1. Indian Forging Industry
8%
39%
8%
1%
2% 3% 4% 3%
23%
9%
NAFTA China India Australia Brazil Korea Taiwan Russia Euroforge
Members
Japan
Total Production-25mt
Global Forging Production(CY14)
• The Indian forging industry has emerged as a major contributor to the manufacturing sector
of the Indian Economy. It is a key element in the growth of the Indian automobile industry as
well as other industries such as general engineering , construction equipment , oil gas and
power . The Indian forging industry is globally recognized globally for its technical
capabilities
• Based on their installed capacity, the forging units may be classified as very large (capacity
above 75,000 MT), large (capacity above 30,000 to 75,000 MT), medium (capacity above
12,500 to 30,000 MT), small (capacity above 5,000 to 12,500 MT) and very small (capacity
up to 5,000 MT). Based on this classification it is seen that about 87% of the total number of
units are small and very small, while only about 5% can be classified as very large and large
units; the balance of about 8% constitute the medium sized units
50%
52%
54%
56%
58%
60%
62%
64%
66%
0
5
10
15
20
25
30
35
40
2011-12 2012-13 2013-14 2014-15 2015-16
Installed Capacity Total Production Capacity Utilization
LakhTonnes
Production Capacity of Indian Forging Industry
Very Small
87%
Medium
8%
Large
5%
Indian Forging Capacity Breakup
Very Small
39%
Medium
17%
Large
44%
Concentrated production
Overview
Source: Association of Indian Forging Industries
2. 40x 41x
29x
27x
Auto Ancillary Auto Mobiles Capital/Engineering Goods Forging Industry
Industry P/EFactors
• Demand: This is a highly interest rate and domestic capex sensitive sector. Demand corresponds to robust
economic growth of the nation
• Supply: Supply or delivery period varies as gestation period varies from project to project and depends on
technological advancement of manufacturing facility
• Expenses: Raw material costs, employee costs and interest costs form the major chunk of the expenditure
for this sector
• Valuation Metrics
P/E
EV/EBITDA
EV/TON
• Major Indian Companies
MM Forging
Mahindra CIE
Ramakrishna Forging
• Major International Companies
Dana Holdings(USA)
Meritor Inc.(USA)
ThyssenKrupp AG(Germany)
Precision Cast Parts(USA)
Shandong(China)
Chongyi Zhangyuan(China)
• Key advantages of Indian Forging Industry
Skilled Labor Force at 20% less wage per hour than USA and Europe
Lower greenfield capex in developed countries along with tightening emission norms should help
Indian Companies to capture higher share of global OEM outsourcing pie
Large Investments in Modern press lines and Machining capacities has helped Indian companies
to attain scale and enter high entry barrier global OEM chain
• Key risks for Indian Forging Industry
Slowdown in major markets Such as India, USA and Europe
Increase in commodity prices
Lower Infrastructure spending in India
0%
5%
10%
15%
20%
25%
30%
35%
DanaHoldings
MeritorInc
ThyssenKruppAG
PrecisionCastParts
Shandong
ChongyiZhangyuan
BharatForge
MMForging
MahindraCIE
RamakrishnaForging
EBITDA MARGINS(CY14)
Source: Association of Indian Forging Industries OEM=Original Equipment Manufacturers
3. Company Overview-Bharat Forge Limited
Description Key Personnel
Position Name
Chairman & Managing Director Mr. B N Kalyani
Deputy Managing Director Mr. G K Agarwal
Executive Director Mr. Amit B Kalyani
Chief Financial Officer Mr. Kishore Saltore
Director Mr. S M Thakore
• Founded in 1961 and Headquartered in Pune, Maharashtra, India
• It has a Market cap of 192.72 Bn INR and it employs 10,000 people worldwide
• Operations of the company are divided into automotive segment and Industrials segment
• Automotive segment: this segment manufactures chassis components, power train components and
transmission parts for passenger vehicles, heavy medium and light commercial vehicles
• Industrial segment consists of
Aerospace: Aerospace business unit is a leading supplier of various components - airframe,
structural and engine parts for the aviation sector
Construction and Mining: This business unit manufactures products such as track links,
Crankshafts, front spindles which are used in mining, construction and general engineering
industry
Power: This business unit manufactures critical components for thermal, wind, hydro and nuclear
