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Moderation in underlying industry growth outlook for CY23

* The demand outlook for CY22 provided by 23 global entities, including CV/PV OEMs, non-auto companies and industry associations, indicates tapering growth for forging companies. Weakening of the European and US economies does not bode too well for the HCV segment, which contributes over 25% to BHFC’s revenue.

* Constrained by flat GDP growth expectation, high finance cost and increasing operating costs, there is steep deterioration in the CY23 North America Class 8 production outlook to -6% (vs. +9% earlier), as per Americas Commercial Transportation. This downturn is likely to persist in CY24, with 8% drop in production, due to change in emission norms leading to notable price hikes of +15%. In comparison, India’s MHCV segment would see strong 28% growth in CY22.

* The global PV segment is likely to clock positive growth. The order book is healthy, but a muted H1CY22 and weakening macro outlook have led to reduction in growth expectations for CY22/23. The outlook for the industrial segments remains robust, owing to higher commodity prices and an upturn in the oil & gas segment, which is likely to see >35% growth in CY22.

* We retain HOLD on Bharat Forge with Sep-23 TP of Rs785, based on 24x Sep-24E EPS for standalone operations, factoring-in the limited upside potential and weak outlook for global CVs. Our valuation multiple is DCF based which also considers 15% premium for upside from nascent segments. Historically, valuation has been under pressure in global CV down-cycles.

HCV outlook moderates for CY23: Volvo, Daimler, Paccar, and Americas Commercial Transportation (ACT) expect the HCV segment in CY22 to grow by up to 17% (12% earlier) in North America and 8% (unchanged) in Europe, supported by pending order book and improving chip supplies. However, the weakening US economy has resulted in double-digit decline in freight volumes and freight rates in recent months (refer Exhibits 1 & 2). Volume outlook for CY23 Class 8 production has moderated to -6% (vs. +9% earlier). This downturn is expected to continue in CY24, with an 8% decline in production due to change in emission norms. Further, there are uncertainties on availability of gas. In comparison, India’s MHCV segment is likely to grow strongly, by 28% (unchanged) in CY22.

PV demand outlook positive, but growth has moderated: Volkswagen and Mercedes expect up to 10% growth (unchanged) in CY22 in their global businesses, driven by their pending order book. The order book remains healthy, but a weak H1CY22, higher finance cost, weakening economy and uncertainties on availability of gas have resulted in reduction in outlook by IHS Markit to 1%/8% from 5%/10% earlier for Europe and to 12%/9% from 13%/11% earlier for North America for CY22/23, respectively. Further, BMW has reduced volume-growth expectation, from being flat earlier to a slight decline now, for the global market.

Robust CY22 outlook for industrials: Volvo and John Deere expect the construction equipment (CE) and tractor segments to grow by 5-15% (earlier 5-20%) in the North America and Europe regions in CY22, driven by higher commodity prices and infra spends. ICEMA, ACE and Escorts expect positive growth for the CE and tractor segments in India in FY23. Though outlook for India is unchanged, it could be revised downwards due to slow construction activity, higher equipment prices and lower Kharif sowing. The North American oil & gas segment is expected to see a multiyear upcycle, with +35% (unchanged) growth in CY22, as per Halliburton. We retain HOLD, with Sep-23 TP of Rs785. Key upside risks: 1) Higher-than-expected growth in chief segments and geographies. 2) Strong order-wins in nascent segments. 3) Favorable commodity/currency rates

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