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New orders to aid growth; Profitability at overseas subsidiaries remains key

In 3QFY23, Bharat Forge (BHFC) reported standalone EBITDAM of 27.4% (+200bps YoY, +310bps QoQ), 250bps ahead of JMFe. Avg. realisation increased 4%YoY (+2% QoQ). Consol. EBITDA margin remained flat QoQ at 14% (-700bps YoY) owing to continued profitability pressure at international subsidiaries. Domestic revenue declined 1% QoQ owing to lower PV production partially offset by healthy growth in MHCV production. Exports increased +9%QoQ driven by strong traction in PV & industrial segment. Management highlighted that while demand for CVs and PVs in US continues to be healthy, it remains uncertain in EU owing to macro challenges. Order book remains healthy for BHFC across verticals. The company expects defence business to grow 3x over next 2-3 years on the back of strong order book (INR 20bn). We see long-term growth triggers in BHFC intact, like the steady CV cycle in US and India and strong ramp-up of PV and defence vertical. Also, cost-optimisation initiatives and positive operating leverage are likely to support margins going forward. We estimate EPS CAGR of 21% over FY22-25E. Maintain BUY with a Mar’24 TP of INR 960 (25x forward earnings). Slowdown in global autos and weak profitability at international subsidiaries are key risks.

* 3QFY23 – International subsidiaries drag profitability: BHFC’s stand. net sales stood at INR 19.5 bn (+22% YoY, +5%QoQ); 3% above JMFe. Total tonnage stood at c.63kt (+18% YoY, +3% QoQ). Realisation increased 4% YoY (+2% QoQ). Reported stand. EBITDAM was 27.4% (+200bps YoY, +310bps QoQ), 250bps higher than JMFe driven by better product mix. Consolidated EBITDAM stood at 14% (-700bps YoY, flat QoQ) owing to higher RM cost and gradual ramp-up of recently commissioned US AL-forging plant. Consol. EBITDA stood at INR 4.7bn (-7%YoY, +9% QoQ). Consol. Adj. PAT stood at INR 787mn (-69% YoY; -45% QoQ).

* Domestic business outlook: Domestic revenue increased 6%YoY (-1% QoQ). CV revenue increased 29%YoY (+4% QoQ) to INR 2.5bn led by improving fleet utilisation. CV sales are expected to remain strong during 4Q. PV revenue stood at INR 929mn (+24%YoY, - 6% QoQ). Seqential decline was owing to lower underlying PV production. Domestic Industrial segment revenue declined 6% YoY (-3% QoQ) to INR c.4.4bn owing to seasonality in Agri/ tractor segment. During 3Q, the company won new business worth INR 2.7bn across automotive and industrial applications. KSSL, (wholly-owned subsidiary) secured an export order worth INR 6bn in 3Q taking the orderbook to INR 19.5bn. Order execution is expected to commence from FY24. Recently acquired JS Auto also won new business worth INR 1.5bn during 3Q taking total order wins to INR 2.5bn post acquisition

* Export business outlook: Exports revenue increased 35%YoY (+9%QoQ) to INR 11.7bn led by strong demand from PV, O&G and Aerospace segment. CV segment revenue stood at INR 4.9bn (+27% YoY, +5%QoQ). Management indicated that class 8 truck demand remains steady and BHFC has secured orders till next year end. MHCV truck volumes in EU also remain healthy. PV segment revenue increased 2.2x YoY (+10% QoQ) to INR 2.6bn owing to strong demand from existing and new customers for existing and new products. Industrial revenue stood at INR 4.1bn (+16% YoY, +14% QoQ) led by growth

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