Initiating Coverage | 17 June 2014
Sector: Automotive
Bharat Forge
Primed for recovery
Jinesh Gandhi
(Jinesh@MotilalOswal.com) + 91 22 3982 5416
Chirag Jain
(Chirag.Jain@MotilalOswal.com) + 91 22 3982 5418

Bharat Forge
Bharat Forge: Primed for recovery
Page No.
Summary
........................................................................................................
3-4
Stronger, leaner and healthier...................................................................... 5-9
Auto business – awaiting CV cycle recovery
............................................
10-17
Non-auto business – play on investment cycle recovery
.......................
18-24
Overseas subsidiaries of strategic value
...................................................
25-27
Multiple levers to support/improve profitability
...................................
28-29
Valuations attractive for global leader in forgings
........................................
30
Financials and valuation
...........................................................................
31-32
Investors are advised to refer through disclosures made at the end of the Research Report.
17 June 2014
2

Initiating Coverage | Sector: Automotive
Bharat Forge
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR 579
TP: INR 710
Buy
Primed for recovery
Stock info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Earnings growth to accelerate with ~27% CAGR (FY14-17E)
BHFC IN
232.8
586/186
22/65/127
129.7
2.2
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
Sales
EBITDA
NP
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Sales (x)
RoE (%)
RoCE (%)
71.9
12.0
5.2
22.5
19.4
25.7
4.4
12.8
2.1
18.2
18.5
85.7
15.3
7.5
32.3
43.7
17.9
3.7
9.8
1.7
22.4
23.1
99.3
18.0
9.1
38.9
20.4
14.9
3.1
8.0
1.5
22.6
25.5
131.9 157.2 187.9
Bharat Forge (BHFC) has emerged stronger, leaner and healthier from the
downcycle, driven by its proactive strategic shift towards a stable, broad-based
and greater value-adding business model. It is now one of India’s largest
engineering exporters.
It is primed for recovery in the global investment cycle. This, coupled with an
expanded product/market mix, would drive strong revenue CAGR of 16% CAGR
over FY14-17. EPS would grow at a CAGR of ~27%, aided by robust margin
expansion.
While the stock has outperformed over the last six months, there are several
triggers for continued outperformance. These include: (a) volume recovery led
benefit of operating leverage, (b) improving segment mix, (c) balance sheet
deleveraging, and (d) improvement in capital efficiencies.
Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR32/INR39 are
attractive for a global leader in forgings and at a discount to the 5/10 year
average of 22x/26x. We initiate coverage with a Buy rating. Our target price of
~INR710 (~22x FY16E EPS) suggests an upside of ~23%.
Stronger, leaner and healthier
BHFC has broadened its revenue stream by entering new segments (non-auto)
and global markets. The share of auto business has declined from ~80% in FY07
to ~60% in FY13 and the share of India has reduced from ~60% to ~48% in
standalone operations. Further, it has increased value-addition by focusing on
machined components, the contribution of which has increased to ~51% in
FY13, boosting realizations and margins. Lastly, it has improved its balance
sheet by focusing on controlling debt through lower capex, resulting in fall in
net debt-equity to ~0.3x/0.2x by FY15/FY16.
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
46.7
14.5
16.3
22.5
46.7
17.5
13.8
21.7
42.1
19.0
9.7
29.3
Auto business – awaiting CV cycle recovery; focusing on PVs
Benefit of US Class-8 demand improvement, driven by pre-buying before
emission norm changes and gradual recovery in the EU would reflect in
FY15/FY16. BHFC is a clean play on the expected domestic CV cycle recovery
from 2HFY15, with over 60% market share in M&HCV components. The PV
segment is a focus area for BHFC and could be an important growth driver. This
segment offers an opportunity size 4x that of CVs.
Stock Performance (1-year)
Non-auto business – play on investment cycle recovery
The non-auto segment offers significant growth potential, as it is much larger
than the auto segment. BHFC is targeting ~60% of its standalone revenues from
the non-auto segment, up from the current ~40%. Its partnerships with global
players (Alstom, Areva, David Brown, etc) bear testimony to its globally cost
17 June 2014
3

Bharat Forge
competitive engineering/manufacturing capabilities. BHFC’s increasing
penetration with existing and new customers, coupled with economic stability
in the international market and investment cycle recovery in India, would drive
~24% revenue CAGR in the non-auto segment. Increasing contribution of non-
auto to consolidated revenues augurs well for profitability and capital
efficiencies, given the segment’s higher realizations, margins and asset turns.
Multiple levers to support/improve profitability
We expect consolidated revenues to grow at a CAGR of ~16% over FY14-17
(adjusted for FAW JV exit), driven by 22% CAGR in India revenues and 12%
CAGR in international revenues. EBITDA margin should expand ~290bp to
18.2%, driven by higher exports from India, rising contribution from non-auto
business and machined components, and operating leverage. BHFC has
sufficient capacities to drive over 25% revenue CAGR over the next two years,
necessitating maintenance capex of INR1.5b-1.8b per year. We estimate
cumulative FCF generation of ~INR21b during FY15-17, enabling reduction of
net debt to ~INR7b (net debt-equity of 0.2x) from ~INR13.4b (net debt-equity of
0.8x). Improving asset turns and profitability would drive improvement in
consolidated RoE to ~22.6% in FY17 from 17.9% in FY14 – the highest RoE since
FY07.
Valuations attractive for global leader in forgings; Buy
BHFC is primed for recovery in the global investment cycle. While the stock has
outperformed over the last six months, there are several triggers for continued
outperformance. These include: (a) volume recovery led benefit of operating
leverage, (b) improving segment mix, (c) balance sheet deleveraging, and (d)
improvement in capital efficiencies. Valuations at ~17.9x/14.9x FY16/FY17E
consolidated EPS of INR32/INR39 are attractive for a global leader in forgings
and at a discount to the 5/10 year average of 22x/26x. We initiate coverage
with a
Buy
rating. Our target price of ~INR710 (~22x FY16E EPS) suggests an
upside of ~23%.
17 June 2014
4

