Bharat Forge Limited (BFL) reported a 23.5% increase in net sales to Rs13.1 billion on account of a strong growth in both the domestic and international markets. Adjusted net profit jumped 48.2% y-o-y to Rs864.7 million, and adjusted net profit margin increased 114 bps to 6.5%, supported by a lower interest expense (as a percentage of sales).
Going forward, we expect the sluggishness in the global auto industry to continue because of the continuing global economic downturn.
High interest rates and a slowdown in consumer spending will keep the demand for automobiles under pressure.
The US and European markets accounting for more than 60% of the company’s revenues, will be the worst affected by the adverse global economic environment.
With an 11.4% q-o-q fall in auto production, the Indian auto industry is also facing tough times. However, with increasing market penetration and a well-diversified product base, BFL should be able to contain the effect of the slowdown.
To reduce its dependence on the automotive industry, BFL is expanding into the non-automotive segment and targets 40% of total revenues from the latter by 2012.
The company commissioned its Mundhwa plant, India’s largest commercial open forging press, in August 2008. The Baramati facilitiy will also commence production soon.
We have valued Bharat Forge by using a three stage Discounted Cash Flow (DCF) model with explicit forecast till 2010, middle period forecast between 2011-15 and terminal period from 2016.
Free cash flows for the explicit period were calculated based on projects announced by the Company. For the middle and terminal period, cash flows were estimated assuming a free cash flow growth of 15% and 5%, respectively.
For discounting the estimated free cash flows, we have assumed a WACC of 13.2% based on the cost of equity of 15.5% and cost of debt of 7.4%.
This valuation gives us a target price of Rs320, which is 27.8% more than the current market price of Rs250.45. We reiterate our BUY rating on the stock.