‐5,605 ‐2,129 ‐3,358 ‐4,158 Investments in subsidiaries ‐5 4 ‐437 253 ‐16 ‐82 ‐200 ‐200 ‐200 Others 221 3,373 ‐2,298 833 ‐661 3,584 72 109 150Net cash used in investing activities (B) ‐7,383 ‐2,095 ‐4,161 ‐4,004 ‐10,498 ‐2,102 ‐2,257 ‐3,449 ‐4,208 Proceeds from long‐term borrowing ‐2,217 3,746 3,967 ‐4,105 6,469 ‐554 ‐2,904 ‐1,825 ‐1,452 Proceeds from/(repayments of) short term Borrowings 1,364 ‐540 ‐2,087 564 1,262 100 ‐2,000 ‐200 0 Dividend Paid ‐918 ‐910 ‐261 ‐272 ‐1,343 ‐949 ‐1,359 ‐1,631 ‐2,175 Others ‐1,336 ‐1,113 ‐1,787 2,397 ‐1,769 ‐2,111 ‐1,835 ‐1,464 ‐1,362Net cash used in financing activities (C ) ‐3,106 1,183 ‐168 ‐1,416 4,619 ‐3,513 ‐8,099 ‐5,120 ‐4,990Net increase / (decrease) in cash and cash equivalents ‐6,206 1,700 1,093 ‐2,012 985 1,960 ‐2,661 1,781 679Cash and cash equivalents at the beginning of the year 9,389 3,183 4,883 5,977 1,197 2,345 4,093 1,432 3,213Cash and Cash Equivalents at End of the year 3,183 4,883 5,977 3,964 2,182 4,305 1,432 3,213 3,892


– 27 of 34 –


Abridged P&L ‐ Standalone (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Revenues 21,965 20,586 18,564 29,470 36,860 31,512 34,002 37,616 43,373% change ‐6% ‐10% 59% 25% ‐15% 8% 11% 15%Operating expenses 16,743 16,988 14,408 22,315 27,707 24,357 25,389 27,814 32,238Operating Profit 5,222 3,598 4,156 7,155 9,153 7,156 8,613 9,801 11,134OPM 24% 17% 22% 24% 25% 23% 25% 26% 26%% change ‐31% 16% 72% 28% ‐22% 20% 14% 14%Interest 1,050 1,004 1,028 1,214 1,505 1,534 1,510 1,332 1,285Other income 884 477 323 465 676 916 1,003 1,120 1,265Depreciation 1,389 1,494 1,644 1,933 2,149 2,239 2,400 2,485 2,625PBT 3,666 1,577 1,807 4,474 6,175 4,299 5,705 7,105 8,490Tax 1,234 544 537 1,365 1,850 1,349 1,826 2,273 2,717Pre‐ exceptional PAT 2,432 1,033 1,270 3,108 4,325 2,950 3,879 4,831 5,773% change ‐57% 15% 148% 38% ‐30% 33% 25% 19%

Abridged Balance Sheet ‐ Standalone (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Share holders funds 14,733 14,869 15,284 19,954 21,431 23,111 25,631 28,831 32,429Deferred Tax Liability 1,182 1,617 1,065 1,556 1,272 1,364 1,364 1,364 1,364Secured loans 4,615 8,706 9,221 11,058 11,526 9,759 8,971 7,846 7,894Unsecured loans 8,260 9,372 9,306 3,676 8,284 8,978 6,810 6,810 6,810Total loan funds 12,875 18,079 18,528 14,734 19,810 18,737 15,782 14,657 14,705Total Liabilities 28,790 34,565 34,877 36,244 42,512 43,213 42,777 44,852 48,498 Net Fixed Assets 17,450 20,634 19,146 18,417 20,850 22,216 21,331 20,374 19,277Investments 5,937 3,672 7,209 8,144 9,362 9,306 11,306 13,306 15,306Inventories 3,381 3,642 3,948 4,684 5,031 4,757 5,082 5,521 6,416Sundry debtors 3,563 2,601 3,072 4,313 4,912 4,742 5,120 5,683 6,569Cash & Bank Balances 1,650 3,667 4,935 2,320 5,006 2,791 1,059 616 1,855Others 7,666 7,272 6,161 6,762 8,121 7,614 8,126 8,891 10,092Total current assets 16,260 17,183 18,116 18,080 23,070 19,905 19,387 20,712 24,931Sundry Creditors 3,894 2,253 3,644 4,242 4,622 3,307 3,532 3,454 4,014Acceptances 2,364 1,415 1,888 1,922 2,034 1,235 1,319 1,433 1,665Other 85 245 1,500 745 2,411 2,425 2,397 2,313 2,344Provisions : 4,513 3,011 2,563 1,488 1,702 1,248 2,000 2,341 2,994Total current liabilities 10,857 6,925 9,595 8,397 10,769 8,214 9,247 9,541 11,017Net current assets 5,403 10,258 8,521 9,683 12,300 11,690 10,140 11,172 13,914Total Assets 28,790 34,565 34,877 36,244 42,512 43,213 42,777 44,852 48,498

