ICICI Securities recommended reduce rating on Bharat Forge with a target price of Rs 412 in its research report dated September 24, 2020.
ICICI Securities research report on Bharat Forge
We are admirers of Bharat Forge (BHFC) for its focus on quality and innovation, yet the truth is its key business segments (CV, PV, Oil & Gas) are cyclical, which are currently in differing demand rebound cycles. Management is trying to pivot and create a larger pie of revenues from stable segments like defence, aerospace etc. Aerospace segment outlook remains uncertain due to Covid-19 pandemic; however, recent defence procurement policy shift has raised investor confidence in BHFC’s potential to win artillery guns’ orders. We deep-dived into the artillery segment opportunity, analysed global peers (e.g. Rheinmetall) and our base case incremental DCF value is ~Rs41/share. Key risk: If Kalyani group chooses to bid for defence orders via Kalyani Strategic Systems BHFC benefits drops by 50%. We roll forward earnings into Sep’20, upgrade our rating to REDUCE from SELL.
The class-8 truck demand (exports) is likely to scale back >300k units by CY22; however, domestic truck market is unlikely to reach FY18 peak volumes before FY24/25. We cut our multiple to 25x (earlier:27x) Sep’22E EPS (roll forward), add Rs41/share fair value (DCF basis) to arrive at fair value of Rs412.
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