Analyst Corner: Retain ‘sell’ on Bharat Forge with revised FV of Rs 320

Exports drag performance again. BHFC reported a very weak 2QFY21 led by sharp decline in export revenues. Management was quite cautious in indicating any recovery in its business given concerns of Covid-19 outbreak in the US and Europe again. Retain SELL rating as valuations are too expensive with revised FV of Rs 320 (from Rs 340 earlier) based on 20X September 2022E EPS for the standalone business.

Bharat Forge reported 2QFY21 standalone Ebitda of Rs1.56 bn (-51% yoy) in 2QFY22, which was significantly below our estimates. Revenues declined by 30% yoy (28% below estimates) led by 11% yoy decline in domestic revenues (6% below estimates) and 40% yoy decline in export revenues (36% below our estimates) in 2QFY21. The 11% yoy decline in domestic revenues was led by 37% yoy decline in aftermarket revenues and other operating income and ]6% yoy decline in the non-auto segment. The 40% yoy decline in export revenues was led by 33% yoy decline in the non-auto segment, 52% yoy decline in the MHCV segment and 26% yoy decline in the PV segment. Ebitda margin came in at 17.8% (-760 bps yoy), which was significantly below our estimates. The company reported standalone net profit of Rs 702 mn (- 71% yoy). Subsidiary performance was very weak with the company reporting a PBT loss of Rs 923 mn in 2QFY21. The stock has run up recently on expectations of a sharp recovery in the US Class 8 trucks due to pick-up in order inflow; however, the company was quite tempered on the outlook in this segment, even orders in defence and aerospace have been delayed.

We expect FY2021E to remain challenging for the company due to weakness in CV and oil & gas segments. However, we expect swift recovery going into FY2022E led by recovery in the CV segment (31% of revenues) and market share gains in the PV segment (20% of revenues) led by new product launches. We also expect strong growth in the defense segment due to the government’s push towards indigenous production. However, recovery in oil & gas and aerospace segments will get delayed due to steep cut in capital expenditures by OEMs.