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Amtek Auto + Bharat Forge – Edelweiss

February 19, 2008

Edelweiss had a site visit to Bharat Forge and Amtek Auto. Here is the key takeaway after talks with the management of both the companies.

Amtek Auto:
Amtek’s Sanaswadi plant was commissioned in Q1FY08 with a machining capacity of 1 mn units, primarily for crankshafts. It also has a capacity for machining 50,000 units p.a. of front axle beams. A second shed is being made for the Amtek VCST JV that is 70% complete. Delivery of machining capacity for this JV is expected by March 2008; the JV’s trial production is likely to start by June end.

There is a huge interest in auto component outsourcing by global OEMs due to slow auto growth in the developed economies and continuous pressure to reduce costs. India has already established its prowess as a high-quality manufacturing location for forgings and castings.

CMP of INR 307, the stock is currently trading at a P/E of 11.3x and 8.6x our fully diluted EPS of INR 27.2 and INR 35.7 for FY08E and FY09E, respectively. Edelweiss maintains a BUY on Amtek Auto.

Bharat Forge Ltd – BFL:
BFL is optimistic about the domestic commercial vehicle (CV) market and expects the CV demand to grow almost 10% in FY09E. In exports, its sales to the US CV sector (the company’s key export market) declined ~40%. The company has, however, managed to offset this impact by moving into the US passenger car market and other geographies in Europe. It is expecting a revival in sales to the US CV market from Q3FY09E.

BFL is hopeful of improving operating margins of its overseas subsidiaries by 100bps, to ~9% over the next year, with efforts like product and process rationalization constantly underway at every plant. Over the next three years, the company is targeting subsidiary EBITDA margins of ~12%.

The company has also signed an MoU with National Thermal Power Corporation (NTPC) for investing in a new joint venture facility for manufacture of components for power plants. This is a 51:49 JV, investments and execution timelines for which are yet to be decided.

At CMP the stock is trading at a P/E of 17.5x and 14.3x our FY09 and FY10 EPS estimates of INR 15.5 and INR 18.9 respectively. Edelweiss maintains an ACCUMULATE recommendation on the stock.

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