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Bharat Forge rating – Reduce: Numbers were below expectations

BHFC reported Q4FY22 Ebitda of Rs 4.3 bn, 3% below our estimates due to RM headwinds. We expect strong growth for the company led by (i) recovery in the domestic CV segment, (ii) strong order wins including the defence segment and (iii) market share gains in the PV segment. However, we expect margin pressures to persist. Given >50% of the revenues are derived from cyclical segments, we await a better entry point on this name. Upgrade to Reduce given recent price correction. 

Standalone Ebitda 3% below our estimates: Q4FY22 standalone Ebitda of Rs 4.3 bn (including forex gains) was 3% below our estimates due to RM pressures. Standalone revenues increased by 5% q-o-q led by (i) 1% q-o-q decline in domestic revenues and (ii) 9% q-o-q increase in export revenues. Standalone revenues were 2% above our estimates largely due to marginally better performance of export and domestic businesses. Tonnage volumes increased by 8% q-o-q whereas average realisations were down by 3% q-o-q.

US export revenues increased by 9% q-o-q due to recovery in US Class 8 truck production numbers amid supply challenges. Domestic revenues declined 1% q-o-q mainly due to sharp decline in the domestic non-auto business, partly offset by strong growth in the M&HCV segment. Standalone Ebitda margin stood at 25.8% (+30 bps q-o-q), 110 bps below our estimates due to RM inflation. Adjusted PAT came in at Rs 2.6 bn, 3% below our estimates. Finance cost increased sharply because of INR depreciation. 

Strong order wins across segments to drive growth; however, margins to remain under pressure: We expect strong revenue growth over FY2023-24e led by (i) strong order wins across automotive and industrial applications (Rs 10 bn worth of new order wins), (ii) recovery in the domestic CV segment, (iii) market share gains in the domestic PV segment led by new product launches and (iv) expected order win for artillery guns in the defence segment. However, we believe margin pressures will remain given persistent inflationary pressure as well as elevated freight and energy costs.

Cut our FY2023-24e consolidated EPS estimates by 1-11%: We have cut our FY2023-24e consolidated EPS estimates by 1-11% on lower Ebitda margin assumptions. Upgrade to Reduce (from SELL) as the stock price has corrected by 10% over the past one month. Fair Value remains unchanged at Rs 660 based on 20X June 2024e standalone EPS and 12X June 2024E subsidiaries EPS.



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