Annual Report Analysis

Bharat Forge Ltd.

Forging ahead on strong fundamentals

BSE Code 500493 Company Background

NSE Code BHARATFORGEQ Bharat Forge Ltd (BFL), is the flagship company of the Kalyani Group, which has
Bloomberg Code BHFC@IN significant presence in key sectors of the Indian economy. It is the largest forging
Face Value 10 company in Asia and the second largest in the world. It is one of the most advanced
CMP Rs 653
company in terms of technology. The company is a major global supplier of automotive
Market Cap Rs 24.6bn
engine and suspension components. It manufacturers a wide range of forging products
and machined components for the automotive, diesel engine, railway, earthmoving,
Share Holding Pattern cement, sugar, steel, coal, ship building & oilfield industries and also general engineering
Share Holding Pattern equipment.
20%

38% Business
The product portfolio of the company is as follows:
15%
Closed die forging segment Opened die forging segment- caters to
Crankshafts Sugar Industry
27% Connecting rods Cement Industry
Promoters Institutional Investors Rocker arm Steel Plants
Other Investors General Public
Front axle beams Gear manufacturing and material handling
Steering knuckles Mining
Share Price Chart Transmission parts Ship building
Hubs Petroleum and Petrochemical
Oil and gas

Clientele
Domestic Global
Swaraj Mazda Meritor Automotive, USA
Mahindra & Mahindra Mercedes Benz, USA
Eicher Mitsubishi Motor Corporation, Japan
Greaves Ltd. Volvo Trucks, Sweeden
Maruti Renault
L&T Toyota
Daewoo Motors Daimler Chrysler
Escorts
Tata Engineering
Bajaj Auto
Ashok Leyland
Kirloskar Group

July 20, 2004 1

 Annual Report Analysis

Auto ancillary industry

FY04 saw auto ancillary industry hog the limelight as it witnessed a 20% growth from
Rs255bn in FY03 to Rs306bn in FY04. Exports witnessed a rise of 28.7% from
Rs35bn in FY03 to Rs45bn in FY04. Though the exports from India account only for
0.25% of the global auto component industry sales, they contributed 14.7% of the
Indian auto component industry sales. ACMA targets exports to touch US$2.5bn
mark by 2010.

The Indian auto ancillary industry has witnessed marked changes over the years. The
domestic automobile industry, which now faces stiff competition from the global majors
such as Hyundai, Ford, General Motors, Toyota, etc, was the only revenue earner for
the domestic auto ancillary industry. These global companies have not only opened
their shops but have also started outsourcing from India. Consequently, the risk of
over dependence on the domestic industry is now mitigated to some extent.

The strengths that are in favor of India are:

• Highly skilled and educated workforce
• Superior software knowledge
• Quality conscious component manufacturers (over the last two years 7 companies
have won the Deming Award)
• Low – cost manufacturing base

The auto component industry in India in 2003-04 grew by 18% to Rs310bn. The
exports crossed the US$1bn mark. Going ahead, exports are expected to maintain
the growth rate but domestic market is likely to experience a lower growth rate as
compared to last year because of the larger base.

July 20, 2004 2

 Annual Report Analysis

Highlights
Bulging exports fuels sales growth
The sales witnessed a CAGR of 16.7% over the last four years. This was mainly on
back of CAGR of 57.6% in exports over the same period. In FY04, BFL’s sales
grew by 30.9% to Rs8.3bn as against Rs6.4bn in FY03. For the same period, the
exports grew by 22.6% to Rs3.3bn from Rs2.7bn. The growth in exports was lower
in FY04 on account of increased domestic demand. Some of the capacity available
for export had to shift its focus to cater the increased domestic demand.

Exhibit 1: Exports & growth in exports (2000-01 to 2003-04)

3500 160
3000 140
Exports (Rs mn)

Growth yoy (%)

2500 120
100
2000
80
1500
60
1000 40
500 20
0 0
2000-01 2001-02 2002-03 2003-04

Source: Company

There was not only significant rise in exports but they were further diversified. The
dependence on USA, which was around 63% in FY03, decreased to 44% in FY04.
Exhibit 2: Share of BFL’s exports by region

