Bharat Forge – the Forging Giant Returns

CMP: 291          Date: 12-08- 2011          Advice: Invest in SIP fashion

  • Till 2006 Bharat Forge (BF) was primarily an auto components firm. A number of mergers and acquisitions in the 2004-07 periods saw BF also enter in several new geographies. Manufacturing is in 11 locations and 5 countries: India (4), Germany (3), China (2), Sweden (1) and USA (1).
  • In the last 3 years, BF has executed a de-risking plan and enter into new verticals. For BF the focus in the Non-Auto business is on growing sectors like Power Plants, Marine, Construction & Mining, Oil & Gas, Energy, Aerospace and Railways, and Import substitution for BHEL.  JVs are with respected partners, like NTPC for power, Alsthom for Thermal/ Nuclear turbine/ generation sets and UK based David Brown for gear box manufacturer
Bharat Forge

Change in Revenue Segments

Fig 1 – Business Segments in 2011 (click chart to expand)

 Bharat Forge has successfully diversified from Auto into other verticals, de-risking their overall business profile

Current Business Outlook

  • The fall in auto demand in 2007-09 saw cost cutting measures rolled out to lower the break even for manufacturing facilities. Capacity utilization improved from 53% in 2009, to 70% for standalone and 45% for international entities in 2010. Additional improvements have contributed significantly to profits. All overseas subsidiaries, including its JV in China, FAW Bharat Forge, have see a turnaround and have started contributing to the bottom line, a year ahead of the 2012 target.
  • The auto market began to revive in 2009, and BF was best placed to take advantage of this trend.
  • In June 2011, Bharat Forge quarterly revenues surged to 857 crores, an all time high.
  • The Business environment and demand situation has now become very positive. BF is able to take advantage of surging demand due to spare capacities, low cost production, global presence and nimble design capabilities. Also a series of well timed entries into new non-automotive markets.
Bharat Forge

Quarterly sales and Net Profits

 Fig 2 – Quarterly revenues have surged (click chart to expand)

 Business is surging, in both Auto and non-Auto segments. Profit growth follows in a phased manner, as investments in new businesses break even

Valuations are low, growth is high

  • The stock price peaked in 2006 and has not touched those levels since. But BF has seen a dramatic business recovery in the last two years in terms of Earnings per share – EPS, which has already risen to all time highs.
  • While the BF stock has given investors only 11% CAGR returns over a 7-year period, the aggressive nature of this firm means that the initial period of rapid gain was followed by a period of restructuring and consolidation. The expectation now is another period of rapid gain on all parameters.
  1. Adjusted EPS has seen a recovery post ‘09 and is now into all time high territory
  2. Debt-equity is 0.74 as of Mar’11 (down from 1.21 in ‘10). This is comfortable, and safe.
  3. ROCE and RONW are in 15-17% range indicating healthy returns.
  4. PE has fallen to reasonable levels (compared to historical) indicating safety in investments at this level.
  5. PEG is in the range of 0.3, indicating indicates high safety and undervalued status
Bharat Forge

Fig 3 - EPS and Cash Flow

Bharat Forge

Fig 4 - Price and PE

Fig 4 – PE has fallen to attractive levels, and combined with robust business performance gives us a very good entry point for long term investments – (click chart to expand)

Bharat Forge

Fig 5 - Price and EPS

Fig 5 – Adjusted EPS has retraced rapidly and is into all time high territory

Projection

  • Bharat Forge has been in a period of consolidation, and will see a break out soon
  • EPS has moved to all time highs. With a suitable lag, this will be followed by stock price also moving into new highs. The stock will appreciate to Market Price of 700 in 12-14 months. This is based on an expected PE of 30 range and continued EPS growth seen since the bottom of June 2009.
  • This is an excellent entry point for this stock as it is currently underpriced and ‘out of favour’. The current market weakness has dragged down the market price of the stock. With overall Sensex / market recovery expected in 6-9 months, this share price is expected to recover rapidly.

