25 Feb

Selective improvement visible, total market turnaround still far away: Mr Unnikrishnan, Themax

Update on the Indian Equity Market:

The weakness witnessed in global equity markets on Friday got reflected in the Indian Equity market at start of the week on Monday. Concerns mounted about the ability of authorities to keep the coronavirus from spreading further beyond China. NIFTY50 closed 2.0% lower at 11,839 level. All NIFTY50 stocks closed in the red. The worst performers were JSWSTEEL (-7.4%), VEDL (-6.5%) and TATASTEEL (-6.3%). METAL (-5.4%), AUTO (-3.5%) and PHARMA (-3.1%) were among the worst hit. No sectoral index closed positively.

Selective improvement visible, total market turnaround still far away: Mr Unnikrishnan, Themax

Excerpts from an interview with Mr Unnikrishnan, MD – Thermax published in Mint dated 24th February 2020.

  • Orders in January were better than the past couple of months. Selective improvement is visible towards the end of 1HFY20 and at the start of 2HFY20E. A total turnaround is far away.
  • There is a lot of traction and capacity build-up in the oil and gas industry. Mr. Unnikrishnan expects a lot more orders coming from the sector in 2HFY21E.
  • The cement sector is seeing positive movement. Most cement companies in India are not overleveraged and there are some greenfield and brownfield expansions expected.
  • Mr. Unnikrishnan thinks Oil & gas, and cement are the only 2 sectors where there could be investments in FY21E.
  • The consumer facing industry is seeing improvement in the utilization levels from December. The negativity in consumer-facing industry, FMCG and durables for the last 6-7 months should start reversing in 1HFY21E. This means that some companies will start ordering from 2HFY20E, which will benefit Thermax.
  • Thermax was facing some issues in terms of slower payments coming in from both the private sector and government orders. Mr Unnikrishnan says private sector payments are improving due to improved performance. There is no improvement in the pace of public sector payments despite the issue being taken up to the highest levels. Including the contracting fraternity, Rs 1,750 bn is stuck with PSUs and government departments, some of which are on account of project completions getting delayed.
  • Mr. Unnikrishnan sees a positive movement in India related to the environment, both in air pollution control and in wastewater and effluent treatment. Many ‘A’ category industries are moving into ESG (Environmental, social, and governance) mode as they understand that without ESG, investments will not come to them. So a higher level of voluntary compliance is seen from the industry.
  • CLSA put out a note saying that this will be a year to focus on emission reduction for companies like NTPC. As per Mr. Unnikrishnan, NTPC has already completed this in half of their plants and they have/ will already initiate action on the rest. Pre dominant part of Indian power generation is with state electricity boards and none of them have placed orders for the Flue-gas-desulfurisation (FGD). That means about 100,000 mega-watts worth of coal-fired power plants are yet to initiate action. When it happens, it will be a huge market opportunity. However, most of these state electricity boards, except 2 are financially stranded.
  • Thermax is in negotiations with multiple private Indian cement companies for pollution control and carbon footprint reduction. Thermax has done multiple plants and is in negotiations with multiple Indian cement companies for generating electricity from their waste heat. There could be some orders in this area in 4QFY20E itself and also a few in 1HFY21E.

Consensus Estimate: (Source: market screener website)

The closing price of Thermax Ltd. was ₹ 970/- as of 24-February-2020. It traded at 35x/ 26x/ 22x the consensus earnings estimate of ₹ 28/ 37/ 45 for FY20E/ FY21E/ FY22E respectively.
The consensus target price for Thermax Ltd. is Rs 1,063 implying a P/E of 24x over the FY22E EPS of Rs 45/-

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24 Feb

Coronavirus impact likely from 1QFY21: Dilip Piramal Chairman, VIP Industries

Update on the Indian Equity Market:
On Thursday, Sensex ended up 152 pts lower and Nifty settled 45 pts lower at 12,080 level led by weekly expiry. Metal (+0.8%) and PSU Bank (+1%) were the top-performing sectors. NIFTY FMCG (-0.6%), NIFTY IT (-0.7%) and NIFTY Media (-0.6%) led the declining sectors. Among stocks, Cipla, Asian Paints, HUL and TCS were the top laggards, while gainers were INDUSIND Bank, Zee, SBI and Tata Steel.

