Bharat Forge's Q4FY19 results (Outperformer) - Steady quarter; automotive outlook remains hazy

Q4FY19 results

• Operating profit inline: Bharat Forge’s adjusted operating at Rs 4.85bn (+16% yoy) was inline with estimates. However, reported PAT at Rs3.0bn benefitted from a forex gain of Rs323mn leading to a beat of 8% above estimates.
• Strong revenue growth: Revenues at Rs 16.7b grew by 14% yoy was a tad below estimates. The growth was led by a sharp 18% yoy (+5% qoq) increase in realisations. The realisation growth was aided by commodity pass through and sales of higher value added products. Exports grew by 18% yoy to Rs9.6bn as the momentum in the industrial segment (+17% yoy) remained strong on the back of the oil & gas and the benefit of new order wins in the passenger car segment were felt. Domestic revenues at Rs7.1bn (+ 8% yoy) was affected by the weak CV business (-31% yoy) was partially offset by strong industrial revenues. Adj EBITDA margins came at 29.1% (+30 bps qoq) were a tad ahead of estimates. Consequently, EBITDA at Rs4.9bn (+16% yoy) was inline PAT benefitted from forex benefit.

Concall highlights: (a) Outlook on India CVs - while Q1 will likely remain weak, 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 330k units in CY 19 (+ 5% yoy). (c) Aerospace and Defence (domestic + exports) has increased by ~2x to Rs4.4bn in FY19. (d) The management has a capex plan of Rs12.5bn for FY20/21.

Key positives: Strong export growth particularly from industrial space

Key negatives: Decline in the domestic CV segments

Impact on financials: We broadly maintain our estimates.

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 (~16XFY21E EPS – ~25% below historical averages) are relatively inexpensive. We maintain an Outperformer rating with a target price of Rs540 (18x FY21E EPS).​