Bharat Forge
Stronger, leaner and healthier
Diversified revenues I Lower fixed costs I Declining debt-equity
BHFC has broadened its revenue stream by entering new segments (non-auto) and
global markets. The share of auto business has declined from ~80% in FY07 to ~60% in
FY13 and the share of India has reduced from ~60% to ~48% in standalone operations.
Further, it has increased value-addition by focusing on machined components, the
contribution of which has increased to ~51% in FY13, boosting realizations and
margins.
BHFC has worked on lowering its breakeven utilization in India (from 35% to 30%) as
well as in its wholly owned subsidiaries (from 60% to 50%).
Lastly, it has improved its balance sheet by focusing on controlling debt through lower
capex, resulting in fall in net debt-equity to ~0.3x by FY15.
Strategic
changes
to lend stability to business model
During the global credit crisis, BHFC formulated a revised business strategy to tide
over the volatility in the business and elevate itself to the next level.
Strategic changes: The focus areas
Diversification
New
markets
New
customers
New
sectors/businesses
Cost
reduction
Efficiency
Lower
breakeven
Reduce
working
capital
Fiscal prudence
Freeze on
capacity
Focus on
cash
Optimization
and rightsizing
of operations
Debt reduction
Source: MOSL
The benefits of these strategic changes are visible in BHFC’s financials in the current
downturn. We believe BHFC is now well placed to emerge much stronger, driven by
recovery in the investment cycle in India and globally. We discuss below the
company’s key initiatives that have helped it to emerge leaner and stronger.
1. Broadening of revenue base
Considering the deep cyclicality in the commercial vehicle (CV) business, BHFC
decided to diversify its revenue stream by increasing the share of personal
vehicle (PV) and non-automotive businesses. Geographical diversification to US,
Europe and RoW has helped protect BHFC against concurrent CV cycles in key
markets, globally. Its presence across segments and markets has helped to
largely insulate BHFC from cyclicality in the automotive business, resulting in 4%
CAGR in consolidated revenue CAGR over FY08-13 (from peak to trough).
17 June 2014
5

Bharat Forge
BHFC’s revenue mix getting more diversified
CVs - Dom
12
5
21
3
45
14
FY07
CVs - Intl
13
5
19
3
45
15
FY08
14
7
19
2
49
8
FY09
PVs - Dom
11
9
21
4
38
17
FY10
PVs - Intl
14
11
14
3
43
15
FY11
Non-Autos - Dom
17
10
7
3
51
18
10
16
4
41
11
Non-Autos - Intl
29
8
12
3
41
7
12
FY12
FY13
FY14
Source: Company, MOSL
New non-auto segments
The non-automotive forgings space, including conventional and non-
conventional energy, power, rail and marine, oil and gas exploration, metals and
mining, and aerospace offers a much larger market than the global automotive
forgings space. In FY06, BHFC started aggressively developing its industrial
components business and invested in large dedicated facilities in Baramati,
Satara and Pune. It targeted five key verticals – oil & gas, construction and
mining equipment, railways, marine engines and components, and aerospace.
Typically, these non-auto components are more complex and have higher
contribution levels per unit of sale. The non-auto segments contributed ~28% of
consolidated revenues in FY13 against 18% in FY08.
Non-auto revenue contribution has increased meaningfully (%)
Consol
Standalone
36
30
20
25
27
39
28
40
37
41
32
18
20
21
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
New markets, segments and customers within auto:
The auto industry follows the cycles of emission technology changes every four
years or so. To reduce the impact of cyclicality, BHFC decided to diversify into
the PV segment and to have a presence across three continents – North
America, Europe and Asia. It is focused on creating a larger presence in PVs, as
this segment is much larger than CVs.
Supply to the PV segment has begun to
gain traction, as stricter emission norms will drive a shift to high performance
parts and from larger to smaller-yet-powerful fuel-efficient engines, in turn
driving the shift from castings to forgings. In the auto segment, BHFC
consolidated its position by increasing its customer base and penetrating deeper
into global markets through its Indian and overseas operations.
17 June 2014
6

Bharat Forge
Significant increase in contribution from international
markets (% of standalone revenues)
India
1
13
26
2
20
22
4
24
21
62
USA
1
15
22
Europe
4
18
20
4
21
22
Others
3
19
28
4
23
27
Trend in PV contribution (% of sales)
Standalone
22
16
13
25
22
16
8
17
10
9
20
15
7
8
Consol
60
56
51
59
53
50
46
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
Source: Company, MOSL
Increasing share of exports from India (% of sales)
Consol
45
42
46
52
41
44
50
Standalone
57
52
58
56
55
23
19
22
22
23
26
29
32
29
32
32
33
Source: Company, MOSL
Why forgings v/s castings in PVs?
Forged components make possible designs that accommodate the highest loads,
operating temperatures and stresses. Economically, forged products are attractive
because of their inherent superior reliability, improved tolerance capabilities, and
the higher efficiency with which forgings can be machined and further processed by
automated methods. The degree of structural reliability achieved in forging is
unexcelled by any other metalworking process. There are no internal gas pockets or
voids that could cause unexpected failure under stress or impact. To the designer,
the structural integrity of forgings means safety factors based on material that will
respond predictably to its environment without costly special processing to correct
internal defects.
2. Focus on value addition
BHFC has evolved from (1) a supplier of forged components to (2) a supplier of
finished components to (3) a development partner for both auto and non-auto
industries. The movement up the value chain has accelerated over the past few
years across automotive and non-automotive components. This has been
achieved as a result of BHFC’s strong technological relationship and close
collaboration with major customers. Machining is the process of removing
excess material from the forging to meet the dimensions required by customers,
converting a forged part into a fully finished and ready-to-assemble component.
Focus on higher value addition has resulted in an increase in the contribution of
machined components to ~51% of standalone revenues from ~40% in FY08.
17 June 2014
7

Bharat Forge
More importantly, machined components offer higher profitability and have
lower capital intensity.
Increasing value addition evident in higher revenue contribution from machined
components and…
M/Cing Revenues (INR b)
% of S/A Revenues
% of Consol Revenues
47
28
51
29
40
19
9
FY08
41
40
22
43
25
18
8
FY09
7
FY10
13
FY11
18
FY12
16
FY13
Source: Company, MOSL
…reflecting in higher realizations and gross margins (%)
S/A Realizations (INR/ton)
Standalone
Consolidated
63
60
55
53
52
50
56
51
55
52
56
54
57
57
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
Source: Company, MOSL
3. Leaner cost structure
In the last few years, BHFC has focused on reducing its fixed costs and bringing
down breakeven utilization at its domestic as well as international subsidiaries.
It has achieved this through restructuring of manufacturing facilities, rightsizing
of manpower in EU operations and optimizing fixed costs. BHFC has closed its
operations at Scottish Stampings and BF America, and is exiting the China JV. As
a result, it has been able to reduce breakeven utilization in India to 30% in FY13
(from 35% in FY08) and in Europe to 50% (from 60%).
17 June 2014
8

Bharat Forge
Restructuring of manufacturing operations led to closure of Scottish and American
subsidiaries, and exit from China JV
India
135
60
200
135
60
200
Europe
135
60
180
US
China
135
180
0
180
340
365
365
380
380
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
Trend in fixed cost
Fixed Cost (% of consol sales)
23.3
21.2
21.2
22.0
20.8
19.0
18.3
Trend in breakeven utilization
FY08
FY13
60
50
35
30
FY07
FY08
FY09
FY10
FY11
FY12
FY13
India
Europe
Source: Company, MOSL
Source: Company, MOSL
Goals for next five years
For the next five years, BHFC has set the following goals:
Increase presence in PVs through new product development and customer
penetration.
Enhance market share in the industrial sector and create presence in the
aerospace sector.
Nurture the JV with Alstom to become a world class, cost competitive power
equipment manufacturer.
Focus on becoming a net debt-free company, improving return ratios and
generating cash flows.
17 June 2014
9

