Jun 5, 2023
Rating: neutral; Bharat Forge: Artillery guns orders to add to the revenue
Pune-based leading forging firm, Bharat Forge Q3FY23 standalone revenue of Rs 1,950 crore +22% y-y was 1-3% was above our forecast and the Bloomberg consensus estimate. Ebitda margin at 25.3% was impacted by -40 bp q-q decline in raw material (RM)/sales at 44.1%. Overseas subs Ebitda margin remained weak at -5.8%.
Management commentary:
Our view: We believe BHFC has made strong progress in the non-auto and defence segment, with artillery guns orders having the potential to contribute 10% additional revenue over time, Aluminium Forging for PVs, and EVs components, which could contribute more in the long run. However, we believe that there can be a slowdown in global truck (23% of revenues) and global industrial segment (20%). With the fall in natural gas prices, upside risks to shale gas segment (10%) are also lower than earlier. India MHCV demand is expected to slow down to 10% y-o-y growth in FY24F from 35% y-y in FY23F, as upsides from new initiatives are balanced with the slowdown risks in traditional businesses. Hence, we downgrade the stock to Neutral.
We raise our overall consolidated revenues by 0%/7.5%/6% for FY23- 25F. Ebitda estimates are cut by -15% / -1%/ -3.5% to factor in lower margins in overseas subsidiaries/India business. Thus, EPS is cut by 36%/5%/8% over FY23-25F. We maintain our target EV/Ebitda of 16x and roll forward the valuation to FY25F (Dec-23F earlier). The stock is currently trading at 13.9x FY25F EV/Ebitda, which we believe is fair. Hence, we downgrade to Neutral. We prefer Sona Comstar and Unominda in the sector.
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