Buy Bharat Forge Ltd For Target Rs.870 - Motilal Oswal Financial Services
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Strong beat led by the Auto business
Exports may see some stress in the near future; domestic recovery on track
* BHFC’s 1QFY23 earnings were a beat on all fronts, led by strong traction in the Auto business and benign RM costs aiding margin. While its core business is seeing a sharp cyclical recovery, the management’s initiatives to diversify into aluminum, light-weighting, and EV components have started to fructify. FY23 will see the first full-year contribution from its recently acquired businesses
* We have upgraded our numbers for the standalone entity, which will offset the negative impact of the US aluminum forging business that is ramping up. We have maintained our FY23/FY24 EPS estimate. We are yet to build in any contribution from Sanghvi Forgings, and JS Auto. We maintain our Buy rating with a TP of INR870 (24x Sep’24E EPS).
Auto business above our estimate, while non-Auto was in line
* Standalone revenue/EBITDA/adjusted PAT grew 28%/18%/15% YoY to INR17.6b/INR4.6b/INR2.46b in 1QFY23.
* Tonnage grew 8% YoY (flat QoQ) to 57.9k tonne. Net realizations grew 18.5% YoY and 4% QoQ to ~INR303.8k (est. INR286k), led by RM cost pass through and mix.
* The Auto/non-Auto business grew 20%/42% YoY. In the non-Auto segment, exports/domestic sales grew 31%/59% YoY. Domestic Auto sales/exports grew 67%/6% YoY.
* Gross margin eroded by 3.3pp YoY and 2pp QoQ to 58.7% (est. 56.5%), as there was some impact of an increase in inventory. There was no reduction in RM prices in 1QFY23.
* EBITDA margin declined by 2.4pp YoY to 26.1% (est. 24.9%) due to lower gross margin, but the same was partly offset by lower staff costs. EBITDA/tonne improved by 9% YoY to INR79.4k.
* A further forex loss led to a decline in adjusted PAT to INR2.46b (est. INR2.3b), up 15% YoY.
* EBITDA margin in its overseas manufacturing subsidiaries stood at 4.7% (v/s 8.2% in 4QFY22), due to the commencement of operations in its US aluminum forging business, which is slowly ramping up. Without this impact, EBITDA margin stood at 7.7%
Highlights from the management interaction
US Class 8 volumes are pegged ~300k units in CY22 v/s ~270k units in CY21. Class 7-8 orders from OEMs are secured till CY23-end and the rate of cancellation is not high. The same is also true for PVs.
* EU: There is a reasonably strong demand for CVs in the EU. It operates in the Premium PVs segment, which is performing well. The weakness in the EU is due you several factors, including inflation and geopolitical issues.
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