Bharat Forge Fundamental Analysis and Future Outlook

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Bharat Forge is a Pune-based Indian multinational company involved in automotive, power, oil & gas, construction & mining, locomotive, marine and aerospace industries. The company has now entered into the defence sector and is moving from being a components manufacturer to a complete product maker. The company is a part of the Kalyani Group which is a $ 3 billion conglomerate.

The company’s shares have 52 weeks price band of INR 533-207 and a total market capitalization of INR 229 billion which makes it a Large-Cap company. The shares have a P/E ratio of 453 and a dividend yield of 0.71%

Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.

  1. Economic Moat
  2. Business Model and Management
  3. Growth Ratios
  4. Profitability Ratios
  5. Cash Flow Ratios
  6. Liquidity and Solvency Ratios
  7. Efficiency Ratios
  8. Valuation Ratios
  9. ROE (Du Pont Analysis)
  10. Future Prospects

(All units are INR Millions except ratios and per share data)

You can get the complete excel model used for this analysis from below:

1.Economic Moat (★ ★ ★ ☆)

The company operates in the Industrial and manufacturing sector where market dominance comes from Scale, distribution reach, innovation capabilities and Clientele. Bharat Forge is the world’s largest forging company and has more than 50+ years of market presence. On the manufacturing front, the company has 10+ large manufacturing facilities across the world including the US, Germany, Sweden, France and India. The company is also vertically integrated and has end-to-end capabilities in forging.

On the innovation and clientele firm, the company is mostly involved in forging of metal parts for commercial vehicles and has to lead Automotive OEMs as their Tier‐1 Supplier. However, this also exposes the company to the fluctuating and cyclic demand in the auto industry. Overall the company has a good economic moat due to its sheer scale, market presence and clientele. Therefore this category gets 4 stars in Bharat Forge fundamental analysis.

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2. Business Model and Management (★ ★ ★ ☆)

The business model of the company is such that it has global leadership in Powertrain and Chassis components forging. The segmental revenue breakup is 43% is from the commercial vehicles, 17% is from the Passenger Vehicles and 40% is from the Industrial components. The geographical distribution is also such that 41% is from India, 42% from the US, 15% is from Europe and the rest of the world contributes 2% to the total revenue. This overall shows a good business model which is still heavily dependent on the Auto industry which is cyclic in nature.

Mr B N Kalyani is the Chairman and Managing Director of the company. Mr G K Agarwal is the Deputy Managing Director along with Mr Amit B Kalyani. Overall the management and Board of Directors of the company have a high concentration of the Promoter’s family and this can lead the Principal-Agent conflict in the future. Therefore this category gets 4 stars in Bharat Forge fundamental analysis.

Bharat Forge Fundamental Analysis and Future Outlook

3. Growth Ratios (★ ★ ★ ★ ★)

The revenue has seen a CAGR growth of 12.76% over the last 10 years. The operating and net income margin has also seen a high CAGR growth over the same period. The working capital has remained positive and the Cap-Ex has also increased over the years. This overall indicates good growth for the company. Therefore this category gets 5 stars in Bharat Forge fundamental analysis.

Bharat Forge Fundamental Analysis and Future Outlook

4. Profitability Ratios (★ ★ ★ ☆)

The gross margin has improved over the years as the company witnessed economies of scale. The other margins along with return on assets have also remained stable over the years with significant improvement. The margins are expected to take a temporary hit due to low absorption of fixed costs amidst Covid-19 outbreak and disrupted supply chains. Therefore this category gets 4 stars in Bharat Forge fundamental analysis.

Bharat Forge Fundamental Analysis and Future Outlook

5. Cash Flow Ratios (★ ★ ★ ☆)

The net income margin has increased and the Cap-Ex as a percentage of sales has almost remained flat. The free cash flow as a percentage of net income has also been positive and stable over the years. The free and operating cash flow growth, however, has been fluctuating with Cap-Ex cycle of the company. This overall shows a good cash flow position. Therefore this category gets 4 stars in Bharat Forge fundamental analysis.

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6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The company has some long term debt in its capital structure but it is declining. Hence the financial leverage and debt to equity ratios have reduced. The company has good profitability and hence there is no concern to the solvency of the firm. The current and quick ratio is also above the minimum threshold which shows good liquidity of assets. Therefore this category gets 5 stars in Bharat Forge fundamental analysis.

Bharat Forge Fundamental Analysis and Future Outlook

7. Efficiency Ratios (★ ★ ☆ ☆)

The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.

Bharat Forge Fundamental Analysis and Future Outlook

The business efficiency has decreased linearly with scale for the company. The inventory days have increased from 85 days to 130 days. The payables period have almost remained flat and receivables days has also seen some increase. Overall The cash conversion cycle has been positive which shows declining efficiency for the company and need for additional working capital. Therefore this category gets 2 stars in Bharat Forge fundamental analysis.

8. Valuation Ratios (★ ★ ★ ☆ ☆)

The company has seen declining valuation multiples over the years due to auto industry cycles and increasing competition. The company, however, expanded into new markets and product offerings to diversify out of the auto industry. However, there may not be any significant appreciation in share prices in the near future to the Covid-19 outbreak and its severe impact on the auto sector. Therefore this category gets 3 stars in Bharat Forge fundamental analysis.

9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆)

The leverage ratio has declined over the years and the asset turnover has been stable. The interest burden ratio has remained high due to the low volume of interest-bearing debt in the capital structure of the company. The operating margin has seen a slight improvement and the tax efficiency declined. Overall the Return on Equity has been stable and positive over the years. Therefore this category gets 4 stars in Bharat Forge fundamental analysis.

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Bharat Forge Shares Fundamental Analysis

10. Future Prospects (★ ★ ★ ☆)

Some insights for the coming years from the analysis, management discussions and con calls are as follows.

  • The effect of Covid-19 will be disrupted supply chains, low absorption of fixed costs, labour crunch and production loss. The management can defer some Cap-Ex to maintain the cash position of the company. The estimated sales loss due to the COVID-19 led lockdown stands at INR 2 billion, which impacted profitability by approximately INR 900 Million.
  • The new product pipeline which includes driveline and powertrain components exported from India remains robust. Except for engine components, all other products are categorized into Hybrid and EVs and command good margin.
  • There will be no CAPEX in FY 2021 except for maintenance. However, cash flow will be stronger on the back of higher receivables as compared to previous years. The management is also looking forward to bring down the gross debt levels.

Overall the company has solid fundamentals but will suffer from the trickle-down effect from the Auto sector slowdown. The management is also looking forward to diversifying away from the Auto industry which may improve profitability in the long run. Therefore this category gets 4 stars in Bharat Forge fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:

BHARAT FORGE SHARES (3.9/5)

Therefore it is a 4-star stock

★ ★ ★

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Bharat Forge Shares
Economic Moat ★ ★ ★ ★ ☆
Business & Management ★ ★ ★ ★ ☆
Growth Ratios ★ ★ ★ ★ ★
Profitability Ratios ★ ★ ★ ★ ☆
Cash Flow Ratios ★ ★ ★ ★ ☆
Liquidity & Solvency ★ ★ ★ ★ ★
Efficiency Ratios ★ ★ ☆ ☆ ☆
Valuation Ratios ★ ★ ★ ☆ ☆
ROE (Du Pont Analysis) ★ ★ ★ ★ ☆
Future Prospects ★ ★ ★ ★ ☆
Overall Fundamental Rating ★ ★ ★ ★ ☆
Bharat Forge Fundamental Analysis

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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)



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