Whether a diversified business model is good or not is a debatable issue. But when we look at the performance of Bharat Forge in terms of financial parameters and performance on the bourses, Baba Kalyani led Bharat Forge certainly wins over the debate. This time our choice scrip recommendation is Pune based diversified business conglomerate Bharat Forge.

Let us take a look at the investment rationale on why we think that this scrip perfectly fits this column of recommendation of ours.

Bharat Forge is one of the global leaders in the metal forging space, serving sectors such as automotive, energy and utilities, construction and mining, wind energy to name a few. It has presence mainly in India, followed by the EU and the US. With mild recovery witnessed in the demand from target export markets in FY14, the management is of the belief that it is the turn of an all inclusive growth that the company is likely to witness from H2FY15. The recovery and the growth trajectory from the second half of the current fiscal is to be led by the domestic commercial vehicle (CV)cycle recovery, in addition to global key markets continuing to improve. On back of the overall entity operating at around 65 per cent utilization, there is visibility of limited capex need in FY15 and FY16. Thus, a major deleveraging and improvement in capital efficiency cannot be ruled out. Recovery in domestic CV and passenger vehicle cycle would be icing on the cake to drive consolidated free cash flow.

With increased demand, margin of the company is likely to remain at around 27 per cent for the next couple of fiscals. The improving machining mix is also likely to be a booster for the same. With margins currently at around 26 per cent, the risk of a stronger INR impacting margin will get mitigated by the positive factors mentioned above. The hiving off its Chinese JV stake with FAW would potentially boost consolidated margin by around 100 basis points. The JV was operating at nil margins, contributing around 12-15 per cent of consolidated revenue as against remaining foreign subsidiaries operating around margins of eight per cent.

The company has an ample scope to generate robust FCF to the extent of `700 crore per annum, as it would be operating at a maintenance capex of `300 crore per annum. This will make it a net cash entity by FY16 from 0.6x net debt-to-equity in FY13. The company is nicely placed to take care of the next capex cycle in terms of balance sheet health while reducing the risk of earnings getting impacted from any interest outgo. Going forward we believe the earnings are going to be robust and we recommend a buy with a price target of `670 for one year time horizon.