CMP: Rs. 331            Recommendation: Buy 

Background :

Bharat Forge Limited  (BFL), promoted by the Kalyani Group is one of the leading manufacturers of forged and machined components for the automotive as well as the non-automotive industry.

The company provides end to end solutions from product conceptualisation to designing as well as manufacturing, testing and validation. The company has presence across the globe as its 12 manufacturing locations are based in India, Germany, Sweden, Scotland, USA and China.

Analyst’s Note :

The auto industry that was hurt by the economic slowdown in the last year has witnessed a revival in demand, both at the domestic as well as the global level. This has resulted in the revival of volumes for BFL as about 80 per cent of the revenue contribution comes from the Commercial Vehicle (CV) segment. In addition to this, incremental revenues are likely to bolster the operating margins due to lack of in-house capabilities for machining and forging among OEMs and auto manufacturers.

Thus, revival in the domestic commercial vehicle segment backed by robust IIP numbers and rise in monthly volumes across the automobile sector is likely to increase the demand for auto components like crankshaft, axles, chassis and engines in which the company leads the market with ~90 per cent share.

The revival in demand has led capacity utilizations to improve from their FY09 lows which was 53 per cent. Thus, in the quarters ahead, the company is expected to register good sets of numbers on the back of healthy domestic growth, a low base effect and receding concerns about economic recovery in the US and Europe which are BFL’s key export markets. Together, they contribute over half of its revenues.

The economic slowdown has aided the company to diversify its business operation into high value high growth non-automotive component sectors like Power, Oil & Gas, Aero space, Capital Goods and Railways. Thus going forward, the growth potential especially in the power sector is likely to enhance earnings for the company.

In the power business segment the company plans to provide services across the power equipment value chain from providing raw material to semi-finished forged goods to the power equipment manufacturers like BHEL. This will also help power equipment manufacturers reduce their dependence on imports from China thus facilitating cost rationalization.

Currently, the power vertical of the company contributes about 20 per cent of the total sales turnover which the management expects to reach about 40 per cent by FY12. This will be aided by the JV with Alstom to provide Turbine generators with a capacity of 5000 MW.

However, on the flip side, the hike in fuel costs are likely to hurt the auto sector in the near term which might see some slowdown in the demand. Also, any uncertainty in the global markets and currency fluctuations may cast an overhang on the operational performance of the company.
 
Conclusion:

Given the robust long term domestic growth prospects and healthy numbers being reported by some of the players in the auto ancillary sector the company too is likely to post good results for Q1 FY11.

Though the stock trades at a relatively higher P/E multiple as compared to its peers, its leadership position and prospects make it worth considering for inclusion as a growth stock in one’s portfolio.