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CY22 outlook strong; moderate growth expectations in CY23

* The demand outlook for CY22 provided by 24 global entities, including CV/PV OEMs, non-auto companies and industry associations, offers a positive read-through for forging companies. India’s MHCV segment is expected to witness a strong 28% volume growth in CY22. North America’s HCV segment is likely to grow by up to 12% and Europe up to 8% in CY22. The outlook for CY22 remains unchanged, supported by large order books. However, the CY23 outlook has moderated to 9% (vs. 22% earlier) on account of macro uncertainties.

* The global PV segment is likely to clock high single-digit growth in CY22. The order book is healthy, but the Russia-Ukraine conflict and China’s Covid lockdowns have created temporary supply issues. The outlook for the industrial segments remains robust owing to increased infra spends and an upturn in the oil & gas segment, which is likely to see up to 45% growth in CY22.

* For Bharat Forge (BHFC), we trim our FY23E/FY24E EPS by 3%/5% to account for some moderation in the demand outlook and lower margins. There are concerns about Europe/US recession (30% probability as per a Bloomberg survey). In a bear-case recession scenario, if we build in a 15% drop in exports (excluding oil and gas segment), our FY24E EPS declines by ~16% (please refer to page 4 for sensitivity analysis).

* Following the EPS revision, we expect a revenue CAGR of 14% over FY22-24E, aided by growth in auto/industrial segments in both domestic and overseas markets. Moreover, nascent segments, such as Defense, Renewables, Aerospace, Railways, E-mobility and Light-weighting solutions, should provide support to overall revenues. Our revised TP of Rs775 (Rs810 earlier) is based on 24x Jun’24E EPS for standalone operations. Retain Buy.

HCV volume growth outlook intact in CY22; moderation in expectations for CY23: With an order book of ~10 months, Volvo, Daimler, Paccar and ACT expect the HCV segment to grow strongly by up to 12% in North America and 8% in Europe in CY22. In May’22, US freight volumes declined by 18% yoy, while freight rates fell 11% (excluding fuel surcharge). However, freight volumes are still higher by 88% over the five-year average and rates are up almost 2x over the last two years. The outlook remains intact, and OEMs indicate that there is no increase in cancellations. The average age of the fleet for operators has increased by 10-15%, which should boost replacement demand and support volumes. However, the volume outlook for CY23 has been moderated to 9% (vs. 22% earlier) due to macro uncertainties. In comparison, India’s MHCV segment is likely to grow strongly by 28% in CY22.

CY22 PV demand outlook positive, but supply issues persist: Volkswagen and Mercedes expect up to 10% growth in CY22 in their global businesses, led by pending order books and low channel inventories. The order book remains healthy, but the Russia-Ukraine conflict and China’s Covid lockdowns have created temporary supply issues, resulting in some reduction in the Europe production outlook by IHS Markit to 5% from 7% earlier

Robust CY22 outlook for industrials: Volvo and John Deere expect the construction equipment (CE) and tractor segments to grow by 5-20% in the North America and Europe regions in CY22, driven by higher commodity prices and infra spends. ICEMA, ACE and Escorts expect positive growth for the CE and tractor segments in India in FY23. The North American oil & gas segment is expected to see a multi-year upcycle, with up to 45% growth in CY22, as per Halliburton and Schlumberger. Key risks: 1) lower-than-expected growth in key segments and geographies; 2) supply constraints; 3) adverse commodity and currency rates.

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