March 24, 2023
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BHARAT FORGE, Standalone in line; losses widen at international subs
Call & Research Report by Motilal Oswal
Sector: Metals – Castings/Forgings
CMP Rs. 874, Target Rs. 1065 (22% upside potential)
Target Period: 12 Months
Defense order wins gain momentum in exports; domestic orders awaited
● BHFC’s 3QFY23 standalone performance was in line, as strong revenue growth offset higher-than estimated RM costs. While all core businesses are seeing a sharp cyclical recovery, BHFC’s initiatives to diversify into aluminum/light-weighting and EV components have started to bear fruit, though we are seeing initial losses due to the ramp-up. Additionally, it has started to gain momentum in defence orders in export markets. Orders for ATAGs from the Indian Army are keenly awaited.
● We lower our consol. EPS estimates for FY23/FY24 by ~23%/3% to factor in 1) higher losses at the new aluminum forging plant, and 2) higher interest costs. Maintain Buy with a TP of INR1,065 (25x Mar’25E consol. EPS).
Strong all-round revenue growth; RM cost benefits yet to come
● Standalone revenue/EBITDA/adj. PAT grew 22%/22%/9% YoY to INR19.5b/INR4.9b/INR2.9b (v/s est. INR18.7b/INR4.8b/INR2.85b). 9MFY23 revenues/EBITDA/adj. PAT grew 22%/ 14%/3% YoY.
● Tonnage increased 18% YoY to 62.75k tons. Net realizations grew 4% YoY to ~INR311.1k (v/s est. INR310.6k).
● Auto/non-Auto businesses grew 41.5%/3% YoY. Non-auto exports rose 16% YoY, while non-auto domestic declined 10% YoY (due to one-off business in FY23). Domestic autos grew 28% YoY, while exports autos grew 49% YoY.
● Gross margins contracted 2.4pp YoY (+30bp QoQ) to 55.9% (est. 57%). EBITDA grew 22% YoY to INR4.94b (est. INR4.8b). EBITDA margins improved 10bp YoY (+100bp QoQ) to 25.3% (est. 25.7%), as the impact of higher-than-estimated RM costs was offset by operating leverage.
● The substantial increase in interest costs (7x YoY/3.4x QoQ, partly due to FX loss of INR350m) was offset by FX gains, leading to in-line adj. PAT at INR2.86b (+9% YoY).
● Losses at overseas subsidiaries widened to INR1.5b (v/s INR188m PBT in 3QFY22 and loss of INR1.16b in 2QFY23), primarily due to the ramp-up phase of its aluminum forging greenfield plant in Germany and the US.
Highlights from the management interaction
● Export – Autos: North America CV and PV volumes continue to grow on the back of fleet replacement and strong demand for personal mobility. The US Class 8 truck market is not seeing any demand slowdown yet, and the company expects FY24 to be as good as FY23 as most of the OEM production slots are full till Nov’23. The EU automotive market remains gloomy, though MHCV truck sales grew in CY22.
● Defence: It won new orders (through SPV) worth INR6b (INR19.5b in 9MFY23) for export of guns, ammunition and spares. It expects orders for the ATAGs from the Indian Army to fructify in the next couple of months.
● Overseas Aluminum business posted an operating loss of INR620m due to ramp-up related issues at new capacities in Germany and the US as they operated at 25-30% utilization. The management expects these new capacities to turn around in FY24 and enjoy high-teen margins at 75-80% utilization.
● Commodity cost benefits are yet to reflect in BHFC’s P&L, though the company did not witness any cost increases in 3Q.
Valuation and view
● While BHFC’s core business is seeing a cyclical recovery, the underlying macro environment in the US and EU is weakening. However, these new businesses incubated in the last 5-10 years are at their inflection points and could more than dilute any weakness in its core businesses. Of these new businesses, we expect industrials and aluminum businesses to see a sharp scale-up over the next couple of years. The Defence business is ready to take off and is waiting for orders to come in. The E-mobility business offers a big opportunity and has building blocks in place, but the competitive landscape is yet to evolve.
● We estimate a consolidated revenue/EBITDA/PAT CAGR of 12%/30%/59% over FY23-25E. The stock trades at 26.2x/20.5x FY24E/FY25E consolidated EPS. We reiterate our Buy rating with a TP of INR1,065 (at 25x Mar’25E consol EPS).
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