Multiple triggers support long-term outlook for Bharat Forge

In the near term, supply challenges and cost pressures to impact margins

A weak performance in the March quarter due to muted export revenues from commercial vehicles and supply chain issues led to an 8 per cent fall in the stock of Bharat Forge from the highs this month. While this trend and the pressure on margins will remain in the short term, brokerages are positive on the stock citing strong growth for non-auto business, India CV revival and revenue inflow from multiple defence projects it has bid for.

Pegged back by a 10 per cent decline in export revenues the company saw a marginal decline in revenues on a sequential basis. The company highlighted that the drop in export revenues was largely due to the lower production of Class 8 trucks due to shortage of semiconductor chips.

North American Class 8 truck orders were down 8 per cent month-on-month in January compared to December last year and 50 per cent lower than year ago levels. Lower new orders are due to supply chain shortages and production constraints. Truck demand in this segment however remains strong on the back of robust order backlog, new orders and production rates.

While the supply constraints are expected to ease gradually, the company has guided for a better domestic and export revenue performance on a sequential basis in the March (Q4FY22) quarter.

The industrial segment, which accounts for 46 per cent of revenues, posted good growth. This was aided by improvement in the oil and gas segment which is supported by rising crude oil prices. The segment is expected to do well on the back of demand from key markets such as Europe, US and India.

Decline in volumes and raw material pressures took a toll on margins in the quarter. The operating performance in the quarter was 11 per cent below consensus estimates and was impacted by a weak product mix and commodity inflation, according to Systematix Research. The company indicated that raw material costs pressures along with higher logistics and energy costs in Europe due to the ongoing geopolitical issues are expected to impact profitability in the first half of CY22. Lower margin expectations has led analysts at Emkay Research to cut earnings per share estimates for FY22-24 by 2-3 per cent.

A major opportunity from the auto side for the company is electric vehicle components with order wins of $50 million (total order wins at $100 million) in the last nine months. Within the EV space, the company is focussing on aluminium forging (light weighting) and power electronic components.

Varun Baxi and Mansi Lall of Prabhudas Lilladher Research are positive on the stock and believe that it has multiple growth levers in domestic and export automotive segments with cyclical turnaround in the CV industry, strong double digit growth in high margin non-auto business and good traction in e-mobility segment. The defence segment is another potential revenue contributor going ahead.

At the current price, the stock is trading at 27 times its FY23 earnings estimates. Given that target prices are in the Rs 900-Rs 1,000 band the upside from the current levels are 30-44 per cent. Investors, however, should await clarity on the geopolitical situation and the impact it can have for its operations in Europe before considering the stock.