IGI Logo

Strong execution despite adversity

Bharat Forge (BHFC) has reported its Q1FY23 standalone earnings at Rs2.65bn (ISec: Rs2.4bn) with the beat mainly led by better than expected tonnage sales at 79kMT (up 1% QoQ). Adj. EBITDA margin was largely in line with our estimate at 26.2% (up 40bps QoQ). Revenue growth (5% QoQ) was supported by ~12% export growth, which is expected to remain strong across FY23 led by steady demand in US/EU truck segment. Strong orderbook for aerospace and improving outlook in defence segment would also add to growth potential in industrials amidst stable O&G outlook. BHFC is capitalising on the strong growth cycle with the following levers: a) domestic capex upcycle, b) electrification of PVs globally, c) global and domestic truck cycle recovery, d) improvement in aerospace segment outlook; and e) potential defence orders. We believe, the company is well positioned to overcome adverse environment seamlessly with its strong balance sheet giving it the capability to do strategic M&As and grow profitably. We value the stock at a DCF-based target price of Rs855/share (earlier: Rs890), implying 23x FY24E EPS with no change in FY24E earnings, and rollover by a quarter. Maintain BUY.

Key takeaways from earnings call:

* Industrial segment is expected to be a key growth driver for the standalone business with an orderbook of Rs14bn. Company has received new orders worth Rs3.5bn in India within auto and aerospace segments. BHFC completed acquisition of JS Auto in Q1FY23 and would be able to double the latter’s capacity without any incremental capex (FY21 revenue: Rs2.6bn). BHFC is currently supplying motor, motor controller, BMS and battery housing system for Tork Motors.

* Foreign subsidiary EBITDA margin was impacted by the new US forging facility having just commenced production (EBITDA loss of US$1mn/month currently). Phase-1 of the new plant caters to specialty chassis component production for premium EV/Hybrid PVs for North America, EU, Japan and Korea markets and would take a couple of more quarters to breakeven (revenue target US$80mn-85mn in FY24). Phase-2 investment is planned to start in FY24E. Despite inflationary pressures and elevated energy costs, EU delivered 8.5% EBITDA margin.

* Strong demand from the aerospace segment led to >10% contribution within industrial segment and BHFC is on track to achieve US$10mn from this segment in FY23E. Company has started two new programme ramp-ups and received two new customers’ orders for aerospace. Within the defence segment, BHFC is currently operating at Rs2bn-2.5bn per year in armoured vehicle orders and Rs3bn-4bn in spares and components segment.

* In the US, BHFC has secured orders for Class 7/8 truck segment till end of FY24 as overall truck production outlook remains stable (300k units per annum).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer