New verticals in Bharat Forge to boost revenue growth

With supply contracts and JVs, firm is well placed to ride opportunities in the aerospace and defence sectors

The Bharat Forge stock extended its gains over the past three days to eight per cent on a multi-year supply contract with Boeing and Kalyani Group’s joint venture with Israel’s Rafael Advanced Defense Systems. While Bharat Forge will supply titanium forgings for wing components to Boeing, the 51:49 joint venture in favour of the  Group is for missile technology, remote weapons systems, and advanced armour solutions. Although the opportunity in the defence space is large, analysts say it will be two to three years before the company will see revenues. While the financial details have not been disclosed, analysts say about 30 per cent of the value of future defence orders should accrue to the listed entity for supply of forging-related components. Components for the defence business are expected to be manufactured by entities within the group, according to capabilities.

While gains from the defence space are long-term in nature, analysts are bullish on the aerospace vertical, which is expected to move up from negligible revenue contributor to about 10 per cent by FY17. The company has indicated aerospace will become a $60-million vertical over the next three years and $100 million in five years. Oil & gas is another  vertical which should see some traction. While falling crude oil prices are a negative, the company is looking at expansion of its product portfolio and customer base to mitigate the impact.

The outlook for the company remains strong, as the management has indicated a revenue target of Rs 7,500 crore by FY17 on a standalone basis. This points to doubling of revenues over the next three years, implying a growth of 30 per cent annually. Standalone revenues were at Rs 3,500 crore in FY14. Also, non-automobile revenues are expected to improve to about 60 per cent from 41 per cent in FY14. Given the customised nature of the projects, these should fetch better margins. Hence, expectations of the company sustaining earnings before interest, depreciation, taxes, and amortisation margins of 30 per cent are realistic. Analysts say this margin number could be higher by two or three percentage points (32-33 per cent), given higher utilisation, improving product mix and higher revenue growth from newer verticals.

Given recent developments and good December quarter results, the stock has seen earnings upgrades over the past month. Most analysts have raised their earnings estimates for FY16 and FY17 by five to seven per cent. While the stock has seen a sharp uptick, analysts say investors with a long-term outlook (FY17) will see more gains, as there is further scope for re-rating.