Bharat Forge
Auto business – awaiting CV cycle recovery
Focusing on PVs, offering 4x the opportunity size of CVs
Benefit of US Class-8 demand improvement, driven by pre-buying before emission
norm changes and gradual recovery in the EU would reflect in FY15/FY16.
BHFC is a clean play on the expected domestic CV cycle recovery from 2HFY15, with
over 60% market share in M&HCV components.
The PV segment is a focus area for BHFC and could be an important growth driver. This
segment offers an opportunity size 4x that of CVs.
Stricter emission norms would not only drive higher realizations for BHFC but also
improve its competitive positioning.
Highly levered to global and local CV cycles
BHFC is a leading global automotive forgings player, with manufacturing presence in
India and Europe. The top-5 global OEMs across CV and PV segments are BFL’s
customers. It has transformed itself from a supplier of components to a preferred
technology and engineering driven development partner for all industries that need
forged components. We expect BHFC’s market share to increase further, driven by
its full service supply capabilities, enabling it to build strong and sustainable
customer relationships. There is a trend towards de-integration of OEM facilities due
to emphasis on lower capital intensity, resulting in increased scope for outsourcing
components. On a steady state basis, the CV segment contributes ~58% of
consolidated revenues (~45% from international markets and ~13% from domestic
markets).
CV segment contributes ~55% to steady-state consolidated
revenues
CVs - Intl
CVs - Dom
12
11
7
Trend in HCV volumes and consolidated revenue growth
HCV Vol Growth (%)
60.0
40.0
20.0
0.0
-20.0
-40.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
* HCV volume growth for India, EU & US
Consol Revenue Growth (%)
14
15
8
17
15
45
45
49
38
43
51
41
41
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Industry, Company, MOSL
Source: Company, MOSL
17 June 2014
10

Bharat Forge
BHFC’s full service capabilities enable it to engage with OEMs right from development stage
Source: Company, MOSL
17 June 2014
11

Bharat Forge
International CV business outlook improving
BHFC is one of the global leaders in forged components for CVs, with strong
relations with key OEMs across the globe. Through several strategic acquisitions, it
has established manufacturing presence in Germany and Sweden and developed
dual-shore manufacturing capacities, giving it the ability to cater to the needs of
customers from multiple locations. The international CV business contributes ~45%
of its consolidated revenues. Exports of CV components from India account for ~30%
of total international CV revenues (~20% in FY10) and have been increasing post the
closure of American operations in November 2012.
Offshoring from India for international CV business to increase (% of international CV
business revenues)
From other operations
20
21
20
From India operations
23
25
26
31
80
79
77
80
75
74
69
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Source: Company, MOSL
US Class-8 CV volumes to pick up on pre-buys before emission norm change
in CY15
BHFC is largely focused on Class-8 trucks (HCVs) and light trucks. It has strong
relationships in the US CV market and has significantly increased its auto exports to
USA on the back of supplies to the M&HCV segment. Based on outlook given by
various OEMs, US Class-8 trucks are expected to grow 6-12% in CY14, driven by
replacement demand and economic recovery. Replacement of aging trucks
continues to be the primary driver of new purchases, with a near-record average
fleet age of 9.57 years. Trucks bought in the last peak in 2004-06 are now 8-10 years
old, supporting solid replacement demand. Repair costs ramp up after 4-5 years,
further driving replacement of trucks. Freight growth and regulatory changes should
encourage replacement of older equipment. Further, Class-8 truck cancellations at
5.2% of gross orders, is below the 10-year average of 9.1%. Cancellations have been
below 10% for the past 14 months, a positive indicator of fleet sentiment.
US/NAFTA
CY14 Growth (%)
Key comments
Volvo
6%
The construction
market continues
to recover and
replacement
demand remains
high
Daimler
upto 10
Significant market
growth of up to
10% due to the
increasingly
dynamic economy
PACCAR
Cummins
upto 12%
8%
Ongoing fleet
replacement and
some expansion of
industry fleet
capacity reflecting
modest overall
i
h
Source: Company, MOSL
17 June 2014
12

Bharat Forge
US Class-8 volume momentum positive since August 2013
Average age of 9.6 years for
Class-8 trucks coupled with
peak volumes during
CY05-08 augurs well for
replacement demand
CY11
CY12
CY13
CY14
25,000
20,000
15,000
10,000
5,000
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov Dec
Source: Bloomberg, MOSL
North America Class-8 cancellation data indicates positive
fleet sentiment
Trend in Class-8 truck volumes and average fleet age
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
EU HCV volumes to remain stable after pre-buying in CY13
While BHFC is focused on luxury PVs in the EU, it is increasing its revenues from the
HCV segment in the EU through exports and BF Kilsta (Sweden). EU HCV volumes
had benefited from pre-buying before emission norm changes to Euro VI from 31
December 2013, registering ~8% growth CY13 (6% de-growth in 9MCY13). While
17 June 2014
13

Bharat Forge
1HCY14 HCV volumes would be sluggish due to the impact of pre-buying, OEMs
expect up to 5% de-growth in CY14, depending on sustenance of economic stability
and quantum of replacement demand. All leading indicators suggest stability in the
Euro zone economies, auguring well for recovery in HCV volumes in 2HCY14.
OEMs expect HCV demand to be sluggish in 1HCY14 due to pre-buying in 4QCY13
Europe
CY14 Growth (%)
Key comments
Volvo
Daimler
-4
slightly negative
Demand in
Developments during
Europe is
the rest of 2014 will
expected to be depend in particular on
slow in the
the extent to which the
beginning
economic revival in
of the year and Europe can offset the
then gradually negative impact of the
improve.
purchases brought
forward
PACCAR
0 to -10%
Some
customers are
purchasing
Euro 5 vehicles
ahead of the
introduction of
the Euro 6
emission
requirement in
2014
Scania
Pre-buys in Europe
during 2013 will impact
the first half of 2014
while Scania’s
assessment is that
economic activity in
Europe has stabilised
and that there is a
replacement need
Source: Company, MOSL
EU HCV volumes still well below peak of CY05-08 and near EU HCV volumes expected to be stable, despite 8% growth in
CY02 levels
CY13 due to pre-buying
CY11
CY12
CY13
CY14
35,000
29,000
23,000
17,000
11,000
5,000
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
Euro zone industrial production indices showing sustained
Euro zone manufacturing PMIs indicate improving confidence recovery over last nine months
60
50
40
30
EU PMI
6
4
2
0
-2
-4
Industrial Production Indices (YoY %)
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
17 June 2014
14

