‘At the bottom of the barrel, see uptick going forward’- Amit Kalyani, Deputy MD, Bharat Forge

Update on the Indian Equity Market:

On Wednesday, NIFTY closed positive (+0.8%) at 12,201. NIFTY50 was led by HINDUNILVR (+5.1%), KOTAKBANK (+2.2%), and EICHERMOT (+1.9%). YESBANK (-1.5%), SBIN (-1.2%) were the top NIFTY50 losers. FMCG (+1.9%), PVT BANK (+0.7%) and FIN SERVICE (+0.7%) were the top gaining sectors. PSU BANK (-1.9%), REALTY (-0.8%) and PHARMA (-0.7%) were among the losing sectors.

‘At the bottom of the barrel, see uptick going forward’- Amit Kalyani, Deputy MD, Bharat Forge

Excerpts from an interview with Mr Amit Kalyani, Deputy MD, Bharat Forge aired on CNBCTV18 on 10^th February 2020:

• In the domestic auto industry, the Commercial Vehicle (CV) and Passenger Vehicle (PV) volume decline has reached the bottom. However, any growth is not visible at this point.
• On the global auto market, seeing good growth in PVs. 3QFY20 was an aberration for Bharat Forge due to a strike at GM, one of their big customers. Mr Kalyani expects business to be sequentially higher in 4QFY20.
• Overall, the Indian auto industry sentiment is not very positive. There are a lot of unknowns in the transition phase leading up to shift to BS6. Bharat Forge’s domestic customers are not willing to give any forecasts for more than 1 – 1.5 months.
• Revenue from North America declined over 30% in 3QFY20. Mr Kalyani commented that he doesn’t expect any further decline in CVs in the North American market. He expects the PV exports to go up in 4QFY20E as well as FY21E as Bharat Forge has won a lot of new product orders.
• The Europe CV business is also expected to go up in FY21 due to new product wins. This growth will be in the form of additional value per vehicle so even if volumes decline, Bharat Forge will see growth.
• Bharat Forge is engaged in a lot of cost reduction, both on fixed and variable costs. By the end of FY21E, the company will have a substantial cost reduction exercise completed which will help margins. In 9MFY20, even though operating at 50% capacity, Bharat Forge’s margins are at about 24%.
• In 3QFY20, profitability has bottomed out. Mr Kalyani expects some improvement in 4QFY20E, but it won’t be substantial.
• Bharat Forge’s business is a derived demand business. The company can only focus on maximizing revenue depending on customer demand and cost-efficiency.
• Bharat Forge is in a position to take advantage of any opportunities that come up. The company has created a lot of capacity. They are able to fulfil all demand operating at 50% capacity. The company is strong financially and technologically.

Consensus Estimate: (Source: market screener website)

• The closing price of Bharat Forge was ₹ 483/- as on 12-February-20. It traded at 34x/ 25x/ 19x the consensus EPS estimate of ₹ 14.1/19.5/25.5 for FY20E/ FY21E/ FY22E respectively.
• Consensus target price is ₹ 469/- which implies a PE multiple of 18x on FY22E EPS of ₹ 25.5/-