Published on 22/09/2018 10:08:51 AM | Source: Motilal Oswal Securities Ltd

Annual Report Bharat Forge FY18 - Motilal Oswal

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Bharat Forge’s (BHFC) FY18 annual report analysis highlights its strong operating performance, with EBITDA growing at 38% to INR17.2b led by standalone operations. PBT growth was lower at 25% to INR12b primarily due to exceptional loss on impairment provision for: (a) oil and gas exploration assets (at INR822m); and (b) loan to an associate (at INR132m). However, profitability of subsidiaries (derived) remained weak with PAT declining 62% to INR0.5b, which led to a lower consolidated RoCE of 11.6% (standalone RoCE of 14.5%). OCF declined to INR9.7b (FY17: INR10.5b) due to a rise in working capital investment. Cash and investments stood high at INR18.1b, 39% of net worth (NW) (FY17: INR15.3b), leading to a decline in net debt at INR15.1b (FY17: INR16.4b), with net D/E declining to 0.3x (FY17: 0.4x). BHFC yield from investment stood at 5%, thereby leading to higher other income at INR1.4b, 12% of PBT, while borrowing cost remained lower at 3.3%. Purchases from related parties declined to INR5.4b, 15% of RM cost as against INR17.7b, 62% of RM cost in FY15.


Standalone operating performance impressive:

Revenue grew 38% to INR53.2b fueled by growth across all business segments. EBITDA was higher at 44% to INR15.4b with margins expanding 115 bp to 29%. Non-auto business segment revenue grew higher at 53% to INR22b aided by underlying growth in oil and gas, and high horse power engine.


Subsidiaries’ performance stays muted:

Subsidiaries’ (derived) performance remained muted with EBITDA growing a mere 4.3% to INR1.9b with margins declining 100 bp to 6%; despite high revenue growth of 20% to INR30.4b. This subdued operating performance has led to a lower RoCE at 1.8%; thereby dragging higher standalone RoCE of 14.5% to consolidated RoCE of 11.6%.


Impairment of non-forging related assets:

On a consolidated basis, BHFC provided for assets (included in Bharat Forge Infrastructure Limited - BFIL) pertaining to oil & gas wells exploration amounting to INR822m due to non-feasibility of further exploration. Also, BHFC provided INR132m towards loan advanced to an associate–Ferrovia Transrail Solution. This has led to an exceptional loss of INR954m, 7% of PBT before exceptional. Also, on a standalone basis, BHFC took provision for diminution of investment, expected loss, loans advanced to BFIL at INR1.3b, 10% of PBT before exceptional.


Investment in working capital to augment growth:

Investment in working capital at INR4b (FY17: INR0.3b) led to an operating cash flow decline, marginally to INR9.7b (FY17: INR10.5b). Although, cash conversion days improved from 109 days to 86 days aided by a steep rise in payable days at 148 days (FY17: 127 days). FCF post-interest remained stagnant at INR2.9b, supported by a reduction in capex to INR5.8b (FY17: INR6.6b).


Related party purchases albeit significant, declines:

Purchases from entities owned by KMP stood lower at INR5.4b, 15% of RM cost as against INR17.7b, 62% of RM cost in FY15.


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