Bharat Forge – Bitten by Slowdown Bug

Bharat Forge’s consolidated net profit, adjusted for forex losses and extraordinary items grew just 1.3% YoY and declined 15.7% QoQ at Rs 729mn, which was below expectations. Consolidated sales grew 28.8% at Rs 13.5bn, but EBITDA grew just 9.2% YoY and declined 5.2% QoQ at Rs 1.94bn. Margins declined 20bps YoY and 120bps QoQ at 14.4%. Disappointment came from both, domestic and subsidiary performances.

Expect company to revert to decelerating EBITDA and declining profits over the next year on slowing sales, contracting margins and higher fixed costs. Our estimates factor on-time commissioning of non-auto facilities, which is expected to partially offset slowdown in auto sales.

Domestic sales account for 50% of standalone operations, where its key customer segments are in the midst of a prolonged slowdown. Within exports, US contributes 47%, but down from a year ago, and Europe is the fastest growing geography (also ~47%). Commercial vehicle segment dominates both markets, estimated at ~60% of
respective sales.

Bharat Forge is expected to report an EPS of Rs 12.30 and Rs 11.17 for FY09 and FY10 respectively.