Nov 14, 2017 12:43 PM IST | Source:

Growth levers to drive momentum for Bharat Forge, but premium valuation a worry

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

Nitin Agrawal @agrawant

Bharat Forge Limited (BFL), a technology-driven metal forging company having a transcontinental presence, has posted a strong set of numbers for the second quarter ended September 2017. BFL posted a significant growth in revenues riding on its performance in both the exports and domestic markets. Consequently, margins also witnessed an expansion. The positive outlook for industrials and Class 8 truck demand in the US and multiple growth avenues make it an ideal investment call, although the rich valuation tempers our excitement.

Quarter result snapshot
Bharat Forge_2Q18
BFL posted strong revenue growth of 41.2 percent aided by strong 27.0 percent growth (YoY) in volume and 11.2 percent (YoY) in realizations. Improvement in realization was attributed to improved product mix and the company’s ability to pass on the raw material price increase.

Growth in exports revenue at 55.9 percent (YoY) was a key driver of the performance. Within exports, US posted more than 150 percent growth (YoY) on the back of the recovery in North America’s industrial segment and significant improvement in the US Class 8 truck segment.

BFL’s industrial segment registered a growth of 79 percent and commercial vehicles a growth of 29 percent whereas passenger vehicle segment witnessed a decline of 5 percent.

Despite inflationary pressures, BFL posted EBITDA margin of 29.4 percent, up 157bps from the same quarter last year, driven by better product mix, enhanced productivity and favourable exchange realization.

Is it an attractive investment proposition at the current valuation?

Positive outlook for M&HCV and industrials

The domestic M&HCV business grew 36.5 percent (YoY) during the quarter on the back of stability coming after BSIV and GST disruptions. The management indicated that the domestic M&HCV segment is expected to register continued growth on the back of government’s focus on infrastructure coupled with stricter implementation of overloading ban and pick-up in the overall economy.

The domestic industrial business grew 19.4 percent (YoY) during the quarter. The management indicated that the domestic industrial segment is expected to register a growth of 15-18 percent over next one and half years led by the government’s ‘Make in India’ initiatives and preference for domestic procurement policy. The company is well-positioned to take advantage of these opportunities as it has lined up lots of new products.

On the global front, there is a significant pickup in Class 8 trucks demand compared to last year's on the back of stronger freight growth in the US. The management believes that the outlook is very positive this year and the demand is expected to grow at 10-12 percent. Additionally, the management believes that the continued renewal and expansion of fleet along with a strong freight environment is supporting demand for trucks in Europe.

On the industrials business front, the industrials grew 154 percent partly from the lower activities base last year.

Multiple avenues for growth

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

Recently, Bharat Forge had received an order of Rs 200 crore from the Ministry of Defense, 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 is 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 FY20.

In the oil and gas space, BFL caters to the sub-sector of shale fracking and has a very strong market share in the same. 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 underway.

Greenfield expansion – focus on future

BFL has commissioned an initial capital expenditure of Rs 200 crore spread over three years to set up a fully automated state of the art Centre for Light Weighting Technology (LWT). This facility would be focused on aluminum and magnesium components and products which are expected to be lightweight products, which will find application in upcoming BSVI emission norm compliant vehicles and evolving electric vehicles.

Expensive valuations

BFL is currently trading at 46.8 times and 36.0 times FY18 and FY19 projected consolidated earnings, which we believe factors in the visibility of its performance, going forward.

Bharat Forge_2Q18_1

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

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