We recently met the management of Bharat Forge (BFL) to get an update on its existing businesses as well as on some new initiatives and expansion plans announced by the company. On the existing business front, BFL has gained market share with Tata Motors – a key customer due to favorable change in Tata Motors’ product mix. This, and a strong growth in the non-automotive components business have mitigated the impact of a slowdown in CV sales in FY08.
Growth in exports too has been strong at 30%yoy (42%yoy adjusted for rupee appreciation) during 9mth FY08. Amongst BFL’s overseas subsidiaries, BFL America has seen a significant drop in business volumes in FY08 due to a slowdown in car and truck sales in North America.
On the new initiatives front, BFL’s upcoming non-automotive components facilities are likely to commence commercial operations in Q4FY09 and we expect material revenue contribution only from Q1FY10. These facilities are likely to operate at ~50% capacity utilization in FY10 and would have a revenue potential of Rs9-10bn at 100% utilization. BFL’s proposed JV with NTPC (51:49) would initially manufacture components for power equipment and would aim at manufacturing complete power plants by 2011-12 (initial capacity likely to 4500MW). Though BFL’s stake in the JV could be in for a significant dilution due to induction of a technology partner, it would remain a key component supplier to the JV with the obvious benefits of enhanced business opportunities.
BFL’s proposed Rs7.0bn fund raising plans (Rs4.0bn in debt and Rs3.0bn in preferential warrant issue to promoters) would be utilized for funding the proposed venture into the Capital Goods sector (which includes the JV with NTPC). We believe BFL would also need to plan a further expansion in its automotive components business as we estimate ~100% capacity utilization in this segment by FY10.
In our view the company’s target of 12% EBIDTA margin for its subsidiaries by FY10 (7.9% in 9mth FY08) appears stretched due to delays in achieving benefits of product rationalization and other synergies. BFL has re-iterated that escalations in steel prices are a pass through with most customers and hence would not impact margins materially. Going forward, we expect higher proportion of non-automotive components to lead to higher margins and consequently expect ~300bps margin expansion over FY08-10. This would lead to a strong 40% PAT CAGR for BFL over FY08-10. The stock trades at PER of 13.3x and EV/EBIDTA of 6.2x FY10 based on fully diluted equity capital. Maintain Outperformer.
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Anil Ambani group firm Reliance Money on Monday joined hands with the Bombay Stock Exchange and the Bombay Bullion Association to launch the country's first organised bullion trading platform.
The over-the-counter 'Bullion Spot Market' would be the first of its kind and would be operationalised within a month, the Anil Dhirubhai Ambani Group announced.
This would help India -- already the world's largest gold consumer -- to move from being a 'price taker' to a 'price maker' in the global gold market, Reliance Money CEO Sudip Bandyopadhyay said.
Currently, gold prices are governed by London Bullion market as a reference point.
While noting that BSM trading platform would be in line with London Bullion Market, Bandyopadhyay said that it would help jewellers monitor international price movements on real time basis and facilitate retail investors in purchase of gold coins and bars.
BSE, with its 25 per cent stake in NMCE, is already present in the commodity market and would provide domain expertise for the initiative. BBA, the country's largest bullion trading association that controls 75 per cent of domestic bullion trade, would help in setting the prices.
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Robust order book (up 48.1% YoY) to drive earnings growth: IVRCL’s current order backlog stands at Rs120b (+48.1% YoY, 3.5x FY08E revenue), which will drive revenue and earnings CAGR of 40.4% and 36.6% during FY08-FY10. We expect EBITDA margins to improve 70bp over FY08-FY10 driven by i) increasing proportion of buildings and power transmission in the order book and ii) operating leverage. Share of transportation projects to order book has reduced from 22% in March 2007 to 12% as at December 2007, which again is positive for margins. Given that ~93% of order book has price variation clauses, the impact of raw material price increases is limited.
Establishing a strong position in power T&D, buildings: IVRCL has been successful in building a strong presence in the power T&D segment (FY08 revenues Rs6.5-7b, v/s Rs3.6b in FY07). Also, share of buildings in order book has increased to 21% in December 2007 (v/s 12% in December 2006), wherein margins are relatively better. Both these segments are expected to be key growth drivers. IVRCL is also the largest construction companies in India in the ‘water management’ segment (50% of FY08 revenues).
Robust FY09 guidance: IVRCL reiterated revenues of Rs46-49b (up 35%-44% YoY), EBIDTA margin of 10.6-10.8% (up ~50bp YoY) and PAT of Rs2.9-3b (up 38-43% YoY). The company has comfortable net DER of 0.6x (March 2008), while incremental equity commitments towards BOT projects are negligible.
Valuation and view: We expect IVRCL to report net profit of Rs2b in FY08 (up 44.4% YoY), Rs2.7b in FY09 (up 34.4% YoY) and Rs3.8b in FY10 (up 38.8% YoY). At the CMP of Rs380/share, the stock trades at reported PER of 23.5x FY08E, 17.9x FY09E and 12.9x FY10E. Adjusted for BOT, real estate etc. the stock is trading at PER of 17.3x FY08E, 13.2x FY09E and 9.5x FY10E.
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