Expect recovery from H2FY21; Retain Buy
* Q1FY21 results were weak, but above estimates. Revenue declined 68% yoy to Rs4.3bn (est.: Rs4.1bn), led by a decline of 70%/66% in domestic/export segments. Led by low scale, EBITDA margin contracted from 26.1% in Q1FY20 to 0.4% in Q1FY21 (est.: -0.3%).
* Q2FY21 domestic revenues are expected to be better, with flat growth yoy, owing to pickup in PV and Industrial segments. Led by gradual improvement in domestic and overseas CV segments, we expect total revenue growth to turn positive in H2FY21.
* Our positive view is underpinned on BHFC’s leadership position in automotive forgings, focus on diversification and expected recovery in the core segments. Medium-term performance will be also aided by high-potential segments such as Defense, Railways, Aerospace and Aluminum parts.
* We expect revenue/earnings CAGRs at 11%/25% over FY20-23E. We retain Buy with a revised TP of Rs537, based on 25x P/E for the standalone business on Sep’22E (20x Mar’22E earlier). We apply a higher multiple on the improved demand outlook.
What we like? Segments such as Domestic Tractors, Domestic & Global PVs, Overseas Construction & Mining and other Industrial segments are showing signs of recovery. Also, North America Class 8 truck orders have turned positive in recent months (orders generally translate into production with lag of 2-3 quarters). Moreover, the implementation of a ban on defense items should result in higher procurement from domestic players such as BHFC.
What we did not like? Margin performance was weak in Q1FY21 across India and overseas businesses owing to low scale. Margins are likely to improve ahead, supported by a gradual recovery in core segments.
Weak results but above estimates: Revenues declined 68% yoy to Rs4.3bn (est.: Rs4.1bn), led by a decline of 70%/66% in domestic/export segments. Led by lower scale, EBITDA margin contracted from 26.1% in Q1FY20 to 0.4% in Q1FY21 (est.: -0.3%). Earnings declined from Rs1.8bn in Q1FY20 to a loss of Rs518mn (est.: -Rs676mn), better than estimates, owing to lower depreciation and interest expenses
Outlook and valuation: We increase FY21E EPS estimate by 13% to Rs8, led by higher revenue and margin assumptions. BHFC’s leadership position in automotive forgings, focus on diversification and expected cyclical recovery in the core segments support our positive view. We expect a gradual recovery in major segments by H2FY21, led by low base, new products, addition of new customers and gradual pickup in economic activity. In addition, there is significant growth potential for nascent segments such as Defense, Aerospace and Railways over the medium term. We retain OW stance in EAP and Buy rating with a revised TP of Rs537, based on 25x P/E for the standalone business on Sep’22E (20x Mar’22E earlier). Key risks include: 1) delay in recovery in domestic/North America CV segments; 2) downturn in the industrial segments; and 3) adverse currency rates.
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