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Strong operational performance; maintain Buy

* Q4FY21 EBITDA margin of 25.5% came in above our estimate of 22% on higher share of exports, lower-than-expected impact of commodity inflation and cost savings. Revenue stood at Rs13.1bn, slightly above estimates, supported by robust exports.

* Our positive view on BHFC is underpinned by its leadership position in automotive forgings, expected recovery in core segments and robust growth in nascent segments such as Defense, Railways, Aerospace, E-mobility and Light-weighting solutions.

* We increase FY22/23 EPS forecast by 8%/9% to Rs19.8/Rs30, mainly due to higher growth assumptions for the Industrial segment. We are introducing FY24E EPS of Rs35.3, factoring in 13% revenue growth and EBITDA margin of 30.6%.

* We build in robust revenue/EBITDA CAGRs of 22%/ 35% over FY21-24E. ROIC (post tax) should expand from 5% in FY21 to 25% in FY24E. Maintain Buy with a revised TP of Rs830 (Rs760 earlier), based on 27x P/E for the standalone business on FY23E.

What we like?

Management commentary was positive: 1) Robust demand is expected ahead in major export segments such as CV, Construction & mining and Oil & Gas segments. 2) Return ratios are expected to improve toward 20%, with improvement in asset utilization. 3) The company has secured a Defence order for the development and supply of components. Trials of Advanced Towed Artillery Gun Systems (ATAGS) by Army are scheduled for Jun’21. 4) Oil & Gas revenue stood at Rs1.4bn in FY21 and should increase to 50% of peak revenues in FY22 (peak was at Rs9.5bn in FY19).

What we did not like?

Domestic revenues are expected to be negatively impacted by lockdowns in Q1FY22, but the weakness is likely to be temporary and growth should return as business activities normalize.

EBITDA margin above estimates:

Considering the low base in Q4FY20, results have been compared with Q4FY19 (2-year CAGR). Revenue declined at 11% CAGR to Rs13.1bn (est.: Rs12.9bn), slightly above estimates due to better-than-expected exports. Tonnage and realization declined at 6% CAGR each. EBITDA margin contracted to 25.5% from 29.1% in Q4FY19, but was above estimate of 22%, driven by higher share of exports, lower-thanexpected impact of commodity inflation, and cost savings. Overall, adjusted PAT declined at 18% CAGR to Rs1.8bn (est.: Rs1.5bn), above estimates, owing to higher operating margins.

Retain Buy:

BHFC’s leadership position in automotive forgings, expected cyclical recovery in the core segments and robust growth in nascent segments support our positive view. We maintain Buy rating with a revised TP of Rs830 (Rs760 earlier), based on 27x P/E for the standalone business on FY23E. Key risks: 1) delay in recovery in domestic/export CV segments; 2) delay in macro recovery impacting rebound in industrial segments; and 3) adverse currency rates.

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