Published on 27/12/2017 5:43:33 PM | Source: Motilal Oswal Securities Ltd

Anuual Report Bharat Forge Ltd FY17 - Motilal Oswal

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Bharat Forge’s (BHFC) FY17 annual report analysis highlights rising capital intensity and a weak operating performance, which led to a muted RoCE of 9.6% (FY16: 10.5%). RoE (adjusted for exceptional gain) stood at 15% (FY16: 19%), aided by a high equity multiplier ratio. Consolidated revenue declined 6% to INR66.0b, while the EBITDA margin shrunk 115bp to 19% due to rising personnel cost. The cash conversion cycle deteriorated to 107 days (FY16: 94 days), leading to low OCF of INR10.5b in FY17 (FY16: INR13.6b). Capex remained high (but declined YoY) at INR6.6b (FY16: INR9.0b), which led to FCF of INR2.9b (FY16:INR3.4b). Purchases from related party transactions stood at 28% (FY16: 53%) of raw material cost. Cash and investments stood at INR15.3b (37% of NW), with a yield of 5.1%. Borrowing cost declined to 3.2% (FY16: 3.4%), aided by the replacement of high interest debentures with cheaper foreign currency borrowings.

* Weak operating performance continues: BHFC’s consolidated revenue declined 6% to INR66b (FY16: INR70b) owing to the sluggish US class 8 truck market and commodity-related sectors, while the EBITDA margin shrunk 115bp to 19%. PBT stood muted at INR9.5b (FY16: INR9.7b). Subsidiaries continued with its minimal contribution to profitability, with PBT (before exceptional gain) of INR0.1b, as against pre-tax loss of INR0.6b in FY16. This has dragged the standalone RoCE (at 11.8%) to lower consolidated RoCE (at 9.6%).

* Rising capital intensity keeps return ratios subdued: BHFC’s continued investments in non-automotive businesses over the past few years have led to increased capital intensity (i.e. increased capex and working capital requirement). However, its operating performance has been muted, leading to a lower RoCE of 9.6% (FY16: 10.5%). Subdued revenue growth led to low asset turnover of 0.7x (FY16: 0.8x). RoE adjusted to exceptional gain on JV stake sale declined to 15.5% in FY17 (FY16: 19.7%). Dupont analysis highlights RoE are supported by a high equity multiplier ratio of 2.3x (Exhibit 3).

* Deteriorating cash conversion cycle dents OCF: Operating cash flow declined to INR10.5b (FY16: INR13.6b), primarily due to deterioration in the cash conversion cycle to 107 days (FY16: 94 days). This was mainly on account of an increase in inventory days to 161 (FY16: 141 days), partially offset by a rise in payable days to 127 (FY16: 119 days). FCF post interest declined to INR2.9b (FY16: INR3.4b), but was supported by a reduction in capex to INR6.6b (FY16: INR9b).

* Related party purchases remain substantial: BHFC’s purchases from entities owned by KMP stood at INR7.1b, 28% of total raw material cost. Purchases from related parties, albeit significant, have declined from FY16 (stood at INR14.1b, 53% of total raw material cost).


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