We upgrade Bharat Forge (BFL) to Buy as we expect an improvement in its medium-term revenue growth trajectory. Our optimism is premised on a combination of strong data points and commentary from end-customers. We forecast BFL’s revenue CAGR at 15% and increase our FY18/19E EPS by 8-15%. Our new target price reflects higher earnings and a re-rating to 16.5xFY19e EV/Ebitda (vs. 15x earlier). While the stock has outperformed YTD, we believe the growth momentum should support further stock price performance; Buy.
Customer commentary and data points reflect an improving operating scenario: BFL derives c40% of its consolidated revenues from US/EU trucks and c15% from India trucks. The contribution from legacy non-auto segments is 30%. BFL’s customers in these end-markets have reported revenue growth beats in 1HCY17 and most of them have raised their full-year guidance.
We are forecasting a recovery in BFL’s end markets: Our global automotive/machinery teams are forecasting NA truck volume growth of 15%/5% in CY18/19 vs.
-30% in CY17. In India, we forecast truck volume growth at 7/10% for FY18/19.
Our forecasts do not build in any upsides from defence business: We do not build any revenues in our explicit forecast period from the defence business, but there is a potential of order wins from the Indian government in the next 12-24 months.