Bharat Forge Ltd. – Healthy margins

Sector Outlook – Positive

Bharat Forge’s Q3FY24 standalone revenues increased by 1% QoQ / 16% YoY to Rs. 2,263 crores, driven by a 9% QoQ rise in domestic business but offset by a 6% QoQ decline in export revenues. 

The adjusted standalone EBITDA was Rs. 663 crores, with an EBITDA margin of 28.5%, surpassing market estimates due to improved gross margins and cost-control measures. 

The reported standalone PAT was Rs. 380 crores, up 8.7% QoQ / 32.1% YoY. Domestic revenues grew 34% YoY, led by the non-auto segment, while export revenues fell 6% QoQ due to declines in PV, M&HCV, and non-auto segments. 

The company’s overseas operations showed improvements, with the US subsidiary expected to become profitable in 1QFY25E. The balance sheet remains strong, with Rs