Buy Bharat Forge Ltd For Target Rs.974 - Yes Securities
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Outlook overall is stable to positive
Valuation and View
Bharat Forge (BHFC) 2QFY23 results were weak as EBITDA/Adj. PAT miss our estimates by ~10%/~12% respectively. Cost headwinds in overseas business as well as RM (gross margins contracted 310bp QoQ at 55.6%) reflected in P&L as despite ~6% revenue growth QoQ, EBITDA declined ~1.6% to Rs4.5b (est Rs5b) with margins at 24.3% (est 26.6%). Adj. for late delivery fee of Rs130m for defense business (one? off), margins are at 25%. The company has reported ~6% QoQ/7% YoY growth in tonnage at ~61.1k. Also, key positives going forward will be 1) continues ramp?up in recent acquisitions such as JS Auto cast (guided revenue growth >25% and double digit margins over 2?3 years), 2) FAME 2 approval for Tork EV motorcycles, 3) Defense revenues expectation of Rs8?10b (v/s Rs3?4b). The management has hinted towards sustenance of healthy demand momentum across segments going forward led by industrial and PV (auto) while Europe (CV) to remain stable. This we believe, should help BHFC navigate inflationary pressure and drive gradual margins expansion over FY23?25E.
New orders win for 1HFY23 have been healthy across auto, industrial, defense (new defense component order post USD155.5m order at KSSL) and JSA Auto (Rs1b). With diverse presence, BHFC is better placed than its previous cycles to benefit from i) steady orders and ramp up in domestic/exports PVs and CVs and ii) healthy outlook for industrials (with strong wins in segments like Aerospace, defense, mining, agriculture). We cut FY23/24 EPS by 2?3% to factor in for weak RM. We reiterate BUY rating on the stock with TP of Rs974 (earlier Rs836) based on ~26x rill?forwarded to Sep’24 consol EPS (v/s FY24). Reiterate BUY as one of our top picks.
Result Highlights – Revenues in?line, operationally weak led by RM
* Revenues grew 6% QoQ at Rs18.6b as tonnage grew 5.6% QoQ at 61.1k tons while ASP grew 0.3% QoQ at Rs304.8k/ton (est Rs309.9k/ton).
* Gross margins contracted ~290bp QoQ at 55.6% (est at 58.7%). This resulted in decrease of ~2% QoQ/0.5% YoY in EBITDA at Rs4.5b (est at Rs 5.0b). EBITDA margins came in at 24.3% (?400bp YoY, ?190bp QoQ), est 26.6%. Overseas subs performance weak with EBITDA loss of Rs341m (v/s profit of Rs495m in 1Q). Adj. for late delivery charge of Rs130m for defense business, EBITDA margins could have been at 25%.
* Weak Op Performance partially offset by higher other income ~85% QoQ/ 48% YoY at Rs 477m (est Rs 250m) resulted Adj. PAT to grow by 9.2% QoQ/(?14% YoY) at Rs2.7b (est at Rs 3.0b). Net debt increased to Rs23.3b (v/s Rs13.8b in 1QFY23) led by WC.
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