Bharat Forge Q2 Review: New Business Initiatives Showing Potential, Say Analysts

Bharat Forge Ltd.'s diversification into new businesses is likely to aid growth and support margins in the future, analysts said.

“While all its core businesses are seeing a sharp cyclical recovery, its initiatives to diversify into aluminum, light-weighting, and EV components have started to fructify,” Motilal Oswal said in a report.

The brokerage said FY23 will be the first year to clock a contribution from the recently acquired businesses as well as from new aluminum forging capacities in the EU and U.S.

Over the last decade, the company ventured into several non-auto businesses to de-risk its business from the volatility in one industry.

In the last few quarters, analysts have acknowledged that these new initiatives have started paying off.

The company’s consolidated net profit fell 48% year-on-year to Rs 141.6 crore in the quarter ended September, according to its exchange filing. That compares with the Rs 256.8-crore consensus estimate of analysts tracked by Bloomberg.

Bharat Forge Q2 FY23 Consolidated (YoY):

• Revenue rose 29% to Rs 3,076.4 crore, against a forecast of Rs 2,894.4 crore.

• Ebitda fell 15% to Rs 432 crore, compared with an estimate of Rs 497.9 crore.

• Ebitda margin at 14% versus 21.4% last year. Analysts had projected it at 17.2%.

Here’s what brokerages said after Bharat Forge’s Q2 performance:

• Market share wins in domestic passenger vehicles and exports, along with diversification through EVs, defense and other industrial business, are likely to aid growth and support margins.

• International subsidiary turnaround will be slower than expected.

• Indian PV sales in the third quarter to be lower than in the second quarter, in line with past seasonality.

• Remain ‘overweight’ with a target price of Rs 1,035 per share, implying an upside of 20%.

• Expect a strong commercial vehicle growth in India, though global CV revenues may be near the peak by FY24.

• Impressive progress on new initiatives gives upside to estimates.

• Raise target enterprise value to Ebitda multiple to 16x from 14x to factor in the upside from new businesses.

• Retain ‘buy’ rating with a target price of Rs 1,021, up from Rs 864, with a potential return on investment of nearly 19%.

• Good cyclical recovery in core businesses and ramp-up in new businesses coupled with new revenue pools in aerospace, defense and e-mobility can lead to de-risking of the business.

• Lower our consolidated earnings per share estimates for FY23 by nearly 19% to factor in consolidation of newly acquired companies and losses in the US aluminum plant, cost inflation and one-time charge in standalone business.

• Maintain ‘buy’ rating with target price of Rs 985, a potential profit of 15%.

• Pick-up in capex cycle, recovery in the domestic CVs and rising presence in industrial castings pose as growth levers for the company.

• Order win in defense suggest materialization of the business is on the anvil.

• Like Bharat Forge for its strong technical capabilities and ability to expand in new segments.

• Reiterate ‘buy’ with a target price of Rs 1,050, implying an upside of 22%.

Watch full conversation with Bharat Forge's Deputy MD Amit Kalyani: