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Bharat Forge's Q3FY18 results (Outperformer) - Robust growth; improved earnings visibility

Q3FY18 results

• PAT in line: Bharat Forge’s PAT at Rs 2.3bn (+77% yoy) met expectations. The growth was driven by robust operational performance led by strong recovery in export markets (+61% yoy) along with support from domestic markets (+33% yoy).
• Robust operational performance: Revenues at Rs 13.9b grew by 47% yoy led by 39% yoy tonnage growth. Exports grew by 61% yoy to Rs 7.8bn with strong recovery in the CVs (Class 8 trucks) and industrial segment (oil & gas). Domestic revenues at Rs5.8bn were up by 33% yoy driven by robust demand in M&HCV segment (+47%) and was supported by healthy growth in the PV segment. EBITDA at Rs 3.7bn grew by 49% yoy with EBITDA margin of 29.9% (+50 bps sequentially). While gross margins showed a slight dip (down 60bp) on higher commodity costs, the company benefitted from operating leverage as other expenses/staff costs declined by 110bps qoq.
• Concall highlights: (a) The growth was visible across geographies and segments – in particular the CV segment (domestic +47% yoy, International 38% yoy) and oil & gas segment have been strong growth drivers (b) BHFC has secured new orders worth USD 60 mn between Nov 17 and Jan 2018 (YTD $100mn) primarily in the passenger vehicle and oil & gas segments. (c) The growth momentum is likely to continue in FY19 as domestic CV market could grow on infrastructure spending and pre-buying before BSVI norms; a better US economy would aid Class 8 trucks and higher crude oil prices would help demand from the O&G segment (d) Guidance for a capex of Rs 3bn over and above the AP plant over the next 2 years.

Key positives: Higher than estimated gross margins

Key negatives: Slightly lower than estimated realisations

Impact on financials: Raise FY19/FY20 EPS by ~3% each.

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 ~24X FY20E EPS (historical average of ~ 22x forward EPS) are expensive, however, we believe these are justified given the strong earnings CAGR (31% between FY17-20). Maintain Outperformer with a TP of Rs850 (27XFY20).