Bharat Forge
Domestic CV cycle to recover from 2HFY15; BHFC best play on CV cycle
recovery
After declining at a rate of ~25% over FY12-14, we expect domestic CV volumes to
recover from 2HFY15, driven by clarity on the new government-led kick-starting of
the investment cycle. We estimate 10%/23%/22% growth in CV volumes in
FY15/FY16/FY17. Given its strong positioning with key OEMs (including new
entrants), we believe BHFC is the best play on CV cycle recovery. BHFC enjoys over
60% market share for forged and machined automotive chassis and engine
components. Further, shift towards multi-axle vehicles and new generation trucks
would drive an increase in usage of forged parts, auguring well for BHFC. The
domestic CV segment contributes ~15% of consolidated revenues and ~25% of
standalone revenues. We expect BHFC’s domestic CV revenues to grow at a CAGR of
~21% over FY14-17E.
Domestic CV revenues (as a % of standalone and consolidated revenues)
% of S/A revenues
35
28
21
14
7
0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
% of Consol revenues
Source: Company, MOSL
Trend in domestic M&HCV volumes
33.1
M&HCV ('000 units)
33.3
-0.7
184
276 274
31.9
7.5
200
-22.7
245 323 347 268
-25.5
220 271 330
82
93
90 111 71
80
Growth (%)
23.0 22.0
10.0
M&HCV ('000 units)
6.5 6.5 11.7 3.7
-12.6-14.3
62
Growth (%)
-3.5
75
-16.2
56
60
-14.6
-30.1-27.9
45
64
58
-31.6-32.5
-33.0
Source: Company, MOSL
Source: Company, MOSL
PV segment a focus area; could be an important growth driver
The global PV market is four times larger than the CV market, but contributes just
~20% to BHFC’s consolidated revenues. While international PVs contribute ~16% to
consolidated revenues, the contribution of domestic PVs is just ~4%. We believe the
PV segment offers significant headroom to grow through increased penetration by
BHFC, benefiting from vendor consolidation in international business and emission
norm-led shift from castings to forged components.
In international PVs, BHFC recently bagged large multi-year orders for EUR250m
from a German OEM, in addition to multi-years orders from Ford and Daimler
17 June 2014
15

Bharat Forge
Chrysler. While Ford Motor USA has initiated development of crankshaft forgings
with BHFC, Daimler Chrysler has chosen it to supply crankshafts and camshaft
forgings for its car engines in Germany. BHFC has also won an order to supply
control arm forgings to a global passenger car company in Australia. In addition, it
has bagged a new multi-year order to supply steering knuckle forgings to Dana (US).
It has also begun supplying to its second Chinese customer, while exports to Renault
are being scaled. It has won a USD100m order in Europe, which will be executed
over the next five years. The management has indicated that BHFC will target to
supply ~1m crankshafts in the European passenger car market by FY18.
Global luxury cars witnessing strong growth
CY11
600,000
500,000
400,000
300,000
CY12
CY13
CY14
International PV contribution expected to increase
PVs
% of total
9,046
21
9,124
9,303
21
7,034
4,363
9,265
16
19
19
14
7,028
200,000
7
FY11
FY12
FY13
FY07
Source: Company, MOSL
FY08
FY09
FY10
Source: Company, MOSL
In India, passenger cars have traditionally used castings. The contribution of the
domestic PV segment to BHFC’s consolidated revenues is, therefore, small.
Progressively, with stricter emission norms and advanced turbocharged engines,
more forgings are being used. BHFC has been working with OEMs on their platform
development and will benefit when they launch new products using high
performance forged components.
Domestic PV revenue growth linked to industry fortunes
39
26
13
0
-13
-26
22
11
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
Source: Company, MOSL
PV Vol Gr (%)
Dom. PV revenue growth (%)
33
Domestic PV business contribution to revenues
% of S/A revenues
% of Consol revenues
17 June 2014
16

Bharat Forge
Trend in domestic PV volumes
PV ('000 units)
27.0
22.9
11.8
7.0
6.4
1.7
Growth (%)
9.2
PV ('000 units)
13.6
0.6
-0.1
7.1
1.9
-4.8
-9.3
13.1
2.4
-6.0 -5.3 -7.0
Growth (%)
19.7
15.0 15.0
10.0
724 731 722 948 776 745 817 860 739 763 767 814 687
Source: Company, MOSL
Source: Company, MOSL
Stricter emission norms to drive higher realizations, improve competitive
positioning
Emission norm changes have meaningful implications for the auto industry. To
adhere to reduced particulate emission, engines require significant changes. The
global introduction of Euro VI regulations required advanced powertrain solutions,
driving the shift towards high performance parts. According to Meritor, trucks
complying with Euro VI regulations command a price premium of ~EUR5,000 over
trucks complying with Euro V regulations. Such regulatory changes provide an
opportunity for BHFC to increase its presence in the global PV industry, driven by
technological shift from castings to forgings. Suppliers that emerge as preferred
partners for OEMs may be able to leverage their global scale to further reduce
technology costs and increase their industry influence. We expect BHFC to benefit
from the trend of vendor consolidation.
Source: Cummins Inc, MOSL
Source: Cummins Inc, MOSL
17 June 2014
17

Bharat Forge
Non-auto business – play on investment cycle
recovery
To benefit from increasing market/customer penetration
The non-auto segment offers significant growth potential, as it is much larger than the
auto segment. BHFC is targeting ~60% of its standalone revenues from the non-auto
segment over next few years, up from the current ~40%.
Its partnerships with global players (Alstom, Areva, David Brown, etc) bear testimony
to its globally cost competitive engineering/manufacturing capabilities.
BHFC’s increasing penetration with existing and new customers, coupled with
economic stability in the international market and investment cycle recovery in India
would drive ~23% revenue CAGR in the non-auto segment.
Increasing contribution of non-auto to consolidated revenues augurs well for
profitability and capital efficiencies, given the segment’s higher realizations, margins
and asset turns. BHFC’s international non-auto business is largely serviced by its more
efficient Indian operations.
BHFC plans to venture into
5-6 new sectors in the
coming 5-7 years, and make
each of these new verticals
USD100m businesses.
Non-auto segment drives diversification, growth and superior profitability
Non-automotive forgings, including conventional and non-conventional energy,
power, rail and marine, oil and gas exploration, metals and mining, and aerospace,
offer a global market much larger than automotive forgings. In FY06, BHFC set out
on a new growth path, where it focused on aggressively developing its industrial
sector components business and chalked out a large investment plan to develop
dedicated facilities in Baramati, Satara and Pune. It has developed and built strong
relationships with customers in the non-automotive space, with the number of non-
automotive customers more than doubling over the last 5-6 years. While existing
non-auto business can be broadly divided into three verticals – (1) energy, (2)
transportation, and (3) mining and construction, it is also exploring areas like
aerospace that have long lead times. It plans to venture into 5-6 new sectors in the
coming 5-7 years, and make each of these new verticals USD100m businesses. Non-
automotive forgings are more complex and have higher contribution levels.
Broad overview of BHFC’s non-auto business
Source: Company, MOSL
17 June 2014
18

