Bharat Forge: Diversification, lower input costs should reap benefits

The tide may be turning for Bharat Forge after three years of pain, when it was hit by weak demand and high prices of its raw material. The company has spent that period figuring out diverse opportunities in new sectors such as defence, aerospace, electrical, e-mobility etc.

Now, things are set to change due to recovery in economic activity leading to demand revival, and a drop or stabilisation in raw material cost which could mean likely improvement in margins. At a recent analyst meet, the company has stated targets of 12-15 per cent compounded annual growth rate (CAGR) in revenue and 20 per cent in Ebitda earnings before interest, tax, depreciation and amortisation.

In the shorter-term, there’s a visible cyclical turnaround in the domestic and export automobile sectors, and likely double-digit growth prospects in the high margin non-auto business, including rising traction in e-mobility and potential opportunities from defence and renewable segments.

Bharat Forge is the largest exporter in forgings components globally, with around 60 global customers and about 68 per cent of its revenue from exports. It works with multiple international OEMs for electric vehicle components.

In castings, (via JS Autocast), it is a manufacturer of high-grade machined ductile iron castings, used in sectors like wind energy, hydraulics, automotive and power generation. The company completed acquisition of JS Autocast, a leading manufacturer of high-grade machined ductile iron castings, in July 2022 for Rs 490 crore.

In search of new business, Bharat Forge has invested in R&D in the defence sector, and has already bagged export orders for artillery systems and hopes to win orders from the Indian army for advanced towed artillery guns (ATAG). It is already supplying KM4 (armed personnel carriers) developed internally, to the army. R&D is also focussed on ground and aerial unmanned vehicles. Revenues from the defence sector is projected to hit Rs 1,000 crore over the next few years, up from Rs 300-500 crore currently. 

The company is also looking at the light-weighting concept in the auto segment, where vehicles use lighter components. This aluminium-component-based business line is expected to grow quickly once the energy crisis in Europe eases – Bharat Forge has significant presence in Europe via subsidiaries and it is looking to start production in an aluminium facility in the US in the 2023-24 financial year (FY24).

Its aerospace clientele includes Boeing, Rolls Royce and Honeywell. The company is also trying to move up the value chain into sub-assemblies and integrated systems with products like undercarriages, transmission systems and LRUs (line replacement units) for engines, rotary wings, etc.

In e-mobility, the company is looking to make power-trains for commercial vehicles and is trying to become a player in the repowering market, converting internal conversion engines to electric. The company is also trying to develop gas turbines and turbomachinery (for railways, defence etc.) and it has launched a turbocharger business for tanks and submarines among others. Given the order book, the management sees visibility in around 70 per cent of its targeted revenues in FY25. 

Valuations have been stable around the PE of 30x in the last five quarters. Revenues are expected to grow 17-18 per cent year-on-year in FY23 and the Ebitda is expected to grow 9 per cent. The Ebitda margin was down slightly in the first half, and it is expected to recover sharply with margins improving through the next fiscal as well. Various analysts have one-year price and valuation targets in the range between Rs 905, Rs 960 and Rs 1,005 etc. There’s some upside from the current price of Rs 868.