Consolidated 3Q results beat our estimates by 12% on exports from India and margin expansion at international wholly-owned subsidiaries. Building in our Europe team's raised global sales volume outlook, we upgrade EPS 5-8% for FY11-13F and see sufficient capacity at low-cost India centre to drive profitability.

Good 3Q showing for parent and consolidated entity
Bharat Forge has reported strong growth in normalised PAT in 3QFY11, at 21% and 34% qoq for the parent and consolidated entity, respectively, and more than double yoy for both. The results beat our estimates by 18% for the parent and 12% for the consolidated entity – chiefly driven by 31.2% qoq growth in exports from India and a 240bp EBITDA margin expansion. Capacity utilisation remains healthy at 55% for India operations and below 50% for international plants. The new emissions standards for trucks appear to have had a lesser impact on Bharat Forge's domestic market supplies than on industry volumes overall.

We upgrade EPS on good results and our raised global auto sales volume forecasts
Our European autos team recently raised its CY11 global sales volume outlook by 15% on trucks and 5% on cars, driven by South America and Asia. Given Bharat Forge's dominant position as a forging component supplier in the global truck market, we feel it is very well placed to benefit from a strong uptrend in industry sales. Incorporating this, the improving capacity utilisation at the new non-automobile forging plant and the 3Q results surprise, we raise our EPS forecasts 8.3% for FY11 and 6.3% for FY12. We think the likely strong recovery in US heavy truck industry sales will extend Bharat Forge's impressive profit leverage as it services this market from its highly profitable India plant.

Buy rating and TP unchanged; higher WACC erodes upside from EPS revisions
We think the company's sufficient capacity in hand and low utilisation improve its ability to benefit from global auto demand, especially at US customers. Given our 24.7% EPS FY11- 13F CAGR at the consolidated level and medium-term power JV potential (we assign no value), we feel the current share price is attractive with 20% upside potential. We see the business's high entry barriers and capital-intensity justifying premium PE valuations for the stock (21.4x FY12F). We reiterate our Buy rating and maintain our Rs423 TP with upside from our EPS revisions (5-8%) eroded by a higher WACC due to a rise in our risk-free rate.