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India continues to cushion weak EU performance

Bharat Forge’s (BHFC) Q3FY23 standalone EBITDA margin at 25.3% was in line with our estimate, and up 100bps QoQ. Revenue growth (5% QoQ) was led by 3% tonnage growth QoQ, supported by ~2% rise in blended realisation. Export revenue grew ~10% QoQ with PVs and industrials driving growth as against domestic revenue being flat QoQ across all key sub segments of PVs/CVs/non-auto. Overseas subsidiaries’ performance only worsened further QoQ as their EBITDAM declined 220bps QoQ to negative 5.8% led by sub-par utilisation, elevated cost structures and aluminium forging business ramping up slowly. India revenue continued to remain resilient led by strong show in domestic CVs and the recently acquired casting entity of JS Auto (QoQ revenue up ~20%). With strong outlook of ~100k M&HCV production in Q4, outlook for CV segment revenue remains strong for near to medium term along with no production disruption led by RDE norms currently. We believe key levers for company’s growth in FY23E-FY25E will be: a) Domestic capex upcycle, b) strong recovery in EU PV/CV business, c) ramping up of EV and defence businesses, d) recovery in demand for critical aerospace components; and e) ramping up of aluminium forging business abroad, subsequently improving the subsidiary level margin. We downgrade to HOLD (from Add) on BHFC with DCF-based target price of Rs894/share (earlier: Rs904), implying 21x FY25E EPS.

Key takeaways from earnings call

* Demand across segments under exports remained strong in Q3FY23. Gradual recovery in global PVs, steady level of production in US Class 8 CVs and various areas within industrials like aerospace ramping up, would be the catalysts for exports revenue ahead, other than favourable currency moves. India growth would be driven by continued growth in CVs, rising PV market, rising order book of JS Auto (casting business) other than the ramping up of domestic defence business (~Rs20bn orderbook currently). EV component-related facilities will start operating from FY24, with Chakan plant set to get operational in Q1FY24 itself. Domestic M&HCV production in Q4FY23 is expected at 100k units, closer to record levels of FY19, giving a good outlook for near-term business scale and profitability in turn.

* With sub-50% utilisation for aluminium forging business under foreign subsidiaries, EBITDAM for foreign subsidiaries is getting heavily impacted. With foreign subsidiaries contributing ~33% of consolidated revenue and aluminium forging at ~28% of this revenue, BHFC is looking forward to ramp up this utilisation towards ~70% levels to achieve EBITDAM of ~15%+ along with getting aid by gradual price hikes and power/freight/wage/commodity inflation cooling off. Standalone EBITDAM of ~25%, we believe, has the scope to move up towards ~28% with improved operating leverage and rising mix of industrials/CV/EV components.

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