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Security Analysis of Bharat Forge Limited

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Security Analysis of Bharat Forge Limited

DECLARATION

I (Ranjan Shankar Shetty .B.K) hereby declare that the work presented in this Project
entitled “Security Analysis of Bharat Forge Limited” submitted to Dr. Sridevi, Ph.D.
(Area Head- Finance) at IFIM Business School, Bangalore Submitted for Security
Analysis and Portfolio Management (SAPM) Paper in Term –V, is an authentic record of
my original work.

Place: Bangalore
Date: 04th October 2010 Ranjan Shankar Shetty .B.K

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Security Analysis of Bharat Forge Limited

Disclaimer

I hereby certify that the views expressed in this document reflect my personal views. I
also certify that no part of my respective comments was, is, or will be, directly or
indirectly, related to the views expressed in this document. I do not own any amount of
stock in the company recommended/covered in this report.

Ranjan Shankar Shetty .B.K

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Security Analysis of Bharat Forge Limited

EXECUTIVE SUMMARY

The Indian Forging and Casting industry is one of the important industries for the
Success of Automobile industry and off lately in the power sector also, which have
undergone metamorphosis with the advent of new business and manufacturing practices
in the light of liberalization and globalization. The sector seems to be optimistic of
posting strong sales in the couple of years in the view of a reasonable surge in demand.
The Indian Auto component market is gearing towards international standards to meet the
needs of the global automobile giants and become a global hub.

A detailed analysis of Forging & Casting has been covered in respect of past growth and
performance. Under this project to better understand the Industry we have used
Fundamental and Technical tools to make it more authentic n meaningful. An E.I.C
approach has been followed under Fundamental Analysis which covered effect of
Recession, the impact of inflation, Interest Rate & GDP on Forging & Casting. The
Industry Analysis has been done with the help of five forces model, BCG Matrix, SWOT

analysis, industry life cycle and the industry specific index. For Company Analysis as a
part of Fundamental tool we have undergone with the Peer comparative analysis of
Bharat Forge Limited our leading company India’s largest Forging & Casting company.
The fundamental aspect consists financial and Non-Financial analysis. In the Technical
aspect we have considered Share price analysis, moving average, trend line, Resistance &
support and M.A.C.D. of Bharat Forge Limited (BFL).

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Security Analysis of Bharat Forge Limited

Recommendation

HOLD Bharat Forge Limited

CMP-NSE (01/10/2007) 371.15


st
Target Price (By 31 December 2010) 405
52 Week high/low 375.20/231.55
Face Value 2
Market Cap (mn) 86378.33
6m Avg vol ('000nos) 544
No of o/s Shares (mn) 223
NSE Code BHARATFORG
Beta 0.67
Date of Incorporation 1961
12 months return 10%
6 months return 21%

Similar Stocks
Price
Companies (Rs) Chg (rs) Vol('000)
Bharat Forge 362.5 3.5 138936
Electro castings 45.65 -0.15 392261
Jayaswal Neco 39.5 -0.25 290213
Mahindra forge 105.75 1.1 45135

1 st
Prices as on 1 of October 2010

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Security Analysis of Bharat Forge Limited

Contents

ANALYSIS OF FORGING INDUSTRY ................................................................................................................ 8


Fundamental Analysis ................................................................................................................................... 8
Indian Economy......................................................................................................................................... 8
Interest rate .............................................................................................................................................. 9
Inflation ................................................................................................................................................... 10
Indian Forging Industry ............................................................................................................................... 11
Current Market Overview ........................................................................................................................... 11
Future Outlook ............................................................................................................................................ 12
Industry characteristics ............................................................................................................................... 12
Indian Forging Industry – SWOT Analysis ................................................................................................... 13
Industrial Life Cycle ..................................................................................................................................... 14
Five Forces Model - Industry ....................................................................................................................... 15
BCG MATRIX ................................................................................................................................................ 16
Security Analysis ......................................................................................................................................... 18
Company Analysis ....................................................................................................................................... 18
Profile of Bharat Forge Ltd .......................................................................................................................... 19
Key Recent Developments ...................................................................................................................... 19
MANAGEMENT........................................................................................................................................ 20
SUBSIDIARY COMPANIES ........................................................................................................................ 20
JOINT VENTURES ..................................................................................................................................... 20
Business Outlook..................................................................................................................................... 22
Product Profile ........................................................................................................................................ 22
Strong Customer Profile.......................................................................................................................... 22
Bharat Forge Ltd - SWOT Analysis............................................................................................................... 23
Five Forces Model - Bharat Forge ltd .......................................................................................................... 24
Ratios .......................................................................................................................................................... 25
Review of Business .................................................................................................................................. 26

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Security Analysis of Bharat Forge Limited

Peer Comparison......................................................................................................................................... 27
Technical Analysis ....................................................................................................................................... 29
Resistance & Support Level..................................................................................................................... 32
Simple Moving Average .......................................................................................................................... 33
Trend line ................................................................................................................................................ 35
MACD ...................................................................................................................................................... 36
Conclusion ................................................................................................................................................... 37
References .................................................................................................................................................. 38

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Security Analysis of Bharat Forge Limited

ANALYSIS OF FORGING INDUSTRY

Over a period of more than two decades the Indian Forging industry has been driving its
own growth through phases. With comparatively higher rate of economic growth rate index
against that of great global powers, India has become a hub of domestic and exports business.
The forging sector has been contributing its share to the shining economic performance of India
in the recent years.

