BUY Bharat Forge Target: Rs 331

May 24, 2008

Bharat Forge’s (BFL) consolidated net revenue for Q4FY08 was below our expectations due to a sharp slowdown in the US M&HCV market. PAT too fell short of estimates owing to a reduction in other income and an exchange loss of Rs 158mn during the quarter. However, in line with our expectations BFL posted a strong standalone performance despite a sluggish Indian CV market. Standalone exports continued to perform well with a growth of 23% YoY to Rs 2.5bn.

Going forward, we expect a recovery in the Indian M&HCV market and diverse product offerings in the US to help BFL register growth. Also, its non-automotive capacities are expected to come onstream by Q2FY09, which will further improve profitability. About 40% of consolidated revenues are expected to come from the non-automotive business by FY12. A focus on high-demand, high-margin products will help BFL to improve its margins as well.

We maintain our DCF-based target price of Rs 331 for the stock, which offers a 15% upside from current levels. BFL is currently trading at a P/E of 12.5x and EV/EBITDA of 6.7x on FY10E. We recommend a Buy on the scrip.

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