Coronavirus impact likely from 1QFY21: Dilip Piramal Chairman, VIP Industries

Edited excerpts of an interview with Mr. Dilip Piramal, Chairman, VIP Industries; dated 19th February 2020:

Mr. Piramal said the Chinese companies’ accounts for 50% of its supplies.
Speaking about Coronavirus he said that this is an unprecedented situation and will have to see how this pans out. This will definitely have an impact on travel and on the general economy as China is a large supplier for most of the products in the world. But India is not so much part of the international economy as yet, so it could have some advantage.
The international travel is going to be affected on the whole as there will be some negative reaction.
China is a large part of VIP’s supply chain as VIP imports from China. The dependence on China is reducing gradually over the last few years.
Coronavirus is going to affect the whole luggage industry as it is dependent on China for finished goods, including the unorganised sector.
The factories in China have started after the Chinese New Year holidays with local workers last Monday, but that is still a small part of the overall employment.
Talking about the Supplies requirement from China, Mr. Piramal informed that 60% of the supplies for the Jun quarter are stocked up and there might be some delay, shortfall and may have to see some decline in revenues.
VIP’s supplies are now about 50% from China and the rest is sourced in India and Bangladesh.
When asked about the pricing scenario, Mr. Piramal commented that he doesn’t expect any price surge in the luggage industry but there will be some amount of firmness and decline in discounts and offers.
Mr. Piramal said that it is too early to comment on the sales growth to be expected in Jun quarter but they have stocked up and hopes that the stock levels go low and they don’t lose any sales.
Because of the downturn and loss of market share, the sales growth for 9MFY20 was less than 5%. The market share as of now stands at ~50%.
Consensus Estimate: (Source: market screener, investing.com website)

The closing price of VIP Industries was ₹ 450/- as of 20th February 2020. It traded at 34x/ 32x/ 26x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 13.4/14.4/17.7 respectively.
Consensus target price of ₹ 520/- implies a PE multiple of 29x on FY22E EPS of ₹ 17.7/-.

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23 Feb

Avoiding Bad Decisions is More Important than Making Great Decisions

Nick Maggiulli writes on his blog about “Winning the Loser’s Game” a book written by Charles Ellis.  In the book, Ellis describes what he calls “winners’ games” and “losers’ games”: In a winner’s game, the outcome is determined by the correct actions of the winner.  In a loser’s game, the outcome is determined by the mistakes made by the loser. Ellis then goes on to explain that investing is a loser’s game because most investors who attempt to beat the market (i.e. those who try to win) typically underperform in the long run.  For example, using excessive leverage or paying high fees for expected outperformance are two common ways in which would-be winners become definite losers.

The better strategy for investors then is not to try and win, but to not lose.  Too many people in the financial community obsess over the “optimal” way to invest when their time would be better spent steering clear of actions that could lead to ruin. Warren Buffett said it best in his 2005 Berkshire Hathaway letter to shareholders: Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero.

The warning from Ellis and Buffett alike is crystal clear: avoid the zeros.  Avoid them at all costs. Why?  Because the zeros are those things that can set you back years or decades in an instant.  What are “the zeros” exactly? In the investment world, the zeros are usually things associated with high costs (i.e. fees, taxes, extravagant spending, etc.) or high risks (i.e. leverage, concentration, etc.).  All of these things, if not managed properly, can wreak havoc on your finances.

As the saying goes, “Play stupid games, win stupid prizes.”  So don’t play.  Not even once.

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20 Feb

No problem on the retail front – V. Vaidyanathan, IDFC Bank

Excerpts from an interview of Mr. V. Vaidyanathan, Managing Director, and Chief Executive Officer, IDFC First with CNBC-TV18:

Update on the Indian Equity Market:

On Wednesday, NIFTY ended positive at 12,130 (+1.2%). The top gainers in NIFTY were Bharti Infratel (+7.0%), Grasim (+4.4%) and Coal India (+3.5%). Whereas Tata Motors (-2.2%), JSW Steel (-1.40%) and Sun Pharma (-1.32%) were the top NIFTY losers. All the sectors were in the green. The top sectoral gainers were pharma (+2.32%), Media (+1.94%) and FMCG (+16.4%).

