Analyst Corner: ‘Buy’ on Bharat Forge; revised Target Price at Rs 625 

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Published: January 7, 2020 3:15:00 AM

With 20% plus consensus downgrade in earnings over past 12 months led by US Class 8/oil & gas down-cycle, we believe BHFC’s earnings are close to bottoming out and historically the stock re-rates/de-rates four-six months ahead of improving global cycle.

Bharat Forge, Bharat Forge buy, Target Price , BHFC , market news, us industrial growth Sustained investments in large capacity forging press lines and focus on right segments have aided solid diversification.

We upgrade BHFC to ‘Buy’ and add it to our Industrials portfolio as, new capacities/shift to platforms-based model enhances revenue visibility – 10% plus revenue from new products by FY22-23E – and bolsters capability-led growth in domestic industrials; exports are approaching bottom levels & so are consensus downgrades – 20% from peak, in line with past cycles; and track record of presciently identifying/scaling up high-value add products is envisaged to further drive returns/ valuations.

Risks: Faster disruption in conventional products (crankshafts etc), delay in new product ramp up and US industrial growth. We revise TP to Rs 625, assigning low-end of peak cycle of 28x (Rs 355 earlier at 18x) given back-ended returns and visible exports stabilisation. With limited downside (refer to sensitivity table), we believe investors need to take risk (1 year forward PE above long-term average). Diversified play: Platform-based revenue stream boosts potential BHFC has transitioned from a plain-vanilla auto forgings company supplying to limited domestic and global CV OEMs to one of the most diversified forgings players with marquee global clientele.

Sustained investments in large capacity forging press lines and focus on right segments have aided solid diversification. While recent investments add Rs 20 bn plus worth of new revenue, business is shifting towards platform-based with co-development for OEMs further strengthening its relationships.

Capability/execution key MOATs; earnings cycle bottoming out.
Identifying high-scale/ value-add segments, prescient investments and market share ramp up have underpinned BHFC’s superior capability/ execution. Diversification and prudent investments across fungible manufacturing assets have moved overall bottom cycle OPMs/returns higher across cycles, reflecting in upward shift in valuation band.

With 20% plus consensus downgrade in earnings over past 12 months led by US Class 8/oil & gas down-cycle, we believe BHFC’s earnings are close to bottoming out and historically the stock re-rates/de-rates four-six months ahead of improving global cycle.

Structural initiatives; upgrade to ‘Buy’ BHFC has consistently delivered superior returns/ growth across past business cycles led by judicious expansion in the right products. We believe, management’s sharpening focus on new product platforms will drive better returns/ earnings over three-four years given first-mover advantage. Hence, we upgrade to ‘Buy/SO’ from ‘Reduce/SU’.

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