Emkay - Bharat Forge

We see BFL as one of the major beneficiaries of the automotive component outsourcing boom from India in the next five years. We expect overall domestic auto demand to remain weak in H1FY08E and it would impact the domestic revenue
growth of BFL in FY08E. But we believe BFL to do well on export front and incremental
capacity would play a major role in it and due to it we are downgrading our FY08E
estimates downward and introducing the FY09E estimates as follows. But we believe
FY09E will be a remarkable year for BFL mainly due to ramp of non-auto business
which enjoys higher margins compared to traditional auto business.
We believe still BFL has enough scope to improve its EBITDA margins on a
consolidated basis. The management has guided to improve the margins of subsidiaries from 9% currently to 14% in the long term. Apart from it we also expect BFL to get price hikes on its products mainly due to rising raw material costs and we expect BFL to improve its EBITDA margins on a year-on-year basis for next two years.

We believe, considering BFL’s strong domestic market share, and strong export visibility plans going ahead over the next 2 years make us feel that the best is yet to come from BFL.

The BFL stock currently trades at 20x FY08E and 14x FY09E. We maintain a positive
outlook on the BFL stock and recommend a BUY with a target price of Rs 416.