Bharat Forge stock falls 3% after Kotak retains Sell call, cuts target on stretched valuations

Bharat Forge share price fell more than 2.5 percent on top of a percent correction in previous session after Kotak Institutional Equities retained its Sell call on the stock due to stretched valuations.

The research house slashed target price to Rs 600 (from Rs 650 per share earlier) as it cut target multiple to 22X (from 25X earlier).

It believes the company's growth trajectory will slow down materially during FY2019-21E as high base effects of export commercial vehicles (CVs) and oil and gas revenues catch up. "Target multiple also incorporates the increase in yields globally, which should result in increase in cost of capital."

Edelweiss has increased FY2019 standalone revenue estimates by 2 percent as it built in higher growth in the export MHCV (medium and heavy commercial vehicle) segment led by strong growth in the US Class 8 truck segment, but kept FY2020 earnings estimates almost unchanged.

FY2018 was a very successful year for Bharat Forge as both automotive and non-auto segments fired on all cylinders. The commercial vehicle cycle was favorable in the US as well as Indian market and crude oil prices increased during the year, which boosted revenues.

Working capital was stretched despite strong revenue growth with inventory and receivable days increasing significantly.

Standalone gross revenues increased 32 percent YoY in FY2018 led by 53 percent YoY increase in export revenues and 12 percent YoY growth in domestic business revenues.

Non-auto revenues increased by 46 percent YoY primarily driven by strong export (+94 percent YoY) while domestic non-auto revenue growth was muted (+2 percent YoY).

The export non-auto business was positively impacted by sharp improvement in the oil and gas vertical and commodity-driven segments.

The company generated a free cash-flow of Rs 295 crore in FY2018 (versus Rs 320 crore in FY2017). The company made a capex of Rs 580 crore in FY2018.

The company’s net working capital led to a drag of Rs 398 crore in FY2018 primarily led by—(1) significant increase in receivables (drag of Rs 600 crore) and inventories (drag of Rs 285 crore) offset by (2) increase in payable days (cash inflow of Rs 710 crore), Edelweiss said.