Growth worries may keep Bharat Forge under pressure; earning estimate cut

The stock of Bharat Forge was down 17 per cent over the past two trading sessions due to a weak near-term growth outlook, though it has marginally recovered by 0.4 per cent to Rs 1,109.15 (on the BSE) on Wednesday. 
 

The management highlighted that in Q4FY24 and FY25, the growth momentum would moderate in both domestic and export markets across industries.

The company, however, is looking to outperform the market led by a diversified business mix.

Brokerages have cut their earnings estimates by up to 11 per cent given the slowdown in multiple segments. 

The management indicated that demand for passenger vehicle (PV) exports, industrial segment, and defense is healthy even as commercial vehicle (CV) demand in Europe is falling while that in the oil and gas vertical remains muted.

Volumes for domestic CVs are also expected to pick up in the medium term. 

“While we expect newer business segments (defence, lightweight, industrial castings, aerospace) to drive growth for the company over the coming years, we see limited growth prospects for the company’s core business given an increase in competitive intensity for the domestic players in export markets and the risk of electrification in select segments—the crankshaft supplier in PV and tractor segments, and oil & gas segments,” says Rishi Vora and Praveen Poreddy of Kotak Research.

The brokerage has cut its earnings per share estimates by 1-11 per cent for FY23-26 on lower revenue growth assumptions, lower profitability assumptions for the EU business, and higher finance costs.

The brokerage has maintained its sell rating as it finds valuations remain expensive given the cyclical nature of the business. 

While the near-term guidance/outlook was muted, the company’s December quarter results did not disappoint the Street. 

Standalone revenues saw a 16 per cent growth led by a 36 per cent growth in domestic revenues.

The defence sector was the key contributor to the revenue growth while the oil and gas sector revenues saw a decline.

Operating profit grew by 31 per cent while margins saw a 320 basis points improvement to 28.5 per cent as against a 27 per cent estimate by brokerages.

The gains were led by lower raw material costs and cost control measures. 
 

While Motilal Oswal Research has cut its earnings by 6-7 per cent for FY24/25 to factor in weak demand in auto exports it has maintained its buy rating. 

“While the near-term outlook is cautious, Bharat Forge has several long-term growth drivers to sustain its outperformance over the industry. The turnaround of its overseas subsidiaries seems on track and expected lines,” says Amber Shukla and Aniket Desai of the brokerage.

JM Financial Research has also maintained its ‘buy’ rating citing long-term growth triggers even as it cuts FY25 earnings estimates by 2 per cent.

“While the growth is expected to moderate in the near term, we see long-term triggers intact like the steady CV cycle in the US and India and strong ramp-up of PV, aerospace, and defence verticals. Cost-control initiatives and positive operating leverage are likely to support margins,’’ Vivek Kumar and Ronak Mehta of the brokerage adds.