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Long term growth remain intact.

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

* Q4FY22 revenue grew by 49.2% QoQ on the back of sharp recovery in domestic & export market and pass through of steel price inflation.

* On a consolidated basis, the margin contracted by –490bps due to lower utilization owing to supply chain issue and increase in RM cost.

* The demand for automobile segment remains robust for both domestic and export market. On QoQ basis, CV & PV registered a growth of 14%/25% respectively. Total volume growth has grown by 7%QoQ.

* 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 to long term. On a consolidated basis, the valuation seems attractive comparing to its historical average. We value BFL at 22x FY24E EPS.

Strong recovery in the automobile market.

Q4FY22 revenue grew by 49.2% QoQ on the back of sharp recovery in domestic & export market and pass through of steel price inflation. On a consolidated basis, the margin contracted by –490bps due to lower utilization owing to supply chain issue and increase in RM cost. Domestic CV/PV/Industrial segment grew by 14%/26%/-8% respectively. However, International truck & car demand has been temporarily disrupted due to former issues. PV segment has been significantly impacted by the chip shortage and logistics issues. 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 resolved. On the car segement, the company continuous to increase its 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 Nirbhar Bharat, 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’s. 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 Defense Ministry to manufacture Kalyani M4 vehicles and expect further order going forward. On the Aerospace, BFL has already set the target to reach Rs.1000cr from Rs.400cr. in revenue by FY2023.

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 & margin and E-Mobility components & system business. We expect the incremental revenue from new business/products to grow at double digit in the next 2 years due to sustained and meaning macroeconomics revival, pick up in infra projects, and roadmap for EV. We expect meaning full recovery in overseas subsidiary in FY23 & factor a consolidated earning growth of 33%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 that, domestic demand visibility looks attractive and expect margin to show resilience owing to, growth coming from the defence and sustained recovery in the auto space. However, rise in inflation globally and geopolitical tension is looming a cause of worry for near term and led to lower 180bps in margin on estimates. On a valuation front we expect meaningful recovery even at current level. we rollover and value BFL at 22x FY24E EPS with a target price of Rs.785 and maintain buy rating .

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