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Bharat Forge

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Author: VENKATARAMAN & CO., Recommendation: BUY Bharat Forge We Initiate Buy on Bharat Forge in the range of 260-275 with a price target 260of 340-390 340The stock slips consistently from higher levels and expected to take a strong support at 265-275. 265Being [260-275] 61% retracement levels, fundamentals of the stock [260remains positive & its advisable to initiate buy in the above mentioned levels. Bharat Forge  June 2007 quarter profit impacted by rupee appreciation Bharat Forge's quart
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  We Initiate Buy on Bharat Forge in the range of 260We Initiate Buy on Bharat Forge in the range of 260--275 with a price target 275 with a price target  of 340of 340--390390 The stock slips consistently from higher levels and expected to take a strongThe stock slips consistently from higher levels and expected to take a strongsupport at 265support at 265--275.275. Being [260Being [260--275] 61% retracement levels, fundamentals of the stock275] 61% retracement levels, fundamentals of the stock remains positive & its advisable to initiate buy in the above mentionedremains positive & its advisable to initiate buy in the above mentionedlevels.levels. Bharat ForgeBharat Forge Recommendation:Recommendation:BUYBUY  Author: Author: VENKATARAMAN & CO., VENKATARAMAN & CO.,   June 2007 quarter profit impacted by rupee appreciation Bharat Forge's quarterly results were well below our expectations as rupeeappreciation vs the US$ distorted operating performance, though gains onforeign currency commercial borrowings (FCCBs) saved the day. Stand-alonereported PAT grew 25.8% yoy to Rs648m, but excluding the Rs333m FCCBgains, normalised PAT dropped 30.4% to Rs429m. EBITDA margin declined5.2ppt to 20.4%, leading to a 5.7% drop in EBITDA to Rs1.01bn despite 18%growth in net sales to Rs4.97bn. Similarly, consolidated reported PAT rose9.2% to Rs804m, while normalised PAT fell 39.7% to Rs471m with 7.5%growth in net sales to Rs10.6bn.  Ex  ports ramped up in a tough Rs/USD environment  The sharp capacity ramp-up for the stand-alone entity began to deliverimpressive gains from the June 2007 quarter in the form of export sales growth(31.5% yoy). The car engine components ramp-up for the US and Europe hasbeen driving growth, while US chassis has been on a cyclical downturn. Actualgrowth was much higher at 42.5% yoy, but was affected by an 8% rupeeappreciation in the last quarter. Bharat ForgeBharat Forge   E arnings model shifted to represent consolidated numbers  W  e shift to consolidated numbers with the availability of the consolidatedentity's financial performance on a quarterly basis and the inclusion of theChinese subsidiary since March 2007. The sales ramp-up in subsidiaries within12-18 months of acquisition was better than expected in FY07. However, wetrim our consolidated EPS forecasts by over 35% each for FY08/FY09 toRs12.6/Rs16, reflecting the potential currency impact on the standaloneentity's EPS  W orst appears to be in the price; Buy maintained Bharat Forge has underperfomed the market by 30% in the last 12 months. The currency impact on profitability is more of an accounting treatment,though the strategy of hedging through FCCBs should pay dividends in thelong run in terms of cash flow.  W  e expect Bharat Forge to emerge a winner inthe medium term, with growth momentum maintained from new exportprogrammes to automobile OEs and non-auto components. W  e shift to athree-stage DCF valuation and peg the target price at Rs332 (from Rs401), ie20.8x our FY09F EPS. Bharat ForgeBharat Forge   Despite a tough external scenario ie, weakness in Indian and USM&HCV demand, and a sharp rupee appreciation (against the US dollar),Bharat Forge standalone recorded impressive 18.1% yoy growth in net sales toRs4.97bn in the June quarter. Adjusting for a Rs187m revenue loss due tocurrency fluctuation, net sales were Rs5.16bn, up 22.6% yoy and flattish qoq. The sharp ramp-up in heavy duty crank-shafts and non-auto sales to the USand Europe helped soften the impact of a slide in US chassis component salesin the quarter. Capacity utilisation rates were flattish qoq.  The Indian entity·s exports increased by a robust 31.5% yoy and 11.5% qoq toRs2.24bn despite the steep rupee appreciation. Similarly, domestic sales growthof 9.1% yoy to Rs2.7bn was better than the weakness apparent in itscustomers' domestic OEM sales volumes. However, subsidiary salesperformance (excluding the Chinese JV) was flattish yoy at Rs5.65bn as therupee appreciation of around 8% ate into growth. Bharat ForgeBharat Forge
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