Equity | India | Autos & Components

17 August 2010

Bharat Forge
Buy Profit traction improves substantially
Target price
Rs401.00 (from Rs385.00)
June quarter results surprised with impressive sales growth and margin
expansion by the standalone and consolidated entities. With US CV cycle
Price
Rs346.20 recovery and non-auto expansion, Bharat Forge looks well placed to us to ride
Short term (0-60 days) the uptrend given restructured costs in its European operations. Buy, Rs401 TP.
n/a
Market view Key forecasts
Underweight
FY09A FY10A FY11F FY12F FY13F
Revenue (Rsm) 47,751 33,276 44,142 52,705 64,980
Price performance EBITDA (Rsm) 5,574 3,385 7,795 9,540 % 10,917
Reported net profit (Rsm) 582.7 -634.2 2,787 % 3,642 % 4,281
(1M) (3M) (12M)
Normalised net profit (Rsm)¹ 1,921 153.1 2,787 3,642 4,281
Price (Rs) 329.5 266.5 226.3
Normalised EPS (Rs) 8.03 0.64 11.7 15.2 % 17.9
Absolute (%) 5.1 29.9 53.0
Rel market (%) 4.5 22.3 30.6 Dividend per share (Rs) 1 1.05 2 3 3
Rel sector (%) 2.9 28.2 62.8 Dividend yield (%) 0.29 0.3 0.58 0.87 0.87
Normalised PE (x) 43.1 540.8 29.7 22.7 19.3
Aug 07 Aug 08 Aug 09
400 EV/EBITDA (x) 17.5 28.7 11.4 9.04 8.47
Price/book value (x) 5.04 5.66 3.42 3 2.59
300 ROIC (%) 6.36 1.73 9.8 11.9 13.7

200 Use of %& indicates that the line item has changed by at least 5%. year to Mar, fully diluted
1. Post-goodwill amortisation and pre-exceptional items
Accounting standard: Local GAAP
100 Source: Company data, RBS forecasts

0
BFRG.BO
Market capitalisation
Rs80.56bn (US$1.72bn)
Average (12M) daily turnover
Rs241.22m (US$5.21m)
Sector: BBG AP Eng & Mach
RIC: BFRG.BO, BHFC IN
Priced Rs346.20 at close 16 Aug 2010.
Source: Bloomberg
Quarterly profit traction improves sharply
Sensex
The Bharat Forge consolidated entity recorded impressive 15.6% qoq growth in normalised
PAT to Rs606m in the June quarter, despite seasonal weakness. The 24% qoq jump in
EBITDA from the international subsidiary post cost restructuring helped, supported by a 13%
rise in EBITDA from the standalone entity.
Raising our net profit forecasts due to global CV, premium car makers’ buoyancy
Global truck and premium car makers such as Daimler, MAN and BMW recorded impressive
profit performance in the June quarter and guided for strong new order intake, which should
benefit Bharat Forge in improved export tonnage from the highly profitable Indian plant. We
build this improved export tonnage into our forecasts, along with recent equity fund-raising
benefits, and upgrade our consolidated PAT by 6% for FY11F and 15% for FY12F. We feel
there is upside risk to our forecasts based on a planned ramp-up of the non-auto forging
business from the December 2010 quarter.

Raising EPS and target price; Buy

Researched by
RBS Equities (India) Limited
Institutional Team
Mafatlal Chambers – C Wing, Ground
Floor, N.M. Joshi Marg, Lower Parel (E),
Mumbai 400 013, India. Tel : +91 022
6754 8411 Fax : +91 022 6754 8420
www.rbs.in/broking
The strong outlook provided by key clients in developed markets, especially in commercial
vehicles (CVs) and premium cars, augurs well for Bharat Forge, which should be able to
ramp up capacity utilisation from 55% currently and extend the operating leverage benefit
soon. By successfully overcoming a substantial repayment of foreign currency convertible
bonds (FCCBs) and subsequent fund raising to trim its net debt:equity to 0.8, the company
looks well positioned to handle the uptrend. In non-auto forging, management guides for a
sharp improvement in capacity utilisation from 30% now to 50% by year-end based on
customer orders in hand, which should be highly accretive to margins. We reiterate Buy with
a revised three-stage DCF-based TP of Rs401 (from Rs385) as we roll forward our forecasts
to FY13. At our TP, the stock would trade at 26.4x FY12F consolidated EPS, in line with its
past trend for the forward PE band, considering our EPS CAGR of 24.6% for FY11-13F.
Important disclosures can be found in the Disclosures Appendix.
 Capacity ramp-up benefit yet to flow through

On the back of impressive volume upgrades in user industries such as trucks and cars,
Bharat Forge looks best positioned to extend operating leverage from its current 55%
capacity utilisation. We raise our EPS and TP for its restructured cost and balance sheet.

