BHFC has taken several steps to strengthen its US exposure like focusing on increasing content per vehicle and higher penetration in oil and gas (now also covers refining) which will ensure higher growth versus earlier cycles. Also, with visible ramp up in 1 of the top-3 US OEMs (FY17E sales pegged at $ 40 million) in passenger vehicle (PVs) segment BHFC seems to be on track to tap the $2 billion car forgings market in the US.
With BHFC already shipping critical forgings to 2 global OEMs, it has high potential in aerospace forgings, which could take its business from $ 5million (FY17E) to $ 50 million by FY19E. The company will play a rising role in defence components (currently mostly limited to tank parts, shells) with more than 25% scope in Howitzers/FICV.
However, we expect defense business to materially pick up only beyond FY18E given current project timelines. We expect aerospace/defence to account for ~10% of SA sales by FY19E with 200bps+ margin improvement over FY17-19E.
BHFC has been focusing on expanding its portfolio, especially in high-value and globally scalable products which have high entry barriers. With the bulk of the CAPEX behind, BHFC is expected to generate Rs 20 billion+ FCF (2x FY14-16) over the next 3 years, further strengthening its financial position.
The NAFTA class 8 truck markets plunged by more than 40% from its peak of 0.34 million vehicles in CY15. Consequently, BHFC’s US commercial vehicle (CV) segment is likely to report more than 35% erosion in revenues to ~R6 billion (FY17E) post hitting a peak of R10 billion plus in FY15. This was despite the addition of PACCAR (largest player in NAFTA Class 8 markets) as an OEM to BHFC’s client list. Here it would be reasonable to deduce that ramp up of PACCAR has been slow as the decline in BHFC’s US CV sales was in sync with the industry fall, despite the addition of PACCAR.