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Healthy medium-term growth prospects, though near-term concerns remain

* We attended the BHFC Analyst Meet, where Management re-iterated healthy mediumterm revenue prospects, supported by growth in the defense, aerospace, e-mobility and aluminium segments.

* In FY24, Management expects revenue growth to be strong in the domestic market, while a muted performance is expected in the overseas markets, especially for North-America Class8 trucks, European HCVs and construction equipment.

* BHFC has significant revenue exposure to the ICE engine and transmission components. Over the medium term, the company is focusing on increasing presence in EVs and Hydrogen vehicles, via initiatives such as: 1) component portfolio expansion; 2) electric 2W/3W vehicle assembly; and 3) retro-fitment of electric drivetrain to ICE vehicles.

* Considering the muted growth prospects in the overseas auto segment ahead and the limited upside potential, we retain our HOLD rating with target price of Rs820/share, based on 24x Dec-24E EPS for the standalone entity.

Key takeaways from the analyst meet

* 2030 Consolidated business targets: i) Revenue expected to clock CAGR of 12-15% over FY22-30. ii) EBITDA margin expected at over 20% vs 18.9% in FY22. iii) ROCE expansion expected at 500bps over FY22-30. iv) Dividend pay-out at +30% vs 27% in FY22.

* Positive outlook on underlying industries for the domestic market: Strong growth is expected across the CV, PV and industrial segments.

* Muted outlook on underlying industries for overseas markets: Muted growth is expected due to weak macros for industries such as the North-America Class 8 trucks (-4% growth) and European HCVs (flat growth). Over the medium-term, BHFC sees good opportunity to gain share on account of the China+1 and Europe+1 policies by customers.

* Diversification strategy: Company’s focus remains on increasing share of revenue from segments like Defense, Aerospace, Light-weighting, E-mobility and Castings.

* Defense: Government initiatives like increased sourcing from local players, allowing local players to use testing facilities, etc. are resulting in better prospects. BHFC has been working in areas of artillery guns, armored/protected vehicles, unmanned systems and ammunitions. It expects strong traction over the medium term. Initial trial orders for the Advanced Towed Artillery Gun System (ATAGS) are likely to be announced in the next 3- 6 months. Export order-book stands at USD180mn, including USD156mn artillery gun orders.

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