Bharat Forge
Non-auto segment capacity in place for further scale-up
Facilities
Location
Capacity
40,000 TPA
Products
Large closed Die
forgings upto 2.5T
and 4.5m long
Machined
components supply
Large rings, Gear
blanks, connectors,
bearings, Valves
Forge ingots upto 70T
Industry
Energy sector, Hydro carbon exploration sector,
transportation including Aerospace, Railways and
Marine sector
Locomotives, Marine and power generation
Wind sector, Oil and gas sector
Centre for Advanced Manufacturing
80mtr Ton Hammer
Baramati
Machining Shop
Ring rolling facility
Baramati
Baramati
12,000 nos
25,000 TPA
Heavy forge division
4,000T press
Machining facility for Heavy
forge division
Pune
60,000 TPA
Wind turbine components, Hydro, Gas and steam
turbine components and components for Mining,
Metal Industry and General engineering applications
Wind sector
Satara
1,400 nos
Machined
components supply
Source: Company, MOSL
JVs with global capital goods players testimony of its capabilities
BHFC has entered into JVs with global players like Alstom (for turbines in super
critical thermal power plants), Areva (heavy forgings for nuclear power plants),
David Brown (for industrial gear boxes) and NTPC (BOP equipment for power
sector). These JVs are a testimony to BHFC’s manufacturing/engineering capabilities
and inspire confidence in its ability to significantly scale-up the non-auto business
globally.
To benefit from eventual investment cycle recovery in both local and global
markets
The non-auto business is linked to the investment cycle, since it caters to
infrastructure development – energy, transportation, and construction and mining.
BHFC’s non-auto business revenues were impacted in FY13 due to macro headwinds
in both India and global markets, resulting in 5% de-growth in non-auto segment
revenues despite increasing traction with new customers/new segments. While the
economic outlook for the US and EU is stabilizing, the Indian economy seems to
have bottomed out with recovery expected from 2HFY15. International non-auto
revenues contribute ~19% of consolidated revenues, whereas domestic non-auto
revenues contribute ~9%.
Trend in non-auto business market mix
Domestic
International
100%
19,454
10,478
5,195 6,319
6,735
7,354
3,603
9,638
75%
50%
25%
0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
Non-auto market mix
International
India
6,661 5,102 5,606
3,525 3,095 5,450
2,075 2,202
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
17 June 2014
19

Bharat Forge
International market outlook stabilizing
Modestly improving economic growth in most developed markets should help
improve business prospects. Demand for capital goods is sensitive to changes in
business confidence and is correlated with economic swings. Key industry indicators
such as industrial production and non-residential construction point to a modest
uptick in growth for the global capital goods business. Revenues of global industrial
players also suggest that the pace of revenue decline has moderated. The CY14
outlook reflects cautious optimism, suggesting possibility of a gradual recovery in
the global investment cycle. Based on the outlook given by its key customers, the oil
and gas segment is expected to grow 8-10%, while power and mining and
construction are expected to remain stable. Currency movements have increased
the competitiveness of Indian manufacturing and created opportunities for export-
led business models.
International non-auto revenues
From India
From Europe
% of Consol revenues
22
17
15
14
4,245
2,490
FY09
8
1,522
2,081
FY10
3,034
4,320
FY11
6,529
21
3,949
4,768
6,353
18
3,880
1,315
FY07
4,493
1,826
FY08
FY12
FY13
Source: Company, MOSL
Manufacturing PMIs point to modest uptick
60
50
40
30
EU PMI
60
50
40
30
US PMI
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
17 June 2014
20

Bharat Forge
Snapshot of comments by global capital goods companies
Segment
Power
Energy & Marine
Company
Alstom
Wartsila
Commentary
Demand in a number of markets is weak and should remain so in the short term and the level of
turnkey and equipment contracts booked is substantially lower than expected in Thermal Power.
Our market outlook for 2014 remains cautious, although a slight improvement may be seen in
certain areas. Based on our current order book and project pipeline we expect some growth in
net sales during 2014 and profitability to remain at a similar level to that of 2013.
There are encouraging signs in the world economy and we're seeing some in our own business,
and that gives us optimism for sales in our Construction and Power Systems segments and we
think they'll each be up about 5% in 2014.
The underlying global economic outlook will support a strong market, with spending on offshore
exploration and production growing 8 percent to 10 percent annually through 2017. Aker
Solutions expects several offshore drilling rigs and floating production facilities to be ordered over
the next 12 to 18 months.
We do not anticipate any significant recovery in the global economy in 2014 and thus expect
practically unchanged investment and project activity compared to 2013 in the markets served by
ANDRITZ, with some major projects likely to be awarded in the hydro and pulp sectors.
In the short term, there are some positive early-cycle macroeconomic signs, such as strengthening
growth in the US and the more encouraging growth in many parts of Europe. However, there are
also some uncertainties related to the impacts of quantitative easing and the speed and strength
of economic development in the emerging markets, especially China.
In North America, we expect our truck business to grow in 2014. We are forecasting that the 2014
market size for heavy-duty trucks to increase 8% YoY. While GDP is expected to grow in the
eurozone in 2014 for the first time in three years, we expect our revenues to be relatively flat.
Demand from our European-based Power Generation customers will remain weak in 2014, given
that most of these products are shipped to developing markets.
Despite the generally positive forecasts for the global economy, we continue to assume that
noticeable impulses will first be felt toward the end of the year. Well, our estimates and we're
conservative and if business picks up as it already has been indicated and has been forecasted, we
are prepared for taking benefit from this and so we can meet expectations.
While we think it's prudent to remain cautious on the global economy at this time, we're
increasingly confident in our 2014 outlook based on the momentum from the fourth quarter.
Source: Company, MOSL
Mining, Construction Caterpillar
& Power
Oil & Gas
Aker Solutions
Diversified
Industrials
Power &
Automation
Andritz
ABB
Power & Engines
Cummins Inc
Diversified
Industrials
Siemens AG
Diversified Industrials Honeywell
Oil & Gas spending is expected to grow at 11% CAGR
Order backlog for GE at all-timehigh levels (USD b)
Services
175
46
129
200
53
147
204
52
152
203
50
153
Equipment
210
53
157
216
56
160
223
57
166
Total
229
61
168
244
64
245
64
180
181
Source: GE, MOSL
Source: Wood Mackenzie, MOSL
Domestic non-auto segment play on investment cycle recovery
A strong decisive mandate in the recent Elections has re-kindled the expectations of
an uptick in India's investment cycle. In our opinion, India's capex J-Curve will be
kick-started by (1) reorientation of fiscal expenditure which could accelerate
spending on flagship projects, and (2) government's attempt to address the
17 June 2014
21

