BF Investment Ltd was incorporated in 2009 by demerging the Investment Business of BF Utilities Ltd. by way of a Composite Scheme of Arrangement. Under the said business restructuring, Investment Business has been transferred to BF Investment Ltd.
BF Investment Ltd. (BFIL) is a part of the USD 2.5 billion Kalyani Group from Pune. Established in the mid-1960s, the Kalyani Group is an Indian multinational company working with advanced technology, engineering & manufacturing capability across industries such as Engineering Steel, Automotive, Industrial, Renewable Energy, Urban Infrastructure and Specialty Chemicals. The group is the market leader in forging globally and the largest exporter of forging from India. The Group Cos. include Bharat Forge, KCTI, Kalyani Technoforge, Kalyani Global, Automotive Axles, etc.
The main operations of the Company are that of investments and the majority of the investments of the Company are in the nature of strategic investments in Kalyani Group Companies. The investments have been made with a view to holding for the long term and are not held for trade.
Most of the value of BF Investment Ltd. lies in the holdings of 3 companies: Bharat Forge, Kalyani Steel and Automotive Axles. These percentage holding and market value of the investments is stated below.
1. Bharat Forge: The maximum value of B. F. Investment is derived from Bharat Forge (~75%). Bharat Forge is India’s largest manufacturer and exporter of auto components and is amongst the world’s leading powertrain and chassis components manufacturers. The company is also involved into defence sector. The defense arm offers artillery systems, protected vehicles, armoured vehicles upgrades, ammunition, air defense solutions and defense electronics publications. The defense segment recorded a growth of 280% between FY22 and FY24, driven by a robust order book. As of FY24, it has an executable order book of Rs. 5,192 Cr in the defense segment. In October 2024, KSSL partnered with US-based AM General & Mandus Group to co-develop and co-produce next-generation artillery platforms with advanced recoil technology for global markets. The company has 15 manufacturing locations spread across India, Germany, Sweden, France and North America with a capacity of: Steel Forging: 6,43,750 MTPA, Aluminium Casting: 52,400 MTPA, Iron Casting: 77,760 MTPA.
The company is expanding its defense capacity to manufacture over 250 guns and 1,000 vehicles per annum, the new plant will commence operations in Q3 FY25. It will invest Rs. 1,000 Cr on capex in FY25-FY26. One can refer to its Credit Rating Report to get a deeper understanding of Bharat Forge.
Here is the link - https://www.icra.in/Rationale/ShowRationaleReport/?Id=133577
Strengths of Bharat Forge:
1. India’s largest manufacturer and exporter of auto components and among the leading manufacturers of industrial components (power, oil & gas, defence & aerospace, construction & mining, rail & marine and general engineering applications).
2. Diversified revenue base with 64% of the consolidated revenue being derived from global markets/markets outside India.
3. Regarding the defence segment, the company has made progress in two areas – successful in passing all tests for ATAGS and production of Kalyani M4 armoured vehicle.
4. In the aerospace segment, the company aims to move from a component supplier to a sub-assembly supplier for global commercial aviation sector.
5. Robust order book.
6. The company is also having a wholly-owned subsidiary – Kalyani Powertrain Limited, engaged in the manufacturing of various components for EVs. This shows decent future outlook.
Weaknesses of Bharat Forge:
1. A large proportion of revenue (41%) comes from commercial vehicle and 55% being derived from the auto segment, thereby exposing the company to inherent cyclicality of the auto industry.
2. Random diversification Risk: The company acquired strategic stake in 2-wheeler-EV (Tork Motors), EV-CV (Tevva Motors) and controllers (Refu Drive).
3. The working capital intensity of the company remains high due to higher inventory (due to commodity inflation, the absolute inventory value was higher) and higher credit period for export receivables.
4. Underperformance in overseas subsidiaries, especially in the aluminium forging business, over the recent past, which has led to operating losses in the overseas subsidiaries and suppression of the overall consolidated operating margins.
5. Only 10-12% of consolidated revenue is at risk due to electrification (EV) in the automobile industry.
6. The company has raised net proceeds of ₹1619 crores (gross proceeds ₹1650 crores) through the QIP route in December 2024, of which around ₹1030 crores are likely to be utilized towards debt repayments and prepayments for the debt raised by its subsidiaries. The balance amount raised through the QIP route, will be utilized towards the acquisition of American Axles Manufacturing India Corporation Private Limited (AAM India), announced in November 2024 for a consideration of around ₹545 crores.