User industry appears to be on an uptrend

Our European auto analyst, Jose Asumendi, expects world truck demand to remain robust
throughout CY10 and grow about 8% during CY11-13F. Our European team has raised its truck
demand forecasts by 10% on average for CVs for CY10-12, with Central/Eastern Europe and
North and South America the major growth drivers. The team has reduced its Western European
sales volume forecasts by 6% for CY11, but notes that on a yoy basis, Western Europe is
expected to register 26% and 21% growth for CY11 and CY12, respectively. We also expect world
car sales to register 6-9% yearly growth during CY10-13. While Western European is forecast to
register a sales volume decline for the next three to four calendar years, the impact is expected to
be more than offset by growth in other regions. Therefore, our European team has raised its car
sales forecasts in the range of 5-7% for CY10-12.

Table 1 : Volume estimate revision for cars and trucks across the global regions

CY10F yoy ch (%) vs CY11F yoy Ch (%) vs CY12F yoy ch (%) vs CY13F yoy ch (%)
previous previous previous
est est est
Trucks heavier than six tons
Africa 13,047 22.7% -6.5% 15,863 21.6% -3.2% 18,611 17.3% -1.6% 20,652 11.0%
Asia-Pacific 1,511,720 29.7% 24.2% 1,290,235 -14.7% -0.6% 1,427,266 10.6% 4.0% 1,578,215 10.6%
Central/East Europe 101,422 33.9% 13.1% 167,610 65.3% 43.8% 181,520 8.3% 37.9% 225,311 24.1%
North America 272,254 9.6% -5.5% 391,992 44.0% 13.3% 476,894 21.7% 25.5% 519,494 8.9%
South America 153,996 33.2% 23.7% 138,871 -9.8% 7.4% 153,201 10.3% 16.2% 167,512 9.3%
Western Europe 193,593 -1.2% -6.2% 243,778 25.9% -6.0% 294,759 20.9% 8.2% 332,940 13.0%
Total 2,246,032 23.9% 15.8% 2,248,349 0.1% 3.8% 2,552,251 13.5% 10.6% 2,844,124 11.4%

Cars and light vehicles

Africa 462,971 22.0% 10.9% 517,279 11.7% 8.3% 593,865 14.8% 6.2% 668,104 12.5%
Asia -Pacific 27,477,974 14.9% 12.1% 28,846,180 5.0% 12.4% 30,456,815 5.6% 12.0% 31,694,583 4.1%
Central/East Europe 3,462,795 5.0% 4.6% 3,803,324 9.8% -1.4% 4,409,542 15.9% -2.8% 5,188,091 17.7%
North America 14,157,617 12.2% 1.6% 16,319,235 15.3% 0.5% 17,884,263 9.6% 0.7% 18,751,223 4.8%
South America 4,701,700 12.5% 3.8% 5,318,287 13.1% 8.0% 5,812,492 9.3% 10.7% 6,183,592 6.4%
Western Europe 14,237,861 -4.9% 6.2% 14,010,968 -1.6% 0.2% 14,911,185 6.4% -2.6% 15,863,792 6.4%
Total 64,500,918 8.7% 7.3% 68,815,273 6.7% 5.6% 74,068,162 7.6% 4.9% 78,349,385 5.8%
Source: RBS forecasts

Indian automobile demand remained strong during seasonally weaker 1QFY11

The strong demand pull across the auto sector, particularly in two-wheelers in 1QFY11, surprised
us. While the two-wheeler segment registered 8% qoq growth, a qoq decline in other segments
was also less than expected, leading us to increase our volume forecasts for most of the
companies in our coverage universe. The M&HCV segment registered impressive 81% yoy
growth, followed by three-wheelers (46%) and LCVs (38%). The normal monsoon and festive
seasons ahead bode well for vehicle demand in the industry for the rest of the year. The M&HCV
upcycle, which our autos team expects to continue for next two to three years, would also favour
Bharat Forge’s business, in our view.

