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  • CMP : 1,407.5 Chg : -5.80 (-0.41%)
  • Target : 1,000.0 (17.65%)
  • Target Period : 12-18 Month
Result Update

18 Nov 2022

Robust order wins across segments bodes well…

About The Stock

Bharat Forge (BFL) is India’s leading auto component exporter with strong engineering, technological competencies in forging and metallurgy. With total capacity of 6.83 lakh MT per annum, its products find application in domestic, exports markets across PV, CV, oil & gas, construction & mining, power, defence, etc.

  • FY22 standalone segment mix – ~30% CV, ~47% Industrial, ~12% PV
  • FY22 standalone export mix - ~68% America, ~29% Europe, ~3% other
Q2FY23

BFL reported healthy performance in Q2FY23 on standalone basis

  • Standalone sales were up 5.9% QoQ to ₹1,864 crore, tonnage up 5.6% QoQ
  • EBITDA was at ₹453 crore, with margins down 40 bps QoQ to 24.3%.
  • PAT was up 10% QoQ to ₹268.1 crore, aided by higher other income
  • Domestic operations secured new business amounting to ~₹ 850 Crores across automotive & industrial application. The defence vertical of the company also secured an export order worth US$ 155.5 million  

     

What should Investors do?

BFL’s share price has grown at ~5% CAGR over the past 5 years (~₹ 696 levels in November 2017), broadly in-line with Nifty Auto index.

  • We retain BUY rating amidst robust order wins in the domestic business, increasing traction being witness in the defence space and margin expansion on anvil amidst decline in RM prices as well as o/p leverage gains.
Target Price and Valuation

Revising our estimates, we now value BFL at revised target price of ₹ 1,000 i.e. 35x P/E on FY24E EPS (earlier target price ₹ 900)

Key Triggers for future price performance
  • Cyclical upswing underway in the domestic CV space amidst increased capex spends, strong orderbook of US Class 7/8 trucks, double digit PV growth & focus to create additional revenue pools like defence, EV, aerospace, etc. to result in robust 14.4% net sales CAGR over FY22-24E
  • With operating leverage at play, cooling off in commodity prices & pickup in utilization level, EBITDA margins are seen improving to ~19% by FY24E.
  • With healthy cash flow generation and low leverage on B/S (Debt/Equity<1), RoCE/RoE are seen reaching 12.4%/16.4% respectively by FY24E.
Alternate Stock Ideas

Besides BFL, in our ancillary coverage we like M&M.

  • Focused on prudent capital allocation, UV differentiation & EV proactiveness

 

  • BUY with target price of ₹1,590

Particulars

Particulars (₹ crore) Amount
Market Capitalization 67,291.0
Total Debt (FY22) 5,655.0
Cash & Investment (FY22) 2,511.0
Enterprise Value 42,717.0
52 week H/L (₹) 1,460.2/919.1
Equity Capital 95.6
Face Value (₹) 2.0

Price Chart

Recent Events & Key Highlights

  • Posts healthy standalone performance in Q2FY23
  • Key Risk: (i) Lower than anticipated sales growth in key export markets (ii) Slower than expected recovery of margins in foreign operations

Research Analyst

Shashank Kanodia
shashank.kanodia@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Key Financials FY19 FY20 FY21 FY22 5 year CAGR (FY17-22) FY23E FY24E 2 year CAGR (FY22-24E)
Net Sales 10,145.7 8,055.8 6,336.3 10,461.1 10.3 12,055.2 13,701.1 14.4
EBITDA 2,055.6 1,114.8 861.7 2,016.0 10.0 1,897.5 2,579.9 13.1
EBITDA Margins (%) 20.3 13.8 13.6 19.3 - 15.7 18.8 -
Net Profit 1,032.6 349.2 -127.0 1,077.2 9.1 816.1 1,323.3 10.8
EPS (₹) 22.2 7.5 -2.7 23.1 - 17.5 28.4 -
P/E 38.3 113.3 -311.5 36.7 - 48.5 29.9 -
RoNW (%) 19.1 7.8 -125.9 15.2 - 11.4 16.4 -
RoCE (%) 15.5 5.6 2.2 9.6 - 8.4 12.4 -
Source: Company, ICICI Direct Research