Bharat Forge
contentious issues in several sectors, leading to increased capex by CPSUs. This
phase will be followed with revival in industrial cycle culminating with traction in
greenfield projects.
Projects completed (as a % of projects under implementation) have touched
abysmally low levels of 3.4%, and impacted the virtuous cycle of cash flow
generation in the system. The initial round of demand improvement will be catered
to by fast tracking these projects. Cabinet Committee on Investments has already
cleared projects worth ~INR20t (~25% of the projects under implementation in the
economy) and with more last-mile push, attempt should be to expedite
implementation. Order finalization during May 2014 (ttm basis) stands at INR1.9t,
and is up 29% YoY. Order awards on a ttm basis have gradually inched up from lows
of INR1.4t in June 2013 to INR1.9t currently.
Domestic non-auto revenues impacted by economic slowdown
Domestic Non-Autos
% of S/A revenues
29
23
13
7
2,075
FY07
12
5
2,202
FY08
16
8
3,525
FY09
15
6
3,095
FY10
5,450
FY11
6,661
FY12
16
13
14
8
5,102
FY13
18
11
5,606
FY14
% of Consol revenues
Source: Company, MOSL
Outstanding Project Investments (% YoY): Phases of
Investment cycle slowdown
60
50
40
30
20
10
0
-10
Projects completed at low levels as economic viability poor,
impacting cash generation cycle
12.5%
10.5%
8.5%
6.5%
Projects completed had consistently
remained at 7%+ of projects under
2.5%
implementation
Projects Completed ttm, as % of Prj under Impl
Execution impacted
given
regulatory, financing
and viability constraints
4.5%
Source: CMIE, MOSL
Source: CMIE, MOSL
17 June 2014
22

Bharat Forge
Few pockets of hope: Geographic diversification, cost optimization, new products, etc
Company
Voltas
Management Comments
Business prospects are somewhat brighter in certain Middle East geographies, with a clear-cut
investment thrust, especially in infrastructure and construction. This is more pronounced in Qatar, KSA
and most recently Dubai.
The company expects to end the financial year with a marginal organic growth largely contributed by
international markets as the domestic market continues to remain sluggish.
Base orders from a wider spectrum of customers helped offset dearth of large projects in the market.
Exports grew annulling the effect of a contraction in the domestic market opportunities.
We've taken adequate steps to increase our focus further on export markets, not only for Ethanol and
Brewery but also for emerging business.
Though our sales have been affected by the overall dismal business environment; we have been
constantly focusing on our product? market growth strategy. The company has stepped up its
investment in R&D activities to develop new products. International business has also been able to
widen its global footprint in South East Asia, East Africa and Middle East markets and has set up a
distribution and aftermarket network.
There are very limited opportunities in the market which have been available in the last nine months
and in the next, at least two or three quarters, but we have introduced new products in the market and
we have been able to curtail our expenses and costs, whereby we have been able to be competitive,
even though the market margins are lower.
While there is some improvement in the macro environment, the changes are gradual. We are seeing
growth in new order enquires which we are optimistic will translate in the next year. Agri equipment
continues to be a key growth driver and we have commenced work on our in house engine
manufacturing facility and expect to have this operational by end of year.
We have a reason to believe that the worst is over as long as gears are concerned and we believe that if
the election shows positive signs, gear is one of the barometers of the economy because our industrial
gearboxes go into all kinds of industries. So we believe that as soon as the economy starts improving,
the demand for this will keep on increasing.
The cash losses of the discoms of the UP, Rajasthan, Haryana, Tamil Nadu have reduced in the range of
42 to 54%, and all these four states are now paying subsidy upfront on a monthly basis. These are the
advantages and these are the turnaround which we are seeing after the implementation of FRP package
in all these four state.
There has been some improvement in demand from the hotel, hospital, commercial complex and
industrial segment.
Source: Company, MOSL
Elgi Equipments
ABB India
Praj Industries
Greaves Cotton
Thermax
Action Construction Equipments
Elecon Engineering
Power Finance Corporation
Blue Star
Order finalizations improve (12mma basis, INR B)
TTM Orders (INR b)
% YoY
45
25
5
-15
-35
Source: Company, MOSL
17 June 2014
23

Bharat Forge
“In all, we are aiming to
bag orders worth at least
USD100m from the
Railways and this is the
minimum we are targeting.
But selling crankshafts
alone won’t do enough, and
hence, we are also working
on other new products, but
it is too early to say what
they might be.”
with scope of market share gain and new segment driving faster growth
In the non-auto segment, BHFC has been focused on (a) new customer additions, (b)
higher value addition of critical components, and (c) expansion of product portfolio
with existing customers. Going forward, we expect the non-auto business to witness
stronger performance on the back of new contracts, improvement in economic
conditions and start of commercial supplies after the completion of product
validation processes for several ongoing programs. It has developed and built strong
relationships with customers in the non-automotive space, with the number of non-
automotive customers more than doubling over the last 5-6 years.
BHFC plans to venture into 5-6 new sectors in the coming 5-7 years, and make each
of these new verticals USD100m businesses. Typically, these products are more
complex, have longer lead times for validation and have higher contribution levels. It
has recently bagged its first order from the Indian Railways for locomotive
crankshafts. This makes BHFC the only indigenous components supplier for the
Indian Railways. The company is also executing, for the first time in India, a
technology-intensive project involving mechanized laying of tracks within India's
upcoming heavy axle load freight corridor. It has developed “demonstrator parts”
for the aerospace sector for global players.
"Ten years from today, we
are very confident that India
is going to emerge as a
large exporter of defence
products. Today, we are the
largest importer of defence
products. And we are going
to be a fairly important
player in this."
Mr Baba
Kalyani, CMD, Bharat Forge
Defence – next big opportunity
With stress on indigenous development, potential defence opportunity of ~INR400b
(defence imports in 2013) is being opened up. BHFC has building blocks in place in
the defence sector, with JV with Israeli company Elbit Systems focuses on land
systems—artillery and infantry equipment and tanks. This JV is developing a 155 mm
artillery gun. Further, BHFC also has a strategic alliance with Swedish defence and
security company Saab, and has a JV with David Brown catering to defence gearing
solutions.
17 June 2014
24

Bharat Forge
Overseas subsidiaries of strategic value
But yet to contribute meaningfully to financial performance
BHFC’s overseas acquisitions were driven by its need for enhanced access to
customers, markets and technology, and to develop a dual-shore manufacturing
model.
Though its overseas subsidiaries are yet to contribute meaningfully to financial
performance, they add strategic value. These subsidiaries contributed ~40%/8%/1% to
FY13 consolidated revenue/EBITDA/PAT.
BHFC’s exports from India have grown at a CAGR of ~25% over FY10-14, benefiting
from the enhanced access to customers and markets provided by these subsidiaries.
Acquisitions add strategic value, but meaningful financial contribution yet
to come
On realizing the need to be closer to international OEM customers and to widen its
reach with global automotive companies, BHFC embarked on a series of acquisitions
across geographies. This helped it to establish an international footprint and
strengthen long-term relationships with a wider customer base in newer markets
while offering greater access to technology. BHFC now has complementary
manufacturing capabilities, a diversified product range, strong focus on key markets
like India, US and EU. It has developed strong design and engineering capabilities
and relationships with more than 35 global OEMs and tier-I automotive customers.
Global acquisitions broaden BHFC’s horizon
Year of
acquisition
Equipment
capability
Products
BHFC
NA
CDP BF
Nov-03
BF AluTech
Dec-04
BF America
Jun-05
4,000 to 6,000 ton
press lines
Strong focus on US
light truck market
BF Kilsta
Sep-05
2,500 to 16,000
Tons press lines
Significant focus on
heavy duty engine
components and
heavy components
FAW BF JV
Dec-05
1,600 ton to 12,500
ton press lines
Very wide
manufacturing
capability with
complete range of
forging equipment
End user
industry
Regional
focus
Current
Status
1,600 Ton to 16,000 4,000 to 8,000 Tons Aluminum forging
Ton press lines
press lines
presses
Full spectrum
Strong focus on
Manufacturer of
product capability passenger car chassis niche aluminum
with major focus on components
chassis components
CV engine and chasis
components and
passenger car engine
component
Passenger Car, CV Passenger car
Aluminum
and Non automotive railways,
components for
business
construction
passenger car
equipment
industry
India, USA, Europe & Europe, USA
Europe & USA
China
NA
Profitable
Break-even
Light trucks
Heavy commercial
vehicles
Passenger car, CV,
buses
USA
Closed
Europe
Profitable
China
Exited
Source: Company, MOSL
BHFC has been focusing on effectively integrating its global operations and realizing
synergies between its global operations through (a) sharing of "best practices"
across its facilities, (b) leveraging different customer relationships and offering a
wider portfolio of products, (c) integrating R&D activities to enhance the scope of
product development and reduce product development time, and (d) cross-
fertilizing different plants with enhanced production capabilities. However, its
acquisitions are yet to contribute meaningfully to financial performance, with
~40%/8%/1% contribution to FY13 consolidated revenues/EBITDA/PAT.
17 June 2014
25