To understand this industry for the purpose of investment we need to analyze it by


following two approaches:
1). Fundamental Analysis (E.I.C Approach)
a. Economy
b. Industry
c. Company
2).Technical Analysis

Fundamental Analysis

Economic analysis is the analysis of forces operating the overall economy a country.
Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed.
Economic analysis is important in order to understand exact condition of an economy.

Indian Economy
The economy of India is the twelfth largest economy in the world by market
exchange rates and the fourth largest by PPP2 basis. Industry accounts for 27.6% of the GDP and
employ 17% of the total workforce. However, about one-third of the industrial labour force is
engaged in simple household manufacturing only. In absolute terms, India is 16th in the world in
terms of nominal factory output.

Source: IMF Apr’09, Economic Survey 2008-09 & RBI Bulletin

2
purchasing power parity

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Security Analysis of Bharat Forge Limited

Today, auto-component sector in India is one of the key sectors of the economy in terms
of the employment. Directly and indirectly it employs more than 10 million people and if we add
the number of people employed in the automobile and auto ancillary industry then the number
goes even higher.

The Indian economy expanded 7.40 percent over the last year, as measured by the year-
over-year change in Gross Domestic Product (GDP YoY). Unlike the commonly used quarterly
GDP growth rate, the annual GDP growth rate takes into account a full year of economic
activity, thus avoiding the need to make any type of seasonal adjustment. The India Gross
Domestic Product is worth 1296 billion dollars or 2.09% of the world economy, according to the
World Bank. The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.60
percent in the last quarter; Services are the major source of economic growth, accounting for
more than half of India's output with less than one third of its labor force. The economy has
posted an average growth rate of more than 7% in the decade since 1997.

Year Mar Jun Sep Dec Average


2010 8.60 8.60
2009 5.80 6.00 8.60 6.50 6.73
2008 8.50 7.80 7.50 6.10 7.48

Interest rate
India benchmark interest rate stands at 4.50 percent. In India, interest rate decisions are taken
by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark
repurchase rate.

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Security Analysis of Bharat Forge Limited

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 3.25 3.25 3.34 3.61 3.75 3.75 4.08
2009 4.05 4.00 3.55 3.39 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25
2008 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.24

Inflation
The Inflation rate in India was 9.67 on 31st July 2010; the reason for the high rate of
inflation in India is due to increase in international crude prices which effect the consumer prices
directly. Due to which the controller RBI (Reserve bank of India) have taken up measures to
tighten the monitory policy, and Fiscal policy. A moderate amount of inflation is important for
the proper growth of an economy like India because it attracts more private investment

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Security Analysis of Bharat Forge Limited

Indian Forging Industry

The Indian Forging Industry has emerged as a major contributor to the manufacturing
sector of the Indian economy. The impact and changes in Indian Automobile Industry is directly
proportional to the Indian Forging Industry, so Forging Industry is often referred as backbone to
the Automobile Industry, while the automotive industry is the main customer for forgings the
industry’s continuous efforts in upgrading technologies and diversifying product range have
enabled it to expand its base of customers to foreign markets. The Indian forging industry is
increasingly addressing opportunities arising out of the growing trend among global automotive
OEM’s3 to outsource components from manufacturers in low-cost countries. As a result, Indian
forging industry has been making significant contributions to country’s growing exports.

Current Market Overview


The Indian automobile market has seen a major revival since the slowdown of FY2009.
Passenger cars and commercial vehicles together registered a growth of 29% in production and
volumes are close to touching 3 million (see Table 3below). More encouraging was the growth in
CV4 production. With LCV’s5 registering a growth of 41% and M&HCV’s6 growing by 30%,
CV production increased by 36%. There is every indication that the CV segment has emerged
from its cyclical low and moving towards an upsurge. Increased infrastructure activity is also
expected to fuel further demand in the CV segment.

Many large and medium forging companies also took important initiatives in
capacity expansion, modernization, cost rationalization etc. Notwithstanding this, the industry
had also to contend with its share of problems. It had to bear the brunt of acute shortages and
steep and frequent increases in the cost of major inputs like power and fuel, forging quality steel
etc. For a major part of the year, the industry has grappled with this issue and managed to keep
floating under these adverse circumstances.

3
Original Equipment Manufacturer
4
Commercial Vehicle
5
Light Commercial Vehicle
6
Medium and heavy commercial vehicles

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Security Analysis of Bharat Forge Limited

Future Outlook

The size of the Indian forging industry has been estimated at `855 billion in 2008–09,
growing at a compound annual growth rate (CAGR7) of about 23 per cent over the previous five
years. The industry is expected to grow to `1800 billion by 2016. Among the 640 players present
in the Indian market, only 160 constitute the organized sector and contribute more than 77 per
cent of the country’s total production of auto components. The unorganized units generally
employ open-die process at lower capital cost, while the organized players dominate the closed
die segment, which is almost 65% of total Indian Forging Industry.

