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Sowmya Sundar

FRESH exposures can be contemplated in Bharat Forge, especially on any declines from the current market price of Rs 373 despite the sharp run-up in the last few months. Business Line had recommended `Pare exposures' at Rs 250 in April, after a sharp run-up in prices. The subsequent appreciation in the share price has been backed by a substantial improvement in earnings.

The change in recommendation from `Pare exposures' to `Buy' is on the back of the impressive performance in the last two quarters.

Other factors that support the change include the likelihood of good growth prospects for the auto component outsourcing business; fresh export prospects to China and lower exposure to the American markets, steady growth in the domestic automobile segment and improved operating efficiency and reduction in interest costs.

Different outsourcing story

There has been a sea-change in the business conditions in the last one year throwing up lucrative opportunities for auto component manufacturers.

The size of the global market is estimated to be about $750 billion. Now, the size of the Indian auto component industry is only $3 billion. A number of foreign companies have shown interest in outsourcing components from India. The industry is expected to manufacture components worth $500 million in 2003-04 — a two-third growth from the previous year.

The industry is expected to grow at 30-40 per cent per annum. As one of the largest component manufacturers, Bharat Forge could gain substantially from this wave. The company plans to expand its capacities to meet the growing demand.

Earnings highlights

Bharat Forge continued to report a commendable performance in July 2003 too. Salient features are:

Significant diversification of the export portfolio has reduced the external risk significantly.

The scope for expansion of OPM could be limited from this level. However, there is scope for reduction in interest costs given that future cash flows could be utilised to reduce debt.

Exports: De-risking pays

In 2002, Bharat Forge's exposure to the US market was close to 71 per cent, exposing its revenue growth to the vagaries of that economy.

The dependence on the US market has substantially reduced in the June 2003 quarter to 22 per cent.

The loss of the US market has been replaced by the Chinese market, which contributed 37 per cent of the total exports in the first year.

The company did not have a presence in the Chinese market a year ago. It expects to bag another OEM order in China. This would ramp up volumes in the later half of the year.

Further, its foray into the passenger car segment would accelerate export growth. So far, it only exported components for commercial vehicles.

Valuation

Bharat Forge trades at 15 times its trailing 12-month per share earnings. Its return on net worth improved significantly from 12 per cent in 2002 to 32.5 per cent in 2003.

At the current market price, this year's growth could largely have been factored in.

However, given the improved fundamentals and the robust long-term growth, investors can look forward to decent returns in a one-to-two-year time-frame.

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