Bharat Forge
Snapshot of financials of key subsidiaries
INR m
Net Revenues
EBITDA
EBITDA Margins (%)
PAT
CY08
10,711
617
5.8
97
CDP BF
CY13
CY14E
9,794 11,320
935
1,215
9.5
10.7
410
589
CY15E
13,365
1,538
11.5
784
CY08
2,810
290
10.3
153
BF AluTech
CY13
CY14E
2,532
2,915
124
176
4.9
6.0
-7
30
CY15E
5,176
650
12.6
257
CY08
6,902
319
4.6
-328
BF Kilsta
CY13
CY14E
CY15E
5,508
6,358
6,874
378
588
669
6.9
9.3
9.7
20
162
235
Source: Company, MOSL
Trend in contribution of subsidiaries to revenues, EBITDA and PAT
Revenues
23,139
14,410
24,558
27,165
21,399
14,712
25,931
20,153
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
1,787 1,822
1,327
EBIDTA
1,114
697
946
432
535
PAT
811
760
44
(154)
(1,122)
(381)
(523)
(985)
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
Source: Company, MOSL
Exports from India have benefited from access to markets and customers
BHFC’s acquisitions have given its India operations access to customers, markets and
technologies, translating into robust export business from India. Its exports from
India have grown at a CAGR of ~25% over FY10-14 and contribute ~57%/30% of
standalone/consolidated revenues.
BHFC is able to cater to customers through a dual-shore model. Its acquisitions are
playing a critical role in accelerating the pace of relationship building and business
initiation. Across businesses, it has been putting in continuous efforts for
upgradation and value addition. It is leveraging global synergies to grow the
business in a de-risked manner and move-up the value chain with the global
customers by progressively developing the supply partnership to the next level of
development partnership.
17 June 2014
26

Bharat Forge
BHFC is one of India’s largest engineering exporters from India, with a relatively diversified
segment mix
58
13
13
10
10
9
9
7
7
6
Source: CapitalLine, Company, MOSL
Exports from India have grown a CAGR of ~26% over
FY10-14…
Exports from India (INR m)
66
59
43
34
25
15
7,109 12,195 17,346 15,837 18,483 21,998 26,248 31,344
FY10
FY11
FY12
FY13
FY14
FY15E FY16E FY17E
Source: Company, MOSL
59
36
% of S/A
65
66
% of Consol
64
…reflected in expansion of standalone gross margins
35
37
33
37
37
Source: Company, MOSL
17 June 2014
27

Bharat Forge
Multiple levers to support/improve profitability
Operating leverage I Limited capex I Debt reduction
We expect consolidated revenues to grow at a CAGR of ~16% over FY14-17 (adjusted
for FAW JV exit), driven by 22% CAGR in India revenues and 12% CAGR in international
revenues.
EBITDA margin should expand ~270bp to 18%, driven by higher exports from India,
rising contribution from non-auto business and machined components, and operating
leverage.
BHFC has sufficient capacities to drive over 25% revenue CAGR over the next two
years, necessitating maintenance capex of INR1.5b-1.8b per year.
We estimate cumulative FCF generation of ~INR20b during FY15-17, enabling
reduction of net debt to ~INR7.7b (net debt-equity of 0.2x) from ~INR13.4b (net debt-
equity of 0.5x) in FY14.
Improving asset turns and profitability would drive improvement in consolidated RoE
to ~22% in FY17 from 17.7% in FY14 – the highest RoE since FY07.
Revenues to grow at ~16.6% CAGR over FY14-16
Net Revenues
53
23
11
Growth (%)
Significant headroom to grow from current capacities
Fixed Asset Turnover (x)
1.6
1.5
1.2
0.8
1.1
1.3
0.9
1.3
1.1
1.1
1.5
38
3
-18
-30
30
7
19
16
Source: Company, MOSL
Source: Company, MOSL
EBITDA margins to improve to new highs (%)
S/A
27
21
15
9
Consol
Consolidated EPS to grow at 30% CAGR over FY14-16
EPS
Growth (%) - RHS
70
40
19
-37
44
20
18
11
-67
-72
Source: Company, MOSL
Source: Company, MOSL
17 June 2014
28

Bharat Forge
Capital efficiencies to improve to highest level since FY07
27
18
9
0
RoE (%)
RoCE (%)
8
4
0
-4
-8
-1.1
-2.2
-2.6
-0.3
3.5
0.5
3.1
Improving CFO, minimal capex resulting in strong FCF (INR b)..
CFO
Capex
FCF
6.8
5.8
6.7 8.7
Source: Company, MOSL
Source: Company, MOSL
…driving meaningful reduction in net debt
Net Debt (INR b)
1.0 1.0
0.8
0.6
0.4
0.6
Net Debt:Equity (x)
0.8
0.5
0.4
0.2
0.0
Dividend per share to increase steadily
Dividend (INR/Sh)
91
Payout (%)
31
28 24
32
26
36
28
26
22
21
Source: Company, MOSL
Source: Company, MOSL
17 June 2014
29

Bharat Forge
Valuations attractive for global leader in forgings
Initiate coverage with Buy rating and target price of ~INR710
BHFC is trading at a
discount to historical
valuations, despite
significant transformation
in its business model
BHFC is primed for recovery in the global investment cycle. While the stock has
outperformed over the last six months, there are several triggers for continued
outperformance.
These include: (a) volume recovery led benefit of operating leverage, (b) improving
segment mix, (c) balance sheet deleveraging, and (d) improvement in capital
efficiencies.
Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR29/INR37 are
attractive for a global leader in forgings and at a discount to the 5/10 year average of
22x/26x.
We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS)
suggests an upside of ~23%.
FY16 performance sensitivity to revenue growth
Rev.
Growth
(%)
5
10
19
20
25
30
EBITDA
Margins
(%)
15.6
16.4
17.8
17.9
18.6
19.2
EPS
(INR)
22.5
26.0
32.3
32.9
36.3
39.8
PE (x)
24.8
21.5
17.2
17.0
15.3
14.0
TP@22x
PE
495
571
711
723
799
875
BHFC: Ten-year PE band
90
60
30
0
25.7
21.6
19.4
P/E (x)
5 Yrs Avg (x)
10 Yrs Avg(x)
Source: Company, MOSL
Source: Bloomberg, MOSL
BHFC: Five-year EV/EBITDA chart
EV/EBDITA
10 Yr Avg
5 Yr Avg
BHFC: Five-year P/B chart
8.0
6.0
9.8
14
11
8
5
10.7
9.4
P/B (x)
5 Yrs Avg (x)
10 Yrs Avg(x)
4.0
2.0
0.0
2.9
3.8
3.8
Source: Company, MOSL
Source: Company, MOSL
17 June 2014
30

Bharat Forge
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT bef. EO Exp.
EO Expense/(Income)
PBT after EO Exp.
Current Tax
Tax Rate (%)
Reported PAT
PAT Adj for EO items
Change (%)
Margin (%)
FY12
62,791
23.4
52,826
84.1
9,964
15.9
3,022
6,943
1,860
915
5,998
0
5,998
1,796
29.9
4,202
4,202
39.1
6.7
FY13
51,666
-17.7
43,750
84.7
7,915
15.3
3,195
4,720
1,672
1,121
4,169
205
3,964
1,529
38.6
2,435
2,561
-39.1
5.0
FY14
67,161
30.0
56,890
84.7
10,271
15.3
3,579
6,693
1,692
1,249
6,250
-807
7,057
2,100
29.8
4,957
4,390
71.4
6.5
FY15E
71,871
7.0
59,876
83.3
11,995
16.7
3,596
8,400
1,615
1,498
8,283
0
8,283
3,041
36.7
5,242
5,242
19.4
7.3
(INR Million)
FY16E
85,701
19.2
70,431
82.2
15,271
17.8
3,802
11,469
1,460
1,556
11,565
0
11,565
4,035
34.9
7,530
7,530
43.7
8.8
FY17E
99,280
15.8
81,231
81.8
18,049
18.2
4,217
13,833
1,434
1,697
14,095
0
14,095
5,033
35.7
9,062
9,062
20.4
9.1
Balance sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Minority Interest
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Creditors
Other Current Liabilities
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY12
466
21,373
21,839
1,957
886
27,835
52,517
49,798
23,270
26,527
5,168
4,450
37,197
10,961
8,134
6,337
11,765
20,825
11,789
6,462
2,575
16,372
52,517
FY13
466
22,098
22,564
1,643
1,345
28,249
53,800
56,452
26,807
29,645
6,324
4,160
34,266
11,320
6,114
5,554
11,278
20,594
9,511
8,950
2,133
13,672
53,800
FY14
466
26,367
26,832
170
1,645
25,612
54,259
60,054
30,386
29,668
1,500
8,012
36,165
10,386
8,660
4,227
12,892
21,086
10,554
7,526
3,006
15,079
54,259
FY15E
466
30,246
30,712
170
1,645
23,612
56,139
63,184
33,982
29,203
1,750
8,012
39,520
11,814
8,861
5,049
13,796
22,346
11,814
7,526
3,006
17,174
56,139
(INR Million)
FY16E
466
36,141
36,607
170
1,645
21,612
60,034
64,934
37,784
27,151
1,750
8,012
47,741
14,088
10,566
6,636
16,451
24,620
14,088
7,526
3,006
23,121
60,034
FY17E
466
43,296
43,762
170
1,645
19,612
65,189
66,684
42,000
24,684
1,750
8,012
57,595
16,320
12,240
9,977
19,057
26,852
16,320
7,526
3,006
30,743
65,189
17 June 2014
31

Bharat Forge
Financials and valuations
Ratios
Y/E March
Basic (INR) *
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x) *
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Fixed Asset Turnover (x)
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Working Capital Turnover (Days)
Growth (%)
Sales
EBITDA
PAT
Leverage Ratio (x)
Current Ratio
Debt/Equity
* Adjusted for treasury stocks
FY12
18.0
31.0
93.8
4.0
25.8
FY13
11.0
24.7
96.9
3.4
38.0
FY14
18.9
34.2
115.2
4.5
24.7
30.7
16.9
5.0
2.3
15.2
0.8
20.0
17.8
1.3
1.2
64
47
69
58
23.4
26.9
39.8
1.8
1.3
11.7
11.6
0.9
1.0
80
43
67
57
-17.7
-20.6
-37.0
1.7
1.3
17.9
15.4
1.1
1.2
56
47
57
59
30.0
29.8
69.8
1.7
1.0
FY15E
22.5
38.0
131.9
5.0
26.0
25.7
15.3
4.4
2.1
12.8
0.9
18.2
18.5
1.1
1.3
60
45
60
62
7.0
16.8
18.6
1.8
0.8
FY16E
32.3
48.7
157.2
6.0
21.7
17.9
11.9
3.7
1.7
9.8
1.0
22.4
23.1
1.3
1.4
60
45
60
70
19.2
27.3
43.7
1.9
0.6
FY17E
38.9
57.0
187.9
7.0
21.0
14.9
10.2
3.1
1.5
8.0
1.2
22.6
25.5
1.5
1.5
60
45
60
76
15.8
18.2
20.4
2.1
0.4
Cash flow statement
Y/E March
N P/ (Loss) bfe Tax & EO Items
Depreciation
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Expense
CF from Operating incl EO
CF from Investments
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
FY12
5,995
3,022
-1,710
-2,307
5,000
2,373
7,372
-10,843
7,902
-1,940
-1,343
4,619
1,148
1,197
2,345
FY13
3,919
3,360
-1,193
-385
5,701
2,456
8,157
-2,896
-454
-2,111
-949
-3,513
1,748
2,345
4,093
FY14
6,693
3,579
-1,801
-2,733
5,737
588
6,325
-2,606
-2,637
-1,692
-1,226
-5,045
-1,326
4,093
2,767
FY15E
8,400
3,596
-3,041
-1,274
7,681
1,498
9,179
-3,380
-2,000
-1,615
-1,362
-4,977
821
2,767
3,588
(INR Million))
FY16E
11,469
3,802
-4,035
-4,360
6,876
1,556
8,432
-1,750
-2,000
-1,460
-1,635
-5,095
1,587
3,588
5,175
FY17E
13,833
4,217
-5,033
-4,281
8,735
1,697
10,433
-1,750
-2,000
-1,434
-1,907
-5,341
3,341
5,175
8,517
17 June 2014
32

Bharat Forge
NOTES
17 June 2014
33

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17 June 2014
34