Buy Bharat Forge Ltd For Target Rs. 980- ICICI Direct
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About the stock: Bharat Forge (BFL) is India’s leading auto component player with strong engineering, technological competencies in forging and metallurgy. With total capacity of 6.83 lakh MT per annum, its products find application in domestic, exports markets across PV, CV, oil & gas, construction & mining, power, defence, etc.
• FY23 standalone segment mix – ~34% CV, ~43% Industrial, ~12% PV
• FY23 standalone export mix - ~68% America, ~27% Europe, ~5% other
Q4FY23 Results: BFL reported a muted performance in Q4FY23
* Standalone sales were up 2.3% QoQ to | 1,997 crore, tonnage up 3% QoQ
* EBITDA was at | 488 crore, with margins down 300 bps QoQ to 24.4% amid a reversal of forex gains. PAT was down 15.4% QoQ to | 244.5 crore
* BFL has secured orders worth ~| 4,000 crore across verticals in FY23. It also informed about worst performance for its foreign subsidiaries being behind it and is looking for positive contribution from the same in coming quarters
What should investors do? BFL’s share price has grown at ~1.3% CAGR over the past five years (~| 733 levels in May 2018), underperforming the Nifty Auto index.
* We retain BUY amid steady growth prospects in base business (on a high base), robust order wins, defence segment on cusp of multi-fold revenue growth, turnaround visibility in foreign operations and EV proactiveness
Target Price and Valuation: Revising our estimates, we now value BFL at | 980 i.e. 30x P/E on FY25E EPS of | 32.6/share (earlier target price: | 1,050).
Key triggers for future price performance
* On the back of diversified exposure across industries with healthy order wins in both domestic and export market, ramp up of overseas aluminium forging business and persistent focus towards EV space (power electronics, components, etc), we expect sales to grow at 15.4% CAGR in FY23-25E
* Strong double digit growth in non-auto business (industrial, defence, aerospace) amid robust order booking to aid margins, reach ~17.2% by FY25E. Hence, RoCE, RoE is seen reaching ~18%, 14%, respectively, by FY25E
* Ambitious Vision 2030 with financial contours as: (i) 12-15% revenue CAGR, (ii) EBITDA margin >20% at consolidated level, (iii) RoCE at 25% at consolidated level, (iv) capital allocation for organic/inorganic growth
Alternate Stock Idea: Besides BFL, in our auto coverage we like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with a target price of | 1,665
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