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Commodity inflation weighs on performance; global supply chain recovery – a key

In 3QFY22, Bharat Forge (BHFC) reported standalone EBITDA margin of 25.5% (+470bps YoY, +40bps QoQ) in-line with JMFe, driven by lower gross margin. Avg. realizstion increased 48%YoY/15%QoQ due to higher steel price. Domestic revenue increased 41% YoY(+13%QoQ) driven by strong volumes across segments, while exports surged 70% YoY(- 10%QoQ) driven by strong demand from CV and recovery in the Oil & Gas segment. The management highlighted that while demand remains robust, supply chain issues continue to impact European operations. However, underlying demand for CVs in the US and the EU continues to be robust driven by increased focus on infra spending and last mile connectivity. BHFC expects domestic and export market to witness positive sales development across all major sectors in 4QFY22 baring the agri equipment sector in India. We see long-term growth triggers in BHFC intact, like the new CV cycle in US, EU, and India. Also, cost-optimisation initiatives and manpower rationalisation are likely to support margins going forward. We estimate revenue CAGR of 38% over FY21-23E. Maintain BUY with a Dec’22 TP of INR 875 (25x forward earnings). Prolonged chip shortage, significant correction in crude oil price and profit unsustainability at international subsidiaries is key risks.

* 3QFY22 – miss on margins:

In 3QFY22, BHFC’s adjusted net sales stood at INR 15 bn (+55% YoY, +7%QoQ), 2% above JMFe. Total tonnage stood at c.53kt (+5% YoY, -7% QoQ). Realisation increased 48% YoY and 15% QoQ, driven by higher steel price. Adjusted EBITDA margin was 25.5% (+470bpsYoY, +40bps QoQ), in line with JMFe driven by lower gross margin (INR 0.3bn impact from steel price increase). Consolidated adjusted margin stood at 20.7% (+18%YoY,+25% QoQ) driven by weak standalone margin. EBITDA stood at INR 4bn (+90%YoY,+9%QoQ). Adj. PAT was INR 2.4bn (+146% YoY, +20%QoQ). The management indicated that capex for the AL forgings facility has been completed and it expects the same to drive the topline and profitability growth in overseas operations in the next 3-4 years. Exceptional gain for 3QFY22 was 1.67bn representing gain on fair value of investments in Tevva motors.

* Domestic business outlook:

Domestic revenue increased 41% YoY (+13% QoQ) driven by improved volume across segments. CV revenue rose 18%YoY (+18% QoQ) to INR 2bn driven by recovery in industry CV production, supported by pick up in industrial activity and fleet utilisation rates. PV revenue decreased 3%/6% YoY/QoQ to INR 752mn due to supply chain constraints. Domestic industrial segment increased 68% YoY (+15% QoQ) to INR 4.7bn primarily driven by completion of supply of forged aluminium cylinders used for delivering medical grade oxygen. Current quarter revenue from cylinders stood at INR 1500mn. The management highlighted that it remains optimistic on domestic rebound in the CV space in 4QFY22 driven by reasonable demand from customers and expects the same to be closer to 2QFY22 levels. Semiconductor shortage, input cost pressure, high diesel prices are near-term risks.

* Export business outlook:

Exports revenue was INR8.6bn (+70% YoY, -10% QoQ), supported by a continued recovery in the oil & gas segment. CV segment revenue stood at 3.8bn (+21%YoY,-20%QoQ). NA class 8 truck demand continues to be strong driven by robust order backlogs and build rates. PV segment revenue increased 17% YoY to INR 1.2bn (+15% QoQ). Export automotive segment continues to be adversely impacted due to chip shortage and supply chain issues. BHFC continues to increase market share in the traditional powertrain and is also engaging with customers on solutions for BEV and other technologies. The management highlighted that it expects the chip situation to resolve in the next 6 months and expects European and US operations to perform better in comparison to last year. BHFC continues to witness inflationary cost pressures across all variable cost elements (RM, logistics and energy) which are expected to weigh on margins of European operations. Industrial revenue stood at INR 3.5bn (+300% YoY ,-4% QoQ) driven by significant recovery in O&G revenue from INR 450mn in 4QFY21 to INR 1.75bn in 3QFY22. Prospects of the O&G segment look positive in the coming quarters owing to crude oil price above USD80/bbl. Construction and mining segment also performed relatively well driven by strong construction related activities globally.

* Overseas manufacturing operations:

In 2QFY22, overseas manufacturing subsidiaries revenue stood at INR 6.5bn (+6% YoY, -23% QoQ). Margin stood strong at 9.5% (vs. - 9.1% in 2QFY21, -140bps QoQ) driven by thrust towards lightweight materials, pruning of the product portfolio and reducing fixed costs. Overseas operations registered a decent performance with revenue of INR 23.5bn and EBITDA of 10.6%

* EV update:

BHFC plans to cater to the EV segment through a) light weighting (forged/cast products), b) e-mobility solutions (power/control electronics, components, systems) and c) develop new products. The management highlighted order wins of over 100mn of which 50mn was for pure EV vehicles. BHFC has recently secured an order win to supply 50k units of 2W components and 3W powertrains from Tork Motors

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