The better-than-expected 1QFY09 result brings Bharat Forge back on to a high-growth trajectory, which it plans to maintain with the help of non-auto capacity ramp-up by 4QFY09. We reiterate Buy, but adjust our target price for higher WACC.
1QFY09 brings back growth momentum
Normalised PAT posted impressive growth of 68% standalone and 48% consolidated, after being flattish for the entire last year, beating our estimates by 20%. The favourable exchange rate and passing on of the steep hike in steel cost has helped improve profitability. Exports from India grew 21% qoq and 33% yoy to Rs293m, which was better than we expected. International subsidiaries recorded 19.4% yoy growth in sales to Rs6.7bn.
Rupee depreciation and low base effect positive for FY09F
Rupee depreciation of 5.4% yoy against the US dollar and 22.5% against the euro in April-July 2008, together with the increase in product prices to pass on the steep increase in steel input cost, should help Bharat Forge meet our FY09 PAT estimate despite weak demand in the automobile sector globally. The company appears on course to start commercial production of high-profitability non-auto components in 4QFY09, for which it has signed three long-term contracts each of
US$50m sales per annum, which should be the key drivers for FY10-11F.
Reiterate Buy
The revenue-diversification model has successfully helped overcome weakness at Bharat Forge's user industries (such as the US and Indian truck markets) this past year, allowing the company to continue on the high-growth path. The non-auto drive should further ease pressure from the auto sector in FY10 and help Bharat Forge sustain its bargaining power over international auto OEMs. We reiterate our Buy rating at current PEs of 16.4x FY09F and 13.5x FY10F on our projected EPS CAGR of 24.9% for FY08-11. However, we trim our DCF-based target price from Rs331 to Rs309, building-in a higher risk-free rate (from 8% to 9%). At our new target price, the stock would trade at 16.3x FY10F PE.
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