Bharat Forge's Q1FY19 results (Outperformer) - Steady quarter; strong outlook

Q1FY19 results

• Adj PAT in line: Bharat Forge’s PAT at Rs 2.3bn (+23% yoy) was in-line with expectations. Operating performance too was in-line led by strong growth in the domestic CV segment and supported by strong demand from Class 8 trucks in North America.
• Operational performance in-line: Revenues at Rs 14.8b grew by 23% yoy led by 20% tonnage growth and supported by 3% yoy realisation boost. Exports grew by 26% yoy to Rs8.4bn with strong momentum in the CV business (+21% yoy) led by class 8 trucks demand on increased freight rates and shortage of transport capacity and supported by PV business (+145% yoy) on a lower base. Domestic revenues at Rs6.3bn were up by 20% yoy driven by strong growth in M&HCV segment (+50%) led by pick up in infrastructure and affordable housing segments. EBITDA at Rs 4.3bn grew by 29% yoy with EBITDA margin of 29% (+50 bps sequentially). Improvement was mainly on account of lower other expenses (-120 bps qoq) while staff costs were marginally higher(+70 bps qoq). RM costs were stable sequentially.
• Concall highlights: (a) The management guided for strong demand in the near term from both domestic (inspite of uncertainty in axle load norms) as well as export segments. (b)It expects strong growth in defence and aerospace in 2QFY19 as some orders were delayed in the current quarter.(c)It outlined 3 new growth drivers for the long term –(i) Defence business (ii)Light weighting (iii) Electric vehicles.(d)It has guided for a capex of Rs 5bn for FY19.(e)It expects oil and gas demand to be strong going forwards (current run rate of USD 100mn/year)

Key positives: Lower other expenses; strong export growth

Key negatives: Slower growth in the domestic PV segment

Impact on financials: No change

Valuation & view

BHFC’s core segments (class 8 trucks/oil & gas) are showing a sharper than expected recovery - expansion in existing categories with new products enhances revenue visibility. New segments (aviation, railways/defense) are likely to contribute more meaningfully in FY20 onwards. The stock currently trades at ~20XFY20E EPS – ~10% below historical averages. With a FY18-20E earnings CAGR of ~30%, we maintain an Outperformer rating. However, given the risks associated with increasing protectionism, we cut our target multiple to 23XFY20 (previously 26x) for a TP of Rs715.