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Poised to encash cyclical recovery in user industries…

About the stock: Bharat Forge (BFL) is India’s leading auto component exporter 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.

* FY21 standalone segment mix – ~40% CV, ~36% Industrial, ~18% PV

* FY21 standalone regional mix - ~46% India, ~31% Americas, ~20% Europe.

Q1FY22 Results: The company posted robust Q1FY22 results.

* Standalone net sales increased 4.9% QoQ to | 1,372 crore

* EBITDA was at |391 crore, with margins up 105 bps QoQ to 28.5%

* Consequent standalone PAT was down 18.9% sequentially to |166.6 crore

What should investors do?

BFL’s share price has grown at ~12% CAGR over the past five years (from ~| 420 levels in August 2016), outperforming Nifty Auto index.

* We retain BUY rating on strong demand, margin expansion visibility

Target Price and Valuation: We value the company at revised target price of | 1,000 i.e. 40x P/E on FY23E EPS (earlier target price | 875)

Key triggers for future price performance:

* Expected cyclical rebound in India CV, US Class 8 truck revival, healthy outlook for PV segment across geographies and pick-up in drilling activity amid higher oil prices lead to robust 29% FY21-23E net sales CAGR

* Defence, e-mobility, aluminium growth to de-risk away from CV, oil & gas

* Prime candidate for auto component PLI scheme benefits

* Operating leverage, mix improvement to expand margins to 21.5% (FY23E)

Alternate Stock Idea: Besides BFL, in our ancillary coverage we like Apollo Tyres.

* India CV revival beneficiary focused on debt reduction, higher return ratios

* BUY with target price of |275

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