Abridged Cash Flow ‐ Standalone (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Op. Profit before Working Capital Changes 5,605 4,001 4,143 7,387 9,212 7,564 9,295 10,546 11,949 Total Working Capital Changes ‐1,174 ‐2,037 1,603 ‐3,446 ‐789 ‐2,203 331 ‐710 ‐304 Others ‐985 ‐,422 ‐416 ‐531 ‐1,708 ‐1,129 ‐1,826 ‐2,273 ‐2,717Net cash flow from operating activities (A) 3,446 1,541 5,331 3,410 6,715 4,232 7,801 7,563 8,929 Purchase of Fixed Assets including CWIP ‐5,408 ‐3,381 ‐1,243 ‐2,025 ‐4,249 ‐2,381 ‐1,515 ‐1,528 ‐1,528 Investments in subsidiaries ‐520 ‐717 ‐1,059 ‐805 ‐103 ‐598 ‐2,000 ‐2,000 ‐2,000 Others ‐259 3,411 ‐2,089 ‐660 ‐3,002 3,308 ‐192 ‐390 ‐751Net cash used in investing activities (B) ‐6,187 ‐688 ‐4,391 ‐3,491 ‐7,354 329 ‐3,707 ‐3,918 ‐4,279 Proceeds from long‐term borrowing ‐1,467 3,555 3,143 ‐3,787 4,032 ‐1,354 ‐3,257 ‐1,125 48 Proceeds from/(repayments of) short term Borrowings 925 ‐533 ‐1,459 ‐20 181 ‐422 302 0 0 Dividend Paid ‐918 ‐910 ‐261 ‐272 ‐1,343 ‐949 ‐1,359 ‐1,631 ‐2,175 Others ‐1,511 ‐949 ‐1,095 1,545 ‐1,292 ‐1,556 ‐1,510 ‐1,332 ‐1,285Net cash used in financing activities (C ) ‐2,971 1,164 328 ‐2,533 1,578 ‐4,281 ‐5,825 ‐4,088 ‐3,412Net increase / (decrease) in cash and cash equivalents ‐5,713 2,017 1,268 ‐2,615 939 281 ‐1,731 ‐443 1,238Cash and cash equivalents at the beginning of the year 7,363 1,650 3,667 4,935 121 1,060 2,791 1,059 616Cash and Cash Equivalents at End of the year 1,650 3,667 4,935 2,320 1,060 1,341 1,059 616 1,855


– 28 of 34 –


Valuations We value BHFC at Rs415, which discounts our FY15 earnings by 18x. Our target multiple is slightly below the median multiple of the last eight years, implying an upside of ~22% from current levels. BUY. Currently trades at a discount BHFC currently trades at a ~15x FY15 earnings – a ~15% discount to its historical valuations. In our view, the earnings multiple fails to account for potential earnings growth. Assigning a median multiple—not yet building in a recovery BHFCs trading multiple has varied between 13‐25x in the last eight years, with a median of ~19x. The multiple varies in the stage of the cycle – the highest multiple is during a recovery phase. While we are expecting recovery in the domestic market in FY16, we are not yet awarding BHFC with a corresponding multiple—only when we see definite signs of a recovery would we would assign a higher multiple; therefore, further upsides are possible. One‐year forward P/E band

