Aug 21, 2017 04:11 PM IST | Source:

Bharat Forge — multiple growth levers at a premium valuation

BHFC posted robust growth in revenues in the first quarter of FY18, riding on its performance in the exports market, especially in the US.

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Bharat Forge (BHFC), a technology-driven metal forging company with a transcontinental presence, has posted a strong set of numbers for the quarter ended June. BHFC posted robust growth in revenues riding on its performance in the exports market, especially in the US. Consequently, margins improved a tad. The positive outlook on industrials, multiple growth avenues and a strong order book makes it an ideal investment call, although the rich valuation tempers our excitement.

Quarter result snapshot

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BHFC posted strong revenue growth of 33 percent aided by 12.2 percent growth (year-on-year) in volume and 18.3 percent (y-o-y) in realisations. Improvement in realisation was attributed to improved product mix and the company’s ability to pass on the raw material price increase.

Growth in exports revenue at 65 percent (y-o-y) was a key driver of the performance. Within exports, the US posted more than 100 percent growth (y-o-y) on the back of the recovery in North America’s industrial segment and improvement in US Class 8 truck segment.

BHFC’s industrial segment registered growth of 80 percent, while passenger vehicles and commercial vehicles registered growth of 8.2 percent and 6.8 percent, respectively.

On the margin front, BHFC posted EBITDA margin of 27.8 percent, up 80 bps from the same quarter last year, driven by a reduction of 120 bps in the staff cost that was partially offset by 100 bps rise in raw material prices and 20 bps in other expenses.

So, is Bharat Forge an attractive investment proposition at the current valuation?

Positive outlook on industrials

The domestic industrial business grew 10 percent (y-o-y) during the quarter. The management indicated that the domestic industrial segment is expected to register a growth of 15-18 percent over the next one-and- a-half year led by the government’s ‘Make in India’ initiative and preference for domestic procurement policy. The company is well-positioned to take advantage of these opportunities and has lined up several new products.

On the global industrials business front, the management pegs the growth at 15-20 percent (y-o-y) for the North America Class 8 truck volumes for the calendar year 2017.

Multiple avenues for growth

The management is very confident on revenues coming from defence, aerospace and oil & gas space.

It had achieved revenues of Rs 1,700 crore from defence in FY17, up 70 percent from FY16. Recently, Bharat Forge has received an order of Rs 200 crore from the defence ministry, which is expected to be executed by FY19. The management indicated that these products will provide double-digit margins to the company.

On the aerospace front, the management has visibility of strong growth on the back of new orders that it has received. The management is also planning to shift from forged components to fully machined components and the plant for the same has been commissioned, which is expected to ramp up soon. The company has set a target of USD 100 million revenue from this space by FY2020.

In the oil and gas space, BHFC caters to the sub-sector of shale fracking and has a very strong market share in the same. The management indicated that this is the only sub-sector which is growing and expects it to grow going forward as well. The company’s exports have increased substantially in this space and the management expects the momentum to continue on the back of new product development on new platforms that are in the works.

Strong balance sheet

Bharat Forge currently has negative long-term debt and it has achieved this feat one year ahead of the deadline. This is attributed primarily to the strong cash flow generation. The management indicated that there is ample cash to fund future capex through internal accruals.

Expensive valuations

BHFC is currently trading at 18.3 times and 15.1 times FY18 and FY19 projected consolidated EV/EBITDA multiple, which we believe factor in the visibility of its performance going forward.

Bharat Forge 1

While we like the business but not the current valuation, we would recommend investors to capitalise on any stock price weakness to build position.
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