Bharat Forge | Investment View | 17 August 2010 2

 Table 2 : Indian auto production volume growth profile

Segmental volume growth 1QFY11 % qoq % yoy

Passenger vehicles 652,020 -5% 29%
M&HCV 76,637 -19% 81%
LCV 98,412 -13% 38%
3-wheelers 172,801 -1% 46%
2-wheelers 3,118,147 8% 32%
Grand total 4,118,017 4% 33%
Source: Company data

Chart 1 : Monthly sales volume trend for CVs and cars

175000
160000
145000
130000
115000
100000
85000
70000
55000
40000
25000
10000
Apr-06

Jun-06

Oct-06
Aug-06

Dec-06

Feb-07

Apr-07

Jun-07

Oct-07
Aug-07

Dec-07

Feb-08

Apr-08

Jun-08

Oct-08
Aug-08

Dec-08

Feb-09

Apr-09

Jun-09

Oct-09
Aug-09

Dec-09

Feb-10

Apr-10

June-10
CV Cars UV and MPVs

Source: Company data, RBS forecasts

June quarter results impressive

For the June 2010 quarter, Bharat Forge reported standalone PAT of Rs594m (down 3% qoq) on
net sales of Rs6.3bn (up 76% yoy and 12% qoq) and EBITDA margins of 25.2% (up 19bp qoq
and 120bp vs our forecast of 24%). Excluding extraordinary items, Bharat Forge’s normalised
PAT increased 2.8% qoq (up 302% yoy) to Rs637m. Higher material cost pressure (up 195bp
qoq) and higher personnel costs (up 108bp qoq) were more than offset by lower manufacturing
(down 190bp qoq) and lower other costs (down 15bp qoq), resulting in a marginal qoq EBITDA
margin increase. On an absolute basis, EBITDA of Rs1.59bn was 36% above our forecast due to
higher-than-expected sales and margins. Normalised standalone EPS for the quarter was Rs2.7.

On a consolidated basis (excluding the China joint venture), PBT grew 24% qoq to Rs906m (vs a
loss of Rs203m in fiscal 1Q10) on net sales of Rs10.1bn (up 66.3% yoy and 9.6% qoq). Fiscal
1Q11 consolidated EBITDA was Rs1.8bn, with margins of 18.2% vs just 9.6% in 1Q10 and 17.5%
last quarter, indicating a qoq margin improvement at the subsidiaries level. Consolidated
normalised PAT was Rs606m, up 15.6% qoq (vs a loss of Rs214m in fiscal 1Q10), lower than
standalone normalised PAT due to a higher tax rate at the consolidated level. Reported
consolidated net profit was Rs621m. Consolidated normalised EPS was Rs2.5.

Bharat Forge | Investment View | 17 August 2010 3

 Chart 2 : EBITDA margin trend

32

27

22

17

12

2
1QFY06

2QFY06

3QFY06

4QFY06

1QFY07

2QFY07

3QFY07

4QFY07

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11
Stand-alone Consolidated

Source: Company data, RBS forecasts

Global subsidiary performance appears to be improving

We were surprised by the extent of loss made by CDP during FY10, as the premium car market
revival began only at the end of the year. However, we expect a turnaround in FY11 because the
company spent Rs300m of the Rs850m restructuring cost in CDP in FY10 to improve its viability
in the premium car market. Management also said in the 1QFY11 conference call that its Chinese
subsidiary, FAW, has also seen a turnaround and made profits at each level of operations during
1QFY11. The chart below shows the turnaround in the international operations at the EBITDA
level, which began in the last two or three quarters as a result of increasing demand in Europe
and the US. EBITDA margins were 4.2% in 1QFY11 vs 2.5% in previous quarter, with capacity
utilisation of 39% in 1QFY11. As was clear from 1QFY11 results, the company’s international
operations were almost breakeven at the PAT level. We believe that FY11 should see a sharp
turnaround on the overall PAT level, driven by strong premium car demand and stability in
European CVs.