A sia
2002-03
P acific
26%

Europe USA
11% 63%

A sia 2003-04
P acific
24%

USA
44%

Europe
32%

July 20, 2004 3

 Annual Report Analysis

OPM decrease on increasing steel prices

During the last year, the steel prices rose significantly, almost 35%. As carbon & alloy
steel together form 98.4% of the total raw material consumption, the raw material
cost as a percentage of sales increased by 320bps. This increase was offset to some
extent by decrease in staff cost and other expenditure as a percentage of sales.
Electricity consumption cost decreased from Rs4.3/KWH in FY03 to Rs3.82/KWH.
Per unit consumption of electricity for steel forging also decreased from 699KWH in
FY03 to 658KWH in FY04. Consequently, operating margins for BFL decreased
by 50bps to 28.9% in FY04 from 29.4% in FY03.
Component Ratio FY02 FY03 FY04
OPM 25.6 29.4 28.9
Raw material 37.2 35.0 38.2
Staff cost 10.1 7.3 6.4
Other expenditure 27.0 28.4 21.7

56% CAGR witnessed in PAT

BFL, on back of strong operating performance, witnessed a CAGR of 56.4% over
the last four years in its PAT. In FY04, the company registered a rise of 54% in its
PAT to Rs1,249mn as against Rs811mn in FY03. Consequently, RONW grew from
47.3% in FY03 to 49.7%. Repayment of debt helped ROCE to grow from 39.6% in
FY03 to 48.3% in FY04 and debt-equity ratio to improve from 1.9 in FY03 to 1.1 in
FY04.

Working capital management releases Rs544mn

Though the sales increased by 30.8% in FY04, working capital reduced considerably
from Rs1,051mn in FY03 to Rs360mn in FY04. The following table clearly depicts
the improved working capital management. Consequently, Rs544mn worth of cash
was released.
FY03 FY04
Debtors days 46.7 43.9
Inventory days 72.6 58.4
Creditors days 77.7 81.8

Rs3.5bn capex plans on the cards

Since BFL was operating at high capacity utilization rates of around 95%, the
management felt the need to expand capacities. To achieve this objective, the company
has lined up a capital expenditure plan of Rs3.5bn. The company plans to fund this
program with debt-equity mix. It has planned a rights issue in the ratio of 1 share of
FV Rs10 for every 20 shares of FV Rs10 each. These shares will have warrants
attached to it which would be convertible into equity shares.

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 Annual Report Analysis

The company is significantly enhancing its small forging capacity by setting up two
additional press lines, including one fully automated transfer press line. These additions
will more than double BFL’s passenger car crankshaft forging capacity to
approximately 3mn crankshafts per year. This is in addition to one 6,000ton and one
2,500ton press line presently under installation.

BFL has targeted the machined heavy-duty crankshaft market as an important element
for future growth. In order to meet this demand, the company is required to increase
both its forging and machining capacity. It is planning to set up a third, large forging
press line to increase forging capacity to meet demand. BFL has also planned to set
up 3 state-of-the-art machining lines having a total capacity of 200,000 machined
crankshafts per annum.

Similarly, BFL is setting up a testing and validation facility for testing the components
developed for its customers. This is a step in becoming full service supply provider,
which will enable the company to deepen its relationship with customers.

CDP acquisition provides synergies to the company

BFL acquired Carl Dan Peddinghaus GmbH (CDP), one of the premier forging
company in the world in November 2003. This acquisition has now made BFL the
2nd largest forging company in the world. The company now aims at reaching the top
spot within next 5 years. The acquisition was made through an asset purchase deal,
through which BFL acquired 100% of the fixed assets, inventory, and business of
CDP, Germany, with effect from January 1, 2004. The deal was funded through
internal accruals. The acquisition would provide the following synergies:
• The diversified markets will help BFL to tap various markets.

CDP BFL

16% 17% 9%

5%
Europe
Asia
US
79%
74%

July 20, 2004 5

 Annual Report Analysis

• Forging capacities of both the companies are complementary in nature, thus will
help the company to cater to the demands of varied products.
• 50% of CDP’s revenue arise from the passenger car segment, while 60% of BFL’s
revenue comes from commercial vehicle segement. BFL can now cater to both the
segments globally.

CDP recorded a total income of Rs1,838mn and a PAT of Rs97mn in the quarter
ended March 2004.

Outlook
The initiatives taken by the new Government in the budget will fuel demand in the
commercial vehicle and the tractor segments. This augurs well for the company. Further,
the R&D benefit provided in the budget will help the company reduce its tax burden
and also to develop new products.

The acquisition of CDP will help the company spread its wings further into the
international market and consequently to increase its exports. However, cheaper
products from China pose a significant threat in the international arena. Capacity
additions, part of which will be in place in 2004-05, will help the company meet the
increasing demand in both domestic and international market.

