Multiple tailwinds likely to lift Bharat Forge further in FY22: Analysts

Most of its segments are expected to be in positive territory for the first time in several year

Strong order momentum for Class 8 trucks, the rising share of the passenger vehicle (PV) business, a rebound in oil prices, and traction in the defence business points to a strong FY22 for Bharat Forge.
 
Though the Indian commercial vehicle (CV) sector is growing at a slower pace, the recovery in economic activity is expected to boost volumes. The sector reported 9 per cent YoY growth in February, as compared to double-digit growth in most segments. Ronak Mehta of Nirmal Bang Research believes leading indicators, such as rail freight traffic, port traffic, and e-way bills point to a revival in the CV cycle going forward. In addition to economic growth, any plan by the government to roll out a scrappage plan can be a big boost for volumes of truck makers, which are key clients of Bharat Forge. CV sales are likely to grow by over 30 per cent in FY22 on a lower base.
 
There is no growth-related issue for the company’s North American Class 8 heavy truck business. Orders for February were up 209 per cent YoY and 3 per cent on a sequential basis. Analysts expect near-term trends to be positive given the strong growth in key sectors and higher freight rates. The EU truck market, too, has seen a recovery since November and is positive if the trends hold in the near term. Commercial vehicles form the single largest segment for Bharat Forge and account for 40 per cent of revenues.
 
While CV sales recovery is a healthy sign, analysts are positive about the rising share of passenger vehicles to the company’s sales. Led by strong growth in the exports segment, PVs now account for 17 per cent of domestic revenues, as compared to 8 per cent five years ago. The company is increasing its technology base by investing in electric vehicle start-ups and expanding its aluminium forging capacities. The company indicated that lightweighting solutions (forging and casting), which have a current revenue run rate of $50 million, can get to $200-$250 million by FY25.

 
The biggest upside for the company can come from the defence segment. Aditya Makharia and Mansi Lall of HDFC Securities highlight that capital expenditure on defence was 20 per cent higher YoY and is the highest in 15 years. Given the government’s localisation initiatives, the higher capex should help Bharat Forge which has been undergoing field trials in artillery guns. The company recently tied up with global aerospace and technology firm Paramount Group to manufacture armoured vehicles in the country. The Street, however, will keep an eye on the flow of orders given the delays over the past few years.
 
The rise in crude oil prices is another positive for the company’s oil and gas vertical. However, the company has been diversifying away from the segment given the volatility in crude oil prices and growth prospects will depend on the pace of demand pick-up and the company’s strategy towards the segment.
 
Given the prospects across verticals, analysts expect earnings per share to quadruple over the next two years, from a low base in FY21. While the stock is up 13 per cent since the start of CY21, there is still some upside from these levels given the target price in the Rs 700-750 range.