Table 3 : Key subsidiaries financials (FY10)

Rs m

Subsidiary name Revenue PBT PAT

CDP Bharat Forge GmbH, Germany 5307.46 -881.02 -901.19
Bharat Forge Aluminiumtechnik Gmbh & Co. KG, Germany 2061.57 18.28 9.93
Bharat Forge America Inc. U.S.A. 993.21 -234.54 -234.54
Bharat Forge Kilsta AB, Sweden2 2685.1 -815.32 -610.84
FAW Bharat Forge (Changchun) Company Limited, China4 3398.14 -315.13 -315.13
Source: Company data

Bharat Forge | Investment View | 17 August 2010 4

 Chart 3 : Quarterly performance of global subsidiary

Rs m
2,500

2,000

1,500

1,000

500

(500)
1QFY07

2QFY07

3QFY07

4QFY07

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11
International Operations Stand-alone Operations

Source: Company data, RBS

Non-auto expansion on gradual ramp-up

Bharat Forge is targeting a 40% top-line contribution from its non-auto business by FY12.
According to management, non-auto is a high-margin business due to high customisation needs
and should not be comparable with auto forging business on a tonnage basis. We believe that
increased sales from the non-auto business would result in margin expansion at the consolidated
level. The company has also stated that the non-auto contracts won in FY10 in the nuclear power
(supply end fitting worth over Rs500m), railways (engine components and portal axels) and oil
and gas (parts for subsea applications) segments will go into serial production in the current fiscal
year, thereby improving capacity utilisation in the segment from 30% now to 50% by year-end.

Apart from the components business, Bharat Forge has also started to firm up its JV plans with
Alstom and NTPC, which will require total equity contribution of about Rs3.5bn. According to the
company, the Alstom JV will be situated in the Mundra special economic zone (SEZ) of Gujarat,
while the NTPC JV will be based in Solapur, Maharashtra. At the Alstom JV, Bharat is planning to
have 5,000MW of supercritical TG sets’ capacity along with auxiliary business. With the NTPC JV,
Bharat will produce parts for balance of plants for the power sector. The company has already
won an EPC order for a 3x 150MW power plant, thereby moving toward becoming a full-value-
chain player in the power plant segment.

EPS upgrade on strong CV cycle uptrend

We build into our FY11 forecasts sustained Indian CV demand and strong upgrades for global
truck and premium car markets by our colleague in Europe. We feel Bharat Forge is ready to
ramp up its global capacity utilisation in coming quarters from the current 55% and extend
operating leverage benefits. We raise our export forecasts and our subsidiary sales and margins
forecasts for the next few years, leading to our net profit upgrades of 6% and 15% for FY11F and
FY12F for the consolidated entity. We also build into our forecasts dilution from recently issued
warrants because they are already in the money. Thus, our EPS forecasts change by -1% and
+7% for FY11 and FY12 from our previous forecasts.

Bharat Forge | Investment View | 17 August 2010 5

 Table 4 : EPS revision summary

FY11F FY12F
Old New Old New
Net sales (Rs m) 45,375.0 44,141.6 51,769.1 52,704.6
Change (%) -2.7% 1.8%
EBITDA margin (%) 16.4 17.7 16.8 18.1
EBITDA (Rs m) 7441.5 7,795.4 8697.2 9,539.5
Change (%) 4.8% 9.7%
Normalised PAT (Rs m) 2623.8 2,787.0 3153 3,641.5
Change (%) 6.2% 15.5%
Normalised EPS (Rs) 11.8 11.7 14.2 15.2
Change (%) -1.3% 7.2%
Source: RBS forecasts

Raising our target price due to EPS upgrade and fund raising
We raise our target price by 4% to Rs401 (from Rs385/share) on our EPS upgrade and fund
raising, which results in a stronger balance sheet. With strong recovery in global CV market in
sight, Bharat Forge looks geared up to raise its capacity utilisation to meet any increase in
demand and should benefit from operating leverage as capacity utilisation increases. The stock is
currently trading at 22.5x FY12F our consolidated EPS forecasts, lower than the peak forward
band trend considering our EPS CAGR of 24.6% for FY11-13F and the early upcycle of the
business. Post FCCB repayment and about Rs2.7bn fund raising through QIP placement, we
believe the company has reached a comfortable net debt:equity position of 0.8. We reiterate our
Buy recommendation on the stock.

