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Strong b/s to help withstand near term challenges…

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.

* FY22 standalone segment mix – ~30% CV, ~47% industrial, ~12% PV

* FY22 standalone export mix - ~68% America, ~29% Europe, ~3% other

Q4FY22 Results: BFL reported a steady performance in Q4FY22.

* Standalone sales were up 4.5% QoQ to | 1,674 crore, tonnage up 7.8% QoQ

* EBITDA was at | 431 crore, with margins up 30 bps QoQ to 25.8%

* PAT was down 22.4% QoQ to | 262 crore (exceptional gains in Q3FY22)

* For FY23, management commentary is upbeat on demand prospects & revenue from new verticals (including EV)

What should investors do? BFL’s share price has grown at ~4.7% CAGR over the past five years (from ~| 527 levels in May 2017), outperforming Nifty Auto index.

* We retain BUY rating on BFL, tracking upbeat commentary on growth

Target Price and Valuation: Rolling over our valuations, we now value BFL at revised target price of | 840 i.e. 28x P/E on FY24E EPS (earlier target price | 910).

Key triggers for future price performance:

* Expected cyclical upswing in India CV, strong order backlog of US Class 8 truck, healthy outlook for PV segment amid personal mobility, pick-up in drilling activity amid higher oil prices and efforts to diversify the revenue base (EV products) to result in robust 14.4% net sales CAGR over FY22-24E

* With operating leverage at play and commodity inflation a pass through, EBITDA margins are seen in the range of 18-19%, going forward

* Consequent EBITDA, PAT seen growing at 13.8% CAGR in FY22-24E

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 | 250

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