Prospects healthy for Bharat Forge, but stock fully valued too

Premier engineering concern Bharat Forge has broadened its revenue streams by entering new non-auto segments and markets, resulting in the share of the auto business dropping to 58 per cent in the financial year 2024 (FY24) from 80 per cent (FY07). It is seeing strong traction in the Defence sector. It has set up a team to work on advanced EV components. The diversifications have helped reduce cyclicality. 

Bharat Forge’s Q1FY25 revenue growth was driven by defence as other segments saw weak demand. Overseas subsidiaries are showing gradual improvement. The standalone revenue, Ebitda (earnings before interest, taxes, depreciation, and amortisation), adjusted PAT grew 10 per cent, 18 per cent and 20 per cent, year-on-year (Y-o-Y), respectively to Rs 2,340 crore, Rs 650 crore and Rs 380 crore, which was roughly in-line with street expectations. The revenue growth was driven by non-autos, which grew 19 per cent Y-o-Y and largely consisted of defence orders while auto segment grew 2 per cent Y-o-Y.

Gross margins improved 250 basis points (bps) Y-o-Y (down 40 bps Q-o-Q) to 58.2 per cent and Ebitda margins improved 190 bps Y-o-Y to 27.9 per cent. The adjusted PAT came in at Rs 380 crore after adjusting for impairment related to Tork Motors. Losses at overseas subsidiaries reduced marginally to Rs 120 crore from Rs 130 crore loss in Q4FY24 but a bit higher than the loss of  Rs 93 crore in Q1FY24. Capex guidance over FY25-26 stands at Rs 1,000 crore. Long-term debt reduced to Rs 2,150 crore (from Rs 2,460 crore Q-o-Q) and net debt/equity ratio is 0.6x.

The company has approved a fundraise of up to Rs 2,000 crore through issue of equity, debt or any other instrument for funds to be used for organic (greenfield plant) and inorganic growth opportunities. In Defence, the management indicates India needs 4k guns of different platforms and the company is likely to be among the beneficiaries of incremental gun orders, from Indian Army and overseas. The aerospace segment may post 15-20 per cent growth in FY25 and strong double-digit growth from FY26E onward (segment revenue at Rs 250 crore in FY24).

The order wins of Rs 775 cr in Q1 led to an order book of June 2024 at Rs 5,400 crore, with a mix of artillery guns, vehicles, and consumables. Traction in outsourcing from China and Europe to India should also drive growth for BHFC. Domestic CVs saw a 9 per cent Y-o-Y decline in revenue in Q1 due to election-led slowdown but there was market share improvement. PVs saw strong 31 per cent Y-o-Y growth in revenues, albeit over low base. Domestic non-auto saw 45 per cent Y-o-Y growth to Rs 730 crore, mainly driven by defence order execution (revenue of Rs 640 crore, up 147 per cent Y-o-Y). Outlook for the non-defence domestic industrial segment is very promising, given spending on power infrastructure and new capacity additions.  The guidance is for 50 per cent growth in defence business in FY25. The management does not expect pick-up in commercial vehicles in Q2FY25 but expects revival in H2FY25 for domestic CVs. CV exports grew 6 per cent Y-o-Y to Rs 530 crore, but Europe is weak. The management expects CV exports to see a moderately negative bias. PV exports declined 1 per cent Y-o-Y in Q1, due to a slowdown in Brazil. Non-auto exports revenue fell 9 per cent Y-o-Y. However, the positive is that oil and gas exports have started recovering.

Europe subsidiary’s margins may remain under pressure for two more quarters and the US subsidiary is expected to see impr­ovement in three-four months. There could be CAGR of 13 per cent in consolidated revenues over FY24-26 with Ebitda CAGR of 26 per cent. But the stock has run up and may look full-valued at expected PE 46x for FY25.