Stock corner: Maintain ‘reduce’ on Bharat Forge, target price Rs 370

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Updated: October 15, 2019 2:29:34 AM

Apart from doubling of defence and aerospace revenues (`4.8 bn in FY19), management estimates new artillery gun contracts to add ~`15-20 bn p.a. revenue over medium term.

Bharat Forge, BHFC, BHFC, North Carolina, CV India growth, Bharat Forge net growth While the management is utilising the current downturn to realign operations to optimise cost, we envisage waning Class 8, oil & gas and CV India growth to impact the company in the near term.

We recently interacted with Bharat Forge’s (BHFC) top management at the company’s analyst meet. Key takeaways: a) in its diversification quest, management will sustain focus on building new revenue streams via `1,500-1,600- crore investment over FY19-21E across geographies (India, the US, Germany) and in new verticals (aluminium forging); b) defence & aerospace revenues to jump 2x over three-four years (`4.8bn in FY19); and c) BHFC is leveraging capabilities to cater to new upcoming opportunities in EV (Tork, Tevva, REFU) — `200 crore already invested.

While the management is utilising the current downturn to realign operations to optimise cost, we envisage waning Class 8, oil & gas and CV India growth to impact the company in the near term. Hence, we revise down FY20/21E EPS by 9/4% respectively and maintain ‘reduce’ with revised target price of `370
(`390 earlier).

The management highlighted near-term challenges in domestic as well as export markets with peaking of Class 8 and oil & gas segment in FY19, coupled with production cuts and slowdown in the domestic CV market. We believe, the impact on bottom line will be sharper given high contribution of these segments.

Apart from doubling of defence and aerospace revenues (`4.8 bn in FY19), management estimates new artillery gun contracts to add ~`15-20 bn p.a. revenue over medium term.

The management expects customer shifting to light-weight aluminium products to drive demand for products from BHFC’s new green field facility in North Carolina. It believes, early entry in EV space with technology edge will help BHFC build long-term supply chain agreements.

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