Industry characteristics
Capital intensive
The industry is becoming capital intensive with increasing globalization and entry of
more MNC auto companies in the domestic market. The forging manufacturers need to invest
aggressively in upgrading technology to meet their strict product norms.
Fragmented nature
The Indian forgings industry is characterized by fragmented production capacities; the
organized sector accounts for a 55% share with 10 large units dominating the industry.
Raw material intensive
Raw material costs approximate 60% of the total cost and the major raw materials are
carbon, alloy, stainless steel, aluminum, titanium, brass, copper and high temperature alloys,
which contain cobalt, nickel or molybdenum.
Technology

7
CAGR – Compound annual growth rate

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Security Analysis of Bharat Forge Limited

The Indian industry lacks adequate R&D8, which has necessitated the need for foreign
collaboration. The techniques comprise the mechanical drop hammer, sophisticated hydraulic
and pneumatic processes etc.

Indian Forging Industry – SWOT Analysis

A scan of the internal and external environment is an important part of the strategic
planning process. Environmental factors internal to the firm usually can be classified as strengths
(S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or
threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.
SWOT analysis of the Indian automobile sector gives the following points:

Strengths Weakness
1. Globally cost competitive, 1. Low level of research and development
2. Access to technology. capability,
3. Strict quality Controls. 2. Exposed to critical downturn in the
4. Major auto manufacturing players have automotive industry,
setup facilities in India, 3. Most Forging companies are dependent on
5. Average Income of an Indian is Increasing, global majors for Technologies,
6. Aggressive YOY9 growth of automobile 4. Heavy dependence on US and European
industry, which acts as a catalyst to the markets having its own business cycle and
Forging industry – Large Domestic Market technological & regulatory requirements
7. Strong Engineering Skill for Labor 5. Low Labor Productivity
6. Infrastructure Bottlenecks
Opportunities Threats
1. Serves as sourcing hub for global 1. Presence of a large counterfeit components
automotive majors. market possesses a significant threat.
2. Significant export opportunities may be 2. Pressure on prices from Original
realized through diversification of export Equipment Manufacturing (OEM’s11)
basket, continues,
3. Implementation of VAT10 will help to the 3. Imports pose price based competition in the
cascading impact of prices. replacement market,
4. Huge business opportunity in automotive 4. Competition from low cost component
as well as non-automotive applications in manufacturing countries such as Thailand
India as well as international markets and China

8
R&D – Research and Development
9
YOY - Year on Year
10
VAT - Value Added Tax
11
OEM - Original Equipment Manufacturer

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Security Analysis of Bharat Forge Limited

Industrial Life Cycle

The industrial life cycle is a term used for classifying industry vitality over time. Industry
life cycle classification generally groups industries into one of four stages: Introduction, growth,
maturity and decline.
In the Introduction stage, the product has not been widely accepted or adopted. Business
strategies are developing, and there is high risk of failure. However, successful companies can
grow at extraordinary rates. The Indian Forging Industry has passed this stage quite successfully.
In the growth stage from FY07-08, Indian Forging industry registered decent
performance riding on demand from domestic automobile industry and export opportunity.
However due to the recession there was a slowdown in FY08-09 Indian forging industry has
realized the importance of diversification to reduce dependence on automobile industry, which is
cyclical in nature and further improve profitability in the long run. Hence forging players have
adopted three pronged strategy to diversify in to manufacturing non-automotive components,
increase product range with more value added products and end-to-end products and acquire
companies and facilities in international markets.
Salient Features of Indian Forging Industry in Growth Stage

 Overall production reached 9,83,000 tpa from 9,29,000 tpa during last year; a YoY
growth of 12%.
 Capacity utilization also improved considerably from 40-50 % in earlier years to 65% of
the additional capacity added during the last two years (approx. 1.5 Million tpa) inclusive
of overseas acquisitions.
 Exports recorded a YoY growth of 16% to reach a level of `16billion; CAGR growth of
26% over past five years.
 Acquisitions in key target markets to acquire additional clientele and also add up
capacities
 Investment in capacity additions to cater to expected upturn in demand from domestic
automobile industry in long run, aggressive diversification in to non-automotive
applications and grab export opportunity.

Indian Forging
Industry

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Security Analysis of Bharat Forge Limited

Five Forces Model - Industry

Michael Porter provides a framework that models an industry as being influenced by five
forces, this is to develop an edge on rival firms this model can use this model to better
understand the industry context in which the firm operates.

Degree of Rivalry
Despite the high concentration ratio seen in the auto component manufacturing sector,
rivalry in the Indian forging sector is intense due to the entry of foreign companies in the market.
The industry rivalry is extremely high with any being product being matched in a few months by
the competitors. This instinct of the industry is primarily driven by technical capabilities
acquired over years of gestation under the technical collaboration with international players, and
the stress on M&A’s12 done by the Indian forge companies.

Threat of Substitutes
The threat of substitutes to the Indian Forging industry is insignificant.

Barriers to entry
The barriers to enter forging industry are substantial. For a new company, the startup
capital required to establish manufacturing capacity to achieve minimum efficient scale is
prohibitive. Although the barriers to new companies are substantial, establishing companies are
entering the new markets through strategic partnerships or through buying out or merging with
other companies. However, a domestic company, with local knowledge and expertise, has the
potential to compete its home market against the global firms who are not well established there.

12
M&A’s – Merger and Acquisition

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Security Analysis of Bharat Forge Limited

Supplier’s power
In the relationship between the industry and its suppliers, the power axis is tipped in
industry’s favor. The industry is comprised of powerful buyers who are generally able to dictate
their terms to the suppliers.

