Buy Bharat Forge as CV cycle continues to recover: HSBC

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Updated: July 3, 2015 1:00:07 AM

EU and India heavy truck data continue to remain strong for May as well. EU27 recorded 17.8%y-o-y growth of sales for heavy trucks YTD...

EU and India heavy truck data continue to remain strong for May as well. EU27 recorded 17.8%y-o-y growth of sales for heavy trucks YTD with May being another strong month recording 20+% yoy growth. India CV production seems to be coming out from the bottom with May also recording 23% yoy growth. EU and Indian market still account for 2/3rd of total sales from CV related sector

US CV cycle is still only optically weak. We agree that May net orders for Class 8 trucks were down 22%, the third consecutive month of decline. However, we note that this follows unprecedented net order growth (38-94%) during the Oct-Dec’14 quarter and hence rest of the year will also look weak.

Weakness in oil and gas could hurt Q1FY16 earnings. Components for oil and gas sector account for c10% of standalone revenue for Bharat Forge.

We expect earnings growth of 27% over FY15-18e, ROE improving to 27% in FY18e from 17% in FY14. We cut our FY16-18e EPS estimates by 3-4% to incorporate the impact of weaker oil and gas related business. We continue to value the business on 26x but we roll forward to June’17e earnings (from Mar’17e) and discount it back by a year to arrive at current fair value. This results in current fair value remaining unchanged at Rs 1350 and we maintain buy.

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