  • Speaking about telecom exposure of the bank, Mr. Vaidyanathan said the total exposure to telecom is ₹ 5,900 crore out of which ₹ 2,700 crores are for Bharti Airtel and Jio together and ₹ 3,300 crore exposure for Vodafone on which the bank has taken 50% provision.
  • He says, out of the names other than Vodafone, there is nothing to worry about. Except for the telecom sector the total exposure on the watch list is roughly ₹ 3,500 crore, which the bank is tracking on a quarterly basis.
  • Out of the ₹ 3,400 crore watch list the bank has taken 51% provisions. The bank has exposure to Reliance Capital, Dewan Housing Finance Ltd (DHFL), and SICAL.
  • The bank has provided 75% provisions to Reliance and DHFL.
  • The bank has got ₹ 825crore on legacy watchlist accounts.
  • Out of the ₹ 51,000 crore book, close to 40% is MSME book, 49-50% is the consumer financing book and close to 11% is housing finance. For the bank, each one of these three segments are behaving very well.
  • Mr Vaidyanathan said people connect anything with anything, there are worries like coronavirus and some trade delays as well but, coronavirus has got nothing to do with secured and unsecured in India.
  • On the retail front the bank is not having any problem.

Consensus estimates:

  • The closing price of IDFC First Bank was ₹ 40/- as of 19-February-2020. The consensus target price for the bank is not available.
  • The bank reported a loss for the year ended 31st March 2019 of ₹ 4.7 per share. The reported loss for nine months ended 31st December 2019 stood at ₹ 6.10, which was ₹ 4.39 for nine months ended 31st December 2018.

 

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19 Feb

Planning for double-digit revenue growth in FY21E: Page Industries

Update on the Indian Equity Market:

Following its Asian peers, the markets continued the downward trajectory on Tuesday with Nifty closing 53 points lower at 11,993. With the majority of result season wrapped up by last Saturday, the focus has been shifted to the global macros. Within the sectoral indices, only two indices, Media (1.9%) and IT (0.6%) ended the day higher while METAL (-1.2%), AUTO (-1.0%) and REALTY (-0.9%) were the highest losers. Among the index stocks, COALINDIA (2.9%), ZEEL (2.7%) and BPCL (2.3%) were the gainers whereas INFRATEL (-11.3%), YESBANK (-6.3%) and TATAMOTORS (-3.9%) brought the index lower.

Excerpts from an interview with Mr. Chandrasekhar K., CFO – Page Industries published in ET NOW on 14th February 2020:

  • Commenting on the 3QFY20 result, Mr Chandrasekhar said that there is a temporary dip in PAT because of investments that company has made in sales, marketing, people and technology. This is the only way for company to drive sustainable growth in the future.
  • The growth in revenues for 3QFY20 as well as for 9MFY20 was at 7%. This was lower than what the company had expected. He said that if the company had volume growth in mid-teens, all of the above stated expenses would have been fully absorbed and the company would have maintained the margins. Whenever the demand returns, the margins will be back to the historical levels.
  • He said that the company operates in an under-penetrated premium apparel market and there are multiple opportunities for growth. The company is expanding its presence and distribution in exclusive business outlets and continue to invest in technology.
  • The street is expecting the industry to grow at 10% in FY21E. The company is also expected to achieve double-digit growth. He said that FY21E should be better than FY20.
  • Instead of looking at market share, the company focuses on the penetration levels in the industry. The company has a penetration of 20% into the premium men’s innerwear market. The company has penetration levels of 6-8% in women’s market as well as in athleisure which is an activewear segment.
  • The company enjoys a strong consumer base. It has a reach of more than 63,000 retail outlets and the company is able to withstand the slow phase. The company currently operates through 720 Exclusive Business Outlets (EBO) and has a target of reaching more than 1,000 EBOs by FY21E.
  • The company has aggressively ramped up the kids’ clothing portfolio. The acceptance has been pretty good in the market. The segment has grown almost 45% this year and the company has created a separate channel for kids. The company is also planning to open exclusive Jockey junior EBOs in the coming quarter.

Consensus Estimate: (Source: market screener website)

  • The closing price of Page Industries was ₹ 22,689/- as of 18-February-2020.  It traded at 63x/ 51x/ 44x the consensus earnings estimate of ₹ 362/ 445/ 520 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price for Page Industries is not available on market screener website.
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18 Feb

‘Opportunities for growth delivery across segments’- Amitabh Chaudhry, Axis Bank

Update on the Indian Equity Market:

On Monday, Nifty 50 closed marginally lower at 12,046. IT was the only sector that ended marginally in the green. PSU Bank (-3.0%), Realty (-1.5%) and Media (-1.1%) were the top losers. Titan (+1.7%), GAIL (+1.6%) and Nestle (+1.6%) were the top gainers while Yes Bank (-4.0%), Coal India (-3.8%) and ONGC (-3.2%) were the top losers for the day.

