MOSL: BHARAT FORGE (Buy)-Hurt by destocking in Oil & Gas and India CV
BHARAT FORGE: Hurt by destocking in Oil & Gas and India CV
(BHFC IN, Mkt Cap USD2.6b, CMP INR401, TP INR475, 19% Upside, Buy)
- Standalone revenue was down 9% YoY at INR13.5b (our estimate: INR17.1b) in 1QFY20 due to lower tonnage (-9% YoY/-3% QoQ to 60.9k ton). Realization declined 17% QoQ (flat YoY) to INR221.2k/ton (our estimate: ~INR267.5k) due to 2% price pass-through and de-growth in Oil & Gas/Defence. EBITDA declined 18% YoY to INR3.5b (our estimate: ~INR4.9b), with the margin contracting 290bp YoY/QoQ to 26.1% (our estimate: 28.8%). Adj. PAT declined 26% YoY to INR1.7b (our estimate: INR2.7b).
- Key highlights from earnings call: (a) Oil & Gas de-stocking impact is behind with an upturn likely from 2QFY20. However, it expects de-growth in this segment in FY20. It has added a new customer, which is likely to contribute ~20% of revenues in FY20 and ~35% in FY21. (b) The US Class 8 truck segment is likely to de-grow by ~10% in FY21, based on the guidance provided by its OEM clients. (c) Nellore plant (light weighing technology) will start operations from Oct'19 and fully ramp-up in three years, contributing revenue of ~INR3b. (d) Electronic component business for EVs through JV with Refu Electronik would start operations in FY21 and contribute INR1.5-2b of revenues from power electronics components (drives, invertors, converters, BMS systems, etc.).
- Valuation view: We cut our FY20/21 consol. EPS estimate by 21%/14% to factor in headwinds in the key businesses of Oil & Gas and CV (India & exports). After last two years of strong performance in all its core businesses and the ramp-up in the nascent businesses, the cycle has turned negative for its core business of CVs. BHFC would continue outperforming, supported by new products/customers and new technologies (light weighting, electronic components, etc.). Post the stock price correction, valuations are attractive at 20.8x/17.5x on downcycle FY20/21E consol. EPS. Maintain Buy.
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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