BFL: strong traction across businesses

BFL: strong traction across businesses

During the September quarter, consolidated profit at Bharat Forge Ltd (BFL) was affected by the performance of its overseas subsidiaries. Although revenue registered year-on-year (y-o-y) growth of 56.3%, at 1,111.2 crore, it was only marginally higher compared with the previous quarter.

Net profit at 60.6 crore reflected the firm’s recovery from a loss of 40.7 crore in the year-ago period. But net profit dipped slightly on a sequential basis.

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Cost controls led to a jump in the operating profit margin (OPM) from 14.1% to 17.5% on a y-o-y basis, although on a quarter-on-quarter (q-o-q) basis it dipped from 18.4%. While details are awaited at the analysts’ conference call to be held on Monday, an earnings statement said sections of European plants were closed for most of the quarter, it being the summer. This might have lowered operating leverage. BFL’s subsidiaries reported a loss before tax of about 7.5 crore during the quarter.

It was the stand-alone business that helped the company’s bottom-line. Revenue jumped 68.5% y-o-y and 14.1% q-o-q to 718.7 crore, riding on strong sales both in auto and non-auto businesses. The contribution of the auto segment, which accounted for nearly 83% of BFL’s revenue in fiscal 2007, was strategically down to 62% in the September quarter.

Efforts to offset the cyclical nature of the firm’s auto business by diversification into critical areas such as oil and gas, power, aerospace and railways have resulted in 38% of the firm’s revenue coming from the non-auto segment. But the Street was disappointed by the sequential dip in the operating profit margin by 100 basis points to 24.2%. The key component has been the rise in raw material costs.

The outlook for both the home market and exports are strong as BFL rides piggyback on robust demand for commercial and passenger vehicles in India and a recovery in the North American market. Exports, which constitute 39% of revenue, have grown for the sixth consecutive quarter. BFL’s net profit for the standalone entity surged 154.5% y-o-y and 14.6% q-o-q to 68.2 crore.

The stock has multiple revenue and earnings triggers in the next three years—traction in domestic and export markets in its core business and focus on power in the non-auto business.

Its emergence as the lowest bidder for the NTPC Ltd tender, beating stalwarts such as Larsen and Toubro Ltd is a pointer to its focus on the non-auto segment too. At a consolidated level, recovery in its overseas subsidiaries holds promise.

BFL shares, trading at 380, have outperformed the Nifty mid-cap index since April 2010. But the positives seem priced into valuations for now, as its estimated 2012 earnings are discounted almost 22 times.

Graphic by Yogesh Kumar/Mint

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