Can Bharat Forge double in two years' time?

Market pick-up could lead to 28% CAGR in earnings over FY14-17

Investors look for multi-baggers, stocks that give super-normal returns in a short span of time. With benchmarks running up 23 per cent over the past six months, it would be tough to look for multi-baggers. Also, past performance of stocks cannot guarantee future returns. Bharat Forge is one such company, which has already risen 93 per cent in six months and 193 per cent in one year, and yet analysts are betting on it.

In a note titled ‘Double Your Stake and Quadruple Your Money,’ IIFL argues India is at the cusp of a multi-year bull market and mid-caps such as Bharat Forge could double in two years.

  As a company, Bharat Forge is on the ‘like list’ of not just IIFL but several other brokerages as well. Credit Suisse believes Bharat Forge is among the best forging company in the world with best in class technology, return ratios and cash generation. However, the brokerage has a ‘neutral’ rating on the stock. Why do analysts like the company so much? Bharat Forge is a leading manufacturer of forged and machined auto components. Over the past few years, it has diversified into forged components for industries such as oil and gas, and railways.

The non-automobile segment now contributes 37 per cent to revenues. Even geographically, the revenue mix has changed. Credit Suisse says as of FY13, India has constituted just 27 per cent of the company’s revenues, with a bulk of exposure to Europe (45 per cent) and the US (18 per cent). However, the firm has not benefited from this diversification due to a slowdown in India and abroad. The sharp slowdown in the domestic commercial vehicle market also hit the company hard.

However, this is set to change, say analysts. Currently, the firm’s capacity utilisation is at 55 per cent and can improve sharply as demand improves in India and Europe. IIFL believes recovery in revenues would translate into a compounded annual growth rate (CAGR) in earnings of 28 per cent over FY14-17, led by benefits of operating leverage. The brokerage expects Bharat Forge’s automotive business to clock 20 per cent CAGR growth over FY14-17, as the domestic commercial vehicle cycle turns. Analysts expect a similar recovery in the international business, too.

According to Credit Suisse, both the truck and passenger vehicle volumes in the US have been seeing a rebound for some time. While NAFTA Class 8 truck sales declined 12 per cent in 2013, industry growth has been positive since September 2013 and has continued this year with 22 per cent growth in the first quarter. At 25x one-year forward earnings, Bharat Forge is trading at a 20 per cent premium to its historical valuations. While analysts believe the company merits a higher multiple, the current valuation seems stretched.