Buy Bharat Forge with target price of Rs 1,350

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Published: April 7, 2015 12:16:13 AM

Heavy commercial vehicles (HCV) which is the main market for Bharat Forge amounting for 40% of its standalone revenues...

Heavy commercial vehicles (HCV) which is the main market for Bharat Forge amounting for 40% of its standalone revenues continues to do well both US and Europe and is showing signs of pick up in India.

Bharat Forge’s entry into aerospace components business looks well timed as the airlines sector has enjoyed three years of strong profitability and order backlog with aircraft manufacturers like Airbus and Boeing are at record levels. New programmes will launched over next 3 years and lot of orders are being given now. BFL, through its group company has formed new JVs with Rafael, Saab, Elbit and Premier Explosives as it further expands its product portfolio in preparation for opening up of the defence sector.

We expect earnings growth of 39% over FY14-17e, ROE improving to 33% in FY17e from 17% in FY14 and company on its path towards being net cash by FY18. This is largely on account of increase in share of business from industrial sector comprising of railways, aerospace which are high margin business as well. We believe company has successfully transitioned itself to a business which is now based on product quality and innovation and not just cost competitiveness.

We have a buy rating with target of R1,350. We revise our earnings for FY17e by 3% to account for higher earnings from aerospace business.

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