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Focus on accelerating growth, upgrade to BUY…

Bharat Forge (BFL) reported a robust performance in Q4FY21. Standalone revenues came in at | 1,307 crore (up 26.2% QoQ), amid 9.6% QoQ tonnage growth to 55,837 MT. Total India revenues were at | 565 crore (up 9.6% QoQ). Export revenues, on the other hand, were a real surprise and were up 42.9% QoQ to | 731 crore. Standalone EBITDA for the quarter was at | 359 crore, with consequent margins at 27.5%. EBITDA margins for the quarter were positively impacted by forex gains. Adjusting for this, margins were at 25.5%, up 300 bps QoQ. Standalone PAT was at | 205.5 crore.

All user industries indicating robust demand prospects…

Bharat Forge derives significant share of revenues from; (i) the global CV space i.e. US class 8 trucks (share of standalone revenues at ~30% in Q4FY21), (ii) domestic CV space (~17% of sales in Q4FY21), (iii) industrials (includes oil & gas space, ~29% of sales in Q4FY21) and (iv) PV segment (~18% of sales in Q4FY21).

With cyclical bottom already in place in the CV domain both domestic and global, crude price rising to ~US$70/barrel coupled with robust prospects in the PV space due to the impending need for personal mobility, all user segments indicate robust demand prospects in FY21-23E. This, coupled with BFL’s intent to grow its aluminium forging business (light weighting of vehicles) along with improved outlook in the defence space amid increased focus on indigenisation, we expect consolidated revenues to grow at 26% CAGR in FY21-23E. With a lean cost structure & operating leverage at play, margins are seen improving significantly, with standalone margins seen at ~30% by FY23E & consolidated margins seen at ~22% by FY23E.

Q4FY21 earnings conference call – highlights, key takeaways

BFL said: (i) cost pressure exists on raw material and freight costs (up 3-4x in the recent past), (ii) BFL has recently won an order from Government of India in the defence domain (non-automotive) wherein BFL will start supplying components in a month’s timeframe (quantum not disclosed); (iii) BFL will be acquiring land to the tune of ~70 hectares at Khed (Maharashtra, near Pune) at an outlay of ~| 240 crore (over the next two to three years) wherein they intend to construct two new plants in the domain of e-mobility and defence.

(iv) BFL will be targeting an RoCE of ~20%; (v) US-class 8 truck production is hampered by chip availability and is expected to get resolved in about two months; (vi) US class 8 truck production is seen at ~3 lakh units in CY21 vs. ~2.1 lakh units in CY20, (vii) on a standalone basis, it operated at ~55% utilisations level in Q4 with peak quarterly revenues pegged at ~| 2,000 crore, (viii) BFL will develop new family of products & platforms in the defence space & (ix) oil & gas space demand outlook is currently robust.

Valuation & Outlook

With improved demand outlook in all the user segments along with revived focus on accelerating growth, going forward, utilising surplus cash on b/s, we turn positive on BFL. We upgrade the stock from HOLD to BUY, valuing it at | 875 i.e. 35x P/E on FY23E EPS of | 25 (earlier target price | 670).

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