For 2QFY2016, Bharat Forge Ltd (BFL)s results have come in below our
estimates. The top-line declined marginally, led by a steep decline in industrial
exports which is owing to weakness in the oil and gas segment. A subdued
top-line and adverse mix (industrial exports have high machining component)
negated most of the benefits of lower steel prices. Given the subdued top-line, the
net profit too declined marginally on a yoy basis.
Top-line declines marginally: After seven consecutive quarters of double-digit
growth, BFL’s revenues declined by 2% yoy to `1,117cr during the quarter. The decline
was led by the export segment which dipped by 9%. Industrial segment exports declined
sharply by 32% yoy due to weakness in the oil and gas sector. The domestic market, in
contrast, grew a healthy 9% yoy led by the non-auto segment, which reported a growth
of 20% yoy.
Subdued topline and adverse mix impacts profitability: BFL’s revenues were under
pressure during the quarter, which led to operating deleverage. Further, the
product mix worsened given the decline in the industrial export segment which
levied pressure on profitability. The net profit, at Rs175cr, declined by 2% yoy.
Outlook and valuation: The outlook in the near term remains subdued given the
pressures in the industrial export segment (particularly in the oil and gas space).
However, BFL expects the topline to return to double digit growth rate from
FY2017 given the gradual recovery in the automotive export markets. Further, the
ramp up in the passenger vehicle exports due to new order wins and addition of
new customers and markets in the export industrial segments would enable BFL to
outpace industry growth. Given the focus on technological innovation and the
ability to move up the value chain, we have positive view on the stock. We assign
Buy rating to the stock with a price target of Rs 1,025 (based on 24x FY2017

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