Chart 4 : Forward PE band

500

450

400
28 x
350

300
22 x
250
16 x
200

150

100

50

0
Oct-03
Jan-04
Apr-04

Oct-04
Jan-05
Apr-05

Oct-05
Jan-06
Apr-06

Oct-06
Jan-07
Apr-07

Oct-07
Jan-08
Apr-08

Oct-08
Jan-09
Apr-09

Oct-09
Jan-10
Apr-10
Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Bharat Forge PER (16 X) PER ( 22 X) PER (28 X)

Source: Company data, RBS forecasts

Bharat Forge | Investment View | 17 August 2010 6

 Forecasts and assumptions

Table 5 : Sales and expenses assumptions

Rs m FY08 FY09 FY10 FY11F FY12F FY07

International sales 34,167.8 37,189.2 21,820.9 28,333.4 33,969.4 30,651.5
Change (%) 11.5% 8.8% -41.3% 29.8% 19.9% 45.3%
India domestic sales 12,355.0 10,561.5 12,327.1 15,808.3 18,735.2 11,131.5
Change (%) 11.0% -14.5% 16.7% 28.2% 18.5% 20.7%
Net sales 46,522.8 47,750.8 34,148.0 44,141.6 52,704.6 41,783.0

Net raw material 22,039.0 24,067.9 16,326.7 20,746.6 24,665.8 19,906.5

as % of net sales 47.4% 50.4% 49.1% 47.0% 46.8% 47.6%
Contribution 24,483.8 23,682.9 16,949.3 23,395.1 28,038.8 21,876.5
as % of net sales 52.6% 49.6% 50.9% 53.0% 53.2% 52.4%

Personnel cost 6,780.4 7,091.6 5,238.5 5,738.4 6,851.6 6,164.4

as % of net sales 14.6% 14.9% 15.7% 13.0% 13.0% 14.8%
Mfgr expenses 7,742.2 7,723.5 5,902.9 7,212.7 8,485.4 6,823.9
as % of net sales 16.6% 16.2% 17.7% 16.3% 16.1% 16.3%
Other expenses 2,916.7 3,293.4 2,423.0 2,648.5 3,162.3 2,424.6
as % of net sales 6.3% 6.5% 7.3% 6.0% 6.0% 5.8%
Total expenditure 39,478.2 42,176.3 29,891.1 36,346.2 43,165.1 35,319.4

EBITDA 7,044.6 5,574.5 3,384.9 7,795.4 9,539.5 6,463.6

EBITDA margin (%) 15.1 11.7 10.2 17.7 18.1 15.5
Source: Company data, RBS forecasts

Bharat Forge | Key Financial Data | 17 August 2010 7

Income statement

Rsm FY09A FY10A FY11F FY12F FY13F

Revenue 47751 33276 44142 52705 64980
Cost of sales -38883 -27468 -33698 -40003 -50165
Operating costs -3293 -2423 -2648 -3162 -3899
EBITDA 5574 3385 7795 9540 10917
DDA & Impairment (ex gw) -2517 -2451 -2976 -3227 -3367
EBITA 3057 933.7 4819 6312 7549
Goodwill (amort/impaired) n/a n/a n/a n/a n/a
EBIT 3057 933.7 4819 6312 7549
Net interest -1291 -1303 -1400 -1600 -1850
Associates (pre-tax) n/a n/a n/a n/a n/a
Forex gain / (loss) n/a n/a n/a n/a n/a
Exceptionals (pre-tax) -1338 -787.4 0.00 0.00 0.00
Other pre-tax items 674.7 511.2 589.5 623.5 610.9
Reported PTP 1102 -645.4 4009 5336 6310
Taxation -695.7 -119.0 -1162 -1601 -1893
Minority interests 176.1 130.2 -59.1 -93.3 -136.1
Exceptionals (post-tax) n/a n/a n/a n/a n/a
Other post-tax items 0.00 0.00 0.00 0.00 0.00
Reported net profit 582.7 -634.2 2787 3642 4281
Normalised Items Excl. GW -1338 -787.4 0.00 0.00 0.00
Normalised net profit 1921 153.1 2787 3642 4281
Source: Company data, RBS forecasts year to Mar

Balance sheet

Rsm FY09A FY10A FY11F FY12F FY13F

Cash & market secs (1) 4883 5977 9724 13818 8631
Other current assets 14649 12990 16012 18544 22579
Tangible fixed assets 27895 26060 25584 25457 35189
Intang assets (incl gw) n/a n/a n/a n/a n/a
Oth non-curr assets 5793 7946 9737 11687 12987
Total assets 53221 52973 61057 69506 79386
Short term debt (2) n/a n/a n/a n/a n/a
Trade & oth current liab 8538 11164 11884 14196 17323
Long term debt (3) 21908 22527 18000 19500 20500
Oth non-current liab 5386 3857 5452 6200 7105
Total liabilities 35832 37548 35336 39895 44928
Total equity (incl min) 17388 15425 25721 29611 34458
Total liab & sh equity 53221 52973 61057 69506 79386
Net debt 17025 16550 8276 5682 11869
Source: Company data, RBS forecasts year ended Mar

