Bharat Forge - Revenue ramp-up trajectory gets stiffer - ICICI Securities

Bharat Forge's (BHFC) Q2FY21 earnings were a miss on consensus estimates as EBITDA margin came in at 17.8%/12.1%, slumped 766bps/340bps for standalone/consolidated margin, respectively. Adjusted PAT (consolidated: Rs1.2bn) has been dragged down by losses in overseas subsidiaries (Rs 0.95bn PBT loss). Management indicated oil & gas, aerospace segments are facing headwinds and immediate growth revival possibilities remain low. Stock remains a good proxy play to cyclical rebound both domestically and globally in developed markets. However, we believe growth revival would likely take longer vis-a-vis consensus expectations. Taking into consideration the growth/return ratios profile of BHFC vis-à-vis its India-listed peers, current valuations seem steep (PE: ~47x/26x FY22/23 respectively). We maintain our REDUCE rating on the stock.

- Key highlights of the quarter: Standalone revenue declined 30% YoY to ~Rs8.8bn, while EBITDA margin declined 766bps on account of elevated employee costs (up 290bps) and other expenditures (up 855bps). Domestic revenue outperformed as it fell ~10% to Rs4bn, while exports declined ~40% to Rs4.6bn. Standalone PAT reported a profit of Rs703mn. Consolidated performance was weaker (PAT loss of Rs13mn) due to overseas losses (PBT loss of Rs 0.95bn).

- Key takeaways from earnings call: Management indicated: a) Domestic CV,PV segment saw sales of Rs0.9bn/Rs0.62bn driven by market share gains and underlying production increase; b) on exports: Class-8 truck sales is witnessing demand pickup with improved outlook; however, backlog is still below preferred levels; c) oil & gas business has dropped ~80% from peak to ~US$3-4mn and BHFC is working to utilise the existing capacity into new opportunities in renewables and marine segments (target Rs1.5bn in FY22E from current Rs0.5bn); d) renewable segment is witnessing strong demand for manufacturing aggregates i.e gear boxes also benefitted from China import restrictions; and e) long-term debt stood at Rs23bn, cash at Rs24bn and working capital at Rs13bn; the company has spent Rs2bn in H1 and expects another Rs0.5bn in H2; consolidated capex stands at Rs4.5bn in FY21 (Rs3.4bn in H1).

- Maintain REDUCE: We trim our EPS estimates for FY21E/FY22E by ~45%/1.8% on the back of delayed rebound in oil & gas and aerospace segments and continued weak performance in overseas subsidiaries. We, upgrade our valuation multiple to 26x (from 25x) for Sep'22E EPS and add Rs42/share (earlier: Rs41/share) fair value (DCF basis) of defence business (link), to arrive at a revised target price of Rs426 (earlier: Rs412). Post the recent rally (~90%), risk-reward remains unfavourable as valuations remain steep. We maintain our REDUCE rating.

Shares of BHARAT FORGE LTD. was last trading in BSE at Rs.495.5 as compared to the previous close of Rs. 484.1. The total number of shares traded during the day was 60949 in over 1894 trades.

The stock hit an intraday high of Rs. 499.3 and intraday low of 486.45. The net turnover during the day was Rs. 30173631.

Source : Equity Bulls

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