Risks

  • Auto sector demand in India has been tapering off in recent months. It is expected to have lower growth for 2-3 quarters before recovering. Auto Exports however from India are accelerating.
  • Headwinds, such as Higher raw-material costs like steel and power may restrict margin expansion and EPS growth. The rising commodity costs have hit manufacturers like Bharat Forge.
  • In recent months the increase in interest rates and slowdown in the economy has slowed the growth of the auto industry, particularly in India.
  • However, both these events appear to have played out/peaked, and will stabilise/ reduce in the near future.
  • Business complexity has increased due to addition of a number of new verticals. However, BF is already seeing exciting success from the new ventures.
  • An increase in working Capital in the firm in 2011 saw the Cash Flow fall this year. This stems from investments in new businesses as well as new investments in the Auto business to increase capacity and de-bottlenecking.
  • External factors like stock market sentiments. However our current view is that this will revert to a positive state over the next 9-12 months.
  • Check back on the website www.jainmatrix.com for updates.
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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/

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My investment rupee says Yes Bank

Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long term investment.

There is an updated report of Yes Bank available at link The Brave Warrior of Indian Banks by JainMatrix Investments includes Q1FY13 results, news updates and FY15 projections.

Yes Bank  – Description and Profile

  • Incorporated in 2003, Yes Bank received the only greenfield (Start up/New Bank) license awarded by the RBI in the last 15 years
  • Founded by bankers Rana Kapoor and Ashok Kapur, (combined stake 32.6%). Other shareholders are Rabobank 18.20%, AIF Capital (private equity), Orient Global (investment firm), Swiss Re, Khazanah Nasional (Malaysia Govt) all 3.5-5% each.
  • It has 185 Branches currently of which 14 were added in Q3 FY11.
  • Market cap is at Rs. 9,300 crores, putting it at #12-13 among all Indian banks, and #7 in private sector
  • The firm has about 4000 employees, including 970 hired already in FY11

Yes Bank has superior strategies

In spite of over a hundred banks as competition, Yes Bank stands out for the following reasons:

  • Seasoned, capable bankers as Management team
  • The firm is nimble and agile, and rapidly enters new high potential industries sectors for advisory, loan and banking services
  • Focus on Knowledge based approach to lending. Loans exposure is to sectors like Food and Agribusiness, Engineering, Infrastructure & Logistics, TMT (Technology, Media & Telecom) and Healthcare.
  • There are four business verticals in the bank: a) Corporate & Institutional Banking b) Commercial Banking c) Business Banking-SME d) Retail Banking.
  • The business focus was Corporate banking till now and on select sectors while providing the entire value chain in those niche sectors. Having achieved some scale, the bank is now widening focus into SMEs and Retail.
  • Aggressive Retail growth plans will help increase low cost CASA deposits, and increase margins. The RBI has granted license for 91 additional branches, so the total may increase to 250 by June ’11
  • Mistakes are made, but it learns from these, and exits fast (example – in 2007, there were a lot of complaints against complex foreign exchange derivative products sold to SMEs, that turned loss making. There were litigations against Yes Bank (and several other banks too). All these have been resolved.
  • Growth has been organic, and may remain as such. The executives believe that for Yes Bank, organic growth comes at a lower cost compared to available banking assets

Stock evaluation, performance and returns

  • It’s IPO in July 2005 was priced at Rs 45. It was 31 times oversubscribed. The maiden dividend was paid in 2010.
  • At CMP of Rs 277 today, the stock has shown a 33% annualized return over the last 6 years! (See Fig 1)
  • Income and Profit too have grown steadily (Fig 2)

Yes Bank, Stock appreciationFig 1 – Yes Bank stock performance (click to enlarge) Source: JainMatrix graphics

Yes Bank, Revenue, ProfitFig 2 – Quarterly income and Profit have grown steadily over the last 5 years Source: JainMatrix graphics

  • NII – the difference between Interest from Loans and Cost of loans – has grown at 41.5 % annually over the last 5 years. This is phenomenal, and indicates good margins
  • NII plus Other Income – Add to this income from fee based services like investment banking, advisory services, etc –  have grown at 37%