Cash flow statement

Rsm FY09A FY10A FY11F FY12F FY13F

EBITDA 5574 3385 7795 9540 10917
Change in working capital -2430 2958 -1633 -270.6 -908.1
Net interest (pd) / rec -616.7 -791.8 -810.5 -976.5 -1239
Taxes paid -207.3 -522.4 -801.7 -1174 -1578
Other oper cash items -1413 -409.7 130.5 -402.4 105.6
Cash flow from ops (1) 907.0 4619 4680 6716 7298
Capex (2) -6801 -616.4 -2500 -3100 -13100
Disposals/(acquisitions) 0.00 0.00 0.00 0.00 0.00
Other investing cash flow 2069 -3218 5925 -588.7 90.6
Cash flow from invest (3) -4732 -3834 3425 -3689 -13009
Incr / (decr) in equity 428.0 -40.9 723.9 406.7 363.9
Incr / (decr) in debt 5364 618.2 -4527 1500 1000
Ordinary dividend paid -260.5 -271.5 -559.7 -839.6 -839.6
Preferred dividends (4) n/a n/a n/a n/a n/a
Other financing cash flow -6.69 2.10 4.59 0.00 0.00
Cash flow from fin (5) 5525 307.9 -4358 1067 524.3
Forex & disc ops (6) n/a n/a n/a n/a n/a
Inc/(decr) cash (1+3+5+6) 1700 1093 3747 4095 -5188
Equity FCF (1+2+4) -5894 4003 2180 3616 -5802
Lines in bold can be derived from the immediately preceding lines. year to Mar
Source: Company data, RBS forecasts

Bharat Forge | Key Financial Data | 17 August 2010

Standard ratios Bharat Forge Ashok Leyland Tata Motors

Performance FY09A FY10A FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F
Sales growth (%) 2.64 -30.3 32.7 19.4 23.3 44.3 19.1 13.3 32.0 14.2 8.98
EBITDA growth (%) -20.9 -39.3 130.3 22.4 14.4 43.9 23.6 13.3 13.9 14.5 8.60
EBIT growth (%) -36.0 -69.5 416.1 31.0 19.6 47.8 26.0 13.8 6.02 16.4 7.83
Normalised EPS growth (%) -31.3 -92.0 1720 30.7 17.6 55.6 26.4 14.6 10.7 19.6 87.1
EBITDA margin (%) 11.7 10.2 17.7 18.1 16.8 10.5 10.9 10.9 10.4 10.4 10.3
EBIT margin (%) 6.40 2.81 10.9 12.0 11.6 7.90 8.36 8.39 6.98 7.11 7.04
Net profit margin (%) 4.02 0.46 6.31 6.91 6.59 5.60 5.94 6.00 3.60 3.77 6.47
Return on avg assets (%) 4.97 1.69 6.64 7.36 7.60 6.92 8.13 8.47 4.89 5.36 6.26
Return on avg equity (%) 11.7 0.99 14.4 14.1 14.4 15.4 18.0 18.8 10.5 10.9 18.8
ROIC (%) 6.36 1.73 9.80 11.9 13.7 9.54 10.5 10.9 7.01 7.40 7.51
ROIC - WACC (%) -5.51 -10.1 -2.06 0.06 1.85 -4.39 -3.40 -0.27 -3.29 -2.91 -2.79
year to Mar year to Mar year to Mar

Valuation
EV/sales (x) 2.04 2.92 2.01 1.64 1.42 1.11 0.96 0.85 1.55 1.35 1.25
EV/EBITDA (x) 17.5 28.7 11.4 9.04 8.47 10.6 8.80 7.83 15.0 13.0 12.1
EV/EBITDA @ tgt price (x) 19.8 32.5 13.0 10.4 9.63 12.3 10.2 9.07 15.6 13.6 12.7
EV/EBIT (x) 31.9 104.0 18.4 13.7 12.2 14.1 11.5 10.2 22.2 18.9 17.8
EV/invested capital (x) 2.69 2.95 2.51 2.34 1.93 1.76 1.64 1.53 2.10 1.97 1.90
Price/book value (x) 5.04 5.66 3.42 3.00 2.59 2.40 2.20 2.00 3.58 3.13 3.04
Equity FCF yield (%) -7.12 4.83 2.63 4.37 -7.01 3.44 5.52 5.40 0.45 2.64 3.57
Normalised PE (x) 43.1 540.8 29.7 22.7 19.3 16.1 12.8 11.2 36.7 30.7 16.4
Norm PE @tgt price (x) 49.9 626.3 34.4 26.3 22.4 19.4 15.4 13.4 38.8 32.4 17.3
Dividend yield (%) 0.29 0.30 0.58 0.87 0.87 2.82 3.52 3.87 1.50 2.00 2.30
year to Mar year to Mar year to Mar

Per share data
Tot adj dil sh, ave (m)
Reported EPS (INR)
Normalised EPS (INR)
Dividend per share (INR)
Equity FCF per share (INR)
Book value per sh (INR)
FY09A FY10A FY11F FY12F FY13F Solvency FY09A FY10A FY11F FY12F FY13F
239.2 239.2 239.2 239.2 239.2 Net debt to equity (%) 97.9 107.3 32.2 19.2 34.4
2.44 -2.65 11.7 15.2 17.9 Net debt to tot ass (%) 32.0 31.2 13.6 8.17 15.0
8.03 0.64 11.7 15.2 17.9 Net debt to EBITDA 3.05 4.89 1.06 0.60 1.09
1.00 1.05 2.00 3.00 3.00 Current ratio (x) 2.29 1.70 2.17 2.28 1.80
-24.6 16.7 9.12 15.1 -24.3 Operating CF int cov (x) 2.81 7.49 7.76 9.08 8.16
68.7 61.2 101.1 115.3 133.5 Dividend cover (x) 7.37 0.56 4.98 4.34 5.10
year to Mar year to Mar

Priced as follows: BFRG.BO - Rs346.20; ASOK.BO - Rs71.00; TAMO.BO - Rs1001.35

Source: Company data, RBS forecasts

Valuation methodology
Economic Profit Valuation Rs m % Discounted Cash Flow Valuation Rs m %
Adjusted Opening Invested Capital 32,182.4 29.3 Value of Phase 1: Explicit (2011 to 2013) 1,239.2 1.1
NPV of Economic Profit During Explicit Period 4,430.6 4.0 Value of Phase 2: Value Driver (2014 to 2024) 63,868.1 58.2
NPV of Econ Profit of Remaining Business (1, 2) 26,275.2 23.9 Value of Phase 3: Fade (2025 to 2035) 32,277.6 29.4
NPV of Econ Profit of Net Inv (Grth Business) (1, 3) 46,873.2 42.7 Terminal Value 12,373.5 11.3
Enterprise Value 109,761.4 100.0 Enterprise Value 109,758.3 100.0
Plus: Other Assets 0.0 0.0 FCF Grth Rate at end of Phs 1 implied by DCF Va 0.0 13.6
Less: Minorities 0.0 0.0 FCF Grth Rate at end of Phs 1 implied by Current 0.0 14.9
Less: Net Debt (as at 16 Aug 2010) 13,813.2 12.6
Equity Value 95,948.3 87.4 Returns, WACC and NPV of Free Cash Flow
No. Shares (millions) 239.2 40% 3,000
Per Share Equity Value 401.0 2,500
35%
Current Share Price 346.2 2,000
30%
1,500
25%
Sensitivity Table No of Years in Fade Period 1,000
#REF! 15 18 20 23 25 20% 500
7.5% 574 617 645 687 713 15% 0
WACC

8.5% 661 716 753 807 843 10% -500

9.5% 661 716 753 807 843 5% -1,000
10.5% 574 617 645 687 713 0% -1,500
11.5% 438 464 481 505 520
2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

Performance Summary Phase 2 Avg

Phase 1 NPV of FCF (RHS) Phase 2 NPV of FCF (RHS)
2011 2012 2013 (2014 - 2024)
Phase 3 NPV of FCF (RHS) Total Business ROIC
Invested Capital Growth (%) 5.1 2.1 32.4 4.2
Growth Business ROIC Remaining Business ROIC
Operating Margin (%) 12.3 13.2 12.6 11.2
WACC
Capital Turnover (x) 1.5 1.7 2.0 2.4
Source: Company data, RBS forecasts
1. In periods following the Explicit Period i.e. Phase 2 and Phase 3
2. Remaining Business is defined as Capital as at the end of Phase 1 and capex = depreciation thereafter
3. Net Investment is defined as capex over and above depreciation after Phase 1
Variance in number of shares with market data section because we have built in pending warrant conversion in fully diluted equity
used for our DCF and EPS valuation.

