Bharat Forge - The push and pull of growth and margins continues - ICICI Securities

Bharat Forge's (BHFC) Q3FY21 earnings was in-line with consensus estimates as standalone and consolidated EBITDA margins came in at 20.7% and 16.5%, and fell 113bps and rose 433bps, respectively. Adjusted PAT (consolidated: Rs927mn) has been dragged down by losses in overseas subsidiaries (though performance is on the improvement path). On a segmental basis, India CV business grew fastest (~49% YoY) while global industrial business dropped 60% (dragged by Oil & Gas). BHFC remains a good proxy play to cyclical rebound in CV/Industrial segments both domestic and export markets. However, we believe even after factoring in sharp growth estimates (~35% PAT CAGR FY20-23), the RoCE's are likely to remain sub-15%, thus we find current valuations seem steep (P/E: ~54x/30x FY22E/FY23 respectively). We maintain our REDUCE rating on the stock.

- Key highlights of the quarter: Standalone revenues declined ~4% YoY to ~Rs10.4bn while EBITDA margin declined 113bps to 20.7%. Gross margin expanded 204bps to 63% as BHFC was able to pass through raw material cost inflation. Other expenses remained elevated (up 348bps) though employee costs declined 31bps. Domestic revenues outperformed as it grew ~27% to Rs5.2bn while exports declined ~19% to Rs5.1bn. Standalone PAT reported a profit of Rs982mn. Consolidated performance was weaker (PAT loss of Rs20bn) due to overseas losses on lower PV and industrial sales.

- Key takeaways from earnings call: Management indicated: a) Oil & gas segment was the key reason for decline in non-automotive exports; revenue from the segment was US$3mn in Q3 against US$10mn in Q2. b) Consolidated debt stood at ~US$220mn for India and ~US$70mn for Europe business; cash position stood at Rs26bn. c) India business witnessed highest-ever PV segment revenues while the non-auto segment grew due to strong growth in the farm equipment segment; the tractor segment constitutes ~20% of India non-auto business. d) Class-8 truck orders remained strong (~40k+ new orders); however, production is lower and is catching up with the demand. e) Focus is on new growth drivers, viz. EVs, light weighting (target FY25 revenue: US$250mn), and defence segment. f) capex spends are largely limited to overseas capacity. g) the penalty for which they provided exceptional charge of ~Rs2.7bn was in their belief a part of regular business practise, not necessarily reflective of cartelisation.

- Maintain REDUCE: We raise our EPS estimates for FY22E/FY23E by 12.1%/12.2% on the back of growth prospects in CV business. We roll forward to FY23E, normalise our multiple to 25x (vs 26x earlier) FY23E EPS and add Rs43/share (earlier: Rs42/share) for fair value (DCF basis) of defence business (link), to arrive at a revised target price of Rs576 (earlier: Rs482). Maintain REDUCE.

Shares of BHARAT FORGE LTD. was last trading in BSE at Rs.625.5 as compared to the previous close of Rs. 638.4. The total number of shares traded during the day was 226250 in over 4095 trades.

The stock hit an intraday high of Rs. 651.45 and intraday low of 616.1. The net turnover during the day was Rs. 141222114.

Source : Equity Bulls

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