security analysis of bharat forge ltd

Security Analysis of Bharat Forge Limited

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D

DECLARATION

I (Ranjan Shankar Shetty .B.K) hereby declare that the work presented in this Project

entitled “Security Analysis of Bharat Forge Limited” submitted to Dr. Sridevi, Ph.D.

(Area Head- Finance) at IFIM Business School, Bangalore Submitted for Security

Analysis and Portfolio Management (SAPM) Paper in Term –V, is an authentic record of

my original work.

Place: Bangalore

Date: 04th

October 2010 Ranjan Shankar Shetty .B.K


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Disclaimer

I hereby certify that the views expressed in this document reflect my personal views. I

also certify that no part of my respective comments was, is, or will be, directly or

indirectly, related to the views expressed in this document. I do not own any amount of

stock in the company recommended/covered in this report.

Ranjan Shankar Shetty .B.K


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EXECUTIVE SUMMARY

The Indian Forging and Casting industry is one of the important industries for the

Success of Automobile industry and off lately in the power sector also, which have

undergone metamorphosis with the advent of new business and manufacturing practices

in the light of liberalization and globalization. The sector seems to be optimistic of

posting strong sales in the couple of years in the view of a reasonable surge in demand.

The Indian Auto component market is gearing towards international standards to meet the

needs of the global automobile giants and become a global hub.

A detailed analysis of Forging & Casting has been covered in respect of past growth and

performance. Under this project to better understand the Industry we have used

Fundamental and Technical tools to make it more authentic n meaningful. An E.I.C

approach has been followed under Fundamental Analysis which covered effect of

Recession, the impact of inflation, Interest Rate & GDP on Forging & Casting. The

Industry Analysis has been done with the help of five forces model, BCG Matrix, SWOT

analysis, industry life cycle and the industry specific index. For Company Analysis as a

part of Fundamental tool we have undergone with the Peer comparative analysis of

Bharat Forge Limited our leading company India’s largest Forging & Casting company.

The fundamental aspect consists financial and Non-Financial analysis. In the Technical

aspect we have considered Share price analysis, moving average, trend line, Resistance &

support and M.A.C.D. of Bharat Forge Limited (BFL).


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Recommendation

HOLD Bharat Forge Limited

1

CMP-NSE (01/10/2007) 371.15

Target Price (By 31st December 2010) 405

52 Week high/low 375.20/231.55

Face Value 2

Market Cap (mn) 86378.33

6m Avg vol ('000nos) 544

No of o/s Shares (mn) 223

NSE Code BHARATFORG

Beta 0.67

Date of Incorporation 1961

12 months return 10%

6 months return 21%

Similar Stocks

Companies Price (Rs) Chg (rs) Vol('000)

Bharat Forge 362.5 3.5 138936

Electro castings 45.65 -0.15 392261

Jayaswal Neco 39.5 -0.25 290213

Mahindra forge 105.75 1.1 45135

1 Prices as on 1

st of October 2010


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Contents

ANALYSIS OF FORGING INDUSTRY ................................................................................................................ 8

Fundamental Analysis ................................................................................................................................... 8

Indian Economy......................................................................................................................................... 8

Interest rate .............................................................................................................................................. 9

Inflation ................................................................................................................................................... 10

Indian Forging Industry ............................................................................................................................... 11

Current Market Overview ........................................................................................................................... 11

Future Outlook ............................................................................................................................................ 12

Industry characteristics ............................................................................................................................... 12

Indian Forging Industry – SWOT Analysis ................................................................................................... 13

Industrial Life Cycle ..................................................................................................................................... 14

Five Forces Model - Industry ....................................................................................................................... 15

BCG MATRIX ................................................................................................................................................ 16

Security Analysis ......................................................................................................................................... 18

Company Analysis ....................................................................................................................................... 18

Profile of Bharat Forge Ltd .......................................................................................................................... 19

Key Recent Developments ...................................................................................................................... 19

MANAGEMENT........................................................................................................................................ 20

SUBSIDIARY COMPANIES ........................................................................................................................ 20

JOINT VENTURES ..................................................................................................................................... 20

Business Outlook ..................................................................................................................................... 22

Product Profile ........................................................................................................................................ 22

Strong Customer Profile .......................................................................................................................... 22

Bharat Forge Ltd - SWOT Analysis ............................................................................................................... 23

Five Forces Model - Bharat Forge ltd .......................................................................................................... 24

Ratios .......................................................................................................................................................... 25

Review of Business .................................................................................................................................. 26


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Peer Comparison ......................................................................................................................................... 27

Technical Analysis ....................................................................................................................................... 29

Resistance & Support Level..................................................................................................................... 32

Simple Moving Average .......................................................................................................................... 33

Trend line ................................................................................................................................................ 35

MACD ...................................................................................................................................................... 36

Conclusion ................................................................................................................................................... 37

References .................................................................................................................................................. 38


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ANALYSIS OF FORGING INDUSTRY

Over a period of more than two decades the Indian Forging industry has been driving its

own growth through phases. With comparatively higher rate of economic growth rate index

against that of great global powers, India has become a hub of domestic and exports business.

The forging sector has been contributing its share to the shining economic performance of India

in the recent years.

