Bharat Forge is attempting to combat slowdown in the US and in the domestic automotive industries by focusing on Europe and entering non-automotive supplies.

Shareholders can continue to stay invested in the Bharat Forge stock. Fresh exposures need not be considered at this point in time as the company is faced with the twin challenges of a slowdown in the US commercial vehicles industry and a pause in the domestic auto industry’s growth. But the company’s conscious efforts to de-risk its exports business and the foray into the non-automotive sector hold promise over the long term, suggesting that investors need not part with their holdings in the stock. At the current market price of Rs 276, the stock trades at around 15 times estimated consolidated earnings for 2010.

De-risking of export business

To weather the US slowdown, the company has adopted a two-fold strategy. One, it has reduced the export of heavy truck chassis components and has instead concentrated on the supply of passenger car components. From about 50 per cent of the total exports in 2006-07, the export of truck components has come down to around 38 per cent this year while passenger car component exports have increased by about 10 percentage points during the same period. Two, the company has focused on increasing its Europe business. For the year-ended March 2008, exports to Europe constituted almost half the total exports as against 31 per cent the previous year.

Non-automotive foray

In a bid to diversify client base and shield their businesses from cyclicality in the automotive industry, several auto component makers are diversifying by supplying to sectors outside of automobiles. This entails high-value products that also bring in better margins. Bharat Forge has moved into forging and machining of high-value parts required for the oil and gas, Railways, aerospace and Defence sectors.

The company has recently ventured into the capital goods sector as well. This February, it entered into a joint venture with NTPC (National Thermal Power Corporation) to manufacture forgings, castings, fittings and high-pressure pipings required for power and other industries. It plans to invest Rs 200 crore initially in this joint venture which will also look at manufacturing power plant equipment in the near future. Non-auto components business currently contributes around 20 per cent to the revenues but the company plans to double that by 2012.

To serve this end, the company is setting up plants at Baramati and Pune which are expected to commence production in the second half of the current financial year. To fund this expansion into the non-auto segment, Bharat Forge is also considering a rights issue of non-convertible debentures with detachable warrants for Rs 400 crore. They are also looking at acquiring small and medium companies in the non-auto space.

Financials

On a standalone basis, net sales grew by 12.3 per cent year on year to Rs 580 crore during the fourth quarter, backed by a 23 per cent growth in exports.

Net profits, however, fell 18 per cent to Rs 52.5 crore after excluding extra-ordinary income (profit) of Rs 30.3 crore arising from the consolidation of its overseas operations (excluding Bharat Forge America) into one company, CDP Bharat Forge. The bottomline has been hit by a Rs 15.8 crore foreign exchange loss on restatement of its foreign currency debt.

Subsidiaries underperform

The company’s fully-owned subsidiaries registered a 4 per cent decline in sales in the fourth quarter. Net profits too fell by about 30 per cent compared to the same period last year. This can be attributed partly to the subdued performance from Bharat Forge America, which has been hit by the slowdown in US truck sales. Operating margins for the subsidiaries too are at a thin 7.2 per cent, which the company aims to improve to 12 per cent in the next two-three years.

To achieve this, it has embarked on a process of product rationalisation to pull out low-margin products and change product lines, if necessary. This exercise will help improve margins, but low synergies with the parent company and operations in mature markets such as the US and Europe may pose challenges to a significant improvement in their performance in the immediate future. Revenue growth for the subsidiaries have so far been lacklustre and earnings have not gained traction since they were acquired, beginning 2004.

But a marked shift to the Europe geography and, hence, the access to a wider clientele indicate that subsidiary earnings may improve in the medium term.This, along with the revenue flows expected from the non-automotive business, make the stock worth holding on to in the castings and forgings space.

Source: http://www.thehindubusinessline.com/iw/2008/05/25/stories/2008052550671100.htm

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GM Discloses Strike's Hit to Production

General Motors(GM - Cramer's Take - Stockpickr) shares slipped Friday after the automaker said a three-month strike by the United Auto Workers at American Axle & Manufacturing Holdings (AXL - Cramer's Take - Stockpickr) significantly hurt its production in the second quarter.

The UAW said it had ratified a new labor agreement with auto components and systems maker American Axle. The strike began in February, when about 3,650 employees represented by the UAW went on strike at the plants in New York and Michigan. GM disclosed the strike resulted in lost production of 230,000 vehicles, an impact of roughly $1.8 billion on second-quarter pretax earnings. In a regulatory filing, GM said the work stoppage had affected approximately 30 plants in North America. In the first quarter, GM said the strike resulted in a loss of 100,000 production units, which had an estimated impact on earnings before tax of approximately $800 million

"We anticipate only a portion of this lost production will be recovered, due to the current economic environment in the United States and to the market shift away from the types of vehicles that were impacted by the action at American Axle," GM said in the filing. Shares of the automaker were recently down 60 cents, or 3.3%, to $17.83.

In American Axle's first-quarter earnings report, the company said production volumes for the full-size truck and SUV programs for GM and Chrysler were down approximately 31% in the quarter as compared to the prior year. Additionally, GM said it would offer $215 million to American Axle to fund employee buyouts and early retirements, which is $15 million more than the automaker originally said it would provide. Shares of American Axle were falling 44 cents, or 2.3%, to $18.81. Among other auto parts makers, Lear LEA was off 1.8%, Visteon VC was down 1.9%, ArvinMeritor ARM slid 3.1% and Dana Holding DAN was falling 2.8%.

The news comes a day after GM rival Ford F said it will increase production of smaller, hotter-selling vehicles while cutting back on gas-guzzling SUVs and large trucks as consumers "move quickly" to more fuel-efficient vehicles. The company also said it would cut overall production of vehicles for the rest of the year, which will impact its earlier forecast of returning to the black in 2009. After falling 8.2% during Thursday's session, shares of Ford were down another 4.3% to $6.85 on Friday

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M&M evaluating majority stake in Kinetic Motors

Though a US-based private equity fund has already completed the due diligence at Kinetic Motor Company (KMC) and evaluated it in the region of Rs 125 crore, a source close to the development says that it is Mahindra and Mahindra (M&M) which is currently assessing the deal to acquire a majority stake, which has the preferred suitor status.

The reason, the source says, is that the promoter Firodia family is not looking at mere fund infusion, but wants to exit from active management of the two-wheeler business, and retain involvement only at the board level. The entry of a strategic partner with financial muscle will help them keep the brand alive and also “release bandwidth” to allow them to concentrate on their other businesses.

One of the options that the Firodias had hoped for was that its minority partner Taiwan-based Sanyang Industry Company Ltd (SYM), which today holds 11.1 per cent stake, would make further investments in KMC. However, SYM has recently invested nearly $50 million in setting up a car manufacturing unit in Vietnam, and was willing to invest a maximum of $10 million more here.

Following due diligence, the PE fund cobbled an offer that involved investment of $20 million by them, SYM to bring in $10 million and the promoters requiring to raise another $10 million (Rs 40 crore). According to the source, the promoters, who currently have already pumped in around Rs 50 crore in the last two years, are reluctant to make any further investments as they believe it could yield better returns elsewhere.

This makes M&M the preferred suitor as it can bring in the necessary working capital, clear around Rs 60 crore of long-term debt and also invest year-on-year in development and marketing of products which include SYM’s second scooter that is ready for launch, and a second model from Italjet SpA that has been developed.

KMC’s current installed capacity at its Pithampur two-wheeler facility is 2.5 lakh units that can be ramped up to 4 lakh, if required. The present production is around 80,000 units annually. Should the M&M deal go through, SYM will remain as a technical partner. Apart from Kinetic Engineering which manufactures power trains and transmissions, other group companies include Jaya Hind Taigene, a 50:50 joint venture with the Taiwanese company that makes auto components such as motors and starters, and a 50:50 JV with Ducati that makes electrical co

Source: http://www.thehindubusinessline.com/2008/05/24/stories/2008052451580200.htmmponents.

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Brazil's auto industry cruises as economy booms

The U.S. auto market may be flagging, but some customers in Brazil have to wait up to three months to get a car. "If they want it, they have to wait," said Ricardo di Pace, a salesman at the Marcas Famosas Volkswagen dealer in Sao Paulo. "People have more money, and lots are using it to buy their first new cars." Brazil's auto industry is enjoying another banner year, piggy-backing on a booming economy. Car sales and output are surging to one record after another. Last month, sales in Latin America's largest country jumped to an all-time high of 244,200 vehicles, while output soared 34.4 percent to 300,600, according to Anfavea, the national automakers association. By contrast, U.S. auto sales are on track to drop as much as 7 percent this year to 15 million vehicles.

Many manufacturers in Brazil are expanding by hiring more employees and opening new factories. Ford Motor Co (F.N: Quote, Profile, Research) was ahead of the curve when it opened a $1.9 billion plant in the northeastern part of the country in 2002. Today, the state-of-the-art facility ensures nearly constant production with three shifts six days a week. General Motors Corp (GM.N: Quote, Profile, Research) followed suit last month by adding a third shift at its Sao Caetano plant on the outskirts of Sao Paulo, hiring an additional 1,500 employees. It is also investing $200 million to build a new engine and auto components plant in southern Brazil. The top U.S. automaker continues to struggle with a home market besieged by a housing and credit crisis. But its Brazilian operation returned to profitability in 2006 and is now doing so well that it is sending dividends back home. "This is the fruit of investment and a lot of creativity from our local staff, our providers and our network of vendors," Fritz Henderson, president of GM's global operations, said at a news conference in Brazil on Monday

Credit Expansion

Optimism is high as the country continues to enjoy an economic revival that has helped lift an estimated 20 million Brazilians from poverty. A sharp drop in interest rates in recent years has also led to a credit boom, driving up sales of everything from cars to real estate. To keep up with red-hot demand, the auto industry is expected to invest $5 billion in 2008, according to Anfavea. That should increase annual production capacity by nearly 9 percent, to 3.8 million vehicles from 3.5 million.Sales are also surging because of longer finance plans. Five years is the industry norm in Brazil, although Ford in 2007 introduced payment terms of as long as seven years.

"The increase in payment plans allowed companies to reach more buyers," said Joel Leite, director of Auto Informe, a Web site that focuses on the Brazilian auto industry. These new buyers -- many from the emerging middle-class -- are propelling sales of roomier luxury vehicles once considered too expensive for the average Brazilian. "Today you can buy a larger car for the same monthly payment as a compact two or three years ago," Leite said. Even the recent surge in oil prices is unlikely to put the brakes on Brazil's auto market. Almost 90 percent of all new cars sold in the country are equipped with flex-fuel engines, which run on either gasoline or cane-based ethanol. Some automakers, like Volkswagen (VOWG.DE: Quote, Profile, Research), are even phasing out the production of gasoline-only cars in Brazil, betting that the ethanol craze is here to stay.

"If you don't have flex cars, then you will have a very difficult time selling anything," said salesman Pace. However, some wonder about future demand as more people become car owners. Analyst Guido Vildozo of U.S.-based consulting firm Global Insight said he was worried that the current sales pace and production boom would slow in the next two years. Many of today's sales are "fleet" vehicles that rental agencies and other companies purchase in large numbers at a low price, he said. "Fleet sales are always very risky," Vildozo said, "because they are robust when the market is strong, but not as robust when the market isn't strong."

Source: http://www.reuters.com/article/latestCrisis/idUSN23173283

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Hero Electric to work on making batteries cheaper

It is great to bike around for just 10 paise per km, but then, in this world, nothing comes without a downside.

Battery powered scooters are in—Hero, TVS, Ultra Motors have all launched their products and there are other wannabes too. The products appear great for short distance, low speed commuting, but with at least one headache—you may have to replace the battery once a year.

The cost of the battery is inexorably dependent upon the international prices of lead. Last year, a battery for a low-speed electric scooter cost around Rs 3,000. Now, it is Rs 7,000. The Indian market for these products is at its infancy. Last year, in India 7.2 million two-wheelers were sold, but only 100,000 of them were electric scooters. The cost of the battery is then an issue to reckon with for the manufacturers.

Hero Electric is doing something about it, says the company’s Managing Director, Mr Naveen Munjal. At a press conference here today, he spoke of Hero Electric “subsidising” the batteries, but only said it was working on the mechanism for it. He said that getting batteries recycled was one option. Getting the government abolish the customs duty (10 per cent basic plus CVD) would help get the prices down further. When volumes increase, Hero would be able to source batteries cheaper.

“It is not a major issue,” Mr Munjal said, comparing life time ownership costs of an electric scooter and a regular scooter. Hero Electric (today a division of Hero Exports, but to be hived off into a separate company soon) sold 21,000 vehicles last year for about Rs 60 crore. This year, it targets to sell 70,000. At present, Hero produces the chassis and most of the mechanicals and it buys a few other items such as lamps and tyres locally. Only the electricals—comprising motor, controller, battery and charger—are imported.

Over time, the company would invest in the manufacture of all the electricals, except the batteries. Hero is in talks with all the major Indian automotive battery manufacturers to get the products made in India. The battery companies are interested, but again, the issue is one of volumes.

Products launched

Today, Hero Electric launched its products, Maxi and Optima, in Chennai. Both are low speed vehicles—they do not need registration or suffer road tax (as opposed to high speed vehicles, which do). They can run a maximum of 25 km an hour. The battery takes six hours to charge and can drive the vehicle for 70 km. The battery will last some 300 charges. The vehicles are priced around Rs 30,000. Mr Munjal said that Hero Electric would look at setting up a manufacturing facility in the South next year.

Source: http://www.blonnet.com/2008/05/14/stories/2008051451000300.htm

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Fiat plans to source auto components

Italian automobile manufacturer Fiat on Wednesday said it will source auto parts from India worth 250 million euro (about Rs 1,595 crore) by 2010, which will be more than eight times the present 30 million euro. "We will source auto parts worth a minimum of 250 million euro from India by 2010," Fiat Group Purchasing CEO Gianni Coda said. The sourcing would be carried out for the company's auto manufacturing plants in Europe, Brazil and North America, he said. Auto parts in India would be about 10-15% cheaper. The decision would also help the company broadbase its global market for sourcing.

http://timesofindia.indiatimes.com/Business/India_Business/Fiat_plans_to_source_auto_components/articleshow/3019785.cms

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Suzlon: Positive energy

The wind turbine maker has leveraged the strong demand to post a good top line growth but operating profit margins have fallen.

