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All-round earnings beat; valuations already capturing robust outlook

Bharat Forge’s (BHFC) Q1FY24 standalone EBITDA margin was resilient at 26%, though EU operations turned EBITDA positive to 4.4% as against being in loss last quarter. Standalone revenue beat expectations despite this being a weak quarter for domestic CVs, with industrial exports driven by defence business execution driving revenue up QoQ as against CV segment exports remaining flattish QoQ. We are building in 14% volume growth for standalone BHFC in FY24 driven by growth in domestic CVs, exports PVs, defence business, aerospace business. Though we remain positive on FY24 business outlook of BHFC, we believe trading at ~26x FY25E earnings, all the good fundamentals are already factored in. BHFC has rallied by ~25% in past couple of months and with our revised DCF based target price of INR 899 (earlier INR773), implying 25x FY25E earnings, we downgrade BHFC to REDUCE (from Hold).

Conference call key takeaways and our views

* Standalone revenue beat was driven by 72% YoY growth in industrial segment revenue as defence business moved up to ~INR 2.5bn from less than ~INR 1bn YoY. In Q1FY24, BHFC won defence order of ~INR 2.8bn (to be executed across coming 18 months), taking the overall defence order book to ~INR 22bn. Both exports and domestic CV businesses were up ~10% YoY, with outlook of flattish growth for US Class-8 trucks in the coming quarters vs 8-12% growth in domestic CVs for FY24. BHFC is expecting ~30%+ YoY growth in aerospace segment exports vs flat revenue outlook for the oil & gas segment in FY24. Overall standalone tonnage at ~68kte was up ~5% YoY with realisation at INR 314/kg, up ~3% YoY. Under foreign subsidiaries, aluminium forging (35% of export subs revenue) grew ~20% QoQ as against steel forging being up 5% QoQ. We are building-in standalone tonnage growth of 14%/7% in FY24E/FY25E.

* From profitability perspective, standalone EBITDAM was resilient and flat at ~26%, both YoY and QoQ, while gross profit/kg remained flat QoQ. With operating leverage continuing to support operating margins, high growth in the aerospace segment as against revenue growth of KSSL (100% defence subsidiary with lower margin) being higher than the portfolio growth rate, we expect standalone EBITDAM to remain around ~26-27% across FY24E-FY25E. EU operations reported INR 510mn of EBITDA vs loss of INR 140mn QoQ. BHFC is expecting to reach EBITDA-breakeven by end of FY24 in its US operations as against INR 350mn EBITDA loss in Q1FY24.

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