‘Opportunities for growth delivery across segments’- Amitabh Chaudhry, Axis Bank

Excerpts of an interview with Amitabh Chaudhry, MD, and CEO, Axis Bank published in Mint on 17th February 2020:

  • The market share of Axis Bank is in the 4.5-5 percent range in deposits and loans. Opportunities are there and growth delivery across all businesses is possible. Although the loan growth has been good, the bank has seen some unexpected stress. Now the stock of overall stress has come down which will hopefully be reflected in the slippages.
  • The bank has been one of the most transparent ones in his view, in terms of disclosing numbers. Barring further shocks, from all the metrics, the future looks good, which they need to demonstrate in the coming quarters.
  • The growth is mainly coming from refinancing activity. No significant new activity has been observed. Hence, he is of the view that economic activity will take some time to pick up.
  • The SME side of the business is the first one to get a hit as the economic activity slows. The average realizations are coming down in a very calibrated way. In some sectors, the exposure has been reduced and some new relationships added.
  • The growth has been good in the retail segment, aided by slower lending by Non-banking financial companies (NBFCs) and the slowdown in consumption. Retail estate and some other asset classes also help in adding to the momentum in retail. In terms of the delinquencies and risk metrics, the bank is at historical lows except for CVC and some parts of MFI business.
  • The retail story is the talk of the day. Everyone is either already into the business or entering it. Either way, the probability of the retail cycle coming is increasing as time passes. The government is also trying to offer relief measures to push consumption, RBI also has a loose monetary policy, thus liquidity is there in the system.
  • Despite the rabi harvest being pretty good, there hasn’t been a significant pickup in tier-2 and tier-3. The slowdown has helped inventory stabilization at a reasonable level but there has not been any pickup in consumption as yet.
  • The government is trying to infuse liquidity to benefit both the real estate and NBFC sectors. Some of the troubled NHBCs today have high exposure to the real estate sector. So, if NBFC is okay and can start lending, the money is expected to go to the real estate sector.
  • The banker is of the view that the cleansing process is not over yet and that the government will continue going after people who have taken the system for a ride. So, that means there will be a negative surprise but they have to be prepared for it.
  • In the hindsight, it was a good thing they raised capital when they did. There is enough ‘firepower’ now for continued growth over the next few years, which will be used in a very calibrated manner.
  • The promises made as part of the GPS strategy haven’t changed yet. The aspirational 18% return on equity (ROE) is not possible. However, they have been able to maintain the long- term credit cost below 1 percent and cost to asset ratio below 2%. These promises were made because they believe they have the means to do something very different, digital banking is one of them.

Consensus Estimate: (source: market screener and investing.com websites)

  • The closing price of Axis Bank was ₹ 739/- as on 17-February-20. It traded at 2.5x/ 2.2x/ 1.9x the consensus Book Value estimate of ₹ 302/ 342/ 396 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 847/- which implies a Price to Book multiple of 2.1x on FY22E Book value of ₹ 396/-
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17 Feb

Government will decide whether to divest more after one-year lock-in: IRCTC’s Pratap

Update on the Indian Equity Market:

On Friday, NIFTY closed at 12,113 (-0.5%). Among the NIFTY50, YESBANK (+5.4%), BHARTIARTL (+4.4%), and UPL (+2.5%) were the top gainers. GAIL (-5.5%), INFRATEL (-5.5%) and INDUSINDBK (-3.7%) were the top losers. In sectoral indices, PSU BANK (-2.0%), METAL (-1.4%) and BANK (-1.3%) were among the losing sectors. There were no sectoral gainers.
Excerpts from an interview with Mahendra Pratap, Chairman and Managing Director, Indian Railway Catering and Tourism Corporation (IRCTC) published in Livemint on 14th February 2020:

