Expect strong recovery from H2FY21 onwards; maintain Buy

* Q2FY21 results were subdued due to weakness in CV and Industrial segments, especially in overseas markets. Revenues at Rs8.8bn missed estimates (Rs10.6bn), owing to lower-thanexpected overseas Auto revenues. EBITDA margin contracted 500bps to 18.8% (est.:19.6%).

* We expect a strong recovery with growth of 28%/34% in H2FY21/FY22, led by Automotive and Domestic Industrial segments. In addition, customer additions and widening of product portfolio should support growth in FY22.

* Our positive view is underpinned by BHFC’s leadership position in automotive forgings, focus on diversification and expected recovery in the core segments. Medium-term performance will be also aided by high-potential segments such as Defense, Railways, Aerospace and Aluminum parts.

* We expect revenue/earnings CAGRs at 11%/24% over FY20-23E. We retain Buy with a revised TP of Rs601, based on 25x P/E for the standalone business on FY23E (Sep’22E earlier). Retain OW stance in EAP.

What we like? 1) Q2FY21 domestic revenues have recovered to ~97% of last year levels and may turn positive in Q3FY21. 2) Growth in North America and Europe truck orders has been strong in recent months and should translate into production growth with lag of 2-3 quarters. 3) Renewable and Marine segments are expected to see revenue of Rs500mn in FY21, and further increase to Rs1.5bn in a year.

What we did not like? Q2FY21 overseas revenues witnessed a steep fall of 40%. Within this, auto revenues are expected to turn positive in H2FY21, while Industrial revenues to remain subdued due to weakness in the Oil & Gas segment.

Weak quarter: Revenues declined 30% yoy to Rs8.8bn, below estimates of Rs10.6bn, mainly due to lower-than-expected revenues in the overseas Auto segment. EBITDA margin contracted by 500bps yoy to 18.8% (vs. estimated 19.6%), due to lower-than-expected revenues. Employee cost/sales rose 290bps and Other expenses/sales rose 590bps. Gross margin improved 380bps due to a change in inventory. Overall, adjusted PAT fell 63% yoy to Rs826mn (vs. Rs1.1bn estimate), due to lower-than-expected revenues and operating margin.

Outlook and valuation: BHFC’s leadership position in automotive forgings, focus on diversification and expected cyclical recovery in the core segments support our positive view. We expect a strong recovery with growth of 28%/34% in H2FY21/FY22, led by Automotive and Domestic Industrial segments. In addition, customer additions and widening of product portfolio should support growth. Moreover, there is significant growth potential for nascent segments such as Defense, Aerospace and Railways over the medium term. Our estimates are broadly unchanged. We retain Buy and OW stance in EAP, with a revised TP of Rs601, based on 25x P/E for the standalone business on FY23E (Sep’22E earlier). Key risks include 1) delay in recovery in domestic/North America CV segments, 2) further downturn in the industrial segments, and 3) adverse currency rates.

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