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Beat on all fronts; maintain Buy

* Q1FY22 EBITDA margin expanded to 28.5% and came in above our estimate of 25%, thanks to better mix and inventory gains. Revenue stood at Rs13.7bn (est.: Rs12.8bn), above estimates, owing to higher-than-expected revenues in the Industrials segment.

* Our positive view on BHFC is underpinned by its leadership position in automotive forgings, focus on diversification and expected recovery in the core segments. Mediumterm performance should be aided by new segments such as Defense, Railways, Aerospace, E-mobility, and Light-weighting solutions.

* We build in robust revenue/earnings CAGRs of 21%/33% over FY22-24E, driven by cyclical recovery in the underlying Auto and Industrial segments in both domestic and overseas markets. Margins are likely to improve from 27.8% in FY22E to 30.7% in FY24E.

* Net debt/equity is expected to improve to -0.1x in FY24E from 0.1x in FY22E, led by average free cash generation of Rs14bn/yr. Retain Buy with a revised TP of Rs920 (Rs830 earlier), based on 27x P/E for standalone business on Sep’23E EPS (Mar’23E earlier).

What we like? Management commentary was positive: 1) It expects sequential revenue growth in Q2FY22, 2) Oil & Gas revenues stood at Rs1.5bn in Q1 vs. Rs450mn in Q4FY21. Expects revenue momentum to continue for the next few quarters. 3) Expects aluminum forging revenues for overseas subsidiaries to more than double in the next three years.

What we did not like? In the near term, production in the underlying global CV segment would be impacted by semi-conductor shortages. This has resulted in a cut in FY22E revenue estimates for the CV segment, which has been offset by the increase in revenue assumptions for Industrials

EBITDA margin above estimates: Considering the low base in Q1FY21, results have been compared with Q1FY20 (2-year CAGR). Revenue grew at 1% CAGR to Rs13.7bn, above the estimate of Rs12.8bn due to higher-than-expected revenues in Industrials. Tonnage declined at -6% CAGR, whereas realization saw 9% CAGR. EBITDA margin expanded to 28.5% (est.: 25%) from 26.1% in Q1FY20, above estimate on better mix and inventory gains. Consequently, adjusted PAT grew at 14% CAGR to Rs2.3bn, above the estimate of Rs1.8bn.

Retain Buy with a revised TP of Rs920, based on 27x P/E for the standalone business on Sep’23E EPS (Mar’23E EPS earlier). Key risks: 1) delay in recovery in domestic/export CV segments; 2) downturn in the industrial segments; 3) supply constraints at company and customer-end; and 4) adverse currency rates.

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