The Suzlon stock rose 3 per cent to Rs 318 on Tuesday with the management indicating that it might sell a part of its 34 per cent stake in RePower Systems that it had bought in May 2007.The share price of RePower is now at euro 234 levels up 56 per cent from the price of euro 150 per share at which Suzlon had bought the stake.

Since Suzlon will be buying out shareholders Areva and Martifer within a year, it has already lined up a syndicated euro loan. However, a sale from the existing shareholding, would mean an inflow of funds into the company, and ease the interest burden.

A back of the envelope calculation shows that Suzlon would need to pay around euro 700 million to acquire the combined 53 per cent stake from Areva and Martifer at a price of euro 150 per cent, though the exact price is yet to be decided. Investors are also relieved that no further provisions are being made for the retrofitting of turbine blades. The company has so far taken a hit of around Rs 120 crore for repairing about 65 faulty blades.

While the numbers are not strictly comparable, the Rs 13,679 crore Suzlon's operating profit margin (opm) was down 220 basis points to 14 per cent in the year FY07-08 although the top line grew a fairly strong 71per cent. With demand both in the US and China remaining strong, Suzlon was able to increase installations by 44 per cent in the March 2008 quarter, which boosted sales. However, volumes were not as high as anticipated and that together with the higher cost of steel as also the appreciation of the rupee, put pressure on the margins.

The expenses of Rs 120 crore, relating to cracked blades ,dented the net profit which grew just 19 per cent to Rs 1030 crore. Suzlon's top line growth will continue to be strong given the growing demand: its order book is robust at Rs 18, 000 crore and the company is adding capacity both in Belgium and China. However, margins could remain under pressure. At 28.3 times estimated FY 09 earnings, the stock prices in near term upsides.

Bharat Forge: Automotive blues

The slowdown in the automobile markets both in the US and at home has impacted top line numbers for Bharat Forge with revenues for the March 2008 quarter up just over 12 per cent. That pulled down the growth in stand-alone revenues for FY08 to about 17 per cent, with the 8 per cent appreciation of the rupee also hurting the top line of India's biggest auto component player by about Rs 90 crore.

The USA accounts for about 50 per cent of the company's exports, which, in the March quarter grew just 28 per cent in rupee terms but by a higher 40 per cent in dollar terms. While sales to the commercial vehicles sector suffered ,the company made up for it by selling more to passenger car makers and also by stepping up sales of non-auto components. In the home market, the Pune-headquartered firm has managed to increase market share with customers such as Tata Motors. For some time now, Bharat Forge has been attempting to de-risk its business model by catering for both commercial vehicles as also passenger cars. It is also selling to clients across more geographies—for instance Europe now accounts for about 45 per cent of exports. Moreover, it is making big investments in non-auto components.

The company has made several acquisitions overseas with a view to acquiring clients and the management says it will continue to pursue inorganic growth, because that has helped the growth of exports from India.
The performance of its overseas subsidiaries, however, remains below expectations and consolidated net profits for FY08 are virtually flat at Rs 291 crore. Consolidated revenues for FY09 are expected to be about Rs 5,200 crore with net profits estimated at Rs 375 crore. The stock lost about a per cent on Tuesday and at Rs 296, the trades at about 20 times estimated FY09 earnings. The proposed rights issue could leave the stock languishing for some time.

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Import from China may hit Indian auto component industry

BL reported that despite a huge surge of 70% YoY in imports of auto components at INR 2,200 crore in 2007-08, Indian auto components industry is not alarmed as auto majors have a perception of inferior quality form Chinese units and as such it accounts for just about 3% of total business size of INR 70,000 crores.

The report said that “Chinese threat is today referred to as something lurking on the horizon, something to be alert about, but nothing that causes a loss of sleep. OEMs use the ‘China factor’ as a stick to beat their vendors into price reduction or at least as a deterrent against demands for price increases.”

But Industry associations have taken a hard line against imports from China. Mr Vishnu Mathur ED of Automotive Components Manufacturers Association said that sourcing by Indian OEMs is based mostly on price arbitrage, which is artificial because often the Chinese products come at a price less than the raw material costs of Indian manufacturers. He said that “If it is a fair competition, we have no issues. If the OEMs import from China, what will happen to component manufacturers who have created capacities, based on long term supply chain commitments?”

Just as the components industry is alert against imports, OEMs are always on the lookout for what best they could buy from China. Even the public sector BEML recently opened a purchase office in Shanghai.

 

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