BHARAT FORGE Stock Research Report by ICICI Securities
Sector: Metals – Castings/Forgings
CMP Rs. 760, Target Rs. 773 (2% upside potential)
Target Period: 12 Months
BHARAT FORGE Stock Research Report: Getting closer to the peak of business cycle
Bharat Forge’s (BHFC) Q4FY23 standalone EBITDA margin at 26.2% was largely in line with consensus estimates, with adjusted PAT and sales tonnage being up ~11% YoY each. Foreign subsidiary’s EBITDA margin continued to impact overall profitability, and earnings remained in the negative zone (negative 4%) for the third quarter in a row, though up 200bps QoQ. With aluminium forging capacity in EU/US still in a ramp-up mode, it would take 2-3 quarters more for BHFC to turn EBITDA positive across key markets. Management outlook of mid-teens margin for aluminium forging is still intact at optimum utilisation/pricing levels down the line. Outlook for both India and US CV markets remains flattish for FY24, thus, putting the mantle for growth on non-auto segments, largely in the form of defence and aerospace with oil & gas, too, expected to remain flat. We are cutting our standalone and subsidiary level margin for FY24/25E, resulting in ~14%/12% cut in EBITDA estimates for FY24/FY25E respectively. We maintain HOLD on BHFC with a revised DCF-based target price of Rs773 (earlier: Rs894), implying 22x FY25E EPS.
Key takeaways from earnings call
● BHFC is looking forward to a mid-single digit growth in domestic M&HCVs in FY24 post a larger-than expected TIV in FY23 driven by pre-buying in Q4FY23. Despite recent pre-buying driven strong Q4 production, the production schedule of domestic CV makers is still strong as inventory levels have depleted from the system and it would take 3-4 months to normalise the stock levels, thus, taking care of the seasonally weaker months. BHFC is expecting US Class 8 truck production to largely remain stable YoY in FY24, with BHFC revenue set to grow slightly driven by market share gains. Exports to LAT-Am would decline YoY on led by outlook of industry weakness. JS Auto’s revenue in FY23 was Rs4.4bn and with capacity trebling to 120k tones in the next 2 yrs for JSA (organic+inorganic combined), revenue from this entity is set to increase proportionately. Passcar segment forging business would continue to grow strongly led by continued addition of orders, customer additions and enhancement of EV portfolio. In EU, aluminium forging business would turn EBITDA positive from Q1FY24 itself led by rising volume and gradual price hikes and US capacity (running at ~50% utilisation) would take a couple of quarters more to turn EBITDA neutral.
● In non-auto space, oil & gas revenue remained flat YoY as against aerospace revenue doubling in FY23. BHFC is expecting aerospace revenue to witness ~40-50% CAGR in coming 2-3 yrs based on its orderbook visibility. In defence vertical, with export orderbook of Rs20bn and FY23 overall revenue of ~US$100mn, BHFC is looking forward to ramp it up fast in the next 2-3 yrs based on the orderbook.
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