The management has indicated that the demand environment in the automotive segment is strong in India and international markets. In passenger vehicle exports, it has guided for a revenue growth of 30% in FY23. Increased infrastructure activity augurs well for the commercial vehicle (CV) segment in India, while demand outlook for CV exports is helped by low cancellation rates on order backlogs with automakers.
As such, Bharat Forge’s overall order book is healthy. In FY22, domestic operations won new orders worth ₹1,000 crore across automotive and industrial sectors. In international operations, it has secured new orders worth $150 million across steel and aluminium forging operations in North America. It has secured an order from a global electric vehicle (EV) automaker for supply of aluminium castings. It also got its first order from an Indian automaker for supply of DC-DC (direct current) converters. Analysts reckon better EV segment traction to be a key catalyst for the stock hereon.
“Bharat Forge is expected to reach peak utilization on its Europe aluminium forging capacity with rising demand from EVs/hybrids," said analysts at ICICI Securities in a report on 16 May.
In FY23, the management expects a ramp-up of US aluminium operations and an increase in revenue contribution from its entry into newer verticals. Sanghvi Forging and Engineering, acquired last year, is expected to clock 50% revenue growth in FY23. Also, Bharat Forge aims to triple revenue over five years in JS Autocast Foundry India, its latest acquisition.
In its Q4 results, standalone revenue grew by 28% year-on-year (y-o-y) to ₹1,674 crore led by 79% growth in the industrial segment and nearly 7% growth in the automotive segment. Gross margin narrowed by 303 basis points (bps) y-o-y because of an increase in input costs, but the fall in Ebitda (earnings before interest, tax, depreciation and amortizationamortization) margin was lower at 171 bps to 25.8% helped by operating leverage. One basis point is 0.01%.
About 55% of its standalone revenue comes from cyclical segments and with the risk of global recession, analysts at Kotak Institutional Equities are waiting for a better entry point on the stock. However, the stock’s correction over the last one month has prompted analysts to upgrade their rating to reduce from sell. “We have cut our FY2023-24E consolidated earnings per share estimates by 1-11% on lower Ebitda margin assumptions," they said in a report on 16 May.
Consolidated free cash flow turned negative in FY22 due to higher working capital. Margin pressures may dampen sentiments for the Bharat Forge stock, which is down by about 20% from its 52-week high of ₹847.95 on 10 November. The auto industry is plagued by supply constraints and high commodity costs. “Bharat Forge’s CV export remains hit as semiconductor shortage in class-8 trucks. This could be limiting the rally in the stock," said Mansi Lall, analyst at Prabhudas Lilladher. In Q4, CV exports grew merely 2% y-o-y.
Also, as analysts from Jefferies India pointed out, “US truck production is supported by backlog in near-term, but rising interest rates and high inflation is hurting economic outlook and could impact further truck orders and Bharat Forge’s industrial exports. India and new businesses should do well, but are unlikely to drive stock up if export growth weakens." Industrial export revenue constituted 22% of total standalone revenue in Q4.