  • ₹200 crore run rate in ticketing revenues will continue. Till September the convenience fee was not there on internet ticketing and September onwards they have started levying it on issue of tickets and it works out to almost ₹52 crore per month.
  • In Q3FY20 two new plants were commissioned, Bhopal and Jagi Road, and in the next quarter, expect two more plants at Sankrail near Kolkata and Jabalpur being commissioned. There are two more in the pipeline, Una in Himachal Pradesh and Vijayawada in Andhra Pradesh.
  • They will perhaps be commissioned in Q1FY21 and then there is a plan for two more plants in Bhubaneswar and Visakhapatnam, which may come up in Q3FY21.
  • All these plants will be at different phases of their capacity because when a plant is commissioned, normally in the first year it produces 50-60% which helps in assimilating the production as well as distribution and logistics mechanism.
  • In the second year, it runs at 75-80% and only in the third year do they go for full-fledged capacity. So there are plants which will give more production next year, new plants will be commissioned. So this run-up will continue at least for the next two years.
  • The first private train was commissioned on 4 October. It ran for almost a quarter. It has given a gross revenue of about ₹15 crore and almost breakeven. The second train was flagged off on 17 January between Ahmedabad and Mumbai and the response in that train has been better than expected.
  • The third train is going to start on 16th March. It will be flagged off from Varanasi—between Varanasi and Indore. It is basically a pilgrimage special, connecting three religious places.
  • In catering, the tariff was revised in November 2019 which will result in increased license fee and concession fee from the trains as well as an increase in turnover from Rajdhani, Shatabdi, and Duronto trains. They are managing about 350 trains.
  • There is competition. In fact a lot of these trains have a transparent bidding process and it is purely on PPP mode.
  • They manage two hotels and two Rail Yatri Niwas. That is BNR Hotel at Puri and Ranchi and Rail Yatri Niwas at Delhi and Howrah.
  • They are also coming up with a hotel at Lucknow, which is a budget hotel and they plan to set up one budget hotel at Kevadiya near the Statue of Unity.
  • They have sufficient cash; they have almost ₹1,000 crore balance with them.
  • The 87.4% stake is with the government, 12.6% was divested last year.

Consensus Estimate:

  • The closing price of IRCTC was ₹ 1,558 as on 14-February-20. The consensus estimate for EPS of IRCTC is not available. IRCTC reported a net profit of ₹ 12.9 and ₹23.6 per share for the quarter and nine months ended December 31, 2019, respectively. It reported a net profit of ₹ 19 per share for the year ended March 31, 2019.
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16 Feb

Investing in bullish markets

Ben Carlson reminds us on his blog that regardless of the start date, this bull market in US equities has been relentless. Agreeing on the start date may be semantics, but we can all agree that pinpointing when it ends is impossible to do in advance. Until that day comes, here are some reminders about investing during bull markets.

Bull markets make you feel smarter the general direction of the market can toy with emotions by magnifying how we feel about our investing abilities. When stocks are going up it can make you feel like a genius just as when stocks are going down it can make you feel inept. Legendary investor Bernard Baruch offered some advice on this point: “Become more humble as the market goes your way.” Confusing brains with a bull market can be a costly mistake because bear markets don’t care how well you did when markets were going up.

Two things to remember Bull markets can last longer than you imagine. Secondly, even bull markets aren’t easy. They don’t keep going up in one direction. There can be a significant decline in share prices before the bullishness returns testing an investor’s patience and resolve.

Bull markets can lull investors to sleep Bull and bear market volatility in the stock market tends to look very different. You would assume bull markets are overflowing with big up days while bear markets consist of mainly big down days but that’s typically not how it works. Bear markets are full of both big down and big up days as volatility tends to cluster. When markets are going down volatility goes up, but it does so in both directions. Bull markets, on the other hand, are slow and methodical.

The methodical nature of bull markets is one of the biggest reasons we see overreactions during the inevitable bear market to follow. Markets that slowly go up blind investors to the fact that sometimes they also go down. And those overreactions are amplified by the fact that no one knows how long the music will continue to play.

Carlson advises investors to enjoy the bull market while it lasts. Just know it will take a pause at some point and when that happens many investors will sell first and ask questions later.

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14 Feb

Shemaroo says economic slowdown impacted business from YouTube

Update on the Indian Equity Market:

On Thursday, NIFTY closed at 12,174 (-0.2%). NIFTY50 was led by Yes Bank (+6.4%), Dr Reddy (+3.6%), and Zee (+2.6%). IndusInd Bank (-3.6%), Tata Steel (-1.8%) and NTPC (-1.7%) were the top losers. Pharma (+0.9%), IT (+0.8%) and Media (+0.6%) were the top gaining sectors. PVT BANK (-1.4%), Bank (-0.8%) and Fin Service (-0.7%) were among the losing sectors.

