Bharat Forge conducted its analyst meet in Pune on 22 April, which focused on showcasing the company’s preparedness to capture new business from changing emission norms, large domestic defence projects and working closely with OEMs. Management expects domestic defence to be a very large opportunity, driven by not just maintenance-related supplies/contracts but capital programmes (manufacturing and development). The company is already doing trial runs and believes the government push to indigenise will be a major boost.
Another major opportunity BHFC sees is making highly load bearing, but appropriately light, transmissions (axles, gears) to support ever-changing emission norms. Management expects to double its content per vehicle for CVs and close to triple it on the PV side due to these developments. While we like BHFC’s structural story with it taking the right steps to capture potential future business and its revenue growth close to bottoming out, we think current valuations at 33x FY18 P/E reflect this very well. Maintain our Neutral.
Domestic defence expected to be a very large opportunity
As per Bharat Forge (BHFC) management, domestic defence contracts are likely to be a large future opportunity. While thus far, BHFC has participated largely in the ‘revenue’ programmes (maintenance-related contracts), there is a lot of domestic business to be tapped on the ‘capital’ (manufacturing of artillery and large guns) side. As per management, this could be a Rs 600 bn opportunity over the next 15 years from capital programmes and another Rs 600 bn may come from maintenance.
For example, the group has participated in a project to convert old Russian 130 mm guns into new 155 mm guns. If trials are successful, this may lead to a total order of 1,500 guns from this project alone. To capitalise on contracts on making air defence systems, Bharat Forge has tied up with three of the best companies in the world: SAAB (Sweden), Rafael (Israel) and IAR (Israel aircraft industries). Currently, there are few domestic players with the requisite capabilities and hence Bharat Forge expects to gain a sizeable share of this business.
On the revenue side, management feels that current government/ quasi government suppliers like HAL and other defence PSUs have a majority of their supplies imported and have not developed domestic manufacturing capabilities. Thus, they will indigenise by sourcing locally from players like BHFC. There is a similar opportunity from Indian Railways which has started sourcing turbochargers from Bharat Forge.
Change in transmissions business offers more scope to forgers
Management highlighted that the focus on tightening of emission norms internationally and in India will translate into higher quality transmission materials (largely forged) which should be light and at the same time highly tensile. Management expects to double its content per vehicle for commercial vehicles (CV) and close to triple it on the passenger vehicle (PV) side due to these developments. As per the company, most original equipment manufacturers (OEMs) focus more on electronics, sensors, connectivity and want to leave metallurgical science to specialist forgers like Bharat Forge. What also adds to India’s advantage is the weak performance of global competition and the fact that engineering costs are ‘5x’ in developed markets compared to India.
Challenges for Bharat Forge ahead
While there is no dearth of opportunities for business, management highlighted a few key challenges: (i) Training and nurturing talent remains a big challenge for BHFC; and (ii) as most of new technologies have a high share of electronics and, training and updating employees is a key challenge given Bharat Forge has historically been strong on the mechanical side.