Buy Bharat Forge; target of Rs 389: GEPL Capital

“Bharat Forge (BFL) has effectively transformed itself from a mere forging company into nonautomotive space and still sustained a hold on its core activities in forging, casting, fabrication, machining and assembly vis-à-vis launching its multi-sectoral growth plans across sectors such as Energy, Transportation and Construction & Mining. Revenue contribution from non-auto business increased from 30% in FY10 to 38% in FY12 and to 40% in Q1FY13. Exports will remain key focus of the company as during the slowdown in domestic markets, the company is gaining momentum in exports. Around 49% of its standalone revenue comes from export.” 

“BFL is assured of timely and adequate supply of raw materials from its group companies such as Kalyani Steel and Kalyani Carpenter Special, which takes care of around 75-80% of the required raw materials. Employee costs accounts for around 7% (of net sales) as compared to around 20% in its international subsidiaries, which points out the immense cost advantage which BFL enjoys. BFL has taken certain corrective measure for its overseas subsidiaries such as shutting one of its plants in Europe and it has clearly stated that no more investments will be made in US plant. With this we believe that there are anyways no more capital expenditure inclined in near future in the domestic business and no further investments in international subsidiaries, makes BFL virtually capex free for near future.”

“At the CMP of Rs282, BFL is trading at a PER and EV/EBIDTA multiple of 10.5x and 6.1x respectively, discounting its FY14E numbers. We have valued the standalone business of the company by ascribing a 14x PER multiple to its FY14E numbers. We have considered only book value for Alstom-BFL JV (for manufacturing of super-critical Turbines and Generator), though it has already received its maiden order. We do not value BFL’s foreign subsidiaries as their contribution till FY14 is expected to be negligible and we believe that it will be too early to assign a value other subsidiaries like JV with NTPC and BFL’s EPC business, which has virtually zero order backlog. We initiate coverage on BFL with buy rating and a target price of Rs 389 per share,” says GEPL Capital research report.

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