Bharat Forge | Performance and Valuation | 17 August 2010

Company description Buy Price relative to country

Bharat Forge is a leading manufacturer of chassis components, such as front axle beams and knuckles, and 110

engine components - crankshafts and connecting rods, for commercial vehicles. The company has several global 100

tier-1 and OE customers. It has acquired four foreign firms - CDP and CDP Aluminiumtechnic of Germany, 90

Federal Forge USA, Imatra in Europe - to build marquee client relationships and diversify its product mix to 80
passenger car components. The 52% joint venture with FAW Forging gives it manufacturing presence in the 70
China's automobile market. The 700,000 MT forging capacity, with dual-shore capability in terms of forging,
60
machining and designing and testing, should help the company to mine its global OEM clients for better growth.
50
The expansion into non-automotive components along with JV' for power equipment will help balance the revenue
40
mix in coming years. Aug Nov Mar Jul Oct Feb Jun Sep Jan Apr Aug
07 07 08 08 08 09 09 09 10 10 10

Price relative to country

Strategic analysis Average SWOT company score: 4 Consolidated FY10 sales mix

Strengths 4 21% 27%

Bharat Forge is the largest forgings player in Asia and has an impressive tier-1 and OE client list. It delivers quality
products on a consistent basis. It is one of the most cost-competitive global forgings players. 30% 22%
Commercial Vehicles
Weaknesses 4 Passenger Vehicles
The company's domestic growth is largely dependent on the cyclical CV business. In India, passenger cars largely Diesel Engines
Non-auto Segment
use castings rather than forgings.
Opportunities 4 Source: Company data
We expect BFL to be one of the largest beneficiaries of rising export outsourcing in the auto-ancillary sector.
Expansion into Power equipment through JV with Alasthom and Aviva should start yeilding result from FY12 and
Market data
onwards.
Headquarters
Threats 2 Mundhwa, Pune Cantonment, Pune,
Several domestic OEMs have their own forging facilities, which are more cost-competitive than BFL's. This could Maharashtra 411 036, India
hurt the company's domestic growth in the long run. Website
www.bharatforge.com
Scoring range is 1-5 (high score is good)
Shares in issue
232.7m
Freefloat
58%
Majority shareholders
LIC (10%), Janus Fund (3%), New India
Assurance (2%)

Country view: India Country rel to Asia Pacific

The macro picture for India has been constructive recently, with GDP and industrial production tracking in line with 170

expectations, while portfolio allocators continue to favour the market for its domestic consumption orientation. 160

However, these positives have already been priced in and we believe risks are rising from the increasing double 150

deficit, demanding valuations and tightening liquidity. 140

130
The country view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team.
120

110

100

90
Aug Nov Mar Jul Oct Feb Jun Sep Jan Apr Aug
07 07 08 08 08 09 09 09 10 10 10

MarketIndex

Competitive position Average competitive score: 3+ Broker recommendations

Supplier power 3- 16
The main raw material for BFL is steel, which is largely sourced from group companies. However, as the company 14
expands geographically and products, it may have to purchase steel from external sources. 12
10
Barriers to entry 3+ 8
The forgings industry is capital-intensive. Apart from this, it takes a long validation time for products from new 6
company to get approved and ramp-up to marquee clients. 4
2
Customer power 3+ 0
High. Forgings is a highly competitive business. However, Bharat forge's pass-through clause on steel price Buy Hold Sell
variation helps it protect profitability.
Source: Bloomberg
Substitute products 3+
Castings are a key substitute, especially in the small car segment. However, forgings are better products for
higher BHP vehicles.
Rivalry 3-
Very competitive. In the global market, key players include ThyssenKrupp and Sumitomo. In India, key players
include Amtek Auto, Amforge and MM Forgings.
Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

Bharat Forge | Strategic and Competitive Overview | 17 August 2010

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Bharat Forge | Disclosures Appendix | 17 August 2010