Higher revenue visibility for long term.
Bharat Forge Ltd (BFL) is a leading player in the forgings industry. The company is serving several sectors including automobile, power, oil and gas, rail & marine, aerospace & defence, construction, mining, etc.
* Q3FY21 revenue declined by 6%YoY due to tepid market demand from the Oil & Gas sector. However, faster revival in both US & Europe truck market and strong rebound in domestic market offset further decline.
* Margin expanded to pre-covid levels at 16.1% owing to continuous restructuring and cost control measure.
* The Union budget’s focus on Infrastructure development along with vehicle scrappage policy bodes well, for both commercial vehicle and industrial sector growth in the medium term.
* Government’s initiative to enhance local manufacturing through the announcement of Production linked schemes (PLI) & mission of Atma Nirbharata in defense, has started opening new orders for BFL.
* Amid crisis, the demand visibility looks attractive on a medium basis for BFL, owing to the growth coming from the CV industry and defence sector and thus reiterate our Buy rating
Recovery in the commercial vehicle sector
Q3FY21 revenue declined by marginally -6%YoY due to tepid market demand from non auto export sector. The sector constitutes 60% and majority is oil and Gas. However faster revival in both US and European truck and strong rebound in the domestic truck market supported further decline. CV export grew by 7% YoY and domestic truck market by 49%YoY. Margin expanded by 440bps at 16.1% owing to continuous restructuring and cost control measure. We expect strong traction in Agriculture, Mining, Construction, defence and Railways. Additionally, with the gradual re-opening of the economy, revival of CV financing and improvement in the supply chain will support growth. There are certain element of exports that are impacted such as Oil & Gas and PV segment due to overall demand cycle. However, domestic passenger car and Industrial segment registered positive growth of 27%YoY and 16%YoY respectively.
Domestic defence procurement to benefit BFL Recently
BFL has bagged Rs178cr order from Defence ministry to manufacture Kalyani M4 vehicles and expected to induct further order going forward. Government’s initiative to enhance local manufacturing through the announcement of Production linked schemes (PLI) and mission of Atma Nirbharata are to open up new growth opportunities for BFL. Over the last few years BFL has invested in technology to transform from a component supplier to sub assembly defense system supplier. It has developed new platform such as Artillery guns, air defense systems and armored vehicles. Once the procurement begins on a large scale, the company will be able to supply these products on a Global basis. On the Aerospace the company has already set the target to reach 1000cr by FY2023 from current Rs400cr.
Newer initiatives to support long term growth
Market shift towards light weighting components for Electric vehicles, represents a considerable growth opportunity for BFL in coming years both in terms of top-line and margin. We expect the incremental revenue from new business/products to grow at double digit in the next 2 years. Sustained and meaning macroeconomics revival, pick up in infra projects, and roadmap for scrappage policy are the critical factors for growth in the CV Industry. We expect meaning full recovery in FY22 and factor revenue & PAT growth of 34%%.
BFL’s strategy to shift to new technological products and ramp-up in Aluminium forging in US & India for new product development are on track and will bring value migration per vehicle in the long run. Industrial export outlook looks challenging, but we believe that the company is well placed with new products in the domestic sector. We believe the demand visibility looks attractive and expect margin expansion owing to the growth coming from the defence sector and sustained recovery in the auto space. We value BFL on premium at 16x EV/ EBITDA on FY23E and reiterate our buy rating at CMP
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