Yes bank, Price Earnings trendFig 3 – Price and PE Graph (click to enlarge) Source: JainMatrix graphics

  • After IPO, made at a high valuation, the PE stayed high for a few years (fig 3). The patient investor got rewarded in 2008-2011 period, where the share price rose rapidly.
  • There has been a recent fall, the PE now is low at 14.4 and this gives investors another opportunity to enter

Yes bank, EPS trendFig 4 – Price and EPS Graph Source: JainMatrix graphics

  • EPS (adjusted for equity dilutions) growth has been 36% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows an amazing parabolic rise. I would say it is a great company just achieving critical mass of size, brand and reach.
  • PEG is at 0.4 – indicates underpriced status, a very good investment opportunity
  • RoE is at around 20% – healthy statistic.
  • Price/Book is 3.08, this is fair for a mid sized fast growing bank.
  • Gross and Net NPAs are at 0.23% and 0.06%. This shows remarkable credit assessments and good processes
  • CASA ratio stands at mere 10.1% as on Q3FY11. This is low by general banking ratios, but this is being addressed aggressively.

Opinion, Outlook and Recommendation

  • India is an underbanked country. The RBI is actively encouraging new banks, and vast swathes of Rural India remain unbanked. The potential for Yes Bank to grow is large.
  • At the same time, competition in urban areas is high, due to presence of public sector, private as well as MNC banks.
  • RBI expects average industry growth rate to be 20% during FY11.  Yes Bank is expected to grow at a far faster rate than industry. It has well-defined, sustainable growth strategies in place.
  • Yes Bank will grow at 35-45% in terms of Profits and NII + fee Income for the next 5 years. With this trajectory, Yes Bank will join the ranks of large well managed private banks like HDFC Bank and Axis Bank
  • The fall in share price by 28% from the Nov 2010 peak to date has made current valuations attractive
  • However a look at the graph of DMA of the stock (fig 5) shows that the stock stays for long periods of time above or below the 200 DMA. It recently went below the 200DMA, so my advice is to wait for the stock to go above this before investing.
  • However retail investors can start to Invest systematically.

Yes Bank technical analysisFig 5 – Price and DMA chart (click to enlarge) Source: JainMatrix graphics

Risks:

  • High competition
  • High interest rates and increased Costs – particularly employee costs
  • Execution risks in rapid bank branch growth
  • Current weakness may mean a period of falling prices before the appreciation resumes (fig 5)

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/
Performancing Metrics

Steep Fall in Indices – Stay calm

Here is a quick round up – of the bad news:

  • Sensex is 17% down from November 2010 peaks. Particularly second half of Jan onwards, fall has been steep
  • Sensex is below its 200 Day Moving Average – DMA
  • FIIs are withdrawing funds from India. After investing $28 billion plus in 2010 they have now taken off $1.5 billion in 2011
  • Sensex represents large caps. Mid caps and small caps have fallen harder
  • A series of scams and bad news has hit us recently.
    • Telecom sector scam. Real estate loans scam. MFI sector bad news. Commonwealth Games scam.
    • High inflation. Soaring agriculture prices. Rising oil prices. Even other commodities are costlier. Metals. Energy.
    • Egypt and Tunisia have erupted and there is unrest here.

So what does an investor do? Calm down. And look at the good news.

  • India growth rate is as high as ever, at over 8% of GDP.
  • 3rd quarter corporate results show a steady growth in revenues, and a flat to positive profitability.
  • The US indices are up right now after a long time of poor performance. FIIs are happy to book some gains in India and invest in their own economy. Some short term money will definitely move away. Some of this money in fact is moving from Indian equity to Indian debt – to take advantage of higher returns.
  • Periodic scam news in India is only to be expected. Problems will be unearthed. SEBI and authorities will take action. Soon the issues should be ironed out. Whether it is Real estate loans or Telecom.
  • Definitely the government will not stand in the way of a going, successful business like telecom. But there needs to be a stable policy environment here. And interests of all – government, business and consumers need to be balanced out. A sector that today is 6-8% of the Indian economy in terms of direct & indirect revenues, definitely is important enough to be  well regulated.
  • New sectors like MFI are grey areas where governments have been taken by surprise. Soon monitoring and governance frameworks will emerge, and the panic will be over.
  • Agriculture is seeing higher demand (and prices) and will respond in one or two seasons with higher outputs.
  • Very soon, somewhere the Indian Indices and market will find support and strength will emerge again.
  • A lot of domestic institutions and Indian investors are only waiting to re-enter the market at lower levels

