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Clutch Auto + Bharat Forge to Outperform – ICICI

September 20, 2007

ICICI has revised the ratings for Clutch Auto Ltd and Bharat Forge Ltd to outperform.

Clutch Auto Ltd: [CAL]
CAL had decided on exports as a major thrust area, had to focus on domestic market due to the delay in exports orders and integration of clutch business acquired from Pioneer Inc into its business model. However, by focusing on the domestic market where volumes were rising at robust pace, the company managed to meet revenue and profit estimates for FY07.

Domestic volume was subdued in the first quarter, which is expected to pick up in coming quarters supporting volume and value growth. The company is trying to enter into A and B segment vehicles.During the quarter, the company acquired the assets of Gurukripa Founders & Engineers (GKF). GKF is engaged in the production of castings used in clutch manufacturing. It is now in the process of augmenting its capacity to 1,200 tonne per month from 750 tonne.

At the current price of Rs 105, the stock trades at 4.1x its FY08E EPS. ICICI remains bullish on the company and maintain earnings estimates for FY08 [Rs 25 EPS]. Reiterate outperformer rating on the stock with a price target to Rs 205.

Bharat Forge Ltd: [BFL]
BFL reported a 18.1% growth in revenue during Q1FY08, strongly backed by a 31.5% growth in exports. It reported net sales of Rs 496.9 crore against Rs 420.6 crore in the corresponding quarter the previous year. Exports to Europe was key growth driver and sales doubled to Rs 93.3 crore. However, a slowdown in demand from the commercial vehicle segment in the US and an appreciation of the rupee against dollar, restricted revenue growth from the US to only 4.3%.

The company has been successful in implementing a hedge policy and had dollarized its loan profile to gain benefit from dollar depreciation. This strategy helped it to record a one-time foreign exchange gain of Rs 33.3 crore on its loan portfolio. The company managed to mitigate the impact of higher interest and depreciation provision by reporting a 129.4% growth in other income, supporting bottom line growth of 15.8% to Rs 64.8 crore against a decline of 5% in EBITDA.

Going forward, higher capacity utilization and increasing focus on European and Asia-Pacific countries, where demand is rising, would mitigate the impact of de-growth in the USA. At the current price of Rs 282, the stock is trading at 18.1x and 13.1x its consolidated FY08E and FY09E EPS of Rs 15 and Rs 20.7 respectively. ICICI reiterates an outperformer rating with a price target of Rs 416.

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