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Robust performance; Improvement in international profitability on track

In 1QFY24, Bharat Forge (BHFC) reported standalone EBITDAM of 25.8% (+110bps YoY, +140bps QoQ), 60bps above JMFe. Avg. realisation improved +2% QoQ (+3% YoY). Consol. EBITDA margin improved 330bps QoQ to 15.4% (+40bps YoY) led by improving profitability at international subsidiaries. Management highlighted that Class 8 demand remains steady in NA & EU. Order book remains healthy for BHFC across verticals. The company expects Defence business to grow in strong double-digits over the next 2-3 years on the back of robust exports order book (INR 22bn). We see long-term growth triggers in BHFC intact, like the steady CV cycle in US and India and strong ramp-up of PV, Aerospace and Defence vertical. Also, RM pass-through, cost-optimisation initiatives and positive operating leverage are likely to support margins going forward. We increase our consol. revenue growth estimate by 2-4% and maintain our margin estimate for FY24/25e. Maintain BUY with a Sept’24 TP of INR 1,025 (25x forward earnings). Weakness in global CV cycle remains a key risk.

* 1QFY24 – All-round beat: BHFC’s stand. net sales stood at INR 21.3bn (+21% YoY, +6.5%QoQ); 6% above JMFe. Total tonnage stood at c.67.8kt (+17% YoY, +5% QoQ). Realisation increased by +2% QoQ (+3% YoY). Reported stand. EBITDAM was 25.8% (+110bps YoY, +140bps QoQ), 60bps above JMFe. Consolidated EBITDAM stood at 15.4% (+40bps YoY, +330bps QoQ) led by improved profitability at EU operations (+4.4% EBITDA margin) and gradual ramp-up of US AL-forging plant. Consol. EBITDA stood at INR 5.9bn (+39%YoY, +36% QoQ), 14% above JMFe. Consol. Adj. PAT stood at INR 2.1bn (+31% YoY; +27% QoQ), 2% above JMFe.

* Domestic business outlook: Domestic revenue increased 33%YoY (+16% QoQ). CV revenue increased 17% YoY (-4% QoQ) to INR 2.7bn led by higher fleet utilisation. CV demand is expected to remain healthy in FY24 led by higher govt spends on infra. PV revenue stood at INR 624mn (-19% YoY, -24% QoQ) due to lower off-take by OEM owing to discontinuation of a PC model. Domestic Industrial segment revenue increased 53% YoY (+36% QoQ) to INR c.6.1bn led by strong growth in Defence segment. And, the company remains optimistic on the growth led by expanded product portfolio catering to renewable energy and construction and mining segment. During 1Q, the company won new business worth INR5bn across Defence and automotive components. In respect of Defence segment, the company expect to secure order for ATAG guns from Govt of India during FY24. The company also plans to double the capacity for casting business (JSA+ISML) on the back of strong order book and reiterated that the business is expected to be highly profitable.

* Export business outlook: Exports revenue increased 13%YoY (flat QoQ) to INR 11.8bn led by healthy demand across automotive segment. CV segment revenue stood at INR 5bn (+10% YoY, flat QoQ). Management indicated that Class 8 truck production remains steady and BHFC has healthy order book (for next 4-5 Qtrs). Demand remains steady in NA and EU and BHFC has gained market share. The company also indicated that its ‘Last Man Standing’ strategy is bearing results with the company signing LTA going upto 2035 with key customers. PV segment revenue increased 43% YoY (+11% QoQ) to INR 2.8bn owing to healthy demand from existing and new customers for existing and new products. Industrial revenue stood at INR 3.9bn (+1% YoY, -6% QoQ). Despite inventory correction in O&G segment, Industrials revenue remained resilient led by strong traction in Aerospace segment (grew by +68% YoY). BHFC expects Aerospace segment to grow by c.30% in FY24. Order book for Defence segment also remains strong at INR22bn, to be executed over next 18 months. The company is adding new capacity in this vertical and expects defence segment to form 10% of overall revenue in FY24. O&G segment is expected to recover during 2HFY24. Overall, the company expects strong double-digit revenue growth in Industrial segment (forging + casting) led by China+1 / EU+1 strategy adopted by global customers.

* Overseas manufacturing operations: During 1QFY24, overseas manufacturing subsidiaries revenue stood at INR 13.3bn (+27% YoY, +10% QoQ). EBITDA margin at EU operations stood at 4.4%. Management indicated that it expects EBITDA margins at EU operations to further improve to high single-digit (and PBT to turn positive) by FY24 end. The company also indicated that US Aluminium forging plant is gradually ramping-up and it expects the plant to turn EBITDA positive by FY24 end.

* Other highlights: 1) The company has planned a capex of INR10bn over FY24-26 to build capacity across its core business, EV components & systems and Defence products. The company expects to fund this capex through internal accruals. 2) BHFC also plans to reduce debt by INR 10bn over the same period.

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