The Bharat Forge Ltdhas been able to deliver strong earnings in recent quarters despite the domestic M&HCV weakness, due to a rising share of exports, an improved product mix with a higher share of non-auto and machined components and favourable exchange rates.
We expect these trends to continue in FY15, with a recovery of domestic M&HCV demand providing room for upside. Additionally, BFL’s overseas subsidiaries have been delivering consistent profits and we expect them to be EPS accretive. We now ascribe a 10x FY15 value to the subsidiaries (vs nil earlier). Our FY14 estimates are largely unchanged, but we increase our FY15/16E EPS by 3%/14%, respectively. We maintain our ‘overweight’ rating and raise our target price to Rs 373 from R316, as we roll forward our valuation to FY15 and incorporate value of subsidiaries (R23/share).
Export revenues contributed 55% of revenues in 2Q FY14 (vs 46% in 3Q FY13). The improvement in export contribution can be attributed to an overall improvement in CV demand in the US (class-8) and Europe.
Additionally, BFL is gaining orders in the non-auto vertical, which we expect to ramp up further in FY15 (eg, supplies of machined locomotive crankshafts expected). Within both the auto and non-auto verticals, we expect a higher share of machining in FY15 (FY13 at 52%).
Current capacity utilisation stands at 63% across the auto and non-auto verticals. We expect BFL’s wholly owned subsidiaries to be EPS accretive due to loss-making entities (BF-America) have been shut down. Consolidation of European assets and cost-reduction measures allowing lower break-even levels (current utilisation at 62%).