Buy Bharat Forge Ltd For Target Rs.1,135 - Motilal Oswal Financial Services
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Defence to contribute ~10% of revenue in FY24; OB stands at ~INR22b
* BHFC’s 1QFY24 standalone performance beats estimates, led by betterthan-expected volumes at 67.8k tons (vs. est. 64.3k tons) and realizations of INR313.9k/ton (vs. est. INR311.2k/ton). The company has guided toward positive demand outlook across divisions. Additionally, defence business contributed INR2.5b in 1Q and is expected to be ~10% of revenue mix in FY24, driven by order backlog of INR22-23b to be executed over the next 18 months.
* We have changed our EPS est by -4%/+4.5% for FY24E/25E to factor in for slower-than-expected rampup in US facility and execution of defence orders in the coming quarters. We reiterate our BUY rating on the stock with a TP of INR1,135 (based on 25x Sep-25E consolidated EPS + INR101 for 2 gun platforms).
Tonnage grew sequentially for 6th straight quarter
* 1QFY24 standalone revenue/EBITDA/adj. PAT grew 21%/20%/27% YoY to INR21.3b/INR5.5b/INR3.1b (vs. est. INR20b/INR5.2b/INR2.9b).
* Tonnage grew 17% YoY to 67.8k tons (vs. est 64.3k). Net realizations grew 3% YoY (up 2% QoQ) to ~INR314k/ton (vs. est. INR311k), benefitting from a favorable product mix.
* Auto segment revenue grew 16% YoY, whereas non-autos grew 31% YoY. The domestic non-autos segment grew 72% YoY (excl. defence, it grew 18% YoY). Exports non-autos remained flat YoY, primarily impacted by one-time inventory correction in O&G.
* Gross margins eroded 300bp YoY (down 80bp QoQ) to 55.7% (vs. est. 56.5%).
* EBITDA margins declined 20bp YoY (down 20bp QoQ) to 26% (inline), as the impact of higher RM was offset by operating leverage.
* Further, despite higher-than-estimated interest expenses and FX loss, adj. PAT grew 27% YoY to INR3.1b (vs. est.INR2.9b).
* Foreign subsidiaries were at a loss of INR930m (vs. INR1.3b loss in 4QFY23 and a loss of INR221m in 1QFY23). EBITDA for European operations stood at 4.4% (vs a loss in 1QFY23).
Highlights from the management interaction
* Global Autos – The management possesses clear demand visibility for US/EU CVs over the next 12 months. This visibility reveals strong demand, primarily driven by healthy build rates and inventory levels. The order books of OEMs have not been initiated for CY24. PVs are also maintaining a solid position, bolstered by the addition of new customers. The introduction of new emission norms and the renewal of new fleets will further generate additional prospects for growth.
