| Global Approach
Bharat Forge is changing its approach towards its global revenue model wherein the company is holding discussion with its major international OEM customers on a long term basis which gives it more revenue consistently. It is negotiating for three long term contracts which will bring in around $50 million each annually. Businessman of 2006
Business India, the leading business magazine of the country, has chosen Mr. Baba Kalyani, CMD of Bharat Forge, as the businessman of 2006. It has honoured him as it recognizes his vision and his achievements in converting Bharat Forge into a global level forging company. Forbes Favourite
Well known Forbes magazine has recognized the efficiency of Bharat Forge. Bharat Forge has been selected as one of the ‘Best Under a Billion Dollar Companies’. In all, 23 Indian companies have been selected for the coveted list out of the top 200 companies. Other prominent companies selected include Cipla, Asian Paints, Punjab Tractors, Dabur, Pantaloon Retail, Carborundum Universal etc. The list figures those companies whose turnover is less than $1 billion and whose sales and profits have depicted an increasing trend and who have shown potential for growth. The company has also been ranked as one of the top ten most dynamic companies in India by BusinessWeek magazine. It is selected along with other companies like Infosys, ICICI Bank, Reliance, Airtel, Wipro, Dr. Reddy’s, Mahindra & Mahindra, Tata Motors and Rediff.com. SEZ
A proposal to levy market rate stamp duty for land acquisition for SEZs (Special Economic Zones) may make the land dearer for the company’s proposed SEZ at Pune. The company may have to fork out a maximum of 5 percent of the deal value on stamp duty. This will increase the project cost. The SEZ may also witness some delay due to the problems related to land allotment to the project. The project is reportedly being redrawn to include the concerns of farmers. A likely decrease in the SEZ area is possible - as irrigated agricultural land may not be allotted to the project. This process of reconsideration will delay the project. PC Panacea – The budget
Budget 2007 presented by the finance minister Mr. P Chidambaram has been generally industry neutral. The focus has been more on agriculture which augurs well for the rural economy. Phasing out CST and laying down roadmap for introduction of GST by 2010 is a move in the right direction. To begin with, CST rate will be decreased from 4 percent to 3 percent. The budget has also cut peak customs duty from 12.5 percent to 10 percent. 1,396 ITIs would be converted into centers of excellence in public-private partnership at a cost of Rs 750 crore. This upgradation initiative will result in the availability of more skilled workers. The budget has extended the exemption on R&D expenditure till 2012 allowing the company to claim deduction for expenses on R&D. Also the imposition of export duty on iron ore is expected to have positive impact for the company. On the negative side, the budget has increased dividend distribution tax from 12.5 percent to 15 percent and imposed education cess of 1 percent. Outlook
Bharat Forge is the largest forging company in the world after Germany’s Thyssen Krupp. The company is changing its nature of partnership with customers from being a mere supplier to being a development partner for major OEMs (Original Equipment Manufacturers). It is also working on value addition process which is evident in the fact that the share of machined forgings in total forgings has increased to 45 percent from 40 percent and is expected to reach 50 percent by 2008. Exports to China are to go up in the coming period. The auto component sector has grown by more than 30 percent in the last three years. Bharat Forge has accounted for 8 percent share in India’s total auto parts exports of about $1.8 billion for the year 2005-06. But Indian exports of $1.8 billion compare very poorly to exports of countries like Japan, Canada and Mexico which have clocked exports of more than $25 billion. On the brighter side, Indian auto parts exports are projected to reach a figure of more than $20 billion by 2015. Global market for auto components outsourcing is projected to take a quantum jump from a little over $100 billion to more than $650 billion in another 7-8 years. Two factors are working in Bharat Forge’s favour. Number one is the change in preference from cast products to forged products and number two is the increasing pressure on margins of automakers in advanced countries which is forcing them to look for cheaper sources of supplies of auto components. Bharat Forge is a safe long term bet. The company has the economies of scale to mitigate increase in cost. The increasing contribution from value added products is a good sign. Its initiatives on the non-auto segment will diversify risk and shield it from concentration on one sector. On the exports front, China market is looking up and the company will increase its exports to the dragon land. Valuations
The stock is currently trading at an EV/ EBIDTA of 33.73x FY07E earnings and 45.58x FY08E earnings. The stock has been historically trading at a P/E of 39.93x its one-year forward earnings. The company has also been paying dividend, with a yield of 0.93%. We rate the stock to Buy with a FY08E price target of Rs.520 at a P/E of 34.62x FY08E earnings. In terms of P/E, the stock is currently trading at 29.00x the FY07E EPS of Rs.11.14 and 21.53x its FY08E EPS of Rs.15.01.
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