Defence a key growth driver for auto component major Bharat Forge stock

Auto component major Bharat Forge's second quarter performance (Q2FY25) was lower than consensus estimates. A slowdown in passenger (PV) and commercial vehicles (CV) in both domestic and export markets was offset to a degree by growth in defence and subsidiary JS Autocast. 

 

The standalone revenue of Rs 2,250 crore, operating profit of Rs 610 crore and adjusted net profit of Rs 350 crore remained flat year on year (Y-o-Y). The H1FY25 revenue grew 5 per cent, operating profit grew 8 per cent and net profit grew 10 per cent. The H2FY25 is likely to see a similar range of growth. 

 

Domestic revenue grew 12 per cent Y-o-Y.  CVs declined 15.5 per cent Y-o-Y while non-autos grew 26 per cent Y-o-Y, primarily led by 67 per cent Y-o-Y growth in defence. Exports declined 9 per cent Y-o-Y mainly due to weakness in the European Union CV segment.  

 

Gross margins improved 180 basis points Y-o-Y (down 30 basis points Q-o-Q) to 58.5 per cent. The operating profit margin remained flat Y-o-Y at 27.2 per cent. 

 

While the European subsidiary’s margin improved 40 basis points Q-o-Q to 3.9 per cent, the US subsidiary clocked an operating loss of Rs 21.6 crore vs an operating loss of Rs 23.5 crore in Q1FY24.

 

The cash flow from operations (CFO) grew 27 per cent Y-o-Y, but free cash flow declined 78 per cent Y-o-Y. Its long-term debt grew to Rs 2,390 crore (from Rs 2,150 crore Q-o-Q) and net debt to equity grew to 0.66 times (v/s 0.6 times Q-o-Q). Consolidated return on capital employed stood at 17.7 per cent. 

 

Total order wins in H1FY25 stood at Rs 2,216 crore with Rs 1,400 crore in defence, Rs 300 crore in aerospace, and Rs 646 crore in traditional businesses. It has added three new customers to its component business in H1FY25.

 

A defence order backlog of Rs 5,900 crore and also a good order book in JS Autocast would continue to be key growth drivers. There is hope of a pickup in domestic CV demand only in a couple of quarters.  

 

Aerospace revenue for H1FY25 was Rs 100 crore with orders of Rs 300 crore during this period (FY24 aerospace revenue at Rs 240 crore). There is room for robust growth. Overseas, the steel forgings business was hit by weak demand. 

 

Consolidate capex would slow down in H2FY25 after spending Rs 800 crore in H1, which included Rs 500 crore in subsidiaries ($8-10 million to be further invested in H2).

 

Management says domestic CV saw a 15.5 per cent Y-o-Y decline in revenue in Q2 due to elections. Another 1-2 quarters may go by before there's a visible pickup in demand. Domestic PVs saw 13 per cent Y-o-Y growth in revenue. 

 

The domestic non-auto segment saw 26 per cent Y-o-Y growth to Rs 640 crore, mainly via defence order execution (revenue of Rs 510 crore in Q3, up 67 per cent Y-o-Y).  

 

Defence order wins of Rs 640 crore in Q2 (H1FY25 at Rs 1,400 crore), and an order book of Rs 5,900 crore, leads to expectations of over 50 per cent growth in FY25 and also FY26. 

 

CV exports declined 5 per cent Y-o-Y to Rs 530 crore. Europe remained weak. Excluding Europe, CV exports saw 14 per cent Y-o-Y growth. Non-auto exports fell 6 per cent Y-o-Y.

 

Autocast’s revenue came in at Rs 165 crore (32 per cent Y-o-Y) and operating profit came in at Rs 20 crore, up 60 per cent Y-o-Y. It has won orders worth Rs 173 crore in H1FY25.

 

The company's diversification strategy has seen the auto contribution fall to 58 per cent in FY24 from 80 per cent in FY07. Value additions have come from focusing on machined components. There's traction in the defence business and a team is working on EV components. These diversifications have helped reduce cyclicality.

 

In the auto business, the PV space offers an opportunity 4 times that of CVs. Management continues to see strong traction in PV exports. It is tapping opportunities in PV light-weighting through aluminium forging, with a focus on hybrids and EVs.

 

Defence contributed Rs 1,560 crore in FY24. The order book is now Rs 6,000 crore, apart from an advanced towed artillery gun system order worth Rs 4,500 crore where the company qualified with another partner.

 

Overseas subsidiaries continue to remain a drag on standalone performance and a key concern. The stock at the current levels is fairly valued.