Bharat Forge's Q3FY19 results (Outperformer) - Steady quarter; automotive outlook getting hazy

Q3FY19 results

• PAT ahead of estimates: Bharat Forge’s adjusted PAT at Rs 2.7bn (+18% yoy) was 8% ahead of street estimates. The beat was on higher other income and a better than expected operating performance.
• Strong revenue growth: Revenues at Rs 16.9b grew by 22% yoy led by sharp 5% qoq (19% yoy) increase in realisations. The realisation growth was aided by commodity pass through and sales of higher value added products. Exports grew by 25% yoy to Rs9.7bn as the momentum in the industrial segment (+35% yoy) remained strong on the back of the oil & gas (quarterly revenue US$40mn), construction and mining segments. Domestic revenues at Rs6.7bn (+ 17% yoy) were driven by strong growth in the industrial business (+32% yoy) even as the CV business grew at a moderate 9% yoy.  Adj EBITDA margins came in at 28.8% (+50 bps qoq; -80 bps yoy). Consequently, EBITDA at Rs4.9bn (+18% yoy) was ~6% ahead of consensus. PAT benefitted from higher other income and lower interest costs.

Concall highlights: (a) Outlook on India CVs - while Q4 will likely be soft on inventory correction, the management expects strong demand to resume on account of pre-buy before BS VI norms kick in. (b) While orders from US Class 8 trucks are weakening on a high base, given the order backlog the company  expects builds to be 335k units in CY 19 (+ 5% yoy).(c) While PV business business has been weak in the current quarter due to WLTP norms, the company expects demand to recover in the coming quarters.  (d) The management has a capex plan of Rs7bn for the domestic business and ~Rs40mn for the subsidiaries in FY19.

Key positives: Strong export growth particularly from industrial space

Key negatives: Slow growth in the PV/CV segments

Impact on financials: We cut our FY19/20 earnings by 3%/13% respectively on the lower revenues/margins

Valuation & view

While the quarterly results were steady, BHFC could be impacted by a slowdown in key segments on the automotive business i.e the domestic CV space, Class VIII trucks (in H2CY19) and global PV sales. Despite the risks we maintain an Outperformer rating as the industrial space continues to perform strongly and the new segments (aviation, railways/defense) could contribute meaningfully from FY21. The valuations (~18XFY20E EPS – ~20% below historical averages) are relatively inexpensive. We maintain an Outperformer rating with a target price of Rs 550 (20x Sept2020 EPS).