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Long term growth remain intact.

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.

* Q2FY22 revenue came at Rs.2,386cr.(+13.2% QoQ). This was largely on account of strong domestic growth of 40% QoQ. Export growth came lower at 4.9% due to chip shortage.

* Despite the input and logistics cost pressure, EBITDA margin came at healthy 21.4% similar to previous quarter.

* The demand in domestic market for both industrial & Automotive and export industrial segment continue to remain robust. However export automotive will witness subdued demand for near term.

* BFL’s 2W- EV associate Tork Motors has received FAME-II approvals. The company has also won orders for developing components for ECVs in the light truck segment. These should start from FY23 onwards.

* Amid crisis, the demand visibility looks robust on a medium basis for BFL, owing to growth coming from the domestic auto and Industrial sector. We value BFL at 16x EV/EBITDA on FY23E.

Strong recovery in the domestic market.

Despite the semi conductor & container shortage, EBITDA margin came healthy at 21.4% similar to previous quarter., owing to superior product mix and cost control initiatives. Q2FY22 revenue came at Rs.2386cr. (+13.2% QoQ). This was largely on account of strong domestic growth of 40% QoQ. Domestic CV/PV/ Industrial segment grew by 31%/35%/63%. However, International truck & car demand has been temporarily disrupted due to former issues. The impact was visible in Q3CY21 at 62,718 units as against 69,488 in Q2CY21, a drop of 10%. PV segment has been significantly impacted by the chip shortage and logistics issue. The industrial sector recovered meaningfully primarily driven by Oil and Gas space. However, we expect the outlook for both CV and PV to remain robust once the above issue are get solved. Especially the PV segment, where the company continuous to increase it market share both in the IC powertrain and BEV.

Defence & Electric Vehicle Initiatives

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. The 2W– EV associate Tork Motors has received FAME –II approvals. The company has won orders for developing components for electric CV in the light truck segment and system electronics for Industrial. The ramp up should start in FY23. Acquisition of Sanghavi Forgings is completed at cost of Rs77cr and company has turned profit in PBT. On defense, Recently BFL has bagged Rs178cr order from Defence ministry to manufacture Kalyani M4 vehicles and expect further order going forward. On the Aerospace the company has already set the target to reach 1000cr by FY2023 from current Rs400cr.

Incremental revenue from new business

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 and E-Mobility components and system business. 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 EV. We expect meaning full recovery in overseas subsidiary in FY22 and factor a consolidated revenue growth 37%YoY .

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. We believe, domestic demand visibility looks attractive and expect margin expansion owing to the growth coming from the defence sector and sustained recovery in the auto space. However, the rise in Europe’s covid cases and thereafter lockdown is looming as a cause of worry for near term. We value BFL on 16x EV/EBITDA on FY23E with a target price of Rs.861 and recommend Buy rating at CMP.

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