BFL rode out a challenging quarter, with revenue declining 20% yoy, PAT falling 38% yoy and the EBITDA margin falling to 27% (after a consistent 30% margin in the last 6 quarters).
The results were largely in line with our estimates. While the North America commercial vehicle (CV) and oil and gas (O&G) segments – the market’s two major concerns – may continue to dent growth in the next few quarters, they have now likely bottomed, mitigating the main source of downside risk in the stock.
On a full-year basis, FY17 might well be another washout year for BFL, but we believe FY18 will put the company back on the growth path. Over the medium term, we expect the India CV business to grow strongly.
In the industrial segment, aerospace, rail and other import substitution opportunities, along with the fast-growing passenger car (PC) business are set to start contributing meaningfully to revenue from FY18e.
We expect the company to be in net cash by FY18e We cut our EPS estimate for FY17 by 7%, but keep our estimates for FY18-19 largely unchanged. We now value the stock on June 2018e EPS (earlier March 2018).
Discounting our valuation back by a year, we arrive at our fair value target price of R875 (earlier R825). Key downside risks: a slowdown in Europe, a sharper-than-expected slowdown in the US and a slower-than-expected pick-up in the Indian economy.