Maintain BUY on Bharat Forge - Outlook upbeat; simplifying group structure - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Bharat Forge's (BFL) 4QFY21 results were a significant beat with APAT coming in at INR 2.06bn (vs 0.98bn QoQ). The management is upbeat on the outlook for Class-8 trucks and expects its volume to reach 300k (+50%) in FY22E. In the defence segment, it is bringing the entire business under the listed entity, which should increase investor confidence. BFL is also setting up a dedicated defence manufacturing facility near Pune to streamline and expand operations. We are raising our estimates by 31/14% over FY22/23E to factor in the positive 4QFY21 results and improving outlook. We maintain BUY with a revised target price of INR 860 at 34.5x FY23E EPS (vs 32x earlier) -the multiple has been raised to factor in the reorganised group structure, emerging opportunities in defence and PV segments, and stronger-than-expected demand. The stock is our preferred pick in the CV segment. Key risks: delayed defence orders; any sudden lockdowns due to COVID.

4QFY21 financials: Revenue grew 26% QoQ to INR 13bn on the back of 10% growth in shipment tonnage to 55.8k. Average realisations grew to INR 234k, led by higher exports (56% of revenue vs. 49% QoQ) and price hikes. The EBITDA margin at 27.5% surprised on the positive side, expanding sharply by 670bps QoQ on improved operating leverage. Adjusted PAT came at INR 2.06bn vs INR 0.98bn (QoQ).

US Class-8 Truck outlook is strong: The management is upbeat on Class-8 recovery and expects its volume to increase to 300k units in FY22E (up from ~200k currently). Industrial demand/oil is rebounding in the US: Further, the company has highlighted that the oil sector is now rebounding from the lows. The peak revenue achieved was INR 10bn, which has fallen sharply since then. The company is witnessing a pick-up in oil/shale demand and revenue could potentially increase to 50-60% of the prior peak. Further, the US stimulus is creating additional demand for the industrial segment.

Defense business realignment under Bharat Forge: The Kalyani group is merging its defense business with BFL buying out the remaining 49% stake in Kalyani Strategic Systems (KSSL). This move will make KSSL a fully owned subsidiary of BFL. The company will become eligible for larger bids, based on its improved net worth. Further, BFL is setting up a dedicated defense production facility near Pune to expand capacities and bring all its defense components under one roof. It has received an order from the GoI for development and supply of components/products, which will be executed by Sep-21; we await more clarity on the same.

Overseas subsidiaries profitability improves: The profitability of overseas operations has risen with EBITDA margin coming in at 10% (5% in CY18/19). As an aluminum forging facility in US has been commissioned this year, the performance should improve further.

Shares of BHARAT FORGE LTD. was last trading in BSE at Rs.749.5 as compared to the previous close of Rs. 751.1. The total number of shares traded during the day was 583055 in over 19661 trades.

The stock hit an intraday high of Rs. 790.3 and intraday low of 744. The net turnover during the day was Rs. 445251158.

Source : Equity Bulls

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