Relook at the big picture

  • As an investor, you need to have faith in the Indian economy and confidence that these are boom years where India goes from a poor/ emerging to a mid income/ developing economy. This is a 15 year story not a 1-2 year flash in the plan
  • Given this, any dip in the market is an opportunity to accumulate. The market will surely rise. For you, it is an opportunity to buy cheaper.
  • Your current portfolio may appear to be losing value, but if you can wait for 6-12 months, the situation will inevitably reverse.
  • Relook at your portfolio, identify the strongest stocks/ MFs that you have most confidence in, and invest in them at these lower levels.
  • Invest systematically, with a plan to buy on a monthly basis, spending a comfortable sum of money

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/

Performancing Metrics

Petronet LNG – This stock beats an FD anyday !!

This report on Petronet LNG was published in Feb 2011. An update is available at Link

Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.

Description and Profile

  • Petronet LNG is a PSU created to import, process and sell LNG in the country
  • It is a JV between GAIL, ONGC, Indian Oil and BPCL. This helps in all inter company coordination issues
  • It owns and operates a LNG terminal at Dahej, Gujarat that imports 10.0 MMTPA (Million Metric Tonne Per Annum) of LNG. It also owns sea vessels that help transport LNG from sources
  • The capital/ investment plans of PLNG include:
    • Capacity expansion at Dahej
    • A new LNG terminal at Kochi, Kerala.
    • Plan for forward integration into power plant construction at Dahej, which will use the imported LNG as fuel
    • A longer term plan is for a power plant at Kochi, using LNG
  • Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL
  • The varied customer base includes Power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc.
  • Turnover in 2010 was Rs 10,600 crores with PAT at 404 crores.
  • Sourcing of LNG is in the form of long term agreements with Australia and Qatar. In addition Petronet sources spot cargo of Natural Gas, to boost volumes and utilize capacity

Stock evaluation, performance and returns

  • This stock had it’s IPO in March 2004 priced at Rs 15.
  • Maiden dividend was paid in 2007. Thereafter dividend has shown a steady to increasing trend
  • At CMP of Rs 126 today, the stock has shown a 44% annualized return over the last 7 years!

Petronet LNG performancePetronet LNG stock performance (click to enlarge)

  • Revenues have grown steadily.

Petronet LNG Quarterly Revenue chartQuarterly revenues have grown steadily over the last 6 years

  • Cash flow and EPS are showing a robust growth rate – see graph. Dip of EPS in 2010 is expected to recover substantially in 2011.

Cash Flow and EPS have grown substantially

  • Price and PE chart shows that PE is at upper end of 5 year range. Some expectations are priced in of capacity additions and likely revenue growth.

Petronet LNG Price and PEPrice and PE graph

  • Price and EPS quarterly graph shows recent spike in price, rising to all time highs

Petronet LNG Price and EPS quarterlyPrice and EPS graph

  • ROCE is between 15 – 25%
  • PEG is at 0.93 – indicates safety and undervalued status

Opinion, Outlook and Recommendation

  • India is an energy hungry country, and will remain so for decades
  • Gas is cleaner and preferred as fuel compared to coal and oil (polluting).
  • Petronet LNG will continue to dominate the gas infrastructure and imports sector due to its PSU and JV status and strong partnerships
  • Reliance Industries gas is at a physically distant source, and of insufficient quantity to challenge Petronet LNG as a supplier. In fact the two firms may work together in the future to service customers in respective regions
  • By investing in further capacities and downstream businesses, Petronet will be able to leverage it’s cash flows for growth and profitability in the future
  • My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade
  • Invest now and systematically for long term outperformance

Risks:

  • A spike in Natural gas prices will be passed on to customers as most are on long term purchase contracts. Spot cargo volumes may be affected, though, and customers may not purchase these incremental volumes
  • Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL
  • Current market weakness may take PLNG down temporarily, but expect recovery and solid performance

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/
Performancing Metrics

For Long term investments start a direct market SIP

This article has been updated. Click on this link to see the latest version.

