PL Stock Report: Bharat Forge (BHFC IN) - Q2FY24 Result Update – Strong standalone performance - BUY

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

Rating: BUY | CMP: Rs1,076 | TP: Rs1,170

Q2FY24 Result Update – Strong standalone performance

Quick Pointers:

§ Strong standalone performance to continue, aided by new revenue streams.

§ Guidance unchanged for overseas subsidiaries.

We cut our FY24E earnings by c7%, given miss on revenue and margins at overseas subsidiaries. Bharat Forge (BHFC) 2QFY24 standalone adj. EBITDA margin at 27.4% (140bps QoQ) came slightly above PLe (26.8%), however, subsidiaries’ margins at +0.4% was –c330bps down QoQ and lower than PLe (4.7%). Strong growth was seen across segments in standalone, however, international subsidiary was lower QoQ given holiday season in key markets. Defense has been ramping up with Rs. 100bn run-rate in 2Q and BHFC sees strong double digit growth continuing for next two years. Aerospace is also expected to show a strong growth over the next few years.

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 1,170 at 26x Sep-25E EPS (unchanged).

§ Miss on revenues, largely in-line margins: Standalone revenue grew by c21% YoY to Rs. 22.5bn and was in-line of PLe (Rs. 22.3bn) and Bloomberg consensus estimates (BBGe) (Rs. 22.2bn). Standalone EBITDA margins at 27.4% beat PLe (26.8%) and BBGe (26.5%). Consol. revenue at Rs. 37.7bn grew 22.7% YoY missed PLe (Rs. 40bn) and EBITDA margin expanded by 245bps YoY to 16.5% missing PLe by 54bps on lower operating leverage.

§ Key takeaways: (1) BHFC sees overall strong growth to continue in the medium term helped by growth in traditional business and new segments like aerospace and ramp-up in defense. (2) BHFCs PV exports growth was driven by market share gains, increasing value addition and order wins from newer geographies & customers. (3) Overseas subsidiary is expected to continue to ramp-up both in revenue and margins with Europe operations expected to be PBT positive and American operations to be EBITDA positive by 4QFY24. Aluminum business capacity utilization was at 50%/70% for US and Europe. (4) Defense: KSSL won new orders worth Rs. 11bn which will be executed over next 24 months. Order book now stands at Rs. 30bn. (5) Domestic PV business remains well placed driven by premiumisation and shift towards SUV within PV space. (6) JS Auto secured new orders of Rs. 550mn in 2QFY24, but growth is hampered by structural challenges in the wind industry and slowdown in construction and mining sectors. (7) BHFC noted that capex will be utilized in defence segment, aluminum casting, aluminum forging and EV business. This diversification will help reduce cyclicality and increase profitability. (8) While most traditional segments are expected to grow with market share gains and new segments to aid growth profile, tailwinds are present from ramp-up of defense, e-mobility and overseas subsidiaries. However, headwinds from geopolitical crises could impact growth.

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