10x

15x

20x

0

100

200

300

400

500

600


P/E band

(Rs)25x


Valuations multiples (X) FY14E FY15E FY16E

PER 18.8 14.7 12.3 EV/EBITDA 9.3 7.9 6.8P/BV 3.1 2.7 2.4

Source: PhillipCapital India Research

BHFC trades at a~15% discount to historical averages

– 29 of 34 –


Risks INR appreciation The sharp depreciation of the INR has clearly benefitted BHFC’s margins, even if costs also rise to an extent because of it. However, overall, INR depreciation is beneficial to BHFC and is likely to have contributed ~250bps to its EBITDA margins. Our estimates for FY15/16 bake in an INR/USD rate of 61. An appreciation in the INR will have a negative impact on our margins and earnings. Higher than expected capex / acquisitions Our thesis is predicated on the company generating free cashflows to reduce its debt burden. Incase, capex rises substantially or the company makes an acquisition, the debt levels may not decline – this would put our estimates and recommendations at risk. However, we note that the company has excess capacity and utilization levels remains – indicating that substantial capex is unlikely for the next 2 years. Further, it seems to be focused on consolidating its footprint/subsidiaries rather than expanding it. Unfavorable election results, delayed recovery in investments A hung parliament in the upcoming elections has the potential to further defer investments and potentially derail even a moderate recovery in the economy. M&HCV volumes are directly correlated to the economy and the investment cycle. This may put our FY15/16 assumptions of M&HCV volume growth of 3% /15% at risk. Also an extended political uncertainty could lead to various government orders, particularly, in the non‐auto business being stalled. This could impact our revenue estimates from the non‐automotive segment. Continued slowdown in USA/Europe Exports account for nearly 50% of BHFC’s domestic revenues with USA/Europe accounting for the majority. Our revenue is based on an assumption of a recovery in these economies. A continued slowdown in these geographies would put our earnings at risk.

A sustained macro‐economic slowdown is the key risk

– 30 of 34 –


Appendix – Company Profile Bharat Forge Ltd (BHFC), the flagship company of the Kalyani Group, is one of the world’s leading manufacturers and suppliers of forged and machined automotive components. Its manufacturing facilities are located in India, Germany, and Sweden. BHFC also manufactures forged and machined components for non‐automotive industries such as power, marine, oil and gas, railways and, construction and mining.

Revenue by Geography Revenue by segment

49.6%

28.3%

18.6%

3.4%

Standalone

India

Americas

Europe

Others

62%

38%

Automobile

Non‐Automobile


Revenue by products Shareholding pattern

37%

50%

6% 7%

ForgingsMachinedScrap/Job WorkOthers

Promoters, 46.7%

FIIs, 13.6%

MFs, 8.2%

Insurance and Fis, 9.3%

Corporate bodies, 7.6%

Others, 14.6%


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Group Structure

Alstom Bharat Forge Power (India) 49%

Kalyani Asltom Power (India) 51%

CDP Bharat Forge GmbH (Germany) 100%

Bharat Forge America (United States) 100%

BF‐NTPC Energy Systems Lte (India) 51%

BF New Technologies (Germany) 100%

BF Deun GmbH (Germany) 100%

BF Holding GmbH (Germany) 100%

BF Aluminiumtechnik(Germany) 100%

BF Beteiligungs(Germany) 100%


BF Kilsta AB (Sweden) 100%

BF HongKong(Hong Kong) 100%

BF Scottish Stampings (UK) 100%

FAW BF (Recently Sold)(China) 52%

Key Operating Entities

Discontinues Entities

Bharat Forge Ltd

Alstom Bharat Forge Power (India) 49%

Kalyani Asltom Power (India) 51%

CDP Bharat Forge GmbH (Germany) 100%

Bharat Forge America (United States) 100%

BF‐NTPC Energy Systems Lte (India) 51%

BF New Technologies (Germany) 100%

BF Deun GmbH (Germany) 100%

BF Holding GmbH (Germany) 100%


BF Beteiligungs(Germany) 100%


BF Kilsta AB (Sweden) 100%

BF HongKong(Hong Kong) 100%

BF Scottish Stampings (UK) 100%

FAW BF (Recently Sold)(China) 52%

Key Operating Entities

Discontinues Entities

Bharat Forge Ltd

Product and customer Profile

Automotive Business Product Segment EGMENTS _______POWER TRAIN COMPONENTS_______ _______CHASSIS COMPONENTS_______ TRANSMISSION PARTS

CRANKSHAFTS CONNECTING RODS FRONT AXLES STEERING KNUCKLES

Passenger Car 10‐30 Kg < 1 Kg NA 2‐10 Kg 0.5 Kg ‐ 6 Kg LCV / MCV 25‐80 Kg 1‐3 Kg 30‐60 Kg 10‐30 Kg 3 Kg ‐30 Kg

