We Initiate Buy on Bharat Forge in the range of with a price target of The stock slips consistently from higher levels and expected to take a strong support at Being [ ] 61% retracement levels, fundamentals of the stock remains positive & its advisable to initiate buy in the above mentioned remains positive & its advisable to initiate buy in the above mentioned levels. levels. Bharat Forge Recommendation: BUY Author: VENKATARAMAN & CO.,

June 2007 quarter profit impacted by rupee appreciation Bharat Forge's quarterly results were well below our expectations as rupee appreciation vs the US$ distorted operating performance, though gains on foreign currency commercial borrowings (FCCBs) saved the day. Stand-alone reported PAT grew 25.8% yoy to Rs648m, but excluding the Rs333m FCCB gains, normalised PAT dropped 30.4% to Rs429m. EBITDA margin declined 5.2ppt to 20.4%, leading to a 5.7% drop in EBITDA to Rs1.01bn despite 18% growth in net sales to Rs4.97bn. Similarly, consolidated reported PAT rose 9.2% to Rs804m, while normalised PAT fell 39.7% to Rs471m with 7.5% growth in net sales to Rs10.6bn. Exports ramped up in a tough Rs/USD environment The sharp capacity ramp-up for the stand-alone entity began to deliver impressive gains from the June 2007 quarter in the form of export sales growth (31.5% yoy). The car engine components ramp-up for the US and Europe has been driving growth, while US chassis has been on a cyclical downturn. Actual growth was much higher at 42.5% yoy, but was affected by an 8% rupee appreciation in the last quarter. Bharat Forge

Earnings model shifted to represent consolidated numbers We shift to consolidated numbers with the availability of the consolidated entity's financial performance on a quarterly basis and the inclusion of the Chinese subsidiary since March The sales ramp-up in subsidiaries within months of acquisition was better than expected in FY07. However, we trim our consolidated EPS forecasts by over 35% each for FY08/FY09 to Rs12.6/Rs16, reflecting the potential currency impact on the standalone entity's EPS Worst appears to be in the price; Buy maintained Bharat Forge has underperfomed the market by 30% in the last 12 months. The currency impact on profitability is more of an accounting treatment, though the strategy of hedging through FCCBs should pay dividends in the long run in terms of cash flow. We expect Bharat Forge to emerge a winner in the medium term, with growth momentum maintained from new export programmes to automobile OEs and non-auto components. We shift to a three-stage DCF valuation and peg the target price at Rs332 (from Rs401), ie 20.8x our FY09F EPS. Bharat Forge

  Despite a tough external scenario ie, weakness in Indian and US M&HCV demand, and a sharp rupee appreciation (against the US dollar), Bharat Forge standalone recorded impressive 18.1% yoy growth in net sales to Rs4.97bn in the June quarter. Adjusting for a Rs187m revenue loss due to currency fluctuation, net sales were Rs5.16bn, up 22.6% yoy and flattish qoq. The sharp ramp-up in heavy duty crank-shafts and non-auto sales to the US and Europe helped soften the impact of a slide in US chassis component sales in the quarter. Capacity utilisation rates were flattish qoq.   The Indian entity’s exports increased by a robust 31.5% yoy and 11.5% qoq to Rs2.24bn despite the steep rupee appreciation. Similarly, domestic sales growth of 9.1% yoy to Rs2.7bn was better than the weakness apparent in its customers' domestic OEM sales volumes. However, subsidiary sales performance (excluding the Chinese JV) was flattish yoy at Rs5.65bn as the rupee appreciation of around 8% ate into growth. Bharat Forge

Sales

Product and country diversification helped maintain sales growth The well planned diversification strategy to build a stable business model that can withstand cyclicality of different product lines in different regions has been delivering excellent results, in our view. Sales continued on a growth path notwithstanding sharp weaknesses in China earlier and in US heavy-truck sales in FY07. This was achieved through a sharp ramp-up in supplies, especially car components, to the US and Europe. Sales - Segmental

Earnings Revision

Bharat Forge

Disclaimer (The above information and opinion is compiled from sources believed to be reliable and provided in good faith. These are subject to change without notice. This note is not and should not be construed to as, an offer to sell or a solicitation of an offer to buy any securities. The author and/or the company or its associates may or may not have positions in the above mentioned scrips and this may change from time to time. Trading and investing in stock markets involve risk of financial loss and it is recommended that you consult an investment professional for your decisions. It is strongly recommended that stop loss be followed to protect from undue risk. This report is exclusively for the clients of Venkataraman & Co. only.) VENKATARAMAN & CO., Stock & Share Brokers New No.2 (Old No.52) Dr. Ranga Road, Mylapore, Chennai Web: