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Strong demand tailwind; new order wins to aid growth

In 1QFY23, Bharat Forge (BHFC) reported standalone EBITDA margin of 24.7% (-380bps YoY, -100bps QoQ), 70bps below JMFe. Avg. realisation increased 18%YoY (+4%QoQ) due to higher steel price. Domestic revenue declined 3% QoQ (+56% YoY) in-line with steady underlying demand across segments, while exports increased 14% YoY (+12%QoQ) driven by strong traction in PV and Industrial segment. The management highlighted that demand remains steady in above segment along with increased traction for Aerospace components. Underlying demand for CVs in US and EU remains steady (healthy order book) and cancellation rate remains low. Domestic industrial business is likely to be driven by new orders, while export (industrials) is expected to be supported by supply chain diversification related demand. EV order book remains healthy and BHFC indicated of strong EV product launch pipeline. We see long-term growth triggers in BHFC intact, like the steady CV cycle in US, EU and India. Also, cost-optimisation initiatives and benefit of recent softening of commodity prices are likely to support margins going forward. We estimate EPS CAGR of 27% over FY22-24E. Maintain BUY with a Mar’23 TP of INR 870 (25x forward earnings). Prolonged supply constraints, significant correction in crude oil price and profit unsustainability at international subsidiaries are key risks

margin miss 

 1QFY23 – margin miss: In 1QFY23, BHFC’s adjusted net sales stood at INR 17.6 bn (+28% YoY, +5%QoQ), c.3% above JMFe. Total tonnage stood at c.58kt (+8% YoY, +1% QoQ). Realisation increased 18% YoY (+4%QoQ) due to higher steel price. Adjusted EBITDA margin was 24.7% (-380bpsYoY, -100bps QoQ), 70bps below JMFe. Consolidated adjusted margin stood at 15% (-640bps, -50bps QoQ), due to higher energy inflation in Europe and gradual ramp up of recently commissioned US AL-forging plant. EBITDA stood at INR 4.3bn (-5%YoY, -23%QoQ). Adj. PAT was INR 1.6bn (-24% YoY, -33%QoQ). Exceptional loss for 1QFY23 was INR 30mn represents VRS costs.

 Domestic business outlook

Domestic revenue increased 56%YoY (-3% QoQ). Sequential decline was in-line with underlying MHCV and PV production. CV revenue increased 84%YoY (-8% QoQ) to INR 2.3bn driven by recovery in CV production led by higher mining & infra activity and fleet utilisation rates. PV revenue increased 31%YoY (- 2%QoQ) to INR 774mn supported by easing of supply chain constraints. Domestic Industrial segment revenue increased 48% YoY (flat QoQ) to INR 4bn. Management indicated that demand for CVs and PVs remains steady. BHFC highlighted that demand in industrial segment continues to remain stable and it continues to make progress in Agri equipment space (product + customer addition) and capital goods (area of import dependence). BHFC is also looking to grow its defence business (c.INR 5-6bn revenue currently) by 3x by FY25-26. Management guided for capex (India business) of INR 3.75bn for FY23 including INR 1.25bn towards EVs

Export business outlook:

: Exports revenue increased 14%YoY (+12%QoQ) to INR 10.5bn led by strong demand from PV and Industrial segment. CV segment revenue stood at INR 4.6bn (+1%YoY, +13%QoQ). Management indicated that class 8 truck demand remains steady and BHFC has secured class 7 & 8 truck orders till next year end. Though the

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