PL Stock Report: Bharat Forge (BHFC IN) - Q1FY24 Result Update - Non-auto segments steal the show - BUY

Bharat Forge (BHFC IN) - Himanshu Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs963 | TP: Rs1,070

Q1FY24 Result Update - Non-auto segments steal the show

Quick Pointers:

§ Overseas business turnaround expected to aid margins and profitability

§ New stream of business start to aid strong revenue growth

We increase our FY24/FY25 earnings by c7%/8%, given smart ramp-up in defense and exports businesses and good improvement on the margins in the subsidiaries. Bharat Forge (BHFC) 1QFY24 standalone adj. EBITDA margin at 26% (-c15bps QoQ) came slightly below our estimate on inferior mix, however, subsidiaries’ margins at 3.7% was +c640bps up QoQ, and were higher than PLe (0.8%). Defense has ramped-up and BHFC sees 10% of total revenues coming from Defence in FY24 (c6% in 1Q) and ramping up over the next few years. Aerospace is also expected to show a strong growth over the next few years. Auto segments in India and export will continue with steady performance and BHFC has good visibility over the next 12 months.

We remain positive on BHFC given (1) multiple growth drivers in domestic & export automotive segment (upcycle in CV industry & easing chip shortage helping PVs), (2) strong order book leading to a strong growth in high margin non-auto segment (3) contribution from defense & renewable segment and (4) rising traction in E-mobility division. Retain ‘BUY’ with TP of Rs 1,070 at 26x Mar-25E EPS (earlier Rs. 955 at 25x Mar-25E).

§ Solid beat on revenue and EBITDA: Standalone revenue grew by c21% YoY to Rs. 21.3bn and beat PLe (Rs. 20.4bn) and Bloomberg consensus estimates (BBGe) (Rs. 19.4bn). Standalone EBITDA margins at 26.0% were lower than our (26.4%) and higher than BBGe (25.8%). Gross margin was lower QoQ by 80bps, impacted by mix; control on employee cost and opex helped reduce the margin miss. Lower other income and higher interest cost led to in line PAT vs PLe. Consol. revenue at Rs. 38.8bn grew 36% YoY and beat PLe (Rs. 35.1bn) and EBITDA margin expanded by 92bps to 15.9% beating PLe by 27bps.

§ Key takeaways: (1) Overall, BHFC sees strong growth momentum to continue for next three quarters and extending to FY25. (2) Significant defense revenues began in 1Q with start of export of systems and components and accounted for c6% of total revenues, BHFC sees this to increase to c10% for FY24. The segment is highly profitable and won new order of Rs. 2.8bn taking total orderbook to Rs. 23bn, to be executed over the next 18 months. (3) Standalone automotive segment performance is expected to remain steady with lower PV revenue due to model shutdown. BHFC standalone won Rs 2bn new order in 1Q. (4) At the overseas automotive segment Europe is at 50%+ utilization and expected to ramp-up further and reach high single digit margins by FY24-end, while the US is expected to break-even by Q4FY24. BHFC has visibility over the next 12 months (5) JS Auto’s acquisition of Indoshell Mold SEZ should increase the casting capacity and help ramp-up revenues. (6) BHFC has guided strategic emphasis on expanding manufacturing operations within India, positioning the country as an export base for global markets. (7) Aerospace segment revenue grew by 68% YoY to Rs 650mn and c4% of total revenue and is expected to grow by 30%+ in FY24.

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