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Demand outlook remains positive; supply issues to slightly affect growth in FY23; Buy

The demand outlook for CY22/23 provided by 23 global entities, including CV/PV OEMs, non-auto companies and industry associations offers a positive read-through for forging companies. The HCV segment is expected to grow strongly by up to 12% in CY22 in the North America and Europe regions. Considering growth moderation in CY22 due to supply issues, CY23 is expected to see much stronger growth of up to 22%. In addition, the India CV segment is likely to grow by up to 30% in CY22.

The global PV segment is expected to clock high single-digit growth in CY22. The order book remains healthy, but the CY22 outlook has been lowered due to supply constraints. The outlook for the industrial segments remains robust on strong commodity prices and a pick-up in infrastructure spending. The oil & gas segment may see 20%+ growth in CY22.

In our view, Bharat Forge is expected to clock a revenue CAGR of 16% in FY22-24E, led by the continuation of cyclical recovery in the underlying auto and industrial segments in both domestic and overseas markets. Moreover, nascent segments, such as Defense, Renewables, Aerospace, Railways, E-mobility and Light-weighting solutions, have the potential to cross US$100mn each in revenues in the medium term.

We reduce our FY23E/24E EPS by 6%/4%, factoring in delays in the pass-through of commodity inflation, higher freight costs and some reduction in revenues. We have a Buy rating on the stock with a Mar’23 TP of Rs840 (Rs950 earlier), based on 25x P/E (27x earlier) for the standalone business on Mar’24E EPS. We have reduced the target multiple, factoring in margin pressures over the next two years.

Strong order book to support the global HCV segment: With an order book of almost one year, Volvo and Paccar expect the HCV segment to grow strongly by up to 12% in CY22 and 22% in CY23 in the North America and Europe regions, aided by better freight availability and improving transporter profitability. The CY22 outlook has been moderated due to supply constraints, resulting in a spill-over to CY23. India is likely grow by up to 30% in CY22 and by double digits in CY23, driven by better utilization and a pick-up in construction activity.

PV demand remains healthy: Strong demand should support higher volumes in CY22/23. Volkswagen and Mercedes expect up to 10% growth in CY22 in their global businesses, led by the pending order book, economic recovery and low channel inventory. Supply constraints on account of chip shortages and the recent Ukraine war will inhibit growth in CY22. Factoring in the Ukraine war, BMW tapered its volume growth guidance to flat from positive growth.

Outlook for industrials remains intact: Volvo and John Deere expect the construction equipment and tractor segments to grow by 10-20% in the North America and Europe regions in CY22, driven by robust commodity prices and higher investments in infrastructure. ACE and Escorts expect 15- 20% growth for the construction equipment segment in India in FY23. The North America Oil & Gas segment is expected to see a multi-year upcycle, with 20%+ growth in CY22, owing to an improvement in fracking activity, as per Halliburton and Schlumberger

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