To understand this industry for the purpose of investment we need to analyze it by

following two approaches:

1). Fundamental Analysis (E.I.C Approach)

a. Economy

b. Industry

c. Company

2).Technical Analysis

Fundamental Analysis

Economic analysis is the analysis of forces operating the overall economy a country.

Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed.

Economic analysis is important in order to understand exact condition of an economy.

Indian Economy The economy of India is the twelfth largest economy in the world by market

exchange rates and the fourth largest by PPP2 basis. Industry accounts for 27.6% of the GDP and

employ 17% of the total workforce. However, about one-third of the industrial labour force is

engaged in simple household manufacturing only. In absolute terms, India is 16th in the world in

terms of nominal factory output.

Source: IMF Apr’09, Economic Survey 2008-09 & RBI Bulletin

2 purchasing power parity


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Today, auto-component sector in India is one of the key sectors of the economy in terms

of the employment. Directly and indirectly it employs more than 10 million people and if we add

the number of people employed in the automobile and auto ancillary industry then the number

goes even higher.

The Indian economy expanded 7.40 percent over the last year, as measured by the year-

over-year change in Gross Domestic Product (GDP YoY). Unlike the commonly used quarterly

GDP growth rate, the annual GDP growth rate takes into account a full year of economic

activity, thus avoiding the need to make any type of seasonal adjustment. The India Gross

Domestic Product is worth 1296 billion dollars or 2.09% of the world economy, according to the

World Bank. The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.60

percent in the last quarter; Services are the major source of economic growth, accounting for

more than half of India's output with less than one third of its labor force. The economy has

posted an average growth rate of more than 7% in the decade since 1997.

Interest rate India benchmark interest rate stands at 4.50 percent. In India, interest rate decisions are taken

by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark

repurchase rate.

Year Mar Jun Sep Dec Average

2010 8.60 8.60

2009 5.80 6.00 8.60 6.50 6.73

2008 8.50 7.80 7.50 6.10 7.48


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

2010 3.25 3.25 3.34 3.61 3.75 3.75 4.08 2009 4.05 4.00 3.55 3.39 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 2008 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.24

Inflation The Inflation rate in India was 9.67 on 31

st July 2010; the reason for the high rate of

inflation in India is due to increase in international crude prices which effect the consumer prices

directly. Due to which the controller RBI (Reserve bank of India) have taken up measures to

tighten the monitory policy, and Fiscal policy. A moderate amount of inflation is important for

the proper growth of an economy like India because it attracts more private investment


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Indian Forging Industry

The Indian Forging Industry has emerged as a major contributor to the manufacturing

sector of the Indian economy. The impact and changes in Indian Automobile Industry is directly

proportional to the Indian Forging Industry, so Forging Industry is often referred as backbone to

the Automobile Industry, while the automotive industry is the main customer for forgings the

industry’s continuous efforts in upgrading technologies and diversifying product range have

enabled it to expand its base of customers to foreign markets. The Indian forging industry is

increasingly addressing opportunities arising out of the growing trend among global automotive

OEM’s3 to outsource components from manufacturers in low-cost countries. As a result, Indian

forging industry has been making significant contributions to country’s growing exports.

Current Market Overview

The Indian automobile market has seen a major revival since the slowdown of FY2009.

Passenger cars and commercial vehicles together registered a growth of 29% in production and

volumes are close to touching 3 million (see Table 3below). More encouraging was the growth in

CV4 production. With LCV’s

5 registering a growth of 41% and M&HCV’s

6 growing by 30%,

CV production increased by 36%. There is every indication that the CV segment has emerged

from its cyclical low and moving towards an upsurge. Increased infrastructure activity is also

expected to fuel further demand in the CV segment.

Many large and medium forging companies also took important initiatives in

capacity expansion, modernization, cost rationalization etc. Notwithstanding this, the industry

had also to contend with its share of problems. It had to bear the brunt of acute shortages and

steep and frequent increases in the cost of major inputs like power and fuel, forging quality steel

etc. For a major part of the year, the industry has grappled with this issue and managed to keep

floating under these adverse circumstances.

3 Original Equipment Manufacturer

4 Commercial Vehicle

5 Light Commercial Vehicle

6 Medium and heavy commercial vehicles


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Future Outlook

The size of the Indian forging industry has been estimated at `855 billion in 2008–09,

growing at a compound annual growth rate (CAGR7) of about 23 per cent over the previous five

years. The industry is expected to grow to `1800 billion by 2016. Among the 640 players present

in the Indian market, only 160 constitute the organized sector and contribute more than 77 per

cent of the country’s total production of auto components. The unorganized units generally

employ open-die process at lower capital cost, while the organized players dominate the closed

die segment, which is almost 65% of total Indian Forging Industry.

Industry characteristics Capital intensive

The industry is becoming capital intensive with increasing globalization and entry of

more MNC auto companies in the domestic market. The forging manufacturers need to invest

aggressively in upgrading technology to meet their strict product norms.

Fragmented nature

The Indian forgings industry is characterized by fragmented production capacities; the

organized sector accounts for a 55% share with 10 large units dominating the industry.

