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We initiate on Bharat Forge with a BUY rating as the company is expected to benefit from its wide-ranging capabilities and near-term cyclical pick-up in CV sales. The company is diversifying its mix by increasing focus on passenger car components as well as increasing capacities in aluminium forgings (for light-weighting). To acquire new skills, it is actively investing in startups and JVs across electric vehicles/defence segments. We believe that the initiatives in the defence segment are likely to materialise (after several years) as India’s defence-based capital expenditure has risen by ~20% in FY21 and the government is aggressively pushing for localisation

* A cyclical rebound in global CVs: The commercial vehicle segment, which accounts for ~40% of revenue, had witnessed a sharp decline in revenue over FY20-21, post the cyclical peak in global CV sales in 2019. Bharat Forge will likely benefit from the pick-up in sales as volumes normalise over FY21-23E (as economies emerge from COVID impact). While US Class-8 truck orders have firmed up from Nov-20 onwards, India heavy truck sales are reviving post the recent budget initiatives and Europe truck sales have bottomed.

* Adapting to new technologies, expanding in the PV segment: The company has expanded into the PV segment, which now accounts for 17% of its India turnover (double from 8% levels five years ago). Further, in a bid to acquire new skills, Bharat Forge has invested in multiple EV startups (Tork, Tevva and REFU). Besides, the company is expanding capacities in aluminium forging – this segment will account for 50% of its overseas capacities. BHFC is also building on its light weighting capabilities that can be used for EVs/hybrids.

* Defence – Atmanirbhar push to benefit Bharat Forge: While the company has been investing in defence capabilities, the management expects to win orders as the government is focusing on ‘Atmanirbhar’ localisation initiatives. The recent defence budget has witnessed an increase in capital expenditure outlay to INR 1.35 trillion ($18.5bn) in FY21, which is ~20% higher YoY. It is the highest-ever increase in capital outlay for defence in 15 years and the spends are expected to remain at these elevated levels in FY22 as well. Bharat Forge has developed protected vehicles and artillery guns, which are undergoing field trials.

* Initiate with a BUY: We set a target price of INR 720 at 32x FY23E EPS as we expect earnings growth to recover over FY22-23E. We value the stock at its average historic long-term P/E multiple to factor in (1) the pick-up in the business cycle and (2) emerging opportunities across defence and the PV segments. Key risks: a sharp increase in commodity input prices and delayed orders in defence; steel price increase could lead to margin volatility in the near term.

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