applications. The primary product focus is centered on windmill shafts, turbine rotors and blades,
retaining rings and gas engine components
Marine: This business unit supplies various products to global ship builders, including key
products like crankshafts, connecting rods and propeller shafts
Oil & Gas: This business unit is a global player in the upstream equipment market. The primary
product focuses on valves, drill bits, surface flow and sub-sea equipment
Rail: This unit is the leading manufacturer of wheel sets, truck frames and rail components in India
with sales across geographies. We are aiming to be in the top 3 rail component suppliers of the
world
• Traded on Bombay Stock Exchange, National Stock Exchange
• List of Manufacturing Plants
Ennepetal, Germany
Saxler, Germany
Brand-Erbisdorf, Germany
Bharat Forge Scottish Stampings Limited, Scotland
FAW Bharat Forge (Changchun) Company Ltd, China
Promoters
47%
General
Public
12%
Institutional
Investors
32%
Other
Investors
9%
Shareholding Pattern
Source: Company Data
4. Key Financials
FY2015 Review
Mar YE (INR Mn) 2014A 2015A 2016E 2017E CAGR
Revenue 67,158 76,247 80,647 91,452 10.8%
Growth 17.8% 13.5% 5.8% 13.4%
EBITDA 10,302 14,408 15,888 18,424 21.4%
% Margin 15.3% 18.9% 19.7% 20.1%
EBIT 6,730 10,784 12,560 15,242 31.3%
% Margin 10.0% 14.1% 15.6% 16.7%
Net Income 5,251 7,666 8,549 10,254 25.0%
% Margin 7.8% 10.1% 10.6% 11.2%
Company History
1961
•Incorporation of Bharat forge
1966
•Commercial Production begins. Forge Shop Hammer Technology
1985
•Initial Exports in Europe
1990
•Technology Upgradation: Investment in state of art forging technology. Commissioning of 16,000MT press line
1991
•Major breakthrough in USA, UK and Japan for critical supply of powertrain and chassis components
2001
•Commissioning of second 16,000MT press line. First M&A acquired order book of Dana Holdings(USA)
2003
•Established Global manufacturing across Europe, North America and China
2007
•Centre for Advanced Manufacturing takes shape in Baramati, Maharashtra, India
2009
•Inauguration of forging and high horse power, industrial-rail, marine and oil and gas crankshaft machining facility at in
Baramati, Maharashtra, India
2010
•Inauguration of Ring Rolling Facility at Baramati, Maharashtra, India. Established Kalyani Centre for technology an
Innovation
2012
•Company's capital goods division won its first commercial order for two 660 MW supercritical turbine generators
2013
•Supply of crankshaft for Indian Rails, becoming the first supplier of indigenous supplier of crankshaft
2014
•Safran and Bharat forge form partnership to address Opportunities in Indian Civil and Military Aerospace
2015
•Inauguration of High Tech Rail Component Manufacturing Facility at Bharat Forge Centre for Advanced Manufacturing,
Baramati, Maharashtra, India
• EBITDA Margins increased 360 bps YoY due to lower input
costs
• Growth in revenue decreased from 17.8% in 2014 to
13.5% due to slowdown in china, USA and Europe and
lower capex and infrastructure spending in India
• Production starts at Alstom-Bharat Forge’s new turbine
and generator manufacturing facility in India
• Acquired Oïl & Gas Machining Company, Mécanique
Générale Langroise (MGL) in France
Source: Company Data
6. Gearing Ratios
Bharat Forge MM Forging
Mahindra CIE Ramakrishna Forging
Comments
Source: Company Data
0.7x
1.9x
1.2x 1.2x
0.7x
2.0x
2.2x 2.2x
Debt Equity Leverage Interest Coverage Ratio Debt Coverage Ratio
2014 2015
0.7x
2.8x
4.0x
0.5x0.7x
2.4x
8.0x
0.8x
Debt Equity Leverage Interest Coverage Ratio Debt Coverage Ratio
2014 2015
1.0x
3.1x
-0.2x
-0.1x
0.8x
2.6x
1.7x
0.7x
Debt Equity Leverage Interest Coverage Ratio Debt Coverage Ratio
2014 2015
1.5x
3.2x
1.3x
0.2x
1.7x
3.5x
3.7x
2.1x
Debt Equity Leverage Interest Coverage Ratio Debt Coverage Ratio
2014 2015
• Debt to Equity ratio of the company is on the higher side but it is less than industry average, engineering companies tend to have higher debt to equity ratio because debt is needed to fund capex
• Leverage of the company has decreased significantly compared to FY2014 this because of increased profits
• Interest Coverage of the company has shown a tremendous increase, this is mainly due to increase in operating profits
• In the last decade Company has invested heavily in Power, Oil and Gas, Aerospace and Defense business units, and majority of the capex was funded via debt as a result the debt coverage ratio of the company is less than the industry