Buyers’ Power
In the relationship between the forging industry and its customer, the power axis is tipped
in the customers favor. This is due to the fairly bulk buying nature and the technological
adaption by the forging industry as required by the Automobile industry which is again
dependent on the Ultimate consumer who want some think new every time they come out and a
very important process is association with selecting among competing brands under immense
pressure of cut throat competition.

BCG13 MATRIX

In an economy, different industries are present and different industries have different
growth rate as compared to the growth of the economy. In an economy, there are a number of
major industries and they all occupy different positions on the BCG matrix according to their
growth and contribution towards the economy. In the Indian economy, some of the major sectors
are FMCG14, automobiles, banking and insurance, Infrastructure, software, pharmacy,
Agriculture, Oil and gas and retail sectors and these can be placed in the different positions in the
matrix as shown below:

Industrial BCG Matrix


13
BCG - Boston Consulting Group
14
FMCG - Fast Moving Consumer Goods

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Security Analysis of Bharat Forge Limited

BCG matrix is used to determine the relative position of the companies of an industry or
different SBU’s15 of any institution, in terms of the market growth rate and the market share of
the company in the industry. In the Indian forging sector, the major players are Bharat Forge Ltd,
Electrosteel casting, Jayaswal Neco Industries, Mahindra Forgings Ltd, Ahmednagar Forging
and Kalyani Forge Ltd. In the BCG matrix, the companies are placed in one of the following four
categories: Star, Cash Cows, Dogs and Question marks. In the Stars we place the companies with
high market growth and high market share, cash cows are the companies who have low market
growth rate and high relative market share, the category of the question marks include the
companies with low relative market share and high market growth rate and dogs include the
companies who have low relative market share and low market growth rate, the below BCG
matrix is built on the profit, number of players in the industry, and incorporation of the industry
and sales percentage for the past 5 years, and computed:

Company BCG Matrix

15
SBU - Strategic Business Unit

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Security Analysis of Bharat Forge Limited

Security Analysis
External Environment

S W

Internal Environment

The size of the Indian forging industry is growing at a compound annual growth rate
(CAGR16) of about 23 per cent over the previous five years. The industry is expected to grow to
`1800 billion by 2016. Among the 640 players present in the Indian market, only 160 constitute
the organized sector and contribute more than 77 per cent of the country’s total production of
auto components. The unorganized units generally employ open-die process at lower capital cost,
while the organized players dominate the closed die segment, which is almost 65% of total
Indian Forging Industry, It has more strength in internal market yet global market has to be
explored, so the investors should exploit this industry.

Company Analysis

The company analysis shows the long-term strength of the company that what is the
financial Position of the company in the market where it stand among its competitors and who
are the key drivers of the company, what is the future plans of the company, what are the policies
of government towards the company and how the stake of the company divested among different
groups of people.

16
CAGR – Compound annual growth rate

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Security Analysis of Bharat Forge Limited

Profile of Bharat Forge Ltd


Bharat Forge Ltd (BFL), a flagship company of Kalyani group, BFL is a full service
supplier of forged and machined-engine and chassis components. It is a primary exporter of auto
components from India and chassis component manufacturer worldwide. The company’s
manufacturing facilities spread across 12 locations and six countries, four in India, three in
Germany, one each in Sweden, Scotland, United States and two in China. Bharat Forge conducts
its operations in the following geographical areas such as Europe, North America and Asia. Its
customer base includes Cummins, BMW, Iveco, Dana Corporation, General Motors,
Volkswagen, Renault, Ford, Honda, Volvo, Toyota, Daimler Chrysler, Arvin Meritor, Detroit
Diesel and Audi.

Key Recent Developments


 Mar 15, 2010: NTPC Energy Systems Begins Construction Work On Manufacturing
Facility In Maharashtra, India
 Mar 14, 2010: Bharat Forge, NTPC starts construction on manufacturing facility in India
 Jan 06, 2010: Pune Based Companies Enter Into Nuclear Equipment Supply Deal In India
 Jan 04, 2010: Bharat Forge Commissions New Ring Rolling Facility in Baramati, India
 Jan 04, 2010: Bharat Forge plans manufacturing facility in Maharashtra, India.

Directors Name Designation


B N Kalyani Ch & Md
S M Thakore Director
S D Kulkarni Director
P G Pawar Director
Uwe Loos (Prof.) (Dr.) Director
P C Bhalerao Director
Lalita D Gupte (Ms.) Director
P H Ravikumar Addnl. Director
Alan Spencer Director
Naresh Narad Addnl. Director
V K Jairath Addnl. Director
T Mukherjee Addnl. Director
G K Agarwal Deputy Md
Amit B Kalyani Exec. Director
B P Kalyani Exec. Director
S E Tandale Exec. Director
P K Maheshwari Exec. Director
Sunil K Chaturvedi Exec. Director
Beejal Desai Co. Secretary

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Security Analysis of Bharat Forge Limited

MANAGEMENT
The Company was incorporated on June 19, 1961 and we commenced business in 1966.
We were originally promoted by Kalyani family headed by Dr. Neelkanth Kalyani. Our initial
equity was subscribed by Kalyani family. The Company is managed by the Managing Director
and Whole-time Directors under the overall supervision of the Board of Directors.
Other members of the Board are renowned personalities and having significant expertise
in their field and have been actively contributing through their valuable advice and support. The
overall management of the Company is vested with the Board of Directors comprising persons
with industrial, management, legal and administration experience. However the day-to-day
affairs are looked after by Mr. B.N. Kalyani, Managing Director, and Mr. P C Bhalerao, Mr. G K
Agarwal and Mr Amit Kalyani, the Whole-time Directors, who hold substantial powers of
management. They are assisted by a team of professionals in the fields of engineering,
marketing, finance and management.

