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Valuation and View – Defense business to see ramp-up finally

Bharat Forge (BHFC) 4QFY23 results were in-line across parameters with miss on EBITDA margins by ~60bp to our estimates at 26.2%. Lower utilization in overseas business (Aluminum forgings) in Germany and North America continues to impact
consol performance as it reported EBITDA loss of Rs489m (v/s loss of Rs626m in 3QFY23). BHFC has reported ~3% QoQ/ 12.3% YoY growth in tonnage at ~64.6k tons, which were at 17 quarter high indicating strong momentum across business
verticals. Key positives going forward will be 1) continues ramp-up in recent acquisitions such as JS Auto cast (guided revenue growth >25% and double-digit margins over 2-3 years), 2) ramp up in defense revenues led by exports and new order
wins (indicated revenues of >USD100m). The management has hinted towards sustenance of healthy demand momentum across segments going forward led by industrial and PV (auto) while Europe (CV) to remain stable.

New orders win for FY23 have been healthy across auto, industrial, defense was >Rs40b. With diverse presence, BHFC is better placed than its previous cycles to benefit from i) steady orders and ramp up in domestic/exports PVs and CVs and ii)
healthy outlook for industrials (with strong wins in segments like Aerospace, defense, mining, agriculture). We cut FY24/25 EPS by 5-5.5% to factor in for delayed margins improvement in key overseas subs. We reiterate BUY on the stock with revised TP of
Rs941 (v/s Rs995 earlier) based on 25x to Mar’25 consol EPS (unchanged). Reiterate BUY as one of our top picks among ancs.

Result Highlights – In-line performance

* Revenues grew 19.3% YoY (+2.3% QoQ) at ~Rs20b* as tonnage grew 12.3%/ 6.2% YoY at 64.4k tons (17qtr high) while ASP grew 6.2%/-0.7% QoQ at Rs308.9k/ton.
* Gross margins expanded 60bp QoQ at 56.5%* (flat YoY, est 56.2%). This resulted EBITDA at Rs5.2b (+6% QoQ, +21.3% YoY, in-line). Consequently, EBITDA margins came in at 26.2% (+90bp QoQ, +40bp YoY, est 26.8%).

* Steady operating performance resulted Adj.PAT at Rs2.76b (-3.4% QoQ, +4.7% YoY, in-line).
* Co announced total dividend of Rs7/share for FY23 (similar in FY22).
* Segmental performance (FY23) – Auto exports (38% of sales) revenues grew 25.8% YoY to Rs28.7b. Auto domestic (18% of sales) revenues grew ~32% YoY at Rs13.7b. Non-auto (37% of sales) revenues grew 12.8% YoY to Rs28.9b.
* FY23 performance - Revenue/EBITDA/Adj. PAT grew 23.4%/50.7%/2.4x.

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