Bharat Forge

2QFY2009 Result Update

BUY Performance Highlights

Price Rs103 ƒ Standalone Results: Bharat Forge (BFL) recorded 19.4% yoy growth in
Net Sales (Standalone) during 2QFY2009 largely on the back of 30.4%
Target Price Rs117 growth in its outside India operations and 7.4% yoy growth in the domestic
market. This growth has come as a surprise especially because the
Investment Period 12 months Automobile industry in India and US are struggling to recover from macro
slowdown and high input costs. In 2QFY2009, BFL clocked a decline in
Stock Info
Operating Margins by 311bp yoy to 24.1% (27.2%). Management had
Sector Auto Ancillary indicated in the last quarter that it was able to fully pass the increase in
input costs to its customers, which helped improve Margins and post higher
Market Cap (Rs cr) 2,283 Net Profit of Rs98.8cr (excluding Forex losses of Rs87.5cr) during
2QFY2009. Including Exceptional items however, BFL reported 83.4% yoy
Beta 0.8 decline in Net Profit to Rs11.3cr.
52 WK High / Low 390/100
ƒ Consolidated Results: BFL reported 28.8% yoy increase in Consolidated
Avg Daily Volume 106950 Net Sales to Rs1,347cr, which was higher than our estimate of Rs1,194cr,
aided by higher realisation. Consolidated Net Profit, excluding Foreign
Face Value (Rs) 2 currency loss and Exceptional items of Rs23.6cr, was up 69.4% to
Rs115.7cr (Rs68.29cr). The company has recognised forex loss of
BSE Sensex 8,701 Rs87.5cr (Rs10.9cr Profit in 2QFY2008) on revaluation of loans consequent
to depreciation of the Rupee. OPMs declined by 260bp to 14.4% (17%). Net
Nifty 2,584
Profit including Forex loss and Extraordinary item was down 94.2% yoy to
BSE Code 500493 Rs4.6cr. BFL’s consolidated numbers did not include FAW Bharat Forge,
BFL's joint venture in China.

ƒ
NSE Code BHARATFORG
Diversifying market concentration and capacity addition on track:
Reuters Code BFRG.BO BFL’s initiatives to de-risk its Export Revenues have been paying off, with
its exports to the European markets growing rapidly. The company’s capex
Bloomberg Code BHFC@IN
for its Non-Auto business is also on track, with capacities at Baramati
Shareholding Pattern (%) expected to get commissioned in 3QFY2009. Trial production commenced
in Baramati during the quarter while the Mundhwa facility is expected to
Promoters begin trial runs from August 2008. Serial production in Mundhwa is likely to
40.6
commence six months thereafter. BFL, at present, has an Order book of
MF/Banks/Indian FIs around 75% for its combined Non-Auto Forging capacity (1,00,000 tonnes
14.6
p.a.) at the two plants. The company expects to generate Rs800-1,000cr at
FII/ NRIs/ OCBs
13.4 full capacity, and on planned capex of more than Rs400cr.
Indian Public
31.4
Key Financials (Consolidated)
Y/E March (Rs cr) FY2007 FY2008 FY2009E FY2010E
Abs. 3m 1yr 3yr Net Sales 4,148.9 4,597.5 5,128.9 5,898.2

Sensex (%) (41.1) (53.0) 9.9 % chg 39.6 10.8 11.6 15.0
Net Profit 299.4 302.4 344.7 400.1
BFL (%) (58.2) (66.1) (68.2) % chg 19.5 1.0 14.0 16.1
OPM (%) 14.6 14.1 14.1 14.9
Vaishali Jajoo EPS (Rs) 11.0 13.6 14.4 16.7
P/E (x) 9.4 7.6 7.1 6.2
Tel: 022 – 4040 3800 Ext: 344
RoE (%) 1.9 1.4 1.0 0.9
e-mail: vaishali.jajoo@angeltrade.com
RoCE (%) 19.0 17.6 13.8 14.5
P/BV (x) 12.2 12.1 12.7 13.0
EV/Sales (x) 0.7 0.7 0.6 0.5
EV/EBITDA (x) 5.2 4.8 4.3 3.6
Source: Company, Angel Research; Note:FY2009, FY2010 EPS on fully diluted Equity Shares.