Excerpts from an interview with Mr Hiren Gada, CEO and CFO of Shemaroo Entertainment aired on CNBCTV18 on 12th February 2020:

  • Mr Gada said that in the next 3-4 years the company is aiming for an equal split across its digital and traditional business. This year the Company is hoping to be about one-third and two-third between digital and traditional.
  • This year the core customer base on the traditional side which is the broadcasters, faced tremendous slowdown on the ad side as well as on the new tariff orders. The content investment has been low-key and that has affected the entire ecosystem according to Mr Gada.
  • The expenses on account of new initiatives have dragged the EBITDA margins down in FY20. They are looking at the margins in the line of approximately 25% from a regular operating business.
  • Mr Gada revealed that digital operations contribute 50% of Shemaroo’s revenues, but the overall economic slowdown in the country also impacted the company’s YouTube revenues.
  • He added that the slowdown has had an effect on the Company’s capital-raising plans.
  • The Company had envisaged the new investment capex for which they were looking to raise money but looking at the current market conditions and given where the current stock price is, the Company will relook at the whole investment project and plan differently in terms of how they are taking that going forward.

Consensus Estimate: (Source: market screener website)

  • The closing price of Shemaroo was ₹ 97/- as on 13-February-20. It traded at 3.3x/ 3.0x the consensus EPS estimate of ₹ 34.5/38.3 for FY20E/ FY21E respectively.
  • Consensus target price is ₹ 280/- which implies a PE multiple of 7.3x on FY21E EPS of ₹ 38.3/-
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13 Feb

‘At the bottom of the barrel, see uptick going forward’- Amit Kalyani, Deputy MD, Bharat Forge

Update on the Indian Equity Market:

On Wednesday, NIFTY closed positive (+0.8%) at 12,201. NIFTY50 was led by HINDUNILVR (+5.1%), KOTAKBANK (+2.2%), and EICHERMOT (+1.9%). YESBANK (-1.5%), SBIN (-1.2%) were the top NIFTY50 losers. FMCG (+1.9%), PVT BANK (+0.7%) and FIN SERVICE (+0.7%) were the top gaining sectors. PSU BANK (-1.9%), REALTY (-0.8%) and PHARMA (-0.7%) were among the losing sectors.

‘At the bottom of the barrel, see uptick going forward’- Amit Kalyani, Deputy MD, Bharat Forge

Excerpts from an interview with Mr Amit Kalyani, Deputy MD, Bharat Forge aired on CNBCTV18 on 10th February 2020:

  • In the domestic auto industry, the Commercial Vehicle (CV) and Passenger Vehicle (PV) volume decline has reached the bottom. However, any growth is not visible at this point.
  • On the global auto market, seeing good growth in PVs. 3QFY20 was an aberration for Bharat Forge due to a strike at GM, one of their big customers. Mr Kalyani expects business to be sequentially higher in 4QFY20.
  • Overall, the Indian auto industry sentiment is not very positive. There are a lot of unknowns in the transition phase leading up to shift to BS6. Bharat Forge’s domestic customers are not willing to give any forecasts for more than 1 – 1.5 months.
  • Revenue from North America declined over 30% in 3QFY20. Mr Kalyani commented that he doesn’t expect any further decline in CVs in the North American market. He expects the PV exports to go up in 4QFY20E as well as FY21E as Bharat Forge has won a lot of new product orders.
  • The Europe CV business is also expected to go up in FY21 due to new product wins. This growth will be in the form of additional value per vehicle so even if volumes decline, Bharat Forge will see growth.
  • Bharat Forge is engaged in a lot of cost reduction, both on fixed and variable costs. By the end of FY21E, the company will have a substantial cost reduction exercise completed which will help margins. In 9MFY20, even though operating at 50% capacity, Bharat Forge’s margins are at about 24%.
  • In 3QFY20, profitability has bottomed out. Mr Kalyani expects some improvement in 4QFY20E, but it won’t be substantial.
  • Bharat Forge’s business is a derived demand business. The company can only focus on maximizing revenue depending on customer demand and cost-efficiency.
  • Bharat Forge is in a position to take advantage of any opportunities that come up. The company has created a lot of capacity. They are able to fulfil all demand operating at 50% capacity. The company is strong financially and technologically.

Consensus Estimate: (Source: market screener website)

  • The closing price of Bharat Forge was ₹ 483/- as on 12-February-20. It traded at 34x/ 25x/ 19x the consensus EPS estimate of ₹ 14.1/19.5/25.5 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 469/- which implies a PE multiple of 18x on FY22E EPS of ₹ 25.5/-
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