Bharat Forge's Q2FY18 results (Upgrade to Outperformer) - Growth across segments, improved visibility
Q2FY18 results
- PAT in line: Bharat Forge’s PAT at Rs 2.04bn (+61% yoy) met expectations of Rs2bn. This was driven by robust operational performance led by strong recovery in export markets (+56% yoy) along with support from domestic markets (+26% yoy).
- Operational performance in-line: Revenues at Rs 12.6b grew by 41% yoy led by 27% tonnage growth and accelerated by 8% realisation boost partly due to improved segment/geographic mix. Exports grew by 56% yoy to Rs5.3bn with strong recovery in the automobile (Class 8 trucks) and industrial segment (oil&gas). Domestic revenues at Rs7bn were up by 26% yoy driven by strong growth in M&HCV segment(+65%) post BS IV/GST disruptions and was supported by healthy growth in PV segment. EBITDA at Rs 3.7bn grew by 49% yoy with EBITDA margin of 29.4% (+160 bps sequentially).
- Concall highlights: (a) The company is setting up a greenfield plant (Light weighting technology) in AP, focused on aluminium and magnesium components & products at capital outlay of Rs 2bn for phase 1. The plant will be operational in 18 months and fully ramped up in 24 months. (b)It expects a 10-12% growth in US Class 8 truck (current run rat at 275k-280k units) with potential upsides. (c) It has guided for a capex of Rs 3bn over and above the AP plant over the next 2 years. (d)It has secured new orders worth USD 40 million YTD across geographies and segments.
Key positives: Higher than estimated gross margins
Key negatives: Slightly lower than estimated realisations
Impact on financials: Raise FY18/FY19 EPS by ~3%/5% respectively.
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. While valuations at ~25X Sept 19E EPS (historical average of ~ 22x forward EPS) are expensive, however, we believe these are justified given the strong earnings CAGR (30% between FY17-20). Additionally, with a low D/E (0.2X) BHFC is well positioned to acquire strategic, distressed assets. Upgrade to Outperformer with a TP of Rs800
Bharat Forge Limited is engaged in the business of steel forgings, finished machined crankshafts, and front axles assembly and components. The Company's segments include Forgings and Projects (Capital goods). Forgings produces and sells steel forging products comprising forgings, finished machined crankshafts, front axle assembly and components, and ring rolling, among others. Projects (Capital goods) include engineering, procurement and commissioning business for power and infrastructure related projects. It manufactures a range of components for various sectors, including automobiles (across commercial and passenger vehicle), oil and gas, aerospace, locomotives, marine, energy (across renewable and non-renewable sources), construction, mining and general engineering. It has factories at Pune, Satara and Baramati. Its manufacturing facilities are spread across India, Germany, France and Sweden. It operates in Delhi, Noida, Hyderabad, Jamshedpur, Kolkata, Chennai and Mumbai.
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