MOSL: BHARAT FORGE (Buy)-Below est.; Op. deleverage hurts; Business bottoming out
Bharat Forge: Below est.; Op. deleverage hurts; Business bottoming out
(BHFC IN, Mkt Cap USD3.3b, CMP INR500, TP INR581, 16% Upside, Buy)
Deep-down cycle hurts all businesses, except PVs
- Bharat Forge’s (BHFC) 3QFY20 is the manifestation of the deep-down cycle’s convergence across its key businesses, which has resulted in sharp EBITDA margin erosion despite stable operating margins. While near-term outlook is weak for both the India and export business, leading indicators are showing initial signs of stability.
- We have lowered our FY20/FY21E EPS by 8%/5% to factor in the near-term weakness in the industry. Maintain Buy as we expect BHFC to come out stronger as the cycle recovers and nascent business/technologies ramp up.
Operating deleverage hurts margins, though operating margins stable
- S/A revenue/EBITDA/PAT declined ~36%/51%/59% YoY to ~INR10.8b/INR2.4b/INR1.3b. 9MFY20 revenue/EBITDA/PAT declined ~24%/36%/29% YoY.
- While tonnage declined 30% YoY, realizations decreased 10% YoY (-3% QoQ) to INR229.1k/t (v/s est. ~INR243.4k/t) due to the adverse mix.
- Auto segment revenues declined ~34% YoY, impacted by 59% decline in India CVs and ~27% decline in CV exports. PV business grew ~9% YoY in 3QFY20, despite impact of strike at GM plants, which has now normalized.
- Non-auto segment revenues declined ~44%, impacted by ~52% decline in exports and ~28% decline in India.
- EBITDA margins declined 650bp YoY (-160bp QoQ) to 22.2% (v/s est. 24%) due to operating deleverage.
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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