Buy Bharat Forge Ltd For Target Rs.965 - Motilal Oswal
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Strong recovery across segments
Recovery expected to sustain; international subs improving
* Bharat Forge (BHFC)’s strong performance in 1QFY22 was driven by strength across segments as well as a better mix. While all core businesses are seeing sharp cyclical recovery, BHFC’s diversified initiatives in aluminum, light-weighting, and e-Mobility are starting to fructify.
* We raise our FY22E consolidated EPS by 16% to account for strong demand in the export markets, while maintaining our estimates for FY23E. We maintain our Buy rating, with TP of INR965/share (28x Sep’23E EPS).
Favorable mix, operating leverage drive margin expansion
* Standalone revenue / EBITDA / adjusted PAT grew 5%/17%/3.5% QoQ to INR13.7b/INR3.9b/INR2.1b.
* Volumes declined 4% QoQ (+200% YoY) to 53.5k ton (est. 48.2k ton). Realizations grew 9.5% QoQ (7% YoY) to INR256.4k/t (est. ~INR231.3k/t) owing to a better mix.
* PV exports declined 2% and domestic CVs/PVs were down 43%/14% QoQ. CV exports grew 15% QoQ. Non-auto exports grew 76% QoQ, while non-auto domestic declined 10% QoQ.
* The gross margin expanded ~230bp QoQ to 62% (est. 60%). EBITDA margins improved 300bps QoQ to 28.5% (v/s est 22.7%), driven by mix and op. leverage. Adj. PAT stood at ~INR2.1b (est. ~INR1.2b).
Highlights from management interaction
* Outlook: Despite semi-conductor issues, it expects recovery to sustain in India and exports. Production for US Class 8 trucks in CY21 is expected to be 290–300k (v/s ~217k in CY20). The current backlog in US Class 8 trucks is equivalent to 10 months of production.
* EV strategy: It has a comprehensive EV strategy covering power electronics, control electronics, motors, etc. for all Auto sub-segments (from 2W to Buses).
* Sanghvi Forgings would enable the company to expand the product portfolio in the Industrial segment, especially in the Wind sector. With the current capacity (post the debottlenecking), it could do revenues of INR5–6b.
* Aluminum forging continues to see a good ramp-up (1QFY22 revenues at INR1.8b or ~29% of overseas subs revenues). It has the capacity to grow for the next 2–3 years, with scope to double revenues as well.
* FY22 S/A capex is expected to be INR2–2.5b. Subsidiaries would not need any growth capex after the recent commissioning of the US plant.
Valuation and view
* All businesses are seeing sharp cyclical recovery. This, coupled with its focus on creating new revenue pools in Defense and e-Mobility, could further lead to the de-risking of the business.
* We estimate a consolidated revenue/EBITDA/PAT CAGR of 35%/71%/303.5% (FY21–23E). The stock trades at 37.7x/26.9x FY22E/FY23E consolidated EPS. We maintain our Buy rating, with TP of INR965/share (28x Sep’23E EPS).
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