SUBSIDIARY COMPANIES
The Company has 13 Subsidiaries of which 12 are overseas and 1 is in India, a significant
portion of the consolidated revenues is generated by the subsidiary companies.
 CDP Bharat Forge GmbH, Germany,
 Bharat Forge Holding GmbH, Germany
 Bharat Forge Aluminiumtechnik GmbH & Co. K.G., Germany
 Bharat Forge Aluminiumtechnik Verwaltungs GmbH, Germany
 Bharat Forge Daun GmbH, Germany
 Bharat Forge America Inc., u.S.A.
 Bharat Forge Beteiligungs, GmbH, Germany
 Bharat Forge Kilsta AB, Sweden
 Bharat Forge Scottish Stampings Ltd., Scotland
 Bharat Forge Hong Kong Limited (Formerly, Lucrest Limited), Hongkong
 FAW Bharat Forge (Changchun) Company Limited, China.
 BF New Technologies GmbH, Germany and
 BF NTPC Energy Systems Ltd., India

JOINT VENTURES
Apart from the acquisitions BFL have entered into Joint-Ventures (JV’s) with the
following companies:
 Joint venture with NTPC,
 Joint venture with ALSTOM,
 Joint venture with AREVA.

Share Transfer Agents and Share Transfer and Demat system: Bharat Forge has no share
transfer agents. Securities of the Company are transferred in-house by the Secretarial Department

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Security Analysis of Bharat Forge Limited

of the company. Bharat Forge’s equity shares are traded in the stock exchanges compulsorily in
Demat mode. The Board’s Executive Committee meets twice a month for dealing with matters
concerning securities of the company.

Distribution of equity holding by type of investors


1.64
Promoters
Mutual Funds/UTI 15.09
Banks, FIs,Insurance Cos.
9.93 43.97
FIIs
Corporate Bodies 12.08
Individuals
Others
10.88 6.41

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Security Analysis of Bharat Forge Limited

Business Outlook
The business outlook for Bharat Forge on both the domestic and export front remains
extremely strong. The company will use its entry into the new segment of passenger car
components as one of the levers of its export growth strategy. The immense opportunity in the
area of machined heavy duty crankshafts for the global markets is expected to boost the
company’s exports in the future. BFL is aiming for global leadership in both these segments in
the coming years. The recent conclusion of two significant orders from Ford and Daimler-
Chrysler are a step in the direction of achieving our goals. The recent opening up on several
International Purchasing Offices by leading global majors in India is adding to our export market
potential. BFL is working very closely with most of these IPO’s in identifying opportunities for
their global requirements.
The outlook remains buoyant domestically on the back of a demand revival across the
automotive market segments and the beginning of outsourcing by Global OE manufacturers who
have setting up manufacturing facilities in India. BFL is working closely with domestic
customers in new product development initiatives that will further catalyze the company’s
leadership position in the domestic market and enable it to grow its market share further.

Product Profile
Company manufactures wide range of safety and critical components for passenger
vehicles, commercial vehicles and diesel engines in the automotive segment. Some of key
automotive components manufactured include Crankshafts, Front Axle Beams, Steering
Knuckle, Connecting Rods, Rocker arm, Transmission Parts and hubs. It also manufactures
specialized components for non-automotive industries such as Railways & Marine, Aerospace,
Oil & Gas, Conventional & Non-Conventional Energy, Mining & Metals, Construction
equipment’s etc.

Strong Customer Profile


BFL has strong domestic customer base including TATA Motors, Mahindra, Ashok
Leyland, Escorts, Bajaj, BHEL, Larsen & Toubro, Kirloskar. On the global front, company has
elite customers in its fold, including BMW, Audi, DaimlerChrysler, Ford, General Motors,
Toyota, Volkswagen, Volvo, MAN, Honda, Audi, Renault, Caterpillar, SAAB, Cummins, DAF,
DANA, Perkins, Porsche, Renault, IVECO, Land rover, ArvinMeritor etc. BFL has already
crossed the stringent acceptability threshold of global OE customers. BFL will here on wards
focus on building collaborative relationships which will result into cost reduction to the global
OE customers and global business leadership in chosen field of activity to BFL.

This is a key to a long- term win-win mutually beneficial relationship for both BFL and
its customers

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Security Analysis of Bharat Forge Limited

Bharat Forge Ltd - SWOT Analysis

Strengths Weaknesses

 Diversified and de-risked business  Heavy dependence on US and


model with widespread geographical European markets having its own
reach and product range business cycle and technological &
 Strategic proximity and strong regulatory requirements
customer relationships on domestic as  Exposed to currency fluctuation risk
well as international front (however, it is an opportunity as well as
 Dual Offshore and fully integrated risk)
manufacturing capabilities along with  Frequent equity dilution
strong customer and product profile
 Technological and man-power cost
advantage
 Strong group comfort of Kalyani Group
Opportunities Threats

 Huge business opportunity in  Integrating subsidiaries operations and


automotive as well as non-automotive delay in ramping up of new capacities
applications in India as well as  Slowdown in demand from domestic
international markets auto OEM's and global auto industry
 Access to better technology and work considering cyclical nature of
practices across globe automotive business
 Presence in developed as well as high  Competition from low cost component
growth developing economies to manufacturing countries such as
supplement topline as well as bottom- Thailand and China
line  Political and economical conditions in
India as well as countries in which
company and its subsidiaries are
operating.

