Bharat Forge: Rate ‘buy’ with Rs 1,050 PT

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November 17, 2021 1:15 AM

Stock is still at 5.1x FY23E PB vs past peaks of 6.7x/7.6x. We rate 'buy'.

New EV components, vehicle light weighting, defence, and US infra package can fuel further growth. Stock is still at 5.1x FY23E PB vs past peaks of 6.7x/7.6x. We rate 'buy'.New EV components, vehicle light weighting, defence, and US infra package can fuel further growth. Stock is still at 5.1x FY23E PB vs past peaks of 6.7x/7.6x. We rate 'buy'.

Key takeaway: BHFC’s 2Q consolidated EBITDA rose 5% QoQ (+1.9x YoY) and was in line with JEFe. Standalone volumes grew 7% QoQ while EBITDA/t was an all-time high. Chip constraints will likely impact 3Q truck/PV exports but underlying demand is strong and all other segments are in a sharp cyclical recovery. New EV components, vehicle light weighting, defence, and US infra package can fuel further growth. Stock is still at 5.1x FY23E PB vs past peaks of 6.7x/7.6x. We rate ‘buy’.

Another strong quarter: 2Q standalone volumes rose 7% QoQ (+40% YoY) while revenues grew 17% QoQ (+82% YoY). Domestic revenues rose 43% QoQ led by double-digit growth across segments. Exports were relatively tepid at +4% QoQ as chip shortages impacted truck and passenger vehicle (PV) segments; export industrials rose 22% QoQ to a 10-quarter high though. EBITDA/t rose 9% QoQ to an all-time high of Rs80K. Standalone EBITDA grew 16% QoQ (+1.7x YoY) and was 11% above JEFe.

Strong cyclical rebound across segments, chip shortages near-term headwind: BHFC derives 35-40% of its standalone revenues from truck segment. North American class-8 truck orders rose a sharp 1.5x over September’20-August’21 but the run-rate has dipped in the last few months (October: -40% YoY) as OEMs are limiting intake amid supply chain constraints. BHFC also expects its truck and PV export revenues to decline sequentially in 3Q.

Underlying demand is strong though and we expect chip issues to gradually ease; JEF US team believes that trucks are poised for a ‘stronger for longer’ cycle. Indian freight demand is also recovering well and we expect a big revival in truck demand ahead.

Improving industrial outlook: BHFC’s industrial export revenues (~20% of standalone) fell 66% over FY19-21, but are recovering well and outlook has improved with pick-up in global construction & mining and revival in oil & gas. Domestic industrials, 15-20% of standalone revenues, is also seeing a strong sequential pick-up.

Rising EV focus; many more tailwinds: BHFC is increasing its focus on EV components with emphasis on light weighting and power electronics. In light weighting. it sees large headroom to expand its aluminum forging and casting businesses over the next two-three years. BHFC is also developing power electronic components for both low and high voltage applications such as personal mobility (2Ws), last-mile delivery, and industrial EVs.

While visibility on defence is limited, any large order could be a big positive. US infra bill should also boost equipment demand in the country, which contributes ~40-50% of BHFC’s standalone revenues.

Reiterate Buy: We cut FY22 EPS by 5% factoring chip issues in 2H, but raise FY23 EPS by 3%. BHFC’s EBITDA/EPS fell 57%/82%, respectively, over FY19-21, but we expect 2.3x/7.8x rise over FY21-24. Stock has outperformed Nifty by 67% since July 2020 and 48% CYTD but is still trading at a reasonable 5.1x FY23E PB vs past two peaks of 6.7x and 7.6x (long-term average of 3.7x). We reiterate ‘buy’ with Rs1,050 PT at 6.5x September’23E PB.

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