BHARAT FORGE Report by Religare

BHARAT FORGE

Religare Securities believes Bharat Forge valuations are attractive at current levels and has maintained a ‘Buy’ call on the stock with a target price of Rs 404 on a price to earning of 22.5x on FY09 estimate. This makes for an upside of 25 per cent to the current price of Rs 322.

Bharat Forge is currently trading at P/E of 17.9 times and EV/EBIDTA of 8.8 times 2008-09 estimate. The brokerage also valued the company on DCF, which yields a fair value of Rs 406 based on weighted average cost of capital of 13 per cent, beta of 1 per cent and terminal growth of 3 per cent.

The company will be incurring capital expenditure of Rs 330 crore during the current year and in 2008-09 to set up greenfield capacities for non-automotive foray at Pune, Mundwa and Baramati. Construction has already started and is expected to begin trial production in the first and second quarter of 2008-09 (April-March). It expects contribution from the non-automotive business to increase the consolidated revenue from 10 per cent to 17 per cent by end of 2009-10.

Bharat Forge has no immediate plans to increase the forging capacity catering to the automotive industry. The company will instead focus on improving productivity to meet the robust demand. The company’s standalone EBIDTA margin has declined, but has improved on consolidated basis.

It experienced a 150 basis points decline in standalone EBIDTA margin to 24.6 per cent in July-September quarter due to 28 per cent increase in expenditure. As a result, the company reported slower growth in EBIDTA at 18 per cent to Rs 140 crore.

However, the consolidated EBIDTA margin improved 40 basis points year on year and 320 bps quarter on quarter to 16.6 per cent in second quarter of 2007-08 due to high productivity in China operations. Thus, consolidated operating profit increased 11 per cent year on year to Rs 180 crore.