We Initiate Buy on Bharat Forge in the range of 260-275 with a price target of 340-390

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Author VENKATARAMAN CO.,
Recommendation BUY

Bharat Forge

• We Initiate Buy on Bharat Forge in the range of
  260-275 with a price target of 340-390
• The stock slips consistently from higher levels
  and expected to take a strong support at 265-275.
• Being 260-275 61 retracement levels,
  fundamentals of the stock
• remains positive its advisable to initiate buy
  in the above mentioned
• levels.

2
Bharat Forge

• June 2007 quarter profit impacted by rupee
  appreciation
• Bharat Forge's quarterly results were
  well below our expectations as rupee appreciation
  vs the US distorted operating performance,
  though gains on foreign currency commercial
  borrowings (FCCBs) saved the day. Stand-alone
  reported PAT grew 25.8 yoy to Rs648m, but
  excluding the Rs333m FCCB gains, normalised PAT
  dropped 30.4 to Rs429m. EBITDA margin declined
  5.2ppt to 20.4, leading to a 5.7 drop in EBITDA
  to Rs1.01bn despite 18 growth in net sales to
  Rs4.97bn. Similarly, consolidated reported PAT
  rose 9.2 to Rs804m, while normalised PAT fell
  39.7 to Rs471m with 7.5 growth in net sales to
  Rs10.6bn.
• Exports ramped up in a tough Rs/USD environment
• The sharp capacity ramp-up for the
  stand-alone entity began to deliver impressive
  gains from the June 2007 quarter in the form of
  export sales growth (31.5 yoy). The car engine
  components ramp-up for the US and Europe has been
  driving growth, while US chassis has been on a
  cyclical downturn. Actual growth was much higher
  at 42.5 yoy, but was affected by an 8 rupee
  appreciation in the last quarter.

3
Bharat Forge

• Earnings model shifted to represent consolidated
  numbers
• We shift to consolidated numbers with the
  availability of the consolidated entity's
  financial performance on a quarterly basis and
  the inclusion of the Chinese subsidiary since
  March 2007. The sales ramp-up in subsidiaries
  within 12-18 months of acquisition was better
  than expected in FY07. However, we trim our
  consolidated EPS forecasts by over 35 each for
  FY08/FY09 to Rs12.6/Rs16, reflecting the
  potential currency impact on the standalone
  entity's EPS
• Worst appears to be in the price Buy maintained
  
• Bharat Forge has underperfomed the market
  by 30 in the last 12 months. The currency impact
  on profitability is more of an accounting
  treatment, though the strategy of hedging through
  FCCBs should pay dividends in the long run in
  terms of cash flow. We expect Bharat Forge to
  emerge a winner in the medium term, with growth
  momentum maintained from new export programmes to
  automobile OEs and non-auto components. We shift
  to a three-stage DCF valuation and peg the target
  price at Rs332 (from Rs401), ie 20.8x our FY09F
  EPS.

4
Bharat Forge

• Despite a tough external scenario ie, weakness
  in Indian and US MHCV demand, and a sharp rupee
  appreciation (against the US dollar), Bharat
  Forge standalone recorded impressive 18.1 yoy
  growth in net sales to Rs4.97bn in the June
  quarter. Adjusting for a Rs187m revenue loss due
  to currency fluctuation, net sales were Rs5.16bn,
  up 22.6 yoy and flattish qoq. The sharp ramp-up
  in heavy duty crank-shafts and non-auto sales to
  the US and Europe helped soften the impact of a
  slide in US chassis component sales in the
  quarter. Capacity utilisation rates were flattish
  qoq.
• The Indian entitys exports increased by a robust
  31.5 yoy and 11.5 qoq to Rs2.24bn despite the
  steep rupee appreciation. Similarly, domestic
  sales growth of 9.1 yoy to Rs2.7bn was better
  than the weakness apparent in its customers'
  domestic OEM sales volumes. However, subsidiary
  sales performance (excluding the Chinese JV) was
  flattish yoy at Rs5.65bn as the rupee
  appreciation of around 8 ate into growth.

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Sales
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Sales - Segmental
Product and country diversification helped
maintain sales growth The well planned
diversification strategy to build a stable
business model that can withstand cyclicality of
different product lines in different regions has
been delivering excellent results, in our view.
Sales continued on a growth path notwithstanding
sharp weaknesses in China earlier and in US
heavy-truck sales in FY07. This was achieved
through a sharp ramp-up in supplies, especially
car components, to the US and Europe.
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Earnings Revision
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Bharat Forge
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Bharat Forge
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Bharat Forge
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Bharat Forge
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Bharat Forge
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• Disclaimer
• (The above information and opinion is compiled
  from sources believed to be reliable and provided
  in good faith. These are subject to change
  without notice. This note is not and should not
  be construed to as, an offer to sell or a
  solicitation of an offer to buy any securities.
  The author and/or the company or its associates
  may or may not have positions in the above
  mentioned scrips and this may change from time to
  time. Trading and investing in stock markets
  involve risk of financial loss and it is
  recommended that you consult an investment
  professional for your decisions. It is strongly
  recommended that stop loss be followed to protect
  from undue risk. This report is exclusively for
  the clients of Venkataraman Co. only.)
• VENKATARAMAN CO.,
• Stock Share Brokers
• New No.2 (Old No.52)
• Dr. Ranga Road,
• Mylapore, Chennai 600 004.
• Web www.venkataraman .com E-mail
  vnkco_at_vsnl.com