For Q4’09, Bharat Forge Limited (BFL) reported a 46.8% y-o-y decline in its top line, mainly due to the continuing dismal performance of the automobile industry, especially the commercial vehicle (CV) segment.
During the quarter, domestic M&HCV production plunged 60.7% y-o-y. Further, the Company witnessed a sharp fall in volumes in the US and Europe Automotive markets.
Going forward, we expect an improvement in the domestic market on the back of positive signals of recovery in the domestic auto sector; however, we expect the overseas revenue to decline due to the continual slowdown in the automotive sector.
We expect sales from BFL’s automotive segment to fall by 20–23% 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 a demand in these markets.
However, during the past few months, the domestic market has shown early signs of recovery; we believe that an improvement in the domestic market should mitigate the drop in BFL’s revenue.
The Company is increasingly shifting its focus towards diversification; it expects to derive 40% of its total revenue from this segment by the end of FY12.
The non-auto facilities, HFD-II at Mundhwa and Centre for Advanced Manufacturing (CAM) Baramati, have already commenced the commercial production. Once fully operational, these plants, with an annual forging capacity of 125,000 tpa, will substantially increase the non-auto segment’s contribution to the top line.
However, we expect the near-term utilisation rate of the new capacities to remain low due to a slow-down in the user industries (construction, mining and marine).
At Rs138.85, the stock is trading at a forward P/E of 15.4x and 12.6x for FY10E and FY11E, respectively.
Based on DCF valuation, we have arrived at a target price of Rs141 (assuming a 12.7% WACC and a 5% terminal growth rate). Since our target price does not provide any significant upside potential from the CMP, we give a HOLD rating on the stock.
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.