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Strong export momentum to continue...

Bharat Forge Ltd (BFL) is a leading player in the forgings industry. The company is serving several sectors including automobile, power, oil and gas, rail & marine, aerospace & defence, construction, mining, etc.

* Q4FY21 has witnessed a standalone revenue growth of 26.2%QoQ on the back of 43% growth in exports (US truck sales and Oil & Gas) and 9.6% growth in domestic revenues.

* Despite cost inflationary pressure, margin expanded by 680bps from Q3FY21, owing to superior product mix and cost control initiatives.

* The demand for US class 8 truck sales will continues to remain robust for FY22. The US truck order book grew by 273%YoY for Q4FY21. However, India truck demand is likely to be weak for H1FY22 and expect steady recovery from H2.

* Government’s initiative to enhance local manufacturing through the announcement of Production linked schemes (PLI) & mission of Atma Nirbharata in defense, has started opening new orders for BFL.

* Amid crisis, the demand visibility looks robust on a medium basis for BFL, owing to growth coming from the export and defence sector and thus reiterate our Buy rating.

Recovery in the commercial vehicle sector

In Q4FY21 total Revenues grew by 26.2%QoQ, on back a strong 42.9% growth in export revenues and 9.6% growth in domestic revenues. The year has ended on a strong note with sharp recovery visible in all the end markets. EBITDA in Q4 FY21 has grown by 67.1%QoQ to Rs359cr. EBITDA margins at 27.5% have expanded by 680bps as compared to Q3FY21. For Q4, CV/PV/Industrial export grew by 69%/48%/22% respectively.

However, India truck demand is likely to be weak for H1FY22 and expect steady recovery from H2. On the other hand domestic truck market grew by 34%.QoQ owing to pent up demand. We expect strong traction in Agriculture, Mining, Construction, defence and Railways. Additionally, with the gradual re-opening of the domestic economy, revival of CV financing and improvement in the supply chain will support growth.

Domestic defence procurement to benefit BFL

Government’s initiative to enhance local manufacturing through the announcement of PLI scheme and mission of Atma Nirbharata, BFL has announced a capex of Rs2.4bn in the next few years for new defense and emobility initiatives. Over the last few years BFL has invested in technology to transform from a component supplier to sub assembly defense system supplier. It has developed new platform such as Artillery guns, air defense systems and armored vehicles.

Once the procurement begins on a large scale, the company will be able to supply these products on a Global basis. Recently BFL has bagged Rs178cr order from Defence ministry to manufacture Kalyani M4 vehicles and expected to induct further order going forward. On the Aerospace the company has already set the target to reach 1000cr by FY2023 from current Rs400cr.

Newer initiatives to support long term growth

Market shift towards light weighting components for Electric vehicles, represents a considerable growth opportunity for BFL in coming years both in terms of top-line and margin. We expect the incremental revenue from new business/products to grow at double digit in the next 2 years.

Sustained and meaning macroeconomics revival, pick up in infra projects, and roadmap for scrappage policy are the critical factors for growth in the CV Industry. We expect meaning full recovery in FY22 and factor 29%YoY consolidated revenue growth

Valuations

BFL’s strategy to shift to new technological products and ramp-up in Aluminium forging in US & India for new product development are on track and will bring value migration per vehicle in the long run. Sharp recovery in the export market is likely to say for the year. We believe the demand visibility looks attractive and expect margin expansion owing to the growth coming from the defence sector and sustained recovery in the auto space. We value BFL on premium at 18x EV/ EBITDA on FY23E and reiterate our buy rating at CMP

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