Brokerage Reports

BHARAT FORGE

Religare Securities believes Bharat Forge valuations are attractive at current levels and has maintained a ‘Buy’ call on the stock with a target price of Rs 404 on a price to earning of 22.5x on FY09 estimate. This makes for an upside of 25 per cent to the current price of Rs 322.

Bharat Forge is currently trading at P/E of 17.9 times and EV/EBIDTA of 8.8 times 2008-09 estimate. The brokerage also valued the company on DCF, which yields a fair value of Rs 406 based on weighted average cost of capital of 13 per cent, beta of 1 per cent and terminal growth of 3 per cent.

The company will be incurring capital expenditure of Rs 330 crore during the current year and in 2008-09 to set up greenfield capacities for non-automotive foray at Pune, Mundwa and Baramati. Construction has already started and is expected to begin trial production in the first and second quarter of 2008-09 (April-March). It expects contribution from the non-automotive business to increase the consolidated revenue from 10 per cent to 17 per cent by end of 2009-10.

Bharat Forge has no immediate plans to increase the forging capacity catering to the automotive industry. The company will instead focus on improving productivity to meet the robust demand. The company’s standalone EBIDTA margin has declined, but has improved on consolidated basis.

It experienced a 150 basis points decline in standalone EBIDTA margin to 24.6 per cent in July-September quarter due to 28 per cent increase in expenditure. As a result, the company reported slower growth in EBIDTA at 18 per cent to Rs 140 crore.

However, the consolidated EBIDTA margin improved 40 basis points year on year and 320 bps quarter on quarter to 16.6 per cent in second quarter of 2007-08 due to high productivity in China operations. Thus, consolidated operating profit increased 11 per cent year on year to Rs 180 crore.

BOMBAY RAYON FASHIONS

Brokerage Prabhudas Lilladher has re-initiated coverage on Bombay Rayon Fashions with a ‘buy’ recommendation for target price of Rs 620. Bombay Rayon Fashions plans to invest Rs 1,100 crore over a span of three years in Maharashtra, to set up six manufacturing units, and this would quadruple and nearly double its fabric and garment manufacturing capacities.

The company has also signed an agreement with the Maharashtra government, to set up its fabric processing and garmenting units in the state. The brokerage expects this initiative to contribute about Rs 1,000 crore in revenue in 2009-10, expanding operating margin by about 500 basis points and net margin by 200 basis points.

Revenue is expected to grow at 73 per cent CAGR and earnings by 77 per cent over 2007-2010. With better government support and greater operational synergies, the company could witness margin expansion of about 740 basis points over 2008-10 estimate, says the brokerage.

At the current price, the stock is trading at 21.3 times, 11.6 times, 6.2 times 2007-08, 2008-09 and 2009-10 estimated earnings per share respectively. The brokerage has derived the target price of Rs 620 (93% upside), by assigning 2009-10 estimated earning per share, an estimate of Rs 51.8, a 12 times PER multiple.

Prabhudas Lilladher believes the true picture of company’s financials would only emerge in 2009-10, once the Maharashtra plans come on-stream.