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Bharat Gears Equity Research

HomeCompanyBharat Gears Equity Research

Date of Research – 13 January 2016

Price – Rs. 84.50

About the Company

Founded in 1971, Bharat Gears Limited (“Bharat Gears” or the “Company”) is one of the leading players in the automotive gears space in the country. The Company was promoted by Bharat Steel Tubes and Raunaq & Company in collaboration with ZF Friedrichshafen, Germany, in 1971 to manufacture automotive gears. BGL manufactures a range of gears for tractors, commercial vehicles, buses, and utility vehicles. The Company’s product profile includes a range of hypoid and spiral gears, differential gears and shafts, complete automotive transmissions, gearbox sub-assemblies, and differential assemblies; it also designs and commissions heat treatment furnaces.

Headquartered in Mumbai, Bharat Gears has two manufacturing plants located at Mumbra (Mumbai) and Faridabad (Haryana) — having a total installed capacity of 5.2 million gears per annum. BGL is currently undertaking a debt funded capex of Rs.580 million in 2012-13 towards increasing its manufacturing capacity and modernization of its existing facility. The Company is setting up its third facility at Satara in Maharashtra at an investment of Rs. 65 crores in 3 phases financed through debt and internal accruals.

The main customers of Bharat Gears are original equipment manufacturers (OEMs) in the tractor and commercial vehicle (CV) industry and include Tata Motors, Mahindra & Mahindra, Ashok Leyland, TAFE, Escorts, VST Tillers & Tractors, John Deere, New Holland Tractors, Carraro India, JCB among others.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 392.62 419.87 414.89 397.48  406.78 
Expenses 364.67 394.35 393.11 366.84  378.22  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 27.95 25.52 21.78 30.64  28.56  
Depreciation 11.55 13.72 13.95 16.50  16.68  
Finance Costs 11.65 14.49 16.35 16.16  14.80  
Other income 2.70 3.29 2.09 2.54  0.96  
PBT 7.45 0.60 (6.43) 0.52  (1.96) 
Tax 2.48 (2.22) 0.28  (0.70) 
PAT (before Minority Interest and share of Associates) 4.97 0.60 (4.21) 0.24  (1.26) 

Profitability Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 7.12 6.08 5.25 7.71  7.02 
Net Profit Margin Ratio 1.27 0.14 (1.01) 0.06  (0.31) 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 7.82 7.82 7.82 7.82 7.82
Reserves & Surplus 65.22 68.43 68.03 62.86 63.10
Net worth (shareholders funds) 73.04 76.25 75.85 70.68 70.92
Long term borrowings 26.08 34.65 61.46 48.88 51.43
Current liabilities 135.29 138.77 136.33 158.88 130.77
Other long term liabilities and provisions 14.84 16.50 15.40 16.90 15.08
Deferred Tax Liabilities 2.07
Total Liabilities 249.25 266.17 291.11 295.34 268.20

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 96.43 116.07 138.74 130.46 118.43
Current assets 145.98 143.51 144.54 155.82 141.16
Long term advances and other noncurrent assets 6.84 6.60 7.82 8.51 8.20
Deferred tax assets 0.41
Total assets 249.25 266.17 291.11 295.34 268.20

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 44.74 25.20 18.59 18.22 25.04
ROE / RONW 25.45 6.52 0.79 (5.96) 0.34

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 392.62 419.87 414.89 397.48  406.78 
Growth (%) (8.81 %) 6.94 % (1.19 %) (4.20 %)  2.34 %
PAT (Rs. Cr.) 4.97 0.60 (4.21) 0.24  (1.26) 
Growth (%) (73.27 %) (87.93 %) (801.67 %) 105.70 %  (1.50 %)
Earnings Per Share – Basic (Rs. ) 6.35 0.76 (5.38) 0.31  (1.61) 
Earning Per Share – Diluted (Rs. ) 6.35 0.76 (5.38) 0.31  (1.61)
Price to Earnings 6.01 51.71 203.06  – 

Dividend History

The Company has maintained an average dividend yield of 2.23 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Bharat Gear’s average current ratio over the last 5 financial years has been 1.03 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations).

Bharat Gear’s average long term debt to equity ratio over the last 5 financial years has been 0.53 times which indicates that the Company operates with a low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations).

Bharat Gear’s average interest coverage ratio over the last 5 financial years has been 2.56 times which indicates that the Company can meet its debt obligations and generate sufficient returns for its shareholders).

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Bharat Gears reported a promoter holding of 52.98 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors. Institutional holding in the Company stood at 0.15% (FII+DII).

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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