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Strong all-round performance drives beat

Core businesses to see sustained recovery in FY23; geographical expansion on the cards

* Bharat Forge (BHFC)’s 4QFY22 result was above expectation propelled by strong all-round performance with better-than-expected revenue, margins and PAT. While all the core businesses are seeing a sharp cyclical recovery, BHFC’s initiatives to diversify into aluminum/lightweighting and EV components have started to bear fruit. FY23E will be the first full year of contribution from the company’s recently acquired businesses.

* We upgrade our FY23E/24E consolidated EPS by ~10%/4% to factor in: a) a good recovery in India Auto and tractors, b) lowering of estimates for the US CVs and c) higher steel prices. We are yet to build in any contributions from its US aluminum business, Sanghvi Forgings, and JS Auto. Reiterate BUY with a TP of INR865 (premised on 24x Jun’24E EPS).

Non-auto business grows both in the domestic and export markets

* BHFC’s standalone revenue/EBITDA/adjusted PAT grew 28%/29%/28% YoY to INR16.7b/INR4.3b/INR2.6b in 4QFY22 and rose 71%/127%/ 227.5% in FY22 (on a low base), respectively.

* Volumes grew 3% YoY to 57.5k tonne (est. 56k tonne). Realization improved 24% YoY to INR290.9k/t (est. INR273.8k/t) led by RM cost pass through and mix improvement (higher CVs and non-auto exports).

* The Auto/Non-auto businesses grew 7%/79% YoY, respectively. Non-auto exports rose 113% YoY, while Non-auto domestic grew 50% YoY. Domestic Auto grew 14% YoY, while Auto exports increased 3% YoY.

* Gross margin contracted ~300bp YoY to 56.7% (est. 58.2%). EBITDA margin was flat YoY to 25.7% (est. 24.3%), aided by operating leverage. Adjusted PAT rose 28% YoY to ÌNR2.64b (est. INR2.2b).

* Consolidated FCFF stood at negative INR5.6b in FY22 (v/s positive INR1.05b in FY21) due to weak CFO of INR4b (v/s INR13b in FY21), on account of higher working capital (a swing of INR8b). Hence, the company’s net debt rose to INR25.3b in FY22 (from INR16b in FY21).

* BHFC’s management declared a final dividend of INR5.5/share for FY22.

Highlights from the management interaction

* In FY22, the Indian operations have received new orders of ~INR10b p.a. and the US operations have won new orders worth USD150m p.a. The EV vertical has secured orders from a global EV OEM for supply of aluminum castings; the company also received its first order from an Indian OEM to supply DC-DC converters for the CV segment.

* At a consolidated level, management expects FY23 to be a strong year with healthy revenue growth and cashflows. It expects a ramp-up of the US aluminum operations and higher revenue contribution from the newer verticals that should diversify revenue further.

* Demand outlook for CV exports is positive as order backlogs with OEMs are quite healthy with low cancellation rates and slots booked for the next 12-15 months. The management expects good traction in CY22/23, despite supply chain woes. India M&HCV’s 1QFY23E schedule is at ~97k, which is close to the historical peak and the outlook is healthy too.

* ATAG gun trials have completed successfully and management expects ordering to happen in FY23. BHFC currently has a capacity of 100 guns p.a., which can be expanded to 200 guns p.a.

Valuation and view

* All the businesses of BHFC are experiencing a sharp cyclical recovery. This, coupled with its focus in creating new revenue pools in Aerospace, Defense, and e-Mobility could lead to the de-risking of the business.

* We have cut our P/E multiple for BHFC to 24x from 26x to factor in: a) an increasing contribution from the overseas operations, and b) a rise in risk-free rate. We estimate a consolidated revenue/EBITDA/PAT CAGR of 11%/17%/26% over FY22- 24, respectively. The stock trades at 24.3x/19.1x FY23E/FY24E consolidated EPS. We maintain our BUY rating with a TP of INR865 (premised on 24x Jun’24E EPS).

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