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Security Analysis of Bharat Forge Limited

Five Forces Model - Bharat Forge ltd

Threat of competitors
• There are 38 players in this
organized industry.
• Dominated by non-
organized players
• Fragmented industry

Low Bargaining High Bargaining


power of power of
Suppliers. PRESENT COMPETITION consumer
• Nature of Electro steel Casting • Large no. of
suppliers(provider alternatives
s of same • Low switching
services) Bharat Forge ltd Here costs
• Few alternatives •
• Depends on Undifferentiated
Steel industry services
• Suppliers are not • Full
concentrated information
• forward about the market
integration

Threat of substitutes
• Plastic fibers being used in
the cars
• No much substitutes for the
industry

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Security Analysis of Bharat Forge Limited

Ratios (Standalone)

Particulars Mar Mar Mar Mar Mar


2006 2007 2008 2009 2010
Profitability & Return Ratios
EBITDA Margin (%) 24.40 24.63 24.54 16.85 21.84
NP Margin (%) 11.80 11.61 10.98 4.50 6.41
EPS 9.26 10.78 12.26 4.64 5.71
BVPS 56.80 66.90 84.20 106.90 124.20
ROE 25.77 19.68 19.54 6.78 8.43
ROACE 16.10 12.30 12.10 12.50 13.10
Operating efficiency and other ratios
Inventory T/o 2.30 2.62 5.77 2.87 3.07
Debtors T/o 0.85 1.06 0.87 1.22 1.21
Interest Coverage (x) 8.77 7.38 6.25 3.11 3.02
Asset/Turnover (x) 0.09 0.10 0.14 0.14 0.39
D/E (x) 0.85 1.06 0.87 1.22 1.21
Valuation Ratios
P/E (x) 48.04 29.22 21.81 21.13 43.2
P/CEPS (x) 27.2 22 19.7 16.6 13.8
P/BV (x) 6.8 6 4.7 3.7 3.2
Mcap/Sales (x) 5 4.2 3.6 3.2 2.7
EV/Sales (x) 5.3 4.2 3.6 3.2 2.7
EV/EBITDA (x) 20.8 17.9 15.9 13.2 10.8

Liquidity ratios (times)


Bharat Forge Ltd.
Particulars Mar Mar Mar Mar Mar
2006 2007 2008 2009 2010
Cash to current liabilities 0.45 0.57 0.14 0.42 0.47
Cash to avg. cost of sales 125.45 153.04 29.04 70.95 108.6
Quick ratio 0.75 0.91 0.6 0.89 0.9
Current ratio 1.3 1.38 1.28 1.83 1.6
Current ratio (incl. mktbl. securites) 1.53 1.54 1.53 1.83 1.82
Debt to equity ratio 0.85 1.06 0.87 1.22 1.21
Interest cover 8.77 7.38 6.25 3.11 3.02
Interest incidence (%) 5.75 4.67 5.67 4.89 4.86

25
Security Analysis of Bharat Forge Limited

Review of Business

Domestic revenues grew by 84.0% & 15.9% on a YoY and QoQ basis despite a 12.3%
17
QoQ drop in domestic M&HCV volumes. Exports continued to grow for the 5th straight
quarter driven by recovery in both US & European markets. Export revenues grew by 63.2% &
6.0% on a YoY and QoQ basis. EBITDA margins have expanded both on a YoY & QoQ basis to
25.2% in Q1 FY1118 driven by improved operating leverage. Utilization for Indian operations
improved on the back of continued strong off-take from domestic OEM’s coupled with
improvement in utilization of new facilities and continuing recovery in export markets.
The subsidiaries’ performance in the quarter is significantly influenced by the Factors
like, Improvement in capacity utilization across the subsidiaries from 25% in Q1 FY10 to 39% in
Q1 FY11. The restructuring actions carried out in CY09 with aim of lowering the breakeven
levels are starting to positively impact the financial performance. EBITDA % for the overseas
subsidiaries has improved to 4.2% in this quarter from 2.5% in Jan – Mar 2010. China JV has
turned the corner and has posted a profit for the first time since the commencement of operations
in April 2006.

The Indian automotive markets have cooled off a bit post the year end & have witnessed
a small volume reduction of 5.4% on a QoQ basis. The M&HCV segment, which is BFL main
addressable segment saw volumes drop by 12.3% on a QoQ basis but jumped by 57.1% on a
YoY basis. In spite of the volume drop, BFL domestic sales surpassed previous highs and
recorded growth of 84.0% & 15.9% on a YoY and QoQ basis respectively. BFL’s sales for
automotive applications have witnessed growth across both the commercial & passenger vehicles
segments.

The US Automotive industry has witnessed moderate growth in CY10 YTD on the back
of overall economic recovery & improvement in consumer sentiments. BFL focuses mainly on
the M&HCV segment with strong relations with both OEM’s & Engine manufacturers. The
segment is now clearly showing signs of growth after 3 continuous years of significant volume
reduction. The segment in CY10 has witnessed several significant news flows relating to new
order bookings from fleet operators which were virtually non-existent in CY2007-CY2009
period, suggesting the beginning of replacement cycle.

