Bharat Forge: restructuring to pay off

Bharat Forge: restructuring to pay off
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First Published: Thu, Oct 01 2009. 10 11 PM IST

Updated: Thu, Oct 01 2009. 10 11 PM IST
Forgings and engineering firm Bharat Forge Ltd has got shareholders’ approval to go ahead with its qualified institutional placement (QIP) of $150 million (Rs720 crore).
The company has several reasons for raising money. It wants to build capacity in the non-automotive forging sector where it sees tremendous growth potential and which will de-risk its existing auto business. It’s also providing for the outflow of around $103.5 million towards redemption of foreign currency convertible bonds in April. It is also the right time to raise money given the liquidity in equity markets.
The Pune-based flagship company of the $2.4 billion Kalyani group is showing signs of recovery from the dismal performance it posted in the last couple of quarters. The slump in the global and domestic auto sector saw Bharat Forge’s consolidated income halve to Rs609 crore in the first quarter of the year to March 2010.
While operating profit margins shrank by 4-5%, it posted a loss of Rs46.1 crore, compared with a profit of Rs40.9 crore in the year-ago period.
Between 2004 and 2006, the company expanded capacity and operations through the inorganic route, expanding its operations globally. The reason was to de-risk and diversify. The downturn put paid to that strategy and it has no alternative but to restructure. For example, in India and Europe, the company is downsizing employee strength. This can improve utilisation to 50% from the present 35%.
In the next two years, its revenue mix will undergo significant change.
Today, 28% of its revenues accrue from the non-auto business. Three to four years hence, around 50% of its revenues will be from non-auto areas, mainly energy, oil and gas, transportation and capital goods. That’s precisely the reason for its joint ventures with industry leaders such as NTPC Ltd, Areva SA and Alsthom. Also, operating profit margins are higher by 4-5% in these areas compared with the auto ancillary sector, which should shore up future earnings.
For now, the management appears to be taking all the right steps to cash in on the auto sector revival and the growth in capital goods. Yet, from a shareholder’s perspective, all the initiatives would bear fruit only two years hence. The markets seem to have already discounted the future and the firm’s shares are up from Rs70 at the end of March to around Rs278. Perhaps it’s time to wait for a correction before jumping on the bandwagon.
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First Published: Thu, Oct 01 2009. 10 11 PM IST