loader2
Partner With Us NRI
Bharat Forge Ltd>
  • CMP : 818.0 Chg : 9.55 (1.18%)
  • Target : 1,050.0 (27.27%)
  • Target Period : 12-18 Month

22 Feb 2023

Unchanged robust fundamentals, positivity retained…

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
Q3FY23

BFL reported healthy performance in Q3FY23 on standalone basis

  • Standalone sales were up 5.9% QoQ to ₹1,952 crore, tonnage up 2.6% QoQ
  • EBITDA was at ₹535 crore, with margins up 310 bps QoQ to 27.4%.
  • PAT was up 7.8% QoQ to ₹289.1 crore
  • Domestic operations secured new business amounting to ~₹ 265 Crores across automotive & industrial application. The defence vertical of the company also secured an export order worth ~₹600 crores with total orderbook in this domain pegged at ~₹1,950 crores (primarily exports).
What should Investors do?

BFL’s share price has grown at ~4% CAGR over the past 5 years (~₹ 742 levels in Feb 2018), broadly in-line with Nifty Auto index.

  • We retain BUY rating amidst robust order wins in domestic and foreign businesses, healthy export orderbook in defence, turnaround visibility in foreign operations & potential healthy wins in domestic defence space.
Target Price and Valuation

Revising our estimates, we value BFL at unchanged target price of ₹ 1,050 i.e., 35x P/E on average FY24-25E EPS of ₹30/share

Key Triggers for future price performance
  • Multiple growth levers in domestic, export market amidst cyclical upswing in CV space, robust demand in PV category amid easing chip issues & focus on EV space. We expect sales to grow at 17.5% CAGR over FY22-25E.
  • Strong double digit growth in non-Auto business (i.e. industrial, defence, aerospace) amidst robust order booking to aid margins and reach ~18% by FY25E, consequently RoCE/RoE is seen reaching ~15%/18% by FY25E
  • Ambitious Vision 2030 with financial contours as: (i) 12-15% revenue CAGR, (ii) EBITDA margin >20% at consolidated level, (iii) RoCE at 25% at consolidated level, (iv) capital allocation for organic/inorganic growth
Alternate Stock Ideas

Besides BFL, in our auto coverage we like M&M

  • Focused on prudent capital allocation, UV differentiation & EV proactiveness
  • BUY with target price of ₹1,665

Key Financial Summary

Key Financials FY20 FY21 FY22 5 year CAGR (FY17-22) FY23E FY24E FY25E 3 year CAGR (FY22-25E)
Net Sales 8,055.8 6,336.3 10,461.1 10.3 12,895.2 14,749.8 16,975.3 17.5
EBITDA 1,114.8 861.7 2,016.0 10.0 1,859.5 2,461.7 3,036.9 14.6
EBITDA Margins (%) 13.8 13.6 19.3 0.0 14.4 16.7 17.9 0.0
Net Profit 349.2 -127.0 1,077.2 9.1 593.0 1,173.9 1,603.9 14.2
EPS (₹) 7.5 -2.7 23.1 - 12.7 25.2 34.4 -
P/E 110.0 -302.3 35.7 - 64.8 32.7 23.9 -
RoNW (%) 7.8 -125.9 15.2 - 8.5 15.0 18.0 -
RoCE (%) 5.6 2.2 9.6 - 8.0 11.7 14.8 -
Source: Company, ICICI Direct Research

Key takeaways of the recent quarter & Concall highlights

Q3FY23 Results:

  • Standalone revenues came in at ₹1,952 crore (up 4.7% QoQ), amid 2.6% tonnage growth to 62,755 MT. The growth was led by international operations wherein revenues grew 9.4% QoQ to ₹1,166 crore (CV up 5.1%, PV up 10.2%, Industrial up 14.2%). Domestic revenues were down 1.7 % QoQ at ₹759 crore (CV up 3.8%, PV down 6.4%, industrials flat QoQ)
    • Standalone EBITDA in Q3FY23 stood at ₹535 crore, with consequent margins placed at 27.4% (up 310 bps QoQ). Gross margin expanded by 37 bps QoQ (vs our expectations of ~180 bps QoQ) however savings were realised in other expense (down ~250 bps QoQ) primarily tracking exchange gains.
    • Reported standalone PAT stood at ₹ 289.1 crore, up 7.8% QoQ, primarily tracking higher absolute EBITDA, however was offset by higher interest expense (includes one time MTM notional loss).

Q3FY23 Earnings Conference Call highlights

  • Management informed about higher interest costs was due to one-time MTM loss of ~|35 crores due to forex excluding which interest expense stood at ~|55 crores and will remain at this level going forward.
  • For Q3FY23 management informed about the domestic operations securing new business worth ~ ₹ 265 Crores across automotive & industrial application vs ~|850 crores order won during Q2FY23. Also, KSSL, the defence vertical of the company (wholly owned subsidiary) also secured an export order worth ~|600 crores with orderbook at ~|1,950 crores (all export) to be executed over 2 years.
  • JS auto also received order worth |153 crores during Q3FY23.
  • For Q4FY23 management informed about stable performance across both domestic and export markets & expects new business to be accretive from FY24E onwards.
  • Company incurred ~|62 crores of EBITDA loss in foreign operations due to low utilization in Germany and North America. Company has ~7.5 million units’ capacity in foreign operations & has utilization of ~50%. Further management informed about some plants in US working at ~25% utilization
  • On its recent acquisition, JS Auto management remained bullish about overall growth with target of increasing revenue by double digit CAGR over next 3 years, with total orderbook post acquisition coming in at |250 crores. Further company has acquired one plant post which capacity to increase to ~75,000 tons with desired margins to be in excess of 15%.
  • USD/INR realization for quarter stood at |81.5.

    QoQ decline in domestic operations was due to lower production in PV space & inventory correction in tractor space

    Management do not foresee disruption in production schedule due to RDE norms.

    Out of defence orderbook ~50% is related to capital good and 50% for consumables.

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.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products.

ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

 

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

 

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stocks price movement, outstanding positions, trading volume etc as opposed to focusing on a companys fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports.

 

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

 

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research.

 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

 

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

 

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

 

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.

 

 

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.

 

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

 

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

 

Since associates of ICICI Securities and ICICI Securities as a entity are engaged in various financial service businesses, they might have financial interests or actual/ beneficial ownership of one percent or more or other material conflict of interest various companies including the subject company/companies mentioned in this report.

 

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

 

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

 

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

 

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

 

Read More