The automotive markets in both India & the export markets, especially USA are on a
steady growth trajectory. The demand in India is being driven by strong economic activity led by
infrastructure & capital goods. The entry of global OEM’s into the Indian markets bode well for
both the industry and Bharat forge ltd.

17
Quarter on Quarter
18
Financial Year 2011 –Quarter 1(one)

26
Security Analysis of Bharat Forge Limited

Peer Comparison
Bharat Forge is second largest auto forging company in world with it's operations spread
out in India, U.S, Europe and China. BFL has total forging capacity of 600000 M.T and is adding
another 100000 M.T capacity for nonautomotive applications. As a matter of strategy BFL
acquired slightly weak companies at low investments to diversify in to different geographies,
enhance overall forging capacities and also enrich its customer profile. Lower profitability of
these subsidiaries has affected company's consolidated profitability; however, BFL is in process
of restructuring these subsidiaries and thereby supplement its topline as well as bottom-line.
Similarly many other forging companies are pursuing organic as well as inorganic growth
strategy to tap the opportunity lying in automotive and non-automotive sector. Electrosteel
casting is also prominent auto component manufacturer engaged in manufacturing casting,
forgings, high value machined parts and other auto components.
BFL commands premium valuations due to its global leadership positioning, large scale
of operations, de-risked business model, strong group comfort and fundamentals and future
growth prospects. I believe that companies with global scale of operations such as Bharat Forge
and Electrosteel casting will be able to sustain any downturns and emerge as dominant players in
global auto component sector. Below is a tabular representation of the EPS, P/E, Sales and
Profit/Loss from 9 companies which consists of 3 Large cap (Bharat Forge Ltd, Electrosteel
casting, Jayaswal Neco Industries) 3Mid cap (Mahindra Forgings Ltd, Ahmednagar Forging,
Kalyani Forge Ltd) & 3 Small Cap (Hinduja Foundries Ltd, MM Forgings Ltd, Ramkrishna
Forgings Ltd) and below the tabular representation there is a Graphical representation:

27
Security Analysis of Bharat Forge Limited

28
Security Analysis of Bharat Forge Limited

Technical Analysis
Technical Analysis does not consider values in the sense in which fundamental analysis
applies it. Fundamental Analysis allows the analyst to forecast the holding period and the
riskiness of the holding but this does not help an investor in identifying a buy or sell action.
Technical Analysis, however, may be useful in timing a buy and sell action. Following is the
Technical Analysis of Bharat Forge Ltd, to understand their pattern and behavior of share prices
in the market. The time taken is from 17th August 2009 to 30th October 2010.
The first chart shows the basic graphical pattern of the movement of share prices of BFL
on NSE (National Stock Exchange) with comparison to CNX100 index.

The following were analyzed;

Correlation 0.2072 Bharat Forge Ltd, have a positive co-relation with the CXN100
Coefficient = Index
Beta = 0.0760 Bharat Forge Ltd, is volatile in comparison with the CNX100 Index

If there is an Increase of 10% in CNX100 Index then there would be a Increase of 0.95% in Bharat
forge ltd
If there is an Decrease of 10% in CNX100 Index then there would be a decrease of 0.76% in Bharat
forge ltd

29
Security Analysis of Bharat Forge Limited

As a peer comparison the second chart shows a graphical representation of the two stocks
Bharat Forge Ltd, with Kalyani Forge which are competitors in Forging and casting Industry.

The following were analyzed;

Correlation 0.0444 Bharat Forge Ltd, have a positive co-relation with the stock of Kalyani
Coefficient = Forge Ltd.,
Beta = 0.1508 Bharat Forge Ltd, is volatile in comparison with the stock of Kalyani
Forge Ltd.,
If there is an Increase of 10% in Kalyani Forge ltd stock value then there would be a Increase of
1.98% in Bharat forge ltd
If there is an Decrease of 10% in Kalyani Forge ltd stock value then there would be a decrease of
1.51% in Bharat forge ltd

30
Security Analysis of Bharat Forge Limited

The third chart is does an analysis of the comparison between Bharat Forge ltd, (BFL)
and S&P - CNX Index

The following were analyzed;

Correlation 0.2005 Bharat Forge Ltd, have a positive co-relation with the S&P CNX Index
Coefficient =
Beta = 0.0719 Bharat Forge Ltd, is volatile in comparison with the S&P CNX Index

If there is an Increase of 10% in S&P CNX Index then there would be an Increase of 0.97% in Bharat
forge ltd
If there is an Decrease of 10% in S&P CNX Index then there would be a decrease of 0.72% in Bharat
forge ltd

31
Security Analysis of Bharat Forge Limited

Resistance & Support Level


This Technical tool helps in telling that what would be the price band of share price in
which it move in near future on the basis of past high and low levels made by a particular scrip.
Resistance Level shows the price above which share price will not move in normal case on the
other hand Support level shows the minimum share price which can be touched by share or
crossing of this share will not be there in normal market condition Following is the Resistance &
Support level of Bharat Forge ltd., for the period of 13 months is below as a long term;

Below is the graph of the Resistance & Support level of Bharat Forge ltd., for the period of 3
months as a Short term;

32
Security Analysis of Bharat Forge Limited

As it is seen in the past 3 months BFL share price moved up and it keeps making on new
level so perfect resistance level for this share is not easy to predict as performance of this share is
very good compare to all scrip’s of this segment.
The above band of resistance and support level shows that the price of shares will move
in between this range only until unless any wrong reaction came out in economy or when any
correction takes place the prices will move in between this band only.

