Bharat Forge's Q4FY18 results (Outperformer) - Steady quarter

Q4FY18 results

• Adj PAT in line: Bharat Forge’s Adj PAT at Rs 2.3bn (+38% yoy) was in-line with expectations with a steady operating performance. Reported PAT was at Rs 1bn (-52% yoy) on one time exceptional loss of Rs1.3bn on provision and impairment on subsidiary losses.
• Steady operational performance: Revenues at Rs 14.7b grew by 30% yoy led by 24% tonnage growth and supported by 5% yoy realisation boost. Exports grew by 36% yoy to Rs8.1bn with strong momentum in the CV business (+37% yoy) and supported by PV business (+46% yoy). Domestic revenues at Rs6.5bn were up by 23% yoy driven by strong growth in M&HCV segment (+44%) and was supported by healthy growth in PV segment (+29% yoy). EBITDA at Rs 4.2bn grew by 31% yoy with EBITDA margin of 28.5% (-140 bps sequentially). EBITDA post adjustment of forex loss was at 29.8%.
• Concall highlights: (a)The management expects US Class 8 trucks to grow by 28% in FY19 while domestic industry CVs are likely to grow by 10-12% in FY19 on continued momentum on the back of mining and infrastructure growth coupled with restriction on overloading.(b)The capacity expansion of at Baramanti plant which entails Rs 4bn capital outlay is expected to go on stream in Apr-19.(c)It has secured new business wins of Rs 150bn(90% for PVs) to be executed over FY21. (d) The new order wins have been boosted by the company’s entry into the PV space.

Key positives: Higher other income

Key negatives: Lower gross margins and higher other expenses

Impact on financials: We broadly maintain our estimates for FY19/20.

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. Additionally, with a low D/E (0.2X) BHFC is well positioned to acquire strategic, distressed assets. The stock currently trades at ~22X FY20E EPS – inline with historical averages. With a FY18-20E earnings CAGR of ~30%, we maintain an Outperformer with a TP of Rs800 (26xFY20).