Raw material intensive

Raw material costs approximate 60% of the total cost and the major raw materials are

carbon, alloy, stainless steel, aluminum, titanium, brass, copper and high temperature alloys,

which contain cobalt, nickel or molybdenum.

Technology

7 CAGR – Compound annual growth rate


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The Indian industry lacks adequate R&D8, which has necessitated the need for foreign

collaboration. The techniques comprise the mechanical drop hammer, sophisticated hydraulic

and pneumatic processes etc.

Indian Forging Industry – SWOT Analysis

A scan of the internal and external environment is an important part of the strategic

planning process. Environmental factors internal to the firm usually can be classified as strengths

(S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or

threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

SWOT analysis of the Indian automobile sector gives the following points:

Strengths Weakness

1. Globally cost competitive,

2. Access to technology.

3. Strict quality Controls.

4. Major auto manufacturing players have

setup facilities in India,

5. Average Income of an Indian is Increasing,

6. Aggressive YOY9 growth of automobile

industry, which acts as a catalyst to the

Forging industry – Large Domestic Market

7. Strong Engineering Skill for Labor

1. Low level of research and development

capability,

2. Exposed to critical downturn in the

automotive industry,

3. Most Forging companies are dependent on

global majors for Technologies,

4. Heavy dependence on US and European

markets having its own business cycle and

technological & regulatory requirements

5. Low Labor Productivity

6. Infrastructure Bottlenecks

Opportunities Threats

1. Serves as sourcing hub for global

automotive majors.

2. Significant export opportunities may be

realized through diversification of export

basket,

3. Implementation of VAT10

will help to the

cascading impact of prices.

4. Huge business opportunity in automotive

as well as non-automotive applications in

India as well as international markets

1. Presence of a large counterfeit components

market possesses a significant threat.

2. Pressure on prices from Original

Equipment Manufacturing (OEM’s11

)

continues,

3. Imports pose price based competition in the

replacement market,

4. Competition from low cost component

manufacturing countries such as Thailand

and China

8 R&D – Research and Development

9 YOY - Year on Year

10 VAT - Value Added Tax

11 OEM - Original Equipment Manufacturer


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Industrial Life Cycle

The industrial life cycle is a term used for classifying industry vitality over time. Industry

life cycle classification generally groups industries into one of four stages: Introduction, growth,

maturity and decline.

In the Introduction stage, the product has not been widely accepted or adopted. Business

strategies are developing, and there is high risk of failure. However, successful companies can

grow at extraordinary rates. The Indian Forging Industry has passed this stage quite successfully.

In the growth stage from FY07-08, Indian Forging industry registered decent

performance riding on demand from domestic automobile industry and export opportunity.

However due to the recession there was a slowdown in FY08-09 Indian forging industry has

realized the importance of diversification to reduce dependence on automobile industry, which is

cyclical in nature and further improve profitability in the long run. Hence forging players have

adopted three pronged strategy to diversify in to manufacturing non-automotive components,

increase product range with more value added products and end-to-end products and acquire

companies and facilities in international markets.

Salient Features of Indian Forging Industry in Growth Stage

Overall production reached 9,83,000 tpa from 9,29,000 tpa during last year; a YoY

growth of 12%.

Capacity utilization also improved considerably from 40-50 % in earlier years to 65% of

the additional capacity added during the last two years (approx. 1.5 Million tpa) inclusive

of overseas acquisitions.

Exports recorded a YoY growth of 16% to reach a level of `16billion; CAGR growth of

26% over past five years.

Acquisitions in key target markets to acquire additional clientele and also add up

capacities

Investment in capacity additions to cater to expected upturn in demand from domestic

automobile industry in long run, aggressive diversification in to non-automotive

applications and grab export opportunity.

Indian Forging

Industry


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Five Forces Model - Industry

Michael Porter provides a framework that models an industry as being influenced by five

forces, this is to develop an edge on rival firms this model can use this model to better

understand the industry context in which the firm operates.

Degree of Rivalry

Despite the high concentration ratio seen in the auto component manufacturing sector,

rivalry in the Indian forging sector is intense due to the entry of foreign companies in the market.

The industry rivalry is extremely high with any being product being matched in a few months by

the competitors. This instinct of the industry is primarily driven by technical capabilities

acquired over years of gestation under the technical collaboration with international players, and

the stress on M&A’s12

done by the Indian forge companies.

Threat of Substitutes

The threat of substitutes to the Indian Forging industry is insignificant.

Barriers to entry

The barriers to enter forging industry are substantial. For a new company, the startup

capital required to establish manufacturing capacity to achieve minimum efficient scale is

prohibitive. Although the barriers to new companies are substantial, establishing companies are

entering the new markets through strategic partnerships or through buying out or merging with

other companies. However, a domestic company, with local knowledge and expertise, has the

potential to compete its home market against the global firms who are not well established there.

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M&A’s – Merger and Acquisition


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Supplier’s power

In the relationship between the industry and its suppliers, the power axis is tipped in

industry’s favor. The industry is comprised of powerful buyers who are generally able to dictate

their terms to the suppliers.

Buyers’ Power

In the relationship between the forging industry and its customer, the power axis is tipped

in the customers favor. This is due to the fairly bulk buying nature and the technological

adaption by the forging industry as required by the Automobile industry which is again

dependent on the Ultimate consumer who want some think new every time they come out and a

very important process is association with selecting among competing brands under immense

pressure of cut throat competition.