average, however going forward debt coverage ratio will increase substantially as company aims to retire all its debt by FY2017
7. Profitability Ratio
Bharat Forge MM Forging
Mahindra CIE Ramakrishna Forging
Comments
Source: Company Data
27.9%
7.8%
14.3%
19.4%
45%
10.1%
20.5%
25%
Gross Profit Margin Net Profit Margin Return On Capital Employed Return On Equity
2014 2015
25.9%
7.1%
13.3%
15.0%
28.7%
10.1%
20.9%
23.3%
Gross Profit Margin Net Profit Margin Return On Capital
Employed
Return On Equity
2014 2015
7.7%
-2.8% -0.8%
-11.2%
22.3%
2.7%
8.5%
11.6%
Gross Profit Margin Net Profit Margin Return On Capital Employed Return On Equity
2014 2015
68.8%
1.9% 3.7% 2.6%
65.9%
9.0% 11.7%
16.6%
Gross Profit Margin Net Profit Margin Return On Capital Employed Return On Equity
2014 2015
• Gross profit Margin of the Company has increased substantially YoY, this is mainly due to decrease in prices of key inputs such as Steel, Aluminum and other alloys and also due to lower energy , Gross Profit Margin of the company is highest in
the industry this is mainly due to heavy investment in Large Press Lines
• Even after having a high Gross profit Margin of 45% company’s Net profit Margin is only 10% this is because of high interest expense
• Company's Return on Capital Employed is second highest in the industry this is because of operating efficiency
• Company’s Return on Equity is highest in the industry, this is mainly due lower breakeven levels and heavy investment in large press lines which result in superior profitability
8. Trading Comparables
Comments Comments Comments
• EV/EBIT of Bharat Forge is less than industry
average and it is decreasing at a higher rate
compared to MM Forging this due to is higher EBIT
Margins and higher EBIT growth
• EV/EBIT of Mahindra CIE and Ramakrishna Forging
Cannot be compared with Bharat Forge as there
EBIT is too low
• EV/FCF of Bharat Forge is decreasing at a higher
rate compared to all its peers, this implies that
Bharat Forge has done necessary cpaex and will
not be needing any substantial capex in the future
• As Bharat Forge will not be needing any substantial
capex it can use the cash to retire its and debt
which will result in increased profitability
•Major Indian listed peers of Bharat Forge are MM
Forging, Mahindra CIE, Ramakrishna Forging
•Bharat Forge has the largest market cap compared
to its peers
•EV/EBITDA of Bharat Forge is less than industry
average its EV/EBITDA is only higher than
EV/EBITDA of MM Forging, MM Forging’s
EV/EBITDA is lower than others because of lower
debt levels
•Bharat Forge has highest EBITDA Margin in the
industry
•Going forward EV/EBITDA of Bharat Forge is
decreasing at a higher rate than MM Forging
Which shows higher growth
•P/E of Bharat Forge is higher than MM Forging this is
due to growth Prospects, Superior Profitability which
is reflected in Share price
•P/E of Mahindra CIE and Ramakrishna Forging is too
high because of too low earnings
•Revenue of Bharat Forge has grown at a CAGR of
19% over the last 25 years this shows the quality of
management
•Going Forward earnings of Bharat Forge are
expected to increase as a result of its entry into Oil
and Gas, Power, Aerospace and defense sector
Source: Company Data
EV/EBITDA EV/EBIT EV/FCF P/E
Company 2014A 2015A 2016E 2017E 2014A 2015A 2016E 2017E 2014A 2015A 2016E 2017E 2014A 2015A 2016E 2017E
Bharath Forge 18x 13x 12x 10x 27x 17x 15x 12x 52x 25x 15x 13x 33x 23x 20x 17x
MM Forging 7x 5x 5x 4x 13x 7x 7x 6x 23x 12x 9x 26x 19x 11x 11x 9x
Mahindra CIE 75x 19x 12x 9x NA 40x 21x 15x 250x 36x 12x 19x NA 46x 26x 16x
Ramakrishna Forging 203x 87x 60x 46x 422x 105x 81x 62x NA NA 117x 56x 1,379x 172x 160x 113x
9. SWOT Analysis
Strengths Weaknesses
Opportunities Threats
1.High Economies of scale
2.Strong and trusted Brands
3.Technology and manpower cost
advantage
1. Over-dependence on Automobile
segment
2. Lacks of in-house R&D
Less focus on small forging
equipment's
1. High demand in automobile industry
2. Demand in Nuclear, Power and Refinery sectors
3. Access to better technology & work practices
across globe
1. Rising input costs, particularly steel &
electrical power.
2. Demand for new products, especially from
foreign OEM’s which may not match by
Economic Order Quantity.
