Weak exports, margins to weigh on Bharat Forge: Morgan Stanley

Moneycontrol BureauMorgan Stanley has retained its 'Equal Weight (In-line)' rating while trimming its price target on Bharat Forge (BHFC). In a note to investors it says while BHFC is well placed to benefit from domestic capacity expansion recovery, export slowdown will offset most of these gains in FY17. The research house expects muted export recovery in FY18.

While the domestic business, which contributes 40 percent to the top line, grew at a compounded rate of 23 percent during FY16-18, exports were a drag. After six years of growth, NA Class 8 truck volumes declined a massive 42 percent YoY year-to-date 2016 and a decline, albeit at a relatively lesser rate is likely to continue for two more years.

MS sees weak private capex trends in much of the developed world, all of which could exacerbate the top-line pressure for BHFC. "Overall global commercial vehicle (CV) exports (34 percent of F2016 top line) will decline by 9 percent in F17E (estimated) and be flat in F18E," the note says, adding, this will drag overall top-line growth to 11 percent FY16-18 estimate CAGR.

Margins are another area of concern. BHFC is at the top end of its historical margin range, and this could change in FY2017-18 as export share is likely to fall to 49 percent by FY18 from 57 percent in FY2016. "Margins could come in at the lower end of guidance at 28 percent over F2017-18e; thus, EBITDA should see a 7 percent F2016-18E CAGR," the note says.