Management is now pinning hopes on pick up in aerospace, oil & gas, PV and new capacities over ensuing quarters for QoQ growth in revenue and EBITDA.
Bharat Forge’s (BHFC) Q1FY20 rev-enue and EBITDA missed consensus est-imates 15% and 25%, respectively —mi-ss intensified as compared to Q4FY19. This was led by sharp dip in industrial ex-ports, apart from generally slowing do-mestic automotive segment.
Conserva-tive stance of global OEMs due to slowdown led to sharp de-stocking, ref-lected in BHFC’s industrial exports plun-ging 34% YoY — largely driven by the oil & gas segment. Management has now pinned hopes on aerospace & defence, oil & gas, passenger vehicles (PV), upco-ming new capacities and BS VI potential over ensuing quarters. While we are alr-eady 10%/15% below Street in earnings (FY20/21E), we trim PE from 18x to 16x building in sharper impact of cyclical sl-owdown in key segments. We maintain ‘REDUCE’ with revised TP of Rs 370 (Rs 410 earlier) as we roll forward valuation to September 2020E (refer to, Cyclical challenges overshadow structural diversification for our detailed thesis).
Revenue fell 9% YoY led by inventory de-stocking in export oil & gas (industrial exports down 34% YoY) and slowdown in domestic automotive segment (CV down 31% YoY). Class 8 production remained robust (international CV up 10% YoY) and management expects momentum to sustain in CY19 riding healthy order backlog. The 34% dip in high margin industrial exports resulted in EBITDA margin declining 300bps YoY.
Management is now pinning hopes on pick up in aerospace, oil & gas, PV and new capacities over ensuing quarters for QoQ growth in revenue and EBITDA. However, in our view, recovery will be gradual given MHCV production cuts by domestic customers and weak order intake in Class 8 trucks (management expects 10% decline in Class 8 production in CY20).
We perceive a near-to-medium term risk of de-rating stemming from taperi-ng US business growth as the cycle tur-ns milder and slowdown in domestic CV despite management’s conscious effor-ts to add new revenue streams. Hence, we maintain ‘REDUCE/SP’. The stock is trading at 18x/17x FY20/21E consolidated EPS.