Street concerns over global slowdown weighs on Bharat Forge stock

Consolidated earnings of Bharat Forge in Q3FY23 missed estimates, largely due to higher-than-expected interest burden, although operational numbers (including standalone numbers) were close to consensus. Still, the management guidance was positive and appeared to be based on logic.

Essentially, the standalone performance of the company met expectations but there were operating losses at overseas subsidiaries. There are also significant risks to exports, given a global slowdown, and this is a serious issue because of Bharat Forge’s strong export profile since exports account for over 60 per cent of its revenue.

Standalone net sales stood at Rs 1,950 crore, up 22 per cent year-on-year (YoY), and up 5 per cent quarter-on-quarter (QoQ). Total volume stood at around 63,000 tonnes (up 18 per cent YoY, and up 3 per cent QoQ). Realisation increased 4 per cent YoY per tonne (up 2 per cent QoQ). The Ebitda margin was at 27.4 per cent (up 200 basis points YoY, and 310 bps QoQ), driven by a better product mix.

The consolidated Ebitda margin stood at 14 per cent (down 700 bps YoY, and flat QoQ), because of higher raw materials costs and the slow ramp-up of the recently commissioned aluminium forging unit in the US. The consolidated Ebitda stood at Rs 470 crore (down 7 per cent YoY, and up 9 per cent QoQ). The consolidated adjusted PAT stood at Rs 78.7 crore (down 69 per cent YoY and 45 per cent QoQ).

Exports revenue increased 35 per cent YoY (up 9 per cent QoQ) to Rs 1,170 crore due to demand from the passenger vehicle (PV), oil & gas, and aerospace segments. The commercial vehicle (CV) segment’s revenue was Rs 490 crore (up 27 per cent YoY and 5 per cent QoQ).

The management’s guidance is that Class 8 truck demand remains steady and the company has orders to fulfil until the end of next financial year. Truck volumes in the EU also remain healthy. PV segment revenue more than doubled to Rs 260 crore. Industrial revenue stood at Rs 410 crore (up 16 per cent YoY and 14 per cent QoQ). 

The management believes FY24 could be a turnaround year for the following reasons:

• It is seeing strong demand in auto, in both domestic and export markets.
• A sharp uptick is expected in the defence segment, led by new export order wins worth Rs 2,000 crore and an order win for Advanced Towed Artillery Gun System (ATAGS)
• Huge outsourcing opportunities in the renewables segment on the back of the recent acquisitions of Sanghvi Forgings (where it targets 2x revenue expansion in 2023-24) and JS Auto (where new order wins are worth Rs 250 crore)
• Turnarounds in overseas subsidiaries as there’s a ramp-up of new aluminium forging lines in the US and Europe, with capacities fully booked with confirmed orders
• Growth opportunities in aerospace

In Q3FY23, overseas manufacturing subsidiaries' revenue stood at Rs 1,070 crore (up 33 per cent YoY and 13 per cent QoQ). But there was lower capacity utilisation (only 50 per cent) in Germany. There was a delay in ramping up the US aluminium forging plant. However, capacity is now fully booked and the company expects a strong ramp-up and order execution. The guidance is for healthy margins from international operations in FY24.

Compared to Rs 889 on February 13, the stock fell 6 per cent over two sessions to Rs 835, after the results (announced on February 14 during market hours), and has recovered only half the lost ground to Rs 862. There are ‘buy’ recommendations from various analysts with fair value and price targets of Rs 850-Rs 960. Given global weakness, investors should be cautious about the fulfilment of overseas revenue and margin targets in the near future.