BCG13 MATRIX

In an economy, different industries are present and different industries have different

growth rate as compared to the growth of the economy. In an economy, there are a number of

major industries and they all occupy different positions on the BCG matrix according to their

growth and contribution towards the economy. In the Indian economy, some of the major sectors

are FMCG14

, automobiles, banking and insurance, Infrastructure, software, pharmacy,

Agriculture, Oil and gas and retail sectors and these can be placed in the different positions in the

matrix as shown below:

Industrial BCG Matrix

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BCG - Boston Consulting Group 14

FMCG - Fast Moving Consumer Goods


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BCG matrix is used to determine the relative position of the companies of an industry or

different SBU’s15

of any institution, in terms of the market growth rate and the market share of

the company in the industry. In the Indian forging sector, the major players are Bharat Forge Ltd,

Electrosteel casting, Jayaswal Neco Industries, Mahindra Forgings Ltd, Ahmednagar Forging

and Kalyani Forge Ltd. In the BCG matrix, the companies are placed in one of the following four

categories: Star, Cash Cows, Dogs and Question marks. In the Stars we place the companies with

high market growth and high market share, cash cows are the companies who have low market

growth rate and high relative market share, the category of the question marks include the

companies with low relative market share and high market growth rate and dogs include the

companies who have low relative market share and low market growth rate, the below BCG

matrix is built on the profit, number of players in the industry, and incorporation of the industry

and sales percentage for the past 5 years, and computed:

Company BCG Matrix

15

SBU - Strategic Business Unit


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Security Analysis

S W

The size of the Indian forging industry is growing at a compound annual growth rate

(CAGR16) of about 23 per cent over the previous five years. The industry is expected to grow to

`1800 billion by 2016. Among the 640 players present in the Indian market, only 160 constitute

the organized sector and contribute more than 77 per cent of the country’s total production of

auto components. The unorganized units generally employ open-die process at lower capital cost,

while the organized players dominate the closed die segment, which is almost 65% of total

Indian Forging Industry, It has more strength in internal market yet global market has to be

explored, so the investors should exploit this industry.

Company Analysis

The company analysis shows the long-term strength of the company that what is the

financial Position of the company in the market where it stand among its competitors and who

are the key drivers of the company, what is the future plans of the company, what are the policies

of government towards the company and how the stake of the company divested among different

groups of people.

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CAGR – Compound annual growth rate

T

O

Internal Environment

Exte

rnal

En

viro

nm

ent


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Profile of Bharat Forge Ltd

Bharat Forge Ltd (BFL), a flagship company of Kalyani group, BFL is a full service

supplier of forged and machined-engine and chassis components. It is a primary exporter of auto

components from India and chassis component manufacturer worldwide. The company’s

manufacturing facilities spread across 12 locations and six countries, four in India, three in

Germany, one each in Sweden, Scotland, United States and two in China. Bharat Forge conducts

its operations in the following geographical areas such as Europe, North America and Asia. Its

customer base includes Cummins, BMW, Iveco, Dana Corporation, General Motors,

Volkswagen, Renault, Ford, Honda, Volvo, Toyota, Daimler Chrysler, Arvin Meritor, Detroit

Diesel and Audi.

Key Recent Developments

Mar 15, 2010: NTPC Energy Systems Begins Construction Work On Manufacturing

Facility In Maharashtra, India

Mar 14, 2010: Bharat Forge, NTPC starts construction on manufacturing facility in India

Jan 06, 2010: Pune Based Companies Enter Into Nuclear Equipment Supply Deal In India

Jan 04, 2010: Bharat Forge Commissions New Ring Rolling Facility in Baramati, India

Jan 04, 2010: Bharat Forge plans manufacturing facility in Maharashtra, India.

Directors Name Designation

B N Kalyani Ch & Md

S M Thakore Director

S D Kulkarni Director

P G Pawar Director

Uwe Loos (Prof.) (Dr.) Director

P C Bhalerao Director

Lalita D Gupte (Ms.) Director

P H Ravikumar Addnl. Director

Alan Spencer Director

Naresh Narad Addnl. Director

V K Jairath Addnl. Director

T Mukherjee Addnl. Director

G K Agarwal Deputy Md

Amit B Kalyani Exec. Director

B P Kalyani Exec. Director

S E Tandale Exec. Director

P K Maheshwari Exec. Director

Sunil K Chaturvedi Exec. Director

Beejal Desai Co. Secretary


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MANAGEMENT The Company was incorporated on June 19, 1961 and we commenced business in 1966.

We were originally promoted by Kalyani family headed by Dr. Neelkanth Kalyani. Our initial

equity was subscribed by Kalyani family. The Company is managed by the Managing Director

and Whole-time Directors under the overall supervision of the Board of Directors.

Other members of the Board are renowned personalities and having significant expertise

in their field and have been actively contributing through their valuable advice and support. The

overall management of the Company is vested with the Board of Directors comprising persons

with industrial, management, legal and administration experience. However the day-to-day

affairs are looked after by Mr. B.N. Kalyani, Managing Director, and Mr. P C Bhalerao, Mr. G K

Agarwal and Mr Amit Kalyani, the Whole-time Directors, who hold substantial powers of

management. They are assisted by a team of professionals in the fields of engineering,

marketing, finance and management.

