(Source: www.bharatforge.com, www.myiris.com, www.hdfcsec.com)
Recommendation: HOLD (BUY ON DIPS)
Sector: Auto Components Manufacturing
Home Country: India
Listed On: Bombay Stock Exchange & National Stock Exchange, Mumbai
Total Revenue FY 2005: Rs. 12.3 bn
Net Income FY 2005: Rs. 1.6 bn
Debt/Equity Ratio 2005: 1.29
Market Capitalization: Rs. 79.09 bn
Share Price May 15th, 2006: Rs. 407.25
Expected Earnings per share FY:
2006 : Rs. 12.9
2007 : Rs. 16.6
2008 : Rs. 21.2
Expected Price/Earnings Ratio FY: (expected EPS to current market price)
2006: 31.5
2007: 24.6
2008: 19.2
Dividend yield 2005: 0.8%
Estimated reasonable P/E ratio 2008: 20
Target Share Price end 2007: Rs. 424.00
(representing an increase of 4.2% compared to current market price)
Exchange rate as of May 16th, 2006: 45.44 Rs. for the US$
Company Profile
Bharat Forge is the second largest forging company in the world. It is one of the most advanced companies in terms of technology in its industry. The company is a major global supplier of automotive engine and suspension components. It manufacturers a wide range of forging products and machined components for the automotive, diesel engine, railway, earthmoving, cement, sugar, steel, coal, ship building & oilfield industries and also general engineering equipment.
Bharat Forge is the largest exporter of auto components from India and a leading chassis component manufacturer in the world. It has built up a strong capability in design and engineering, including a full fledged product testing and validation facility, which gives Bharat Forge a Full Service Supply Capability - from product conceptualization to designing to manufacturing and product testing & validation.
Analysis
Bharat Forge has positioned itself to take advantage of its global sourcing capabilities, sharing best practices&benchmarking and benefit from synergies in manufacturing. The recent initiatives of the global technology center, its acquisitions and the recently formed JV with FAW, China- make BFL a global company. BFL remains a preferred component supplier for several global car companies and is a low cost producer with the high technological capabilities. We remain positive on the growth prospects of the company.
After the acquisitions of three global companies in 2 years time frame, the company has performed another acquisition. Bharat Forge acquired Imatra Kilsta AB, Sweden with its wholly owned subsidiary Scottish Stampings. The Imatra Forging group is the largest manufacturer of front axle beams and the second largest crankshafts producer in Europe having manufacturing facilities at Karlskoga, Sweden and Ayr, Scotland. Imatra Kilsta AB-Scottish Stampings has a forging capacity of 100,000-ton par annum. Bharat Forge can now produce all of its core products like- crankshafts, beams, knuckles and pistons in two locations worldwide and provide design & engineering and technology, and support close to the customers for these products. With a strong long-term client relationship with auto majors in the world, the company will continue to get benefit in the long run.
Valuation
Following the arguments as stated above we believe Bharat Forge will be able to grow its revenues, net income and EPS substantially over the coming years. We estimate a growth rate of close to 30% for EPS until 2008 and arrive at our above EPS estimates. Our estimated reasonable P/E ratio of 20 compares to a market average of about 12 and P/E ratios for pure growth stocks of 25 to 28. As an industrial company Bharat Forge can not be valued as a pure growth stock as the capital intensity of the business will make it harder in the future to continue to grow at the present rate. Part of the growth might be financed by capital increases, which would increase the number of shares outstanding and potentially limit the EPS growth. With our estimates for EPS and the P/E ratio we arrive at our target share price of 424.00 Rs., which represents only an increase of 4.2% compared to the current market price. Even with the excellent profitable growth prospects of Bharat Forge we can only give a HOLD recommendation, as the stock is valued so high already.