Two main things that can be highlighted is equity dilution and losses in US subsidiary. Doing 10 yrs. long term Cash Flow Analysis of the company also highlights this problem.
Totalling Rs. 2000 Cr. of FCF and Rs. 4000 Cr. of debt comes to be Rs. 6000 Cr. Bharat Forge has utilized it in following ways:
Despite being FCF of Rs. 2000 Cr. only company utilized Rs. 6000 Cr. of funds. This shows that dividend and investments are debt funded which is a key weakness. That’s the reason why the company has to opt for high debt (D/E > 1 till FY23), raise funds through equity dilution. How big the risk is in future?
Currently company has a debt of Rs. 6700 Cr. Considering 8% interest on these loans the annual interest payment comes out to be Rs. 536 Cr. Having operating profits of the company be Rs. 2562 Cr. the company can comfortably pay its interest obligations without defaulting.
1. Kalyani Steel: Kalyani Steel Ltd. (KSL) is a leading manufacturer of forging and engineering quality carbon and alloy steel, which caters to the requirements of various segments, viz., automotive, oil & gas, energy, bearings, seamless tubes, railways, etc. The company is a preferred steel supplier for engineering, automotive, seamless tube and primary aluminium industry used in the automobile and engineering industries. KSL has a state-of-the-art integrated manufacturing facility spread across 375 acres located at Hospet. The total installed capacity (Hospet Steels Limited) is around 7 lakh metric tonne per annum (MTPA). There is a strategic alliance between KSL and Mukand Limited (ML, part of the Bajaj group) where the manufacturing facilities are shared, with KSL holding 41.38% of the assets and ML holding the remaining. Kalyani Steel derives most of its revenue from group companies. Sales to group companies have constituted around 55-60% of net sales. For deeper understanding of Kalyani Steel, its strengths and weaknesses please refer this credit rating report -
https://www.careratings.com/upload/CompanyFiles/PR/202412141259_Kalyani_Steels_Limited.pdf
On financial front,
Totalling Rs. 900 Cr. of FCF and Rs. 200 Cr. of debt comes to be Rs. 1100 Cr. KSL has utilized it in following ways:
This shows that company doesn’t have to rely on outside funding or borrowing to manage its business expansion projects and dividend payout to shareholders.
1. Automotive Axles Ltd.: Incorporated in 1981, Automotive Axles Limited is a joint venture between MHVS USA and BFL, with the JV partners holding a 35.52% stake each. In February 2022, Cummins Inc. (rated Moody’s A2) acquired a 100% stake in Meritor, making AAL an indirect JV of Cummins Inc. AAL is the largest independent manufacturer of rear drive axle assemblies for CVs (primarily M&HCVs) in India at present. Its product portfolio includes a wide range of axles catering to haulage trucks, tippers, tractor trailers and other off-highway vehicles used for special purposes. The company also supplies drum and disc brake assemblies for trucks, trailers, buses and coaches and is the second largest brake manufacturer in India after Brakes India Private Limited. Its manufacturing plants are in Mysore (Karnataka), Pantnagar (Uttarakhand), Jamshedpur (Jharkhand) and Hosur (Tamil Nadu). For deeper understanding of Kalyani Steel, its strengths and weaknesses please refer this credit rating report – https://www.icra.in/Rationale/ShowRationaleReport/?Id=134134
On financial front,
Totalling Rs. 640 Cr. of FCF and Rs. 50 Cr. of debt repayment to be Rs. 600 Cr. Automotive Axles has utilized it in following ways:
This shows that company doesn’t have to rely on outside funding or borrowing to manage its business expansion and dividend payout to shareholders. Still, Automotive Axles is a relative weak business because more than half of its revenue comes from Ashok Leyland which exposes them with customer concentration risk and inherent cyclicality of commercial vehicle (CVs) segment.
Valuations
We rely on historical value to come up with the valuations. But in general norms it is said that holding company trades at a discount of 50-70% of investments.
At a glance it looks like buying below P/B value of 0.27 and selling above P/B value of 0.5 and till stock corrected 15% can give a +2x return.
Disclaimer: I am not a SEBI registered RA and IA. This report is just for educational purpose and don’t consider it as a recommendation.