SUBSIDIARY COMPANIES

The Company has 13 Subsidiaries of which 12 are overseas and 1 is in India, a significant

portion of the consolidated revenues is generated by the subsidiary companies.

CDP Bharat Forge GmbH, Germany,

Bharat Forge Holding GmbH, Germany

Bharat Forge Aluminiumtechnik GmbH & Co. K.G., Germany

Bharat Forge Aluminiumtechnik Verwaltungs GmbH, Germany

Bharat Forge Daun GmbH, Germany

Bharat Forge America Inc., u.S.A.

Bharat Forge Beteiligungs, GmbH, Germany

Bharat Forge Kilsta AB, Sweden

Bharat Forge Scottish Stampings Ltd., Scotland

Bharat Forge Hong Kong Limited (Formerly, Lucrest Limited), Hongkong

FAW Bharat Forge (Changchun) Company Limited, China.

BF New Technologies GmbH, Germany and

BF NTPC Energy Systems Ltd., India

JOINT VENTURES Apart from the acquisitions BFL have entered into Joint-Ventures (JV’s) with the

following companies:

Joint venture with NTPC,

Joint venture with ALSTOM,

Joint venture with AREVA.

Share Transfer Agents and Share Transfer and Demat system: Bharat Forge has no share

transfer agents. Securities of the Company are transferred in-house by the Secretarial Department


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of the company. Bharat Forge’s equity shares are traded in the stock exchanges compulsorily in

Demat mode. The Board’s Executive Committee meets twice a month for dealing with matters

concerning securities of the company.

43.97

6.41 10.88

12.08

9.93

15.09

1.64

Distribution of equity holding by type of investors

Promoters

Mutual Funds/UTI

Banks, FIs,Insurance Cos.

FIIs

Corporate Bodies

Individuals

Others


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Business Outlook The business outlook for Bharat Forge on both the domestic and export front remains

extremely strong. The company will use its entry into the new segment of passenger car

components as one of the levers of its export growth strategy. The immense opportunity in the

area of machined heavy duty crankshafts for the global markets is expected to boost the

company’s exports in the future. BFL is aiming for global leadership in both these segments in

the coming years. The recent conclusion of two significant orders from Ford and Daimler-

Chrysler are a step in the direction of achieving our goals. The recent opening up on several

International Purchasing Offices by leading global majors in India is adding to our export market

potential. BFL is working very closely with most of these IPO’s in identifying opportunities for

their global requirements.

The outlook remains buoyant domestically on the back of a demand revival across the

automotive market segments and the beginning of outsourcing by Global OE manufacturers who

have setting up manufacturing facilities in India. BFL is working closely with domestic

customers in new product development initiatives that will further catalyze the company’s

leadership position in the domestic market and enable it to grow its market share further.

Product Profile

Company manufactures wide range of safety and critical components for passenger

vehicles, commercial vehicles and diesel engines in the automotive segment. Some of key

automotive components manufactured include Crankshafts, Front Axle Beams, Steering

Knuckle, Connecting Rods, Rocker arm, Transmission Parts and hubs. It also manufactures

specialized components for non-automotive industries such as Railways & Marine, Aerospace,

Oil & Gas, Conventional & Non-Conventional Energy, Mining & Metals, Construction

equipment’s etc.

Strong Customer Profile BFL has strong domestic customer base including TATA Motors, Mahindra, Ashok

Leyland, Escorts, Bajaj, BHEL, Larsen & Toubro, Kirloskar. On the global front, company has

elite customers in its fold, including BMW, Audi, DaimlerChrysler, Ford, General Motors,

Toyota, Volkswagen, Volvo, MAN, Honda, Audi, Renault, Caterpillar, SAAB, Cummins, DAF,

DANA, Perkins, Porsche, Renault, IVECO, Land rover, ArvinMeritor etc. BFL has already

crossed the stringent acceptability threshold of global OE customers. BFL will here on wards

focus on building collaborative relationships which will result into cost reduction to the global

OE customers and global business leadership in chosen field of activity to BFL.

This is a key to a long- term win-win mutually beneficial relationship for both BFL and

its customers


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Bharat Forge Ltd - SWOT Analysis

Strengths

Diversified and de-risked business

model with widespread geographical

reach and product range

Strategic proximity and strong

customer relationships on domestic as

well as international front

Dual Offshore and fully integrated

manufacturing capabilities along with

strong customer and product profile

Technological and man-power cost

advantage

Strong group comfort of Kalyani Group

Weaknesses

Heavy dependence on US and

European markets having its own

business cycle and technological &

regulatory requirements

Exposed to currency fluctuation risk

(however, it is an opportunity as well as

risk)

Frequent equity dilution

Opportunities

Huge business opportunity in

automotive as well as non-automotive

applications in India as well as

international markets

Access to better technology and work

practices across globe

Presence in developed as well as high

growth developing economies to

supplement topline as well as bottom-

line

Threats

Integrating subsidiaries operations and

delay in ramping up of new capacities

Slowdown in demand from domestic

auto OEM's and global auto industry

considering cyclical nature of

automotive business

Competition from low cost component

manufacturing countries such as

Thailand and China

Political and economical conditions in

India as well as countries in which

company and its subsidiaries are

operating.


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Five Forces Model - Bharat Forge ltd

Threat of competitors

• There are 38 players in this

organized industry.

• Dominated by non-

organized players

• Fragmented industry

Low Bargaining

power of

Suppliers.

• Nature of

suppliers(provider

s of same

services)

• Few alternatives

• Depends on

Steel industry

• Suppliers are not

concentrated

• forward

integration

High Bargaining

power of

consumer

• Large no. of

alternatives

• Low switching

costs

•

Undifferentiated

services

• Full

information

about the market

Threat of substitutes

• Plastic fibers being used in

the cars

• No much substitutes for the

industry

PRESENT COMPETITION

Electro steel Casting

Bharat Forge ltd Here


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Ratios (Standalone)

Particulars Mar 2006

Mar 2007

Mar 2008

Mar 2009

Mar 2010

Profitability & Return Ratios

EBITDA Margin (%) 24.40 24.63 24.54 16.85 21.84

NP Margin (%) 11.80 11.61 10.98 4.50 6.41

EPS 9.26 10.78 12.26 4.64 5.71

BVPS 56.80 66.90 84.20 106.90 124.20

ROE 25.77 19.68 19.54 6.78 8.43

ROACE 16.10 12.30 12.10 12.50 13.10

Operating efficiency and other ratios

Inventory T/o 2.30 2.62 5.77 2.87 3.07

Debtors T/o 0.85 1.06 0.87 1.22 1.21

Interest Coverage (x) 8.77 7.38 6.25 3.11 3.02

Asset/Turnover (x) 0.09 0.10 0.14 0.14 0.39

D/E (x) 0.85 1.06 0.87 1.22 1.21

Valuation Ratios

P/E (x) 48.04 29.22 21.81 21.13 43.2

P/CEPS (x) 27.2 22 19.7 16.6 13.8

P/BV (x) 6.8 6 4.7 3.7 3.2

Mcap/Sales (x) 5 4.2 3.6 3.2 2.7

EV/Sales (x) 5.3 4.2 3.6 3.2 2.7

EV/EBITDA (x) 20.8 17.9 15.9 13.2 10.8

Liquidity ratios (times)

Bharat Forge Ltd.

Particulars Mar 2006

Mar 2007

Mar 2008

Mar 2009

Mar 2010

Cash to current liabilities 0.45 0.57 0.14 0.42 0.47

Cash to avg. cost of sales 125.45 153.04 29.04 70.95 108.6

Quick ratio 0.75 0.91 0.6 0.89 0.9

Current ratio 1.3 1.38 1.28 1.83 1.6

Current ratio (incl. mktbl. securites) 1.53 1.54 1.53 1.83 1.82

Debt to equity ratio 0.85 1.06 0.87 1.22 1.21

Interest cover 8.77 7.38 6.25 3.11 3.02

Interest incidence (%) 5.75 4.67 5.67 4.89 4.86


26

Review of Business

Domestic revenues grew by 84.0% & 15.9% on a YoY and QoQ basis despite a 12.3%

QoQ17

drop in domestic M&HCV volumes. Exports continued to grow for the 5th straight

quarter driven by recovery in both US & European markets. Export revenues grew by 63.2% &

6.0% on a YoY and QoQ basis. EBITDA margins have expanded both on a YoY & QoQ basis to

25.2% in Q1 FY1118

driven by improved operating leverage. Utilization for Indian operations

improved on the back of continued strong off-take from domestic OEM’s coupled with

improvement in utilization of new facilities and continuing recovery in export markets.

The subsidiaries’ performance in the quarter is significantly influenced by the Factors

like, Improvement in capacity utilization across the subsidiaries from 25% in Q1 FY10 to 39% in

Q1 FY11. The restructuring actions carried out in CY09 with aim of lowering the breakeven

levels are starting to positively impact the financial performance. EBITDA % for the overseas

subsidiaries has improved to 4.2% in this quarter from 2.5% in Jan – Mar 2010. China JV has

turned the corner and has posted a profit for the first time since the commencement of operations

in April 2006.

The Indian automotive markets have cooled off a bit post the year end & have witnessed

a small volume reduction of 5.4% on a QoQ basis. The M&HCV segment, which is BFL main

addressable segment saw volumes drop by 12.3% on a QoQ basis but jumped by 57.1% on a

YoY basis. In spite of the volume drop, BFL domestic sales surpassed previous highs and

recorded growth of 84.0% & 15.9% on a YoY and QoQ basis respectively. BFL’s sales for

automotive applications have witnessed growth across both the commercial & passenger vehicles

segments.

The US Automotive industry has witnessed moderate growth in CY10 YTD on the back

of overall economic recovery & improvement in consumer sentiments. BFL focuses mainly on

the M&HCV segment with strong relations with both OEM’s & Engine manufacturers. The

segment is now clearly showing signs of growth after 3 continuous years of significant volume

reduction. The segment in CY10 has witnessed several significant news flows relating to new

order bookings from fleet operators which were virtually non-existent in CY2007-CY2009

period, suggesting the beginning of replacement cycle.