HCV 60‐250 Kg 2‐5 Kg 60‐150 Kg 25‐40 Kg 20 Kg ‐ 100 Kg


Automotive clients Daimler IVECO Chrysler Tata Volkswagen FPT Maruti Suzuki Mahindra Navistar Audi DAF Mahindra Force Porsche MWM Detroit GM YC Diesel Mitsubishi BMW Meritor Tata Cummins Ford DANA Volvo Toyota Federal Mogul Renault Honda MAHLE MAN SAAB ZF Steering Scania


Non‐Automotive business Sectors Segments Product Customers

Oil & Gas Surface, sub‐sea, shale gas Gate valve body, casing head, shell surface, blow out preventor, annular BOP

GE,FMC Technologies, Cameron, Wood Group, Halliburton, Aker Solutions

Construction& Mining

Metals and mining, construction equipment, general engineering

Tracklink, fron spindle, crankshaft ThyssenKrupp, Humboldt Wedag, Caterpillar, Ambuja Cement, Aditya Birla Group FLSmidth

Power Therma, wind, hydro, transmission H‐P rotor, I P rotor, exciter shaft, forged turbine blades, tube sheet

Alstom, Cummins, Caterpillar, Rexroth, NTPC, Andritz, GE, Hansen

Locomotive Railways Crankshaft, axle, connecting rod, claw lock GE, Indian Railways, GHH‐Valdunes

Marine Crankshaft, connecting rod Berg, Caterpillar, Cummins, Wartsila

Aerospace Main leg forging, wheel lever forgings, fan forgings

HAL, ISRO


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Financials

Income Statement Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Net sales 56,343 59,170 59,525 66,163Growth, % ‐9 5 1 11Other income 679 726 828 930Total income 57,022 59,896 60,353 67,093Raw material expenses ‐26,072 ‐26,617 ‐26,186 ‐29,026Employee expenses ‐8,013 ‐7,692 ‐7,441 ‐8,204Other Operating expenses ‐15,243 ‐15,359 ‐15,198 ‐16,794EBITDA (Core) 7,694 10,228 11,528 13,069Growth, % (22.8) 32.9 12.7 13.4Margin, % 13.7 17.3 19.4 19.8Depreciation ‐3,360 ‐3,599 ‐3,806 ‐4,119EBIT 4,334 6,629 7,722 8,950Growth, % (37.6) 53.0 16.5 15.9Margin, % 7.7 11.2 13.0 13.5Interest paid ‐1,908 ‐1,835 ‐1,464 ‐1,362Other Non‐Operating Income 788 840 986 1,164Non‐recurring Items ‐168 0 0 0Pre‐tax profit 3,385 6,006 7,653 9,201Tax provided ‐1,728 ‐1,802 ‐2,296 ‐2,760Profit after tax 1,658 4,204 5,357 6,440Others (Minorities, Associates) 453 0 0 0Net Profit (adjusted) 2,110 4,204 5,357 6,440Growth, % (44.8) 84.5 27.4 20.2Net Profit 2,278 4,204 5,357 6,440Unadj. shares (m) 233 233 233 233Wtd avg shares (m) 233 233 233 233

Balance Sheet Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Cash & bank 5,553 2,893 4,674 5,353Marketable securities at cost 3,874 4,174 4,474 4,774Debtors 6,114 6,421 6,460 7,180Inventory 11,320 11,557 11,370 12,603Loans & advances 7,119 7,476 7,521 8,360Other current assets 4,705 4,941 4,971 5,525Total current assets 38,686 37,462 39,470 43,795Investments 285 485 685 885Gross fixed assets 56,472 62,925 66,483 70,641Less: Depreciation ‐27,374 ‐30,973 ‐34,779 ‐38,898Add: Capital WIP 6,324 2,000 1,800 1,800Net fixed assets 35,423 33,952 33,504 33,543Total assets 74,394 71,900 73,659 78,223 Current liabilities 28,400 24,019 21,874 22,955Provisions 2,133 2,785 3,016 3,686Total current liabilities 30,533 26,804 24,890 26,641Non‐current liabilities 19,655 18,044 17,992 16,540Total liabilities 50,188 44,849 42,882 43,181Paid‐up capital 466 466 466 466Reserves & surplus 22,098 24,943 28,668 32,934Shareholders’ equity 24,206 27,051 30,777 35,042Total equity & liabilities 74,394 71,900 73,659 78,223