Simple Moving Average


Moving Average is an indicator that shows the average value of a security's price over a
period of time. The method of interpreting a moving average is to compare the relationship
between moving averages of the security's price with the security's price itself. In the below
figure we have the share price of Bharat Forge Ltd, on a moving average of 20 period as Short
Term, 50 period for Medium Term respectively.
A buy signal is generated when the security's price rises above its moving average and a
sell signal is generated when the security's price falls below its moving average. It is designed to
keep you in line with the security's price trend by buying shortly after the security's price
bottoms and selling shortly after it tops. It shows that Bharat Forge ltd is performing better, so
industry as whole is also performing outstanding. So keeping a hold position for the companies
would be profitable in future.

20 Days Moving Average

33
Security Analysis of Bharat Forge Limited

50 days Moving Average

100 days Moving Average

The graph also represents the point at which you have a chance of buying the shares and
selling then based on the moving averages.

34
Security Analysis of Bharat Forge Limited

A buy signal is generated when the security's price rises above its moving average and a
sell signal is generated when the security's price falls below its moving average. In the near
future based on the Moving average show Hold signal as their security prices rises above its
moving average. This shows that an investor can kept a hold position or can buy for longer
period of time but as we can see in case the moving average line is also rising which shows that
Buy n hold position for very long period could be unprofitable a minor correction in the share
price can bring down the share price line and then moving average line will easily cross the share
price line.

Trend line

A trend line is formed when you can draw a diagonal line between two or more price
pivot points. They are commonly used to judge entry and exit investment timing when trading
securities trend line is a bounding line for the price movement of a security. Bharat Forges ltd
have a upward trend line on the long term but the security had a stagnant trend line for a period
of 6 months from January 2010 to June 2010.

35
Security Analysis of Bharat Forge Limited

MACD19

As shown in the chart above, when the MACD falls below the signal line, it is a bearish
signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the
signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely
to experience upward momentum. Many traders wait for a confirmed cross above the signal line
before entering into a position to avoid getting "faked out" or entering into a position too
early, as shown by the first arrow. This means upside momentum is increasing. Negative MACD
indicates that the 12-day EMA20 is below the 26-day EMA. Negative values increase as the
shorter EMA diverges further below the longer EMA.

Above graph shows the MACD of Bharat Forge Ltd., for the period of 13 months. The
MACD is the difference between a 50-day a 25-day exponential moving average (EMA), called
the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities.
From the 25-day moving average it shows a Sell opportunity and on 50-day moving average on
MACD shows a Hold Opportunity.

19
Moving Average Convergence / Divergence
20
Exponential Moving Average

36
Security Analysis of Bharat Forge Limited

Conclusion

Indian Automobile Industry is in the growth phase and the expected growth rate is 23%
for FY2009-10 compare to last year growth rate which was just 0.7% and the above facts and
figures in our study also support this truth. According to Indian Statistical Organization the per
capita income (Rs.38000) is increasing and national income at the rate of 14.4% which shows
potential to buy vehicle in auto industry. The growth rate of Indian forging and casting industry
is so fast that by 2016 Indian Industry will be world 7 largest manufacturers in all sections. The
Indian auto market is still untapped the majority of the people in country don’t own a four
wheeler and all the major auto companies are trying to increase their sales by several moves.

By the way Bharat Forge Ltd (BFL) are now concentrating not only the automobile
industry, they are trying in the area of relative diversification and non-relative diversification
such as power (electricity) which is proved to be the big money spender industry in terms of
volume and growth, due to the importance given by the government agencies to spend more on
infrastructure, and Power sector is one to be benefited, to which BFL have a Joint venture with
NTPC which is a India’s biggest power supplier and Alstom of France the world largest,
producer of electricity.

From the Technical Analysis i come to know that the share price of Bharat Forge Ltd,
will move in the Price band of band of Rs.301.39 to Rs.270.17 if you are looking for a long term
investment and if you are looking for a short term like 3 months then the price will move in the
range of Rs. 357.80 to Rs. 328.69. Also the share price through the trend line and the moving
average is on the uptrend, for long term considering 13 month period and as well as short term
for 3 months is also have uptrend, but off late it is on the stagnant trend line.

37
Security Analysis of Bharat Forge Limited

References

http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=132756
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=113335
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=113509
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=100493
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=100128
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=122285
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=122241
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=122241
http://money.livemint.com/IID64/F132527/Financial/Ratios/Company.aspx
http://money.livemint.com/IID42/F100493/QuickQuote/Company.aspx
Annual report of Bharat Forges ltd – 2008-09 & 2009-10
KJMC Research – on BFL 2008
Indiainfoline Research –on BFL march 2010
www.ibef.org
www.rbi.org.in
www.moneycontrol.com
www.nseindia.com
http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=INR
http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR
http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=INR
www.bharatforge.com
Investment analysis and Portfolio management – M.ranganathan & R.madhumathi
Investment analysis and Portfolio management – F.Reilly & K.Brown
CMIE – Prowess

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