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Creating value beyond core to forge ahead

Aluminum forging to benefit from EVs; e-mobility plan offers optionality Cyclical recoveries across key businesses and contributions from the new businesses are expected to propel a sharp recovery for Bharat Forge (BHFC) over the next 2–3 years. This along with a ramp-up in the overseas aluminum forging business is likely to result in a consolidated EPS CAGR of 24% over FY22-25E. We see upside to our estimates from a) the US aluminum capacity, b) the recent acquisitions in the industrial business and c) foray into the e-mobility business. The stock trades at 25.4x/19.6x FY23E/FY24E consolidated EPS, respectively. We maintain our BUY rating with a TP of INR860 (based on 26x Mar’24E EPS), implying 33% potential upside. BHFC is our top pick in the auto component industry

First year of cyclical recovery in the core business curbed by chip shortages

After witnessing a cyclical downturn until FY21, accentuated by the COVID impact, BHFC is undergoing a cyclical recovery in its core businesses in both domestic as well as international markets. Although chip shortages are impairing the CV/PV production across geographies, underlying demand momentum remains strong in the Auto business. While the underlying CV industry (US+EU) volumes declined 30% from the previous peak, BHFC’s revenue was almost higher by 20% from its peak quarterly CV export revenue. Non-autos exports have seen a smart recovery fueled by a sharp revival (albeit, ~25% lower than the previous peak) in shale oil business for BHFC as well as a strong traction visible in construction and mining segments. With firm crude oil/commodity prices and higher infrastructure investments by the governments in the developed markets, non-autos exports would see a sustained recovery over the next few years.

Aluminum forgings – a play on lightweighting the EVs/ICE

Stricter CO2 emission regulations globally and the advent of electric vehicles (EVs) are leading to an increase in aluminum usage. BHFC’s overseas subsidiaries are witnessing a strong demand of aluminum-forged components for chassis from EVs and hybrid PVs and hence, the company has doubled its capacity to 40k tons from 20k tons (10k ton additions in the EU to 30k tons and 10k tons Greenfield plant in the US). With all capacities on stream and already fully booked, the aluminum forgings business is expected to ramp-up to EUR200-220m in the next 3-4 years from EUR59m in CY20. This business has enjoyed an EBITDA margin of 13-15% in the past, which should further improve with scale.

Strengthening its industrial business through recent acquisitions

BHFC sees tremendous opportunities in industrial space (renewable, off-highway, and others) and has invested in expanding its capacities (via Sanghvi Forgings) and capabilities (via JS Autocast) through acquisitions in the last nine months. BHFC has a relatively smaller contribution from renewable energy and industrial segments in India. The acquisitions of Sanghvi Forgings and JS Autocast are targeted towards reinforcing its presence in these segments. With the addition of castings, BHFC will be able to address low-volume and high-value products in the industrial segment by offering a much diversified portfolio of products to its customers. Management expects the non-autos business to become ~2x in three years.

EVs – option value through Tork Motors and e-components

BHFC has been working on building its capabilities in components for EVs across vehicle segments through organic initiatives (via its 100% subsidiary, Kalyani Powertrain), Refu JV (50% JV focused on power electronics), Tevva Motors (~10% stake in e-CVs start-up) and Tork Motors (~60.7% stake in electric motorcycle and motor manufacturer). Apart from targeting lightweighting opportunities in the EV space, the company is also aiming for sub-systems as well as complete electric powertrains across vehicle segments.

Estimate 24% EPS CAGR over FY22-25, with levers for further upgrades

We estimate BHFC’s consolidate revenue/EBITDA/PAT to report 10%/17%/24% CAGR over FY22E-25, respectively. Our estimates are yet to factor in a) the US aluminum forging business (~10k tons capacity), and b) the recent acquisitions of Sanghvi Forgings and JS Autocast. These two businesses can add ~INR1.4b to PAT or ~8% to our current estimate of FY25 consolidated PAT.

Growth levers in place for improved consolidated performance

Cyclical recoveries across key businesses and contributions from the new businesses are expected to propel a sharp recovery for BHFC over the next 2–3 years. This coupled with a ramp-up in the overseas aluminum forging business is likely to drive improved consolidated performance. We see further upsides to our estimates from a) the US aluminum capacity, b) the recent acquisitions in the industrial business and c) foray into the e-mobility business. The stock trades at 25.4x/19.6x FY23E/FY24E consolidated EPS, respectively. We maintain our BUY rating with a TP of INR860 (premised on 26x Mar’24E EPS), implying 33% potential upside. BHFC is our top pick in the auto component industry. Key risks: a) delayed improvement in semi-conductor supplies, b) faster electrification in CVs and c) de-rating due to the ESG concerns on defense business as and when it ramps-up.

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