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Healthy performance; Improvement in int’l biz. profitability remains key

In 2QFY24, Bharat Forge (BHFC) reported standalone EBITDAM of 27.0% (+270bps YoY, +120bps QoQ), 100bps above JMFe. Avg. realisation improved +2% QoQ (+5% YoY). Consol. EBITDA margin improved 110bps QoQ to 16.5% (+240bps YoY). Management highlighted that Class 8 demand remains steady in NA & EU. Order book remains healthy for BHFC across verticals. The company expects Defence business to grow in strong double-digits going ahead on the back of robust exports order book (INR 28bn). We see long-term growth triggers in BHFC intact, like the steady CV cycle in US and India and strong ramp-up of PV, Aerospace and Defence vertical. Cost-control initiatives and positive operating leverage are likely to support margins. We increase our consol. earnings estimate by 3-5% for FY25/26e. Maintain BUY with a Mar’25 TP of INR 1,150 (25x forward earnings). Weakness in global CV cycle remains a key risk.

* 2QFY24 – India business beats est.; International subsidiaries affected by seasonality: BHFC’s stand. net sales stood at INR 22.5bn (+21% YoY, +6%QoQ); 1% above JMFe. Total tonnage stood at c.70.3kt (+15% YoY, +4% QoQ). Realisation increased by +2% QoQ (+5% YoY). Reported stand. EBITDAM was 27.0% (+270bps YoY, +120bps QoQ), 100bps above JMFe led by cost control efforts. Consolidated revenue stood at INR 37.7bn (+23%, -3%); 5% below JMFe due to seasonality at EU operations. EBITDAM stood at 16.5% (+240bps YoY, +110bps QoQ). EBITDAM at EU operations declined 90bps QoQ to 3.5% due to seasonality. Consol. EBITDA stood at INR 6.2bn (+44%YoY, +4% QoQ), 5% below JMFe. Consol. Adj. PAT stood at INR 2.15bn (+52% YoY; flat QoQ).

* Domestic business outlook: Domestic revenue increased 21%YoY (+1% QoQ). CV revenue increased 7% YoY (-5% QoQ) to INR 2.6bn. CV demand is expected to remain healthy led by higher govt spends on infra. PV revenue stood at INR 817mn (-18% YoY, +31% QoQ). PV business remains well-placed for growth driven by premiumisation and shift towards UVs. Domestic Industrial segment revenue increased 36% YoY (+1% QoQ) to INR c.6.2bn led by strong growth in Defence segment. Order pipeline remains strong led by revival in infrastructure and capital goods. During 1H, the company won new business worth INR7.4bn across various segments incl. INR 3bn for E-mobility programs. In respect of Defence segment, the company secured new business worth INR11bn taking total orderbook to INR 30bn (domestic + exports; to be executed over coming 24 mths). The company expects to secure order for ATAG guns from Govt of India in the near-term.

* Export business outlook: Exports revenue increased 21%YoY (+9% QoQ) to INR 12.8bn led by healthy demand across segments. CV segment revenue stood at INR 5.4bn (+18% YoY, +9% QoQ) led by market share gains and addition of new geographies. Management indicated that Class 8 truck production remains steady and outlook for next CY is flattish. Demand remains steady in NA and EU. PV segment revenue increased 39% YoY (+21% QoQ) to INR 3.4bn owing to healthy demand from existing and new customers for existing and new products (mkt. share gain and enhanced geographical presence). Industrial revenue stood at INR 5.5bn (+18% YoY, +9% QoQ). Despite inventory correction in O&G segment, Industrials revenue remained resilient led by new business wins for expanded product portfolio. Order book for Defence segment also remains strong at INR28bn, to be executed over next 24 months. The company is focusing on winning new business targeted at Construction & Mining, Railways, Agri equipment, Aerospace etc.

* Overseas manufacturing operations: During 2QFY24, overseas manufacturing subsidiaries revenue stood at INR 12bn (+27% YoY, -10% QoQ). EBITDA margin at EU operations declined 90bps QoQ to 3.5% owing to seasonality. EU operation is currently operating at c.70% utilization level and the management indicated that it expects EBITDA margins to improve significantly led by cost reduction efforts, focus on value added business and higher capacity utilization (once phase 2 plant becomes operational). The company also indicated that US Aluminium forging plant is gradually ramping-up (50% cap. utilisation currently) and it expects the plant to be EBITDA breakeven at 75% utilisation level.

* Other highlights: BHFC has reduced debt by INR 3bn during 1HFY24 and plans further debt reduction of close to INR 5bn in 2HFY24.

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SEBI Registration Number is INM000010361