The numbers

The earnings numbers of Bharat Forge for the March 2004 quarter may appear disappointing. But this was on account of the constraint in its manufacturing capacities.

The companyrunning at over 90 per cent capacity as of December, has reached full capacity utilisation now. Through 2003-04, the domestic demand has been robust. As the capacities were utilised to meet domestic demand, the export growth was lower in the later half of the year. But the capacities are now being expanded.

Value-addition to drive margins

The operating margins have been on a steady uptrend over the last couple of years and stabilised at 30 per cent in 2003-04. The swapping of the rupee for the dollar loan not only saved interest costs but also provided the company a hedge against the rupee appreciation.

The geographical diversification from the US to Europe and China also helped. The steel price hike was mitigated by partially passing it on to customers and through manufacturing efficiencies.

Margins can improve further as the revenue mix tilts towards machined components rather than raw forgings. The contribution of machined forgings, as a proportion of total revenues, increased and is now close to 50 per cent.

A new machining facility, to be commissioned next year, for two lakh machined heavy crankshafts, could further improve the ratio.

CDP: Gateway to new markets

The acquisition of the German operations of Carl Dan Peddinghaus (CDP) is complete and it will function as a subsidiary of Bharat Forge. The acquisition will act as a gateway to the European market and also give Bharat Forge greater access to the passenger car segment.

The complimentary nature of the manufacturing facilities and product profile would also add up to its product range. However, CDP's operating margin is just 12.5 per cent against Bharat Forge's 30 per cent.

The earnings for the consolidated entity are higher by 26 per cent, post-integration, of CDP's earnings for the March 2004 quarter.

On the domestic front...

The auto numbers, especially of commercial vehicles, have been very encouraging for April 2004 and are expected to be strong for the next couple of quarters.

But given that sales took off in the second half of 2003-04, growth rates could taper off in the later half of 2004-05 due to the high base effect. In a nutshell, domestic sales would drive the earnings for Bharat Forge in the first half and exports may take off in the second.

Impact of the rights issue

The rights issue will dilute the equity by 5 per cent in 2004-05. Together with the conversion of warrants in 2005-06, the total equity dilution would only be 7.5 per cent.

Since close to 85 per cent of the expansion is funded through equity (rights and warrants), additional debt too will not have a major impact on earnings.

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