Bharat Forge's Q2FY19 results (Outperformer) - Steady quarter; strong outlook

Q2FY19 results

• PAT broadly in-line: Bharat Forge’s PAT at Rs 2.3bn (+12% yoy) was  broadly in-line with expectations. Operating performance post adjustment for notional exchange loss was in-line led by strong growth in the domestic CV segment and supported by strong demand from Class 8 trucks in North America.
• Strong revenues ;Operational performance in-line: Revenues at Rs 16.8b grew by 33% yoy led by 19% tonnage growth and supported by 12% yoy realisation boost.(+9% qoq) Exports grew by 34% yoy to Rs9.4bn with strong momentum in the CV business (+27% yoy) led by class 8 trucks demand and  supported by gains in the PV business (+130% yoy). Domestic revenues at Rs6.9bn were up by 32% yoy driven by strong growth in the industrial business (+38% yoy) along with support from the M&HCV segment (+24%) on account of pick up in infrastructure segments and recovery in construction and industrial activity. Adj EBITDA margins came in at 28.3% (-70 bps qoq; -110 bps). There was a notional foreign exchange loss of Rs410 mn on revaluation of debt on currency depreciation. Reported EBITDA margins came in at 25.9%.

Concall highlights: (a) Management expects demand momentum to continue going forward in 2HFY19 with defence business starting to contribute to revenues in coming quarters. (b)  Outlook on CV business- It has guided for strong demand outlook for domestic CVs till Jan 2020 on account of pre buy before BS VI norms kick in. US Class 8 truck demand too is expected to be steady. It expects US Class 8 truck demand to be 335k units in CY 19 (+ 5% yoy).(c) It expects PV business to ramp up with existing business growing at 10-12% while new products and aluminium forging is likely to grow faster.

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 strong momentum - an 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 with a target price of Rs 715.