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CLSA has retained its Buy call on Bharat Forge, the auto ancillary company, with a target price of Rs 905 per share, implying a potential upside of nearly 30 percent from Tuesday's closing price.
Valuations at 30x one-year forward PE are not cheap but should sustain, the research house feels.
The stock rallied nearly 2 percent intraday Wednesday, on top of 3.4 percent upside seen in previous session after strong trend continued in North American class 8 truck orders. At 11:09 hours IST, it was quoting at Rs 709.50, up Rs 11.40, or 1.63 percent on the BSE.
The research house said outlook for exports has improved significantly and the demand is picking up in US trucks and key industrial export segments.
CLSA sees a strong 34 percent EPS CAGR over FY17-20.
The brokerage house said the tightening emission norms (BS-VI) is positive for the company but electrification is a long-term risk.
The Bharat Forge stock has been outperforming off late, spurred by steady rise in North American Class 8 truck orders as well as a steady improvement in the oil & gas segment.
On Tuesday, North America class 8 truck orders for the November month increased sharply by 68 percent to 32,387 units, compared with 19,285 units in year-ago. The reason for strong leap in truck and tractor sales was US economic growth that has been topping 3 percent for last two quarters.
North American business contributes 40 percent to company's total revenue.
The first half saw the company post 30 percent growth in revenue and 40 percent in EBITDA. Baba Kalyani, CMD, Bharat Forge is confident of not only maintaining the growth rate but said they aim to do better than that going forward.
The company also has big expansion plans for the domestic market, said Kalyani, adding that they would spend Rs 500 crore expanding capacity within their facilities outside Pune and also spend Rs 200 crore to set up facility in Andhra Pradesh for light weight components.
The orderbook for oil and gas business is also pretty strong, it is almost 4-5 times last year, he said.
He said North American economy is doing extremely well and so the company is benefiting from that. However, only 12 percent of company’s revenues comes from North American Class 8 Trucks, he specified. So, no longer are highly dependent on that market, although their market share in that market has gone up, he said.
On the defence business, Kalyani said the order pipeline is healthy and they are beginning to get export orders as well. Bharat Forge recently test-fired two artillery guns in Pokhran and will be going for winter-trial to Sikkim. He expects defence orders to come through in the next 24 months.
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