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Pre‐tax profit 3,385 6,006 7,653 9,201Depreciation 3,360 3,599 3,806 4,119Chg in working capital 2,142 ‐2,278 ‐139 ‐2,140Total tax paid ‐1,382 ‐1,802 ‐2,296 ‐2,760Cash flow from operating activities 7,576 5,526 9,024 8,420Capital expenditure ‐7,088 ‐2,129 ‐3,358 ‐4,158Chg in investments ‐82 ‐200 ‐200 ‐200Chg in marketable securities 373 ‐300 ‐300 ‐300Cash flow from investing activities ‐2,102 ‐2,629 ‐3,858 ‐4,658Free cash flow 5,473 2,897 5,166 3,762Debt raised/(repaid) 237 ‐4,904 ‐2,025 ‐1,452Dividend (incl. tax) ‐947 ‐654 ‐1,359 ‐1,631Cash flow from financing activities ‐3,513 ‐5,558 ‐3,384 ‐3,083Net chg in cash 1,960 ‐2,661 1,781 679

Valuation Ratios & Per Share Data FY13 FY14E FY15E FY16E

Per Share data EPS (INR) 9.8 18.1 23.0 27.7Growth, % (44.8) 84.5 27.4 20.2Book NAV/share (INR) 96.9 109.1 125.1 143.4FDEPS (INR) 9.8 18.1 23.0 27.7CEPS (INR) 24.9 33.5 39.4 45.4CFPS (INR) 26.9 20.1 34.5 31.2DPS (INR) 3.4 5.0 6.0 8.0Return ratios Return on assets (%) 3.9 7.4 8.6 9.6Return on equity (%) 10.1 16.5 18.4 19.3Return on capital employed (%) 6.3 11.7 13.0 14.2Turnover ratios Asset turnover (x) 1.3 1.3 1.3 1.4Sales/Total assets (x) 0.8 0.8 0.8 0.9Sales/Net FA (x) 1.7 1.7 1.8 2.0Inventory days 73 71 70 70Fixed capital/Sales (x) 0.5 0.5 0.5 0.5Receivable days 40 40 40 40Payable days 61 62 62 62Liquidity ratios Current ratio (x) 1.3 1.5 1.7 1.7Quick ratio (x) 0.9 1.0 1.2 1.2Interest cover (x) 2.8 4.5 7.3 9.8Dividend cover (x) 2.9 3.6 3.8 3.5Total debt/Equity (%) 123.4 90.3 71.8 58.3Net debt/Equity (%) 81.6 62.5 40.4 28.0Valuation PER (x) 34.6 18.8 14.7 12.3PEG (x) ‐ y‐o‐y growth (0.8) 0.2 0.5 0.6Price/Book (x) 3.5 3.1 2.7 2.4Yield (%) 1.0 1.5 1.8 2.4EV/Net sales (x) 1.7 1.6 1.5 1.3EV/EBITDA (x) 12.7 9.3 7.9 6.8EV/EBIT (x) 22.5 14.3 11.7 9.9

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Management (91 22) 2300 2999(91 22) 6667 9735

Research Engineering, Capital Goods Pharma

Deepak Jain (9122) 6667 9758 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Aditya Bahety (9122) 6667 9986

Retail, Real EstateInfrastructure & IT Services Abhishek Ranganathan, CFA (9122) 6667 9952

Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Neha Garg (9122) 6667 9996Sachit Motwani, CFA, FRM (9122) 6667 9953 Varun Vijayan (9122) 6667 9992

TechnicalsMetals Subodh Gupta (9122) 6667 9762

Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Dhawal Doshi (9122) 6667 9769Vivekanand Subbaraman (9122) 6667 9766 Dharmesh Shah (9122) 6667 9974 Database ManagerManish Pushkar (9122) 6667 9764 Vishal Randive (9122) 6667 9944

Oil&Gas, Agri InputsCement Gauri Anand (9122) 6667 9943 Sr. Manager – Equities SupportVaibhav Agarwal (9122) 6667 9967 Deepak Pareek (9122) 6667 9950 Rosie Ferns (9122) 6667 9971

Anjali Verma (9122) 6667 9969

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Sales Trader ExecutionAshvin Patil (9122) 6667 9991 Dilesh Doshi (9122) 6667 9747 Mayur Shah (9122) 6667 9945Shubhangi Agrawal (9122) 6667 9964 Suniil Pandit (9122) 6667 9745Kishor Binwal (9122) 6667 9989Sidharth Agrawal (9122) 6667 9934Dipesh Sohani (9122) 6667 9756

Economics

Consumer, Media, Telecom

Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

Contact Information (Regional Member Companies)

SINGAPORE Phillip Securities Pte Ltd

250 North Bridge Road, #06‐00 Raffles City Tower, Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834 www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai – 400011

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