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All-round beat; growth prospects remain robust; maintain Buy

* BHFC’s Q2 EBITDA was above our estimate by 9%, mainly driven by an 8% revenue beat. The revenue beat was aided by higher-than-expected revenues in the Industrial segment on a surge in Oil & Gas segment exports and higher defense revenues in the domestic market.

* We increase FY22E EPS by 6% to Rs21.3, factoring in higher export revenues. Following the revision, we build in robust revenue/earnings CAGRs of 19%/29% over FY22-24E, driven by the cyclical recovery in the underlying Auto and Industrial segments in both domestic and overseas markets. Margins are likely to improve to 30.5% in FY24E from 28.3% in FY22E.

* Our positive view is underpinned by its leadership position in automotive forgings, focus on diversification, and an expected recovery in the core segments. Medium-term performance should be supported by new segments such as Defense, Railways, Aerospace, E-mobility, and Light-weighting solutions.

* Net debt-to-equity is expected to improve to -0.04x in FY24E from 0.2x in FY22E, with an average FCF generation of Rs12bn/year. Retain Buy and raise TP (Dec’22) to Rs950 from Rs920, based on 27x P/E for the standalone business on Dec’23E EPS (Sep’23E earlier).

What we like? 1) In EV components, the company is focusing on Power Electronics. Current revenues stand at ~US$15mn (about 70% from Refu) and expected to reach over US$100mn in the medium term. In India, revenues from EV stands at Rs100-150mn and are expected to reach Rs1bn+ in the medium term; 2) In the Defence segment, mounted Guns are under trials. Further, ATAGS summer trials are over and use-case trials are being conducted. Kalyani M4 vehicle orders will be executed in Q4FY22 and Q1FY23; 3) The India industrial business could double in the next three years, driven by the turnaround of Sanghvi Forgings, which has the potential to reach US$100-110mn in revenues from

What we did not like? In the near term, production in the underlying global CV segment would be impacted by semi-conductor shortages. Q3FY22 export automotive business is expected to decline qoq.

EBITDA above estimates: Revenue grew by 82% yoy to Rs16.1bn (est.: Rs15bn), above estimates due to higher-than-expected revenues in the Industrial segment, supported by a surge in Oil & Gas segment exports and higher defense revenues in the domestic market. The Defense business was helped by aluminum cylinder orders worth Rs690mn. EBITDA grew by 174% to Rs4.6bn, 9% above our estimates. EBITDA includes one-time benefits of Rs110mn relating to export incentives for Jan-Jun’21. Overall, adjusted PAT grew by 241% to Rs2.8bn (est.: Rs2.5bn), above estimates on higher operating profit.

Maintain Buy with a revised TP of Rs950, based on 27x P/E for the standalone business on Dec’23E EPS. Key risks: 1) delay in recovery in domestic/export CV segments; 2) downturn in the industrial segments; 3) supply constraints at the company and customer-end; and 4) adverse currency rates.

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