FY2018 was a successful year for Bharat Forge as both automotive and non-auto segments fired on all cylinders. The commercial vehicle cycle was favourable in the US as well as Indian market and crude oil prices increased during the year, which boosted revenues. Working capital was stretched despite strong revenue growth with inventory and receivable days increasing significantly. We retain ‘Sell’ rating as we cut TP to Rs 600 (from Rs 650 earlier) due to stretched valuations.
Standalone gross revenues increased by 32% y-o-y in FY2018 led by 53% y-o-y increase in export revenues and 12% y-o-y growth in domestic business revenues. Non-auto revenues increased by 46% y-o-y primarily driven by strong export while domestic non-auto revenue growth was muted. The export non-auto business was positively impacted by sharp improvement in the oil and gas vertical and commodity-driven segments. The company generated a free cash-flow of Rs 2.95 bn in FY2018 (versus Rs 3.2 bn in FY2017). The company made a capex of Rs 5.8 bn in FY2018. The company’s net working capital led to a drag of Rs 3.98 bn in FY2018 primarily due to (1) significant increase in receivables (drag of Rs 6 bn) and inventories (drag of Rs 2.85 bn) offset, (2) increase in payable days (cash inflow of Rs 7.1 bn).
We have increased our FY2019 standalone revenue estimates by 2% as we build in higher growth in the export MHCV segment led by strong growth in the US Class 8 truck segment but kept FY2020 earnings estimates almost unchanged. We have, however, cut our target price to Rs 600 as we cut our target multiple to 22X (from 25X earlier). We believe the company’s growth trajectory will slow down materially during FY2019-21E as high base effects of export CVs and oil and gas revenues catch up. Our target multiple also incorporates the increase in yields globally, which should result in increase in cost of capital.