July 20, 2004 6

 Annual Report Analysis

Income Statement
Period to FY02 FY03 FY04
(Rs in mn) (12) (12) (12)
Net Sales 4,232 6,358 8,321
Operating expenses (3,148) (4,491) (5,918)
Operating profit 1,084 1,867 2,402
Other income 113 92 191
PBIDT 1,197 1,959 2,593
Interest (454) (408) (324)
Depreciation (397) (418) (458)
Profit before tax (PBT) 346 1,133 1,812
Tax (133) (322) (563)
Profit after tax (PAT) 213 811 1,249

Balance Sheet

FY02 FY03 FY04

(12) (12) (12)
Sources
Share Capital 577 677 677
Reserves 1,185 1,039 1,836
Net Worth 1,762 1,716 2,512
Loan Funds 3,822 3,236 2,856
Def Tax liability 0 818 850
Total 5,584 5,770 6,218
Uses
Gross Block 7,071 7,697 8,220
Accd Depreciation (2,859) (3,270) (3,708)
Net Block 4,212 4,427 4,512
Capital WIP 263 139 877
Total Fixed Assets 4,475 4,565 5,389
Investments - - 344
Total Current Assets 2,939 4,014 5,228
Total Current Liabilities (1,938) (2,963) (4,869)
Net Working Capital 1,001 1,051 360
Miscellaneous expenditure 108 115 81
Def Tax assets 0 39 45
Total 5,584 5,770 6,218

July 20, 2004 7

 Annual Report Analysis

Cash Flow Statement

Year to (Rs mn) FY03 FY04
Net profit before tax and extraordinary items 1,133 1,812
Depreciation 418 458
Interest expense 408 324
Interest income (5) (5)
Operating profit before working capital changes 1,954 2,588
Add: changes in working capital
(Inc)/Dec in
(Inc)/Dec in sundry debtors (97) (189)
(Inc)/Dec in inventories (405) (67)
(Inc)/Dec in other current assets (433) (1106)
Inc/(Dec) in sundry creditors 335 512
Inc/(Dec) in other current liabilities 691 1,394
Net change in working capital 91 544
Cash from operating activities 2,044 3,132
Less: Income tax (322) (563)
Inc/(Dec) in Def Tax liability 818 32
(Inc)/Dec in Def Tax asset (39) (6)
Misc expenditure w/off (7) 34
Net cash from operating activities 2,495 2,629
Cash flows from investing activities
(Inc)/Dec in fixed assets (508) (1281)
(Inc)/Dec in Investments 0 (344)
Interest received 5 5
Net cash from investing activities (503) (1620)
Cash flows from financing activities
Inc/(Dec) in debt (587) (380)
Inc/(Dec) in equity/premium 100 0
Direct add/(red) to reserves (671) 5
Interest expense (408) (324)
Dividends (286) (458)
Net cash used in financing activities (1,852) (1,156)
Net increase in cash and cash equivalents 140 (147)
Cash at start of the year 93 233
Cash at end of the year 233 86

July 20, 2004 8

 Annual Report Analysis

Ratios
FY02 FY03 FY04
(12) (12) (12)
Per share ratios
EPS (Rs) 5.7 21.5 33.2
Div per share 30.0 40.0 65.0
Book value per share 46.8 45.5 66.7
Valuation ratios
P/E 115.0 30.2 19.6
P/BV 13.9 14.3 9.7
EV/sales 9.7 7.4 5.6
EV/ PBIT 51.6 30.5 21.9
EV/PBIDT 34.4 24.0 18.0
Profitability ratios
OPM (%) 25.6 29.4 28.9
PAT (%) 5.0 12.8 15.0
ROCE 21.4 39.6 48.3
RONW 12.1 47.3 49.7
Leverage ratios
Debt / Total equity 2.2 1.9 1.1
Payout ratios
Dividend Payout Ratio 67.9 35.2 36.7

July 20, 2004 9

 Annual Report Analysis

Segment wise performance

FY02 FY03 FY04
Revenues (Rs mn)
Steel Forging 4,666 6,328 8,285
General Engineering 90 46 53
PBIT (Rs mn)
Steel Forging 1,008 1,798 2,347
General Engineering 2 13 3
Capital Employed (Rs mn)
Steel Forging 5,131 5,155 5,433
General Engineering 33 31 28
ROCE
Steel Forging 19.6 34.9 43.2
General Engineering 5.3 42.9 10.0

Raw materials breakup

FY02 FY03 FY04
Raw Materials Value (Rs mn) % of Total Value (Rs mn) % of Total Value (Rs mn) % of Total
Carbon & 1,478 98.6 2,286 97.7 3,056 98.4
Alloy Steel
Components 21 1.4 54 2.3 49 1.6
Total 1,499 2,340 3,104

Published in July 2004. © India Infoline Ltd 2003-4.

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July 20, 2004 10