The Hindu Business Line : Bharat Forge: Buy

INVESTORS can consider exposures to the Bharat Forge stock at Rs 487. The stock, which trades at 17 times its trailing 12 months earnings per share, could scale up to higher levels as the growth prospects on the domestic and export fronts appear bright. The strong growth in automobile production, the successful foray into the export market and the constant flow of orders suggest that sustaining earnings growth at over 25 per cent should be possible.

Business Line recommended the stock at Rs 381 in July 2003. Since then it has returned 28 per cent. We continue to reiterate the `Buy' recommendation on the stock.

Domestic sales shoot up

Bharat Forge has forged ahead, registering yet another quarter of robust sales and earnings growth. Sales continue to rise at a scorching pace. A 40 per cent rise in sales and a net profit growth of 90 per cent during the quarter ended September 2003 was primarily fuelled by a ramp up in domestic sales. Business had started looking up on the domestic front in the June 2003 quarter itself. However, what is significant is domestic growth outpacing the export growth in the September quarter.

Good showing by the domestic automobile companies such as Tata Motors, Ashok Leyland, Maruti Udyog and Bajaj Auto, to whom Bharat Forge supplies, has led to a 64 per cent growth in domestic sales.

Its foray into new product segments such as components for earth moving equipment and engine parts also appears to have resulted in a healthy show on the domestic front. Its clients in the non-automotive segment includes original equipment manufacturers such as Bharat Earth Movers, Kirloskar group and Larsen and Toubro, whose prospects appear better in the near term.

The prospects for the domestic automotive and non-automotive segment continue to be bright at least for the next two-three quarters.

Exports on a strong footing

Bharat Forge has been riding high on exports as overseas sales continue to leap forward. Exports have consistently scaled up over the last 10 quarters from Rs 20 crore in June 2001 to Rs 81crore in September 2003. For the September 2003 quarter, exports grew 13.6 per cent compared to the corresponding previous quarter.

The company's latest foray into the passenger car market opens up avenues for business. The company has been traditionally supplying to the commercial vehicle segment in the overseas market.

The latest breakthrough — a multi-year order from Ford and DaimlerChrysler for export of crankshaft and camshaft forgings for the passenger car segment has thrown up fresh opportunities for growth.

The company is also looking at expanding its product range by supplying engine components for overseas original equipment manufacturers.

Given the low lead-time of less than three weeks, advanced technologies and manufacturing facilities, the probability of entering this market too appears positive.

Operating parameters improve

After a substantial scale up in operating profit margins in March 2003, the cost-cutting efforts continue to bear fruit.

At the operating level, despite increase in steel prices, the raw material cost, as a percentage of sales, improved significantly from 39 per cent in September 2002 to 32 per cent in September 2003 as the effect was counteracted by an increase in product prices.