March 2016 – A Superior Investing Process – Do a DIP SIP

 

Jan 2011

  • The market indices have fallen, and it seems like a good time to invest?
  • But you’re not sure what to invest in? Should you choose just one or two stocks with good prospects, and invest a large sum?
  • Or should you just choose a Mutual Fund, and invest in a lump sum, or even a SIP?

I have another idea for you. Invest in a direct market SIP !!

By this I mean, use your current Online Trading & Demat account to buy 5-6 shares yourself in a systematic manner every month.

Comparisons of direct market SIP with a Mutual Fund:

  • Only initial charges of 0.5 to 0.75% which are the brokerage commissions + taxes, compared to 2.5% per annum, which are the normal Mutual Fund charges. This really adds up over the years.
  • A quick look at equity MFs performance over 3 years (from Value Research) shows that only 15/57 MFs outperformed the Nifty’s 5% gains over the last 3 years.
  • Instead of a decision on which MF, you have to only make an initial decision on the bunch of 5-6 stocks. I will help you through this also :-)
  • Utilize your online trading account better, and gain control over your investments !!

Comparison of direct market SIP with a lump sum in 1-2 direct stocks:

  • The market indices can fall further. A systematic investment every month will help you gain more from falls in the market
  • Do not try to time the market. Instead by investing systematically, you can beat the Sensex in terms of returns !!
  • Just one or two stocks for investing heavily – this may be too concentrated a portfolio. Even the largest and most stable stocks (think Reliance or DLF) can be victims of pockets of non performance, or worse, large unpredictable swings.

Comparison of direct market SIP and Brokerage Equity SIP:

  • Several brokerages  – ICICI direct and ShareKhan for sure – have introduced Equity SIP facility for customers.
  • They can specify the stocks and purchase monthly of a specified Value (of portfolio) or specified quantity (of shares)
  • Initial and recurring charges are identical
  • There have been doubts expressed about the brokerage’s transaction –  Bad Trade Execution/ buying into morning spike, etc. as expressed in this article – http://shabbir.in/why-no-stock-sip/
  • My feel is a Do-It-Yourself approach removes these doubts and gives some satisfaction (while taking just 10 minutes a month).
  • See fig 1 for a tabular comparison of above options
Comparison of SIP Options, JainMatrix Investments

Fig 1 – Comparison of SIP purchase options  (click image to enlarge)

Checklist for a direct market SIP:

  1. You will use your current Online Trading account/ broker relationship for this SIP. If you have to choose among your options, choose the one with lower brokerage.  Could be ICICI securities, or Kotak securities, or whatever.
  2. Decide on the 5-6 stocks you will invest in.  My help here – see next section – Choose your stocks.
  3. Decide on the amount you will invest every month – here I would suggest you fix an amount such as Rs 10,000 or 20,000 and keep up this amount every month.
  4. Create a small calculation excel for helping you decide the actual number of shares to be bought. See section – Here’s an example.
  5. Decide on a date for investing. If you are salaried, perhaps 2nd or 3rd every month is a good date as it is right after you have received your salary. Or any other convenient date. Keep a self reminder for this date.

Choose your stocks

This is an important first step. My key principles in choosing the stocks are:

  • Choose large liquid blue chips.  They should be Nifty/ Sensex stocks. You do not want too much volatility in your mutual fund.
  • The 5-6 stocks should be from different sectors. Bad news in one stock / sector should not affect the other.
  • These stocks should be solid businesses that are going strong even 10-15 years from now, as your SIP and asset building is for long term

My recommended stocks – choose only one per sector:

  • Banking – HDFC Bank or SBI
  • Automobiles – Tata Motors or Bajaj Auto
  • Capital Goods & Engineering – L&T
  • Information Technology – TCS or HCL Technologies
  • Oil & Gas – ONGC or Petronet LNG
  • Telecom – Bharti Airtel 
  • FMCG/ Food – Hindustan Lever or ITC

Returns from this approach.