Key takeaways of the recent quarter & Concall highlights

Q2FY23 Results:

  • Standalone revenues came in at ₹1,864 crore (up 5.9% QoQ), amid 5.6% tonnage growth to 61,149 MT. The growth was led by domestic operations wherein revenues grew 12% QoQ to ₹772 crore (CV up 3.8%, PV up 28.3%, Industrial up 16.1%). International revenues were up 1.8% QoQ at ₹1,066.4 crore (CV up 1.2%, PV down 24.8%, industrials down 8.7%)
  • Standalone EBITDA in Q2FY23 stood at ₹453 crore, with consequent margins placed at 24.3% (down 40 bps QoQ). Margin performance was negatively impacted by gross margin decline (down ~310 bps QoQ) and was however offset by lower other expense (down ~220 bps QoQ).
  • Reported standalone PAT stood at ₹ 268.1 crore, up 10% QoQ, primarily tracking higher absolute EBITDA and higher than anticipated other income.

Q2FY23 Earnings Conference Call highlights

  • For Q2FY23 management informed about the domestic operations securing new business worth ~ ₹ 850 Crores across automotive & industrial application vs ~|350 crores order won during Q1FY23. Also, KSSL, the defence vertical of the company (wholly owned subsidiary) also secured an export order worth US$ 155.5 million (~₹ 1,250 crore) to supply Artillery Gun system, executable over a 3 year period. JS auto also received order worth |100 crores during H1FY23.
  • For H2FY23 management expects Indian operations to report steady state of numbers amidst robust demands across segments and Cooling of commodities, however foreign subsidiaries are expected to post muted set of numbers. Moreover, The European Aluminium operations performance is expected to show gradual recovery over the next two quarters.
  • During the quarter company witnessed highest ever quarterly exports however management informed about the performance of the European operations being adversely impacted by lower than anticipated sales volumes for the Aluminium forging business. Further the new Greenfield Aluminium Forging facility in North America being in ramp-up phase and operating at utilization levels below EBITDA break-even levels.
  • In Indian operation company remained bullish about defence & aerospace apart from domestic CV, PV space. During the quarter company achieved ~|80 crore of revenue from sale of armoured vehicles.
  •  On the standalone operations, management informed about one-time expense booked during quarter of ~|13 crores (late delivery levy) and raw material related inflation impacting margins by 40-50 bps post ex of which margins were expected to be ~25%. In its overseas operations, energy cost remained unabsorbed & it also had to bear higher employee expense on account of anticipation of high demand prospects.

  • Aluminium forging business usually works on ~16% margins but is impacted by raw material price, energy cost, freight cost & would take 2-3 quarter to offset these hiked costs. Aluminium forging facility in Europe is working at ~55% capacity utilization

  • Company does not intend to enter into bio chemical defence weapons and would only supply to government approved agencies.

  • Management informed about CV demand in European region to remain steady and would be at current level.

  • Management expects demand from US Class 8 trucks to remain healthy with production run-rate expected at 28-29k/month with most OEM’s booked for CY23E.

  • Management expects JS Auto topline to grow by 10-15% this year & ~20-25% in FY24E.

  • Management informed about company’s subsidiary Tork Motors now eligible for FAME II subsidiary and revenue from EV business to grow meaningfully from FY24E.

  • Company aspires to increase revenue from defence to |700-|1000 crores vs ~|300-500 crores currently riding on owned Intellectual property rights on artillery guns and high demand for these guns in domestic as well as export markets

  • Defence facility under KSSL will require ~|30-40 crores of assembly plant for the recent artillery gun order win with major forging work would be done in BFL plant.

Disclaimer

ANALYST CERTIFICATION

I/We, Shashank Kanodia, CFA, MBA (Capital Markets), and Raghvendra Goyal, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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