Brokerages see limited growth for core business of Bharat Forge

Bharat-Forge

Shares of Bharat Forge Ltd were trading nearly 3 percent higher on May 8 after the company reported lower-than-expected earnings. Brokerage firm Kotak Institutional Equities and Nuvama Research expect limited growth for its core business. Both the brokerages have maintained their 'sell' and 'reduced' ratings respectively on the stock with the price targets unchanged.

At 9.20am, the stock was trading at Rs 780 on the BSE, up 2.6 percent from its previous close, while India's benchmark Sensex edged up 0.54 percent to 61,385 points.

Net profit for the quarter declined 7 percent on-year to Rs 244.50 crore from Rs 262 crore a year ago. Revenue jumped 19 percent to Rs 1,997.30 crore.

Bharat Forge reported standalone EBITDA of Rs 490 crore, including forex losses, which came in 9 percent below Kotak's estimates due to EBITDA losses at overseas subsidiaries. After factoring in a forex loss of Rs 34.70 crore, the standalone EBITDA was slightly lower than Kotak's projections by 3 percent. This was mainly due to lower-than-anticipated revenue, although this was somewhat offset by better-than-expected gross margins.

The overseas EU operations experienced an EBITDA loss, which was caused by the slower-than-anticipated increase in revenues and inflationary pressures in the EU and US forging businesses. The company anticipates that its EU and US forging business will become profitable in the first and second quarters of fiscal year 2024, respectively. This will be driven by higher utilisation levels and price adjustments made for customers to address inflationary pressures.

The Bharat Forge management is optimistic about FY24 being a turnaround year, based on several factors. First, they anticipate a sharp uptick in the defence segment due to new order wins in exports worth Rs 2,000 crore domestically, including an order for 307 ATAGs for which RFQs will be floated soon. The management expects this business to ramp up to $100 million in FY24, with strong margins and returns.

Second, there is strong visibility in the aerospace segment, with an expected growth rate of 30-40 percent even in FY24, after doubling in FY23. The near-term target is to reach Rs 500-600 crore in revenue, up from the current Rs 170 crore. Finally, there is huge ramp-up potential at JS-Auto Cast, as its capacity is expected to double, and there is significant demand for aluminum castings both in India and abroad.

"We have cut our FY2024-25 consolidated EBITDA estimates by 2-5 percent, led by a 4-5 percent cut in standalone EPS estimates. Although we expect newer business segments (defence, light-weighting, industrial castings and aerospace) to drive growth for Bharat Forge over the coming years, we see limited growth prospects for its core business, given an increase in competitive intensity among domestic players in the export market and the risk of electrification in select segments—the crankshaft supplier in the PV and tractor segments and oil and gas segment," Kotak Institutional Equities said in its latest report.

The brokerage firm has maintained 'sell' rating and kept the target price unchanged at Rs 660 a share.

According to Kotak's projections, the consolidated business revenues are expected to post a compounded annual growth rate (CAGR) of 10 percent between fiscal year 2023 and 2026. This growth will be driven by strong order wins in the defense, industrial casting, and aluminum light-weighting businesses, as well as an increase in the aerospace segment due to program ramp-ups.

However, the growth rate may be moderated by a slowdown in growth in the domestic commercial vehicle segment, weakening order inflow trends for US Class-8 over the past six months, and a decline in oil prices, which will negatively impact the oil and gas segment.

Nuvama anticipates a slowdown in auto exports due to a single-digit decline in North America Class-8 and Europe heavy commercial vehicle production in CY23, which has been affected by subdued macroeconomic conditions. This downturn is expected to continue for North America Class 8 in CY24 due to the depletion of the order book and changes in emission norms in certain regions.

In contrast, the compound annual growth rate (CAGR) for domestic commercial vehicle/passenger vehicle revenues is likely to slow to 10 percent/7 percent over FY23-25 due to interest rate hikes and a decrease in pent-up demand. The brokerage firm retained its reduced rating with a target price of Rs 615 a share.