Bharat Forge Limited (BFL) reported weak results for Q3’09. Net sales fell 11.1% y-o-y to Rs9.6 billion, triggered by the continuing dismal performance of the automobile industry, especially the commercial vehicle (CV) segment.
The EBITDA margin tumbled 630 bps (y-o-y) to 10.1% due to the commencement of new facilities at Baramati and Mundhawa, resulting in higher costs.
We expect sales from BFL’s automotive segment to fall by 20–25% in FY10. Since most of the company’s revenue comes from the US and European markets, we expect exports to fall by ~30% due to the ongoing recession in these markets.
Meanwhile, the Indian auto market is also feeling the heat, though the severity is less as compared to the developed economies. Thus, we expect domestic sales to decline by ~10%.
Within the auto segment, the BFL’s mainstay the CV division is expected to take a major hit—it is already showing signs of deterioration because of a huge inventory buildup at the suppliers’ end.
We have reduced our EBITDA margin estimate by ~2% and ~4% for FY09 and FY10, respectively.
At Rs81.4, the stock is trading at a forward P/E of 9.6x and 15.3x for FY09E and FY10E, respectively. We have used the Discounted Cash Flow (DCF) method of valuation, assuming a 12.8% WACC and a 5% terminal growth rate.
Our valuation suggests a target price of Rs89 and we believe that the stock is fairly valued at the CMP. Hence, we have downgraded our rating from Buy to HOLD.
As the DCF valuation is sensitive to changes in the WACC and the terminal growth rate, we have performed a sensitivity analysis for the same.