Bharat Forge (BFL) recorded 18.6% y-o-y decline in net sales (standalone) during 3QFY2009 largely on the back of 39.3% y-o-y decline in the domestic market while outside India operation sales grew 6.3% y-o-y during the quarter.
In 3QFY2009, BFL clocked a decline in operating margins by 537bp y-o-y to 19.6% (24.9%).
Net Profit at Rs32.6 crore (excluding forex losses of Rs28.2 crore), declined 46.2% during 3QFY2009. Including exceptional items, BFL reported a substantial 92.5% y-o-y decline in net profit to Rs4.4 crore.
A substantial portion of the company’s revenue comes from the CV segment, where recovery looks unlikely in the next couple of quarters.
Further, a major portion of the company’s consolidated revenue comes from the US and European markets, which is almost in recessionary mode indicating further stress for the company.
The FCCB loans make up a major portion of the company’s loan book. Out of a total of Rs730 crore in FCCB loans, Rs410 crore 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.
Outlook and valuation
On account of these factors, we have revised our FY2009E and FY2010E EPS downwards to Rs8.7 (Rs12.4) and Rs7.6 (Rs13.1), respectively.
At Rs74, the stock is trading at 9.7x its FY2010E consolidated EPS and 1x BV, which is substantially lower than its historical valuation.
It must be noted that the business mix of the company would improve FY2010 onwards with greater contribution from its non-automotive ventures, which would cushion the impact of the slowdown in the automotive segment.
While this is a positive development for the company, considering the current high exposure to the automotive industry, which is witnessing a slowdown, we believe that the true value of the company stands overshadowed.
Thus, since P/E multiple will not reflect the true picture at the current juncture, and keeping in mind the prospects of the company beyond FY2010, we value the company on its book value.
We maintain a BUY on the stock with a revised target price of Rs113, which values the company at 1.5x FY2010 BV (adjusted for FCCB interest impact).