We remain overweight on Bharat Forge and raise our target price to R400 (earlier R380) to adjust for improved capital efficiency. We increase our FY14, FY15, and FY16 net profit estimates by 55%, 4.5% and 4.4%, respectively, to account for one-offs arising from divestment proceeds and reduced depreciation and interest cost. Our target price is based on a P/E of 17x on FY15e and EPS of R23.3 stands increased by 4.5% as we incorporate these capital efficiencies. Our cost of equity is based on 8.5% risk free rate, 5% ERP and beta of 0.83.
The company announced its exit from its JV with China FAW for R1.75 billion. This represents almost the same amount which it has invested over the last eight years (in rupee terms) and is also c.1x book value post the accumulated losses. The Chinese JV had struggled in initial years. It achieved profitability in CY10 but again returned to losses resulting in record losses last year. With the Chinese CV market remaining weak, the company was struggling to achieve Ebitda break-even and with the JV unable to manage costs, we believe this exit to be positive. It will free up capital, as the JV also has R4 billion of loans and should result in better allocation of management bandwidth. We expect c4% earnings growth on this account in FY15/16.
– HSBC