October 25, 2008 1

 Bharat Forge
Auto Ancillary
Key Highlights and Business Outlook
• The Indian Automobile industry has witnessed a drop in activity and demand due to the
difficult economic conditions coupled with the high oil prices and hardening of Interest
rates. This has resulted in a drop in production across segments.
• Although the demand from major geographies continued to be sluggish, BFL registered
a stable performance in 2QFY2009 with Top-line growing by 28.8% on consolidated
basis. This was aided, to some extent, by the Rupee depreciation against major
currencies. Among the subsidiaries, BFA had experienced a difficult 1HFY2009 due to
prolonged shutdown at one of its key customer facilities and due to the severe slow
down in the US economy.
• The company has taken simple forward covers against Export receivables. To
recognise impact of forex fluctuation arising out of instruments acquired to hedge
highly probable transactions in appropriate accounting periods, the company has from
this year decided to apply the principles of recognition set out in the International
Accounting Standards (IAS) as suggested by the ICAI, which is also reflected in the
Accounting Standard-30- Financial Instruments - Recognition and Measurement. As a
result, impact of unrealised loss (net) consequent to foreign currency fluctuation in
respect of effective hedging instruments, to hedge future exports, aggregating
Rs21.7cr for the quarter and Rs47.2cr year-to-date are carried as a Hedging Reserve
to be ultimately settled when the underlying transaction arises, in the Profit and Loss
account as against the practice of recognising the same in the Profit and Loss account,
on valuation at the end of each period. Hence, previous period / year figures are not
strictly comparable.
• Other Foreign currency financial assets, liabilities, receivables etc. that do not qualify
for hedge accounting have been revalued at the period end rate and resultant Net Loss
of Rs87.5cr for the quarter and Rs156.9cr year-to-date has been debited to the Profit
and Loss account and treated as Exceptional Items in the above results on account of
the wide fluctuation in foreign exchange rates witnessed during the quarter/ period. Out
of this loss Rs73.6cr for the quarter and Rs130.4cr year-to-date is with respect to the
FCCBs, which if not converted are repayable from April 2010 to April 2013 and Rs14cr
for the quarter and Rs26.5cr year-to-date is with respect to other loans, etc.
• Due to breakdown of the crankshaft at the press during February 2007, one of the
wholly-owned subsidiaries of the company, acknowledged claims from its customers
for reimbursement of all costs, expenses, loss and damage incurred by an alleged
failure to deliver. The said subsidiary filed a claim with the Insurance company for
business interruption and material damages for an amount of Rs32.9cr. The claim with
the Insurance company is yet to be settled. BFL acknowledged Rs24.1cr against this
damage in 2QFY2009.
• Emerging opportunities in Non-Automotive Business: BFL sees a lot of
opportunity in its Non-Automotive business also and is focusing on six sectors, viz.,
Marine, Power, Aerospace, Construction Equipment, Locomotive and Railways. BFL
expects its Non-Automotive business to contribute around 40% of its global revenues
over the next four years. Over the last two years, BFL announced fresh investments to
the tune of Rs490cr (Rs350cr in Baramati and Rs140cr in Pune) to set up capacity to
cater to the opportunities arising in its Non-Automotive business. Currently, the
company’s Non-Automotive business accounts for around 17% of its consolidated
revenues. Going ahead, it expects to increase it to 25% once new capacities become
operational in Baramati. Margins in this segment are also expected to be superior
compared to the Auto segment.

October 24, 2008 2

 Bharat Forge
Auto Ancillary
Valuation

At the CMP of Rs103, the stock is trading at 7.1x FY2009E and 6.2x FY2010E
consolidated Earnings. Foreign currency convertible bond (FCCB) loans make up a major
portion of the company’s loan book. Out of a total of Rs730cr in FCCB loans, Rs410cr is
due in April 2010. Since the exercise price is way above the current market price, it looks
unlikely that it would be converted to equities. Hence, the company may have to raise fresh
loans thereby increasing its Interest costs.

We believe Industry valuations are likely to remain subdued in the near term due to overall
slowdown in the sector. A substantial portion of the company’s Revenue comes from the
Commercial Vehicle segment, where recovery looks unlikely in the near term. Further, a
major portion of the company’s consolidated Revenue comes from the US and European
markets, which is almost in recessionary mode, indicting further underperformance for the
stock. In view of all these, we lower our Target multiple to 4x (earlier 5.5x) FY2010E
EV/EBITDA and P/E to 7x (earlier 12x) FY2010E Earnings. We maintain a Buy on the
stock, with a revised Target Price of Rs117 (Rs218).

Exhibit 2: 2QFY2009 Performance (Standalone)

Y/E Mar (Rs cr) 2QFY2009 2QFY2008 % chg 1HFY2009 1HFY2008 % chg
Net Sales 654.5 548.1 19.4 1,291.8 1,045.0 23.6
Other Income 10.2 14.4 (29.0) 22.3 34.4 (35.2)
Total Income 664.7 562.5 18.2 1,314.1 1,079.4 21.7
EBITDA 157.7 149.2 5.8 313.7 250.4 25.3
OPM (%) 24.1 27.2 24.3 24.0
Interest 23.6 27.3 (13.7) 43.1 50.7 (14.9)
Depreciation 38.9 35.1 10.8 76.6 68.0 12.7
Profit Before Tax 18.0 101.2 (82.2) 59.4 199.5 (70.2)
Tax 6.7 33.4 (79.8) 21.6 66.9 (67.7)
Profit After Tax 11.3 67.8 (83.4) 37.8 132.6 (71.5)
EPS (Rs) 0.5 3.0 1.7 6.0
Source: Company, Angel Research

Exhibit 3: 2QFY2009 Performance (Consolidated)

Y/E Mar (Rs cr) 2QFY2009 2QFY2008 % chg 1HFY2009 1HFY2008 % chg
Net Sales 1,346.6 1,045.2 28.8 2,657.9 2,106.6 26.2
Other Income 13.2 15.2 (13.3) 25.7 35.8 (28.2)
Total Income 1,359.8 1,060.4 28.2 2,683.6 2,142.4 25.3
EBITDA 193.8 177.6 9.1 398.4 324.2 22.9
OPM (%) 14.4 17.0 15.0 15.4
Interest 28.9 30.0 (3.7) 54.2 56.7 (4.3)
Depreciation 60.8 54.3 11.9 120.9 106.8 13.2
Profit Before Tax 29.8 119.4 (75.0) 92.1 240.8 (61.8)
Tax 1.6 40.2 (95.9) 23.0 81.2 (71.7)
Profit After Tax 4.6 79.2 (94.2) 45.5 159.6 (71.5)
EPS (Rs) 0.2 3.6 2.0 7.2
Source: Company, Angel Research

October 24, 2008 3

 Bharat Forge
Auto Ancillary

TM

Angel Broking Limited

Research Team Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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October 24, 2008 4