  • Lets say you chose 5 stocks for your SIP – HDFC Bank, Infosys, L&T, ONGC and Bharti Airtel.
  • If you invested in these five on a monthly basis over the last 30 months, following above approach, you will get returns per fig 2
Portfolio vs Sensex, Jainmatrix Investments

Figure 2 – Comparison of  SIP Portfolio with Sensex

Here’s an example

  • Choose your MF portfolio from above recommended stocks
  • Next you have chosen Rs. 20,000 per month for your SIP.
  • Create a small excel  – which can help you calculate the number of shares to be bought every month. See fig 3. This will help do this easily in a few minutes
SIP calculation tool

Fig 3 – Tool for SIP purchase

  • Decide the date of the month you want to invest every month – say 2nd. Very important – stick to your monthly investing routine as far as possible.
  • There you go – you are all ready.
  • Happy Investing :-)

Performancing Metrics

Bharat Forge – CMP: 361 – Invest with an 18 month target of 700

Introduction

  • Bharat Forge is a Pune based manufacturer of forged and machined – engine & chassis components. It is the largest exporter of automotive forgings and chassis components from India. It is the second largest in the world, after ThyssenKrupp of Germany.
  • Manufacturing facilities are spread across 11 locations and 5 countries – four in India, three in Germany, one each in Sweden, USA and two in China.
  • The company manufactures a wide range of safety and critical components for passenger cars, SUV’s, light, medium & heavy commercial vehicles, tractors and diesel engines. The company also manufactures specialized components for the aerospace, power, energy, oil & gas, rail & marine, mining & construction equipment, and other industries. Parts are made of steel and aluminium.
  • Business growth has been steady over the last 7 years. The fall from end 2008 to end 2009 due to a global slowdown, and this has been followed by a rapid recovery thereafter.
  • Pre- 2004, Bharat Forge was focused on increasing capacity and the Pune facility became the largest single forging and casting plant.

Fig 1 – In Sept 2010, Bharat Forge achieved all time high revenues of Rs 719 crores, signaling full recovery.

Fig 2 – Business Segments in 2009

M&A

  • A number of mergers and acquisitions in the 2004-2007 period saw Bharat Forge expand to new geographies. In the process it added a number of prestigious customers and was able to supply products to almost all the major automotive firms worldwide as OEM

Diversification

  • Till 2006 Bharat Forge was primarily an auto components firm. The auto demand collapse and forward looking corporate de-risking plans saw the firm fast track entry into other verticals in the period from 2006 to date.
  • Internal targets are to double non-automotive business from 20% in 2008 to 40% by 2012.
  • For Bharat Forge the focus in the Non-Auto business is on fast growing sectors like Power Plants, Marine, Construction & Mining, Oil & Gas, Energy, Aerospace and Railways. Also on Import substitution for BHEL which itself is a big opportunity. Diversification into these sectors is through a series of JVs with respected partners (eg NTPC for power and Alsthom for Thermal/ Nuclear turbine/ generation sets

