Bharat Forge: Riding on multiple growth levers

Bharat Forge (BFL), a technology-driven metal forging company having a transcontinental presence,  posted robust numbers for the March quarter. Revenues grew 30 percent year-on-year, driven by a strong performance in both export and domestic markets. A positive outlook for end user industries, strong demand for Class 8 trucks (15 tonne & above) in the US and multiple growth triggers make it an ideal investment call, although its rich valuations temper our excitement.

Result snapshot

The strong growth in revenues was driven by a 24.5 percent YoY growth in volumes and a 4.7 percent growth in realisations.

Exports fared well, rising 36 percent YoY. Within exports, the US market witnessed 56 percent YoY growth on the back of a recovery in North America’s industrial segment and significant improvement in the US Class 8 truck segment. Commercial vehicles (CV), passenger vehicles (PV) and industrial segments witnessed a YoY growth of 37/ 33/46 percent respectively. Growth in the industrial segment improved on recovery in oil and gas exports.

Its domestic business recorded a 23 percent YoY growth, led by strong demand for CVs. Within the domestic business, the CV and PV segments registered 44 percent YoY and 29 percent YoY growth, respectively, whereas the industrial segment declined 4 percent YoY.

Despite inflationary pressures, the company was able to maintain its earnings before interest, tax, depreciation and amortisation (EBITDA) margin at 28.5 percent.

Key growth drivers

The management expects the domestic M&HCV segment to register continued growth given the government’s infrastructure focus, strict implementation of the overloading ban and pick up in overall economy. It has guided for 10-12 percent YoY growth in domestic CVs in FY19.

BFL expects the domestic industrial segment to register 15-18 percent growth over the next one-and-a-half years led by the government’s ‘Make in India’ initiatives and preference for domestic procurement. The company is well-positioned to take advantage of these opportunities and has lined up a number of new products.

On the global front, there is a significant pickup in Class 8 truck demand compared to last year due to strong freight growth in the US. The management has raised its demand guidance for Class 8 trucks to 28 percent in CY18 from of 10-12 percent earlier. It sees continued fleet renewal and expansion along with a strong freight environment supporting demand for trucks in Europe.

In the last two years, the company has bagged orders worth more than Rs 1,500 crore, mostly from the PV and industrial segments. In FY18 alone, the company received Rs 700 crore in orders from various segment and geographies. These orders are expected to start contributing to revenues from FY19 onwards.

The management is confident of revenues accruing from the defence, aerospace and oil & gas space. It recently received a Rs 200 crore order from the Ministry of Defence, which is to be executed by FY19. The management indicated that these products will earn double-digit margins.

In aerospace, BFL is planning to shift from forged components to fully machined components, for which a plant has been commissioned. The management has set a revenue target of $100 million from this space by FY20.

The company also caters to the sub-sector of shale fracking and has a very strong market share. Exports increased substantially in this space and help generate revenue of $100 million in FY18. The management has penned a roadmap to double revenue in the next three years on the back of new product launches and ramp up in clients and geographies.

The company is expanding forging and machining capacity at its Baramati facility for Rs 400 crore. It is also setting up a greenfield facility at Nellore to tap additional growth opportunities. The management pegs all these initiatives generating a topline of Rs 650 crore over FY20-21.

A fully automated state-of-the-art centre for Light Weighting Technology (LWT) has been recently commissioned. It would focus on lightweight aluminium and magnesium components that find application in BS-VI emission norm compliant vehicles and electric vehicles.

The stock is currently trading at 28.3 times and 24.5 times FY19 and FY20 projected consolidated earnings, respectively. This factors in most of the visibility in performance going forward. Hence, we would recommend that investors accumulate the stock on any price weakness.