The automotive markets in both India & the export markets, especially USA are on a

steady growth trajectory. The demand in India is being driven by strong economic activity led by

infrastructure & capital goods. The entry of global OEM’s into the Indian markets bode well for

both the industry and Bharat forge ltd.

17

Quarter on Quarter 18

Financial Year 2011 –Quarter 1(one)


27

Peer Comparison Bharat Forge is second largest auto forging company in world with it's operations spread

out in India, U.S, Europe and China. BFL has total forging capacity of 600000 M.T and is adding

another 100000 M.T capacity for nonautomotive applications. As a matter of strategy BFL

acquired slightly weak companies at low investments to diversify in to different geographies,

enhance overall forging capacities and also enrich its customer profile. Lower profitability of

these subsidiaries has affected company's consolidated profitability; however, BFL is in process

of restructuring these subsidiaries and thereby supplement its topline as well as bottom-line.

Similarly many other forging companies are pursuing organic as well as inorganic growth

strategy to tap the opportunity lying in automotive and non-automotive sector. Electrosteel

casting is also prominent auto component manufacturer engaged in manufacturing casting,

forgings, high value machined parts and other auto components.

BFL commands premium valuations due to its global leadership positioning, large scale

of operations, de-risked business model, strong group comfort and fundamentals and future

growth prospects. I believe that companies with global scale of operations such as Bharat Forge

and Electrosteel casting will be able to sustain any downturns and emerge as dominant players in

global auto component sector. Below is a tabular representation of the EPS, P/E, Sales and

Profit/Loss from 9 companies which consists of 3 Large cap (Bharat Forge Ltd, Electrosteel

casting, Jayaswal Neco Industries) 3Mid cap (Mahindra Forgings Ltd, Ahmednagar Forging,

Kalyani Forge Ltd) & 3 Small Cap (Hinduja Foundries Ltd, MM Forgings Ltd, Ramkrishna

Forgings Ltd) and below the tabular representation there is a Graphical representation:


28


29

Technical Analysis Technical Analysis does not consider values in the sense in which fundamental analysis

applies it. Fundamental Analysis allows the analyst to forecast the holding period and the

riskiness of the holding but this does not help an investor in identifying a buy or sell action.

Technical Analysis, however, may be useful in timing a buy and sell action. Following is the

Technical Analysis of Bharat Forge Ltd, to understand their pattern and behavior of share prices

in the market. The time taken is from 17th

August 2009 to 30th

October 2010.

The first chart shows the basic graphical pattern of the movement of share prices of BFL

on NSE (National Stock Exchange) with comparison to CNX100 index.

The following were analyzed;

Correlation Coefficient =

0.2072 Bharat Forge Ltd, have a positive co-relation with the CXN100 Index

Beta = 0.0760 Bharat Forge Ltd, is volatile in comparison with the CNX100 Index

If there is an Increase of 10% in CNX100 Index then there would be a Increase of 0.95% in Bharat forge ltd

If there is an Decrease of 10% in CNX100 Index then there would be a decrease of 0.76% in Bharat forge ltd


30

As a peer comparison the second chart shows a graphical representation of the two stocks

Bharat Forge Ltd, with Kalyani Forge which are competitors in Forging and casting Industry.



0.0444 Bharat Forge Ltd, have a positive co-relation with the stock of Kalyani Forge Ltd.,

Beta = 0.1508 Bharat Forge Ltd, is volatile in comparison with the stock of Kalyani Forge Ltd.,

If there is an Increase of 10% in Kalyani Forge ltd stock value then there would be a Increase of 1.98% in Bharat forge ltd

If there is an Decrease of 10% in Kalyani Forge ltd stock value then there would be a decrease of 1.51% in Bharat forge ltd


31

The third chart is does an analysis of the comparison between Bharat Forge ltd, (BFL)

and S&P - CNX Index



0.2005 Bharat Forge Ltd, have a positive co-relation with the S&P CNX Index

Beta = 0.0719 Bharat Forge Ltd, is volatile in comparison with the S&P CNX Index

If there is an Increase of 10% in S&P CNX Index then there would be an Increase of 0.97% in Bharat forge ltd

If there is an Decrease of 10% in S&P CNX Index then there would be a decrease of 0.72% in Bharat forge ltd


32

Resistance & Support Level This Technical tool helps in telling that what would be the price band of share price in

which it move in near future on the basis of past high and low levels made by a particular scrip.

Resistance Level shows the price above which share price will not move in normal case on the

other hand Support level shows the minimum share price which can be touched by share or

crossing of this share will not be there in normal market condition Following is the Resistance &

Support level of Bharat Forge ltd., for the period of 13 months is below as a long term;

Below is the graph of the Resistance & Support level of Bharat Forge ltd., for the period of 3

months as a Short term;


33

As it is seen in the past 3 months BFL share price moved up and it keeps making on new

level so perfect resistance level for this share is not easy to predict as performance of this share is

very good compare to all scrip’s of this segment.

The above band of resistance and support level shows that the price of shares will move

in between this range only until unless any wrong reaction came out in economy or when any

correction takes place the prices will move in between this band only.

Simple Moving Average Moving Average is an indicator that shows the average value of a security's price over a

period of time. The method of interpreting a moving average is to compare the relationship

between moving averages of the security's price with the security's price itself. In the below

figure we have the share price of Bharat Forge Ltd, on a moving average of 20 period as Short

Term, 50 period for Medium Term respectively.

A buy signal is generated when the security's price rises above its moving average and a

sell signal is generated when the security's price falls below its moving average. It is designed to

keep you in line with the security's price trend by buying shortly after the security's price

bottoms and selling shortly after it tops. It shows that Bharat Forge ltd is performing better, so

industry as whole is also performing outstanding. So keeping a hold position for the companies

would be profitable in future.

20 Days Moving Average


34

50 days Moving Average

100 days Moving Average

The graph also represents the point at which you have a chance of buying the shares and

selling then based on the moving averages.


35

A buy signal is generated when the security's price rises above its moving average and a

sell signal is generated when the security's price falls below its moving average. In the near

future based on the Moving average show Hold signal as their security prices rises above its

moving average. This shows that an investor can kept a hold position or can buy for longer

period of time but as we can see in case the moving average line is also rising which shows that

Buy n hold position for very long period could be unprofitable a minor correction in the share

price can bring down the share price line and then moving average line will easily cross the share

price line.

Trend line

A trend line is formed when you can draw a diagonal line between two or more price

pivot points. They are commonly used to judge entry and exit investment timing when trading

securities trend line is a bounding line for the price movement of a security. Bharat Forges ltd

have a upward trend line on the long term but the security had a stagnant trend line for a period

of 6 months from January 2010 to June 2010.


36

MACD19

As shown in the chart above, when the MACD falls below the signal line, it is a bearish

signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the

signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely

to experience upward momentum. Many traders wait for a confirmed cross above the signal line

before entering into a position to avoid getting "faked out" or entering into a position too

early, as shown by the first arrow. This means upside momentum is increasing. Negative MACD

indicates that the 12-day EMA20 is below the 26-day EMA. Negative values increase as the

shorter EMA diverges further below the longer EMA.

Above graph shows the MACD of Bharat Forge Ltd., for the period of 13 months. The

MACD is the difference between a 50-day a 25-day exponential moving average (EMA), called

the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities.

From the 25-day moving average it shows a Sell opportunity and on 50-day moving average on

MACD shows a Hold Opportunity.

19

Moving Average Convergence / Divergence 20

Exponential Moving Average


37

Conclusion

Indian Automobile Industry is in the growth phase and the expected growth rate is 23%

for FY2009-10 compare to last year growth rate which was just 0.7% and the above facts and

figures in our study also support this truth. According to Indian Statistical Organization the per

capita income (Rs.38000) is increasing and national income at the rate of 14.4% which shows

potential to buy vehicle in auto industry. The growth rate of Indian forging and casting industry

is so fast that by 2016 Indian Industry will be world 7 largest manufacturers in all sections. The

Indian auto market is still untapped the majority of the people in country don’t own a four

wheeler and all the major auto companies are trying to increase their sales by several moves.

By the way Bharat Forge Ltd (BFL) are now concentrating not only the automobile

industry, they are trying in the area of relative diversification and non-relative diversification

such as power (electricity) which is proved to be the big money spender industry in terms of

volume and growth, due to the importance given by the government agencies to spend more on

infrastructure, and Power sector is one to be benefited, to which BFL have a Joint venture with

NTPC which is a India’s biggest power supplier and Alstom of France the world largest,

producer of electricity.

From the Technical Analysis i come to know that the share price of Bharat Forge Ltd,

will move in the Price band of band of Rs.301.39 to Rs.270.17 if you are looking for a long term

investment and if you are looking for a short term like 3 months then the price will move in the

range of Rs. 357.80 to Rs. 328.69. Also the share price through the trend line and the moving

average is on the uptrend, for long term considering 13 month period and as well as short term

for 3 months is also have uptrend, but off late it is on the stagnant trend line.


38

References

http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=132756 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=113335 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=113509 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=100493 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=100128 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=122285 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=122241 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=122241 http://money.livemint.com/IID64/F132527/Financial/Ratios/Company.aspx http://money.livemint.com/IID42/F100493/QuickQuote/Company.aspx

Annual report of Bharat Forges ltd – 2008-09 & 2009-10 KJMC Research – on BFL 2008 Indiainfoline Research –on BFL march 2010 www.ibef.org

www.rbi.org.in

www.moneycontrol.com

www.nseindia.com

http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=INR

http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR

http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=INR

www.bharatforge.com

Investment analysis and Portfolio management – M.ranganathan & R.madhumathi

Investment analysis and Portfolio management – F.Reilly & K.Brown

CMIE – Prowess

http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=132756

http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=113335







http://money.livemint.com/IID64/F132527/Financial/Ratios/Company.aspx

http://money.livemint.com/IID42/F100493/QuickQuote/Company.aspx

http://www.ibef.org/

http://www.rbi.org.in/

http://www.moneycontrol.com/

http://www.nseindia.com/

http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=INR

http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR

http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=INR

http://www.bharatforge.com/

security analysis of bharat forge ltd

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