Current Business Outlook

  • The fall in auto demand in 2007-09 saw cost cutting measures rolled out to ensure a lower break even for these facilities. Capacity utilization was 53% in 2009. This has improved to 70% for the standalone entity and 45% for international entities in 2010. From here all improved utilization will contribute significantly to profitability. We do not anticipate a need for auto capacity increase for several years.
  • As a result of these business initiatives, when the market began to revive in 2009 for auto industry, Bharat Forge has been best placed to take advantage of this trend.
  • Demand is increasing from both domestic business – Commercial Vehicles and Passenger cars, as well as international – UK and USA. Demand growth is led by India and China, and developed economies have stabilized and are expected to slowly recover in terms of business volumes.
  • The Society of Indian Automobile Manufacturers (SIAM) releasing the 2010 sales growth data of 14.82 million units as against 11.32 million units registered in 2009. Sales of passenger vehicles segment grew by 31.34 percent, commercial vehicles segment by 45.24 percent, three-wheelers by 22.03 percent and two-wheelers by 30.51 percent. They said that the growth was due to increasing dispensable incomes, low interest rates and increase in sales base at par with the pre-recession era.
  • The firm has seen all of its overseas subsidiaries, including its joint venture in China, FAW Bharat Forge, turn around and start contributing to the bottom line, a year ahead of the 2012 target
  • India is emerging as a small car-manufacturing hub, with a number of new entrants and a slew of product launches. The luxury market too has grown rapidly. As the market matures, mid sized sedan volumes too will grow. Bharat Forge is a supplier to virtually all the auto manufacturers in India as OEM.
  • Demand for Bharat Forge’s auto components is a derived demand – dependant upon the Auto manufacturers for sales. The India domestic auto market is doing well with many auto models having a ‘waiting period’ of 2-4 months for delivery after booking by the consumer.

Conclusions, projections and Investment advise

Valuations and conclusions

  • The chart (Fig 3) plots the market price (adjusted) against EPS (adjusted) over a 7-year period.
  • The stock price peaked in 2006 and has not touched those levels since. But we can see the dramatic business recovery of Bharat Forge in the last one year in terms of EPS
  • The PE of Bharat Forge (Fig 4) has been at high levels of late – rising to as high as 80 times. However if you see this in the light of the short-term squeeze in business environment, this is a passing phase.
  • The Business environment and demand situation has now become very positive. Bharat Forge is well placed to take advantage of surging demand due to sufficient spare capacities, low cost production facilities, global presence and nimble design and manufacturing capabilities. Also a series of well timed entries into new non-automotive markets.
  • We expect EPS to continue recovery and move to all time highs. This will be followed by stock price also moving into new highs territory.
  • Net Cash From Operating Activities has shown a positive trend, barring FY 2009.
  • Debt equity is 1.21 as of March 2010. This is not too high and is 3.5 times the Net Cash From Operating Activities

Fig 3 – Current PE looks high but seen in the context of a rapidly increasing EPS, improving capacity utilization and positive business outlook, it will soon settle to lower levels.

Fig 4  – Adjusted EPS has retraced rapidly and is nearing the 2008 peak.

Projection

  • We expect the stock to appreciate to Market Price of 700 in 18 months.
  • This is an excellent entry point for this stock as it is currently underpriced and ‘out of favour’. The the next 2-3 quarterly results will be positive and the share price may start to reflect it’s true worth.

Risks

  • Higher raw-material costs like steel and power  may restrict margin expansion and EPS growth.
  • Low cost domestic capacity may get exhausted, requiring additional capital investments.
  • Business complexity has increased due to addition of a number of new verticals. Management bandwidth and Vertical/ Technical skill-sets need to be upgraded to meet the business challenges.
  • New subsidiaries and JVs need to rapidly add capacity and win deals – early stage of new businesses are uncertain and need management attention before business stabilizes.
  • External factors like stock market sentiments. However our current view is that this will be positive over the next 12 months at least

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/

P&S Bank IPO – Post review on 20th Dec

  • Punjab & Sind Bank IPO closed on Dec 16th with amazing strength – overall over-subscription 51 times with QIB 50 times, HNI 86 times and Retail 44 times !!
  • It exceeded all my expectations – looks like everyone has bet on the winning horse :-)
  • It will be a bit of a lottery if you get any shares. Also with minimum lot size at 50, retail cannot expect any more than this.
  • If they stick to the usual processing times, allotment may be around 26th and listing around 30th.
  • I feel the listing pop thereafter could beat CIL and MOIL as in banking stocks we are in familiar territory. Barring market abnormalities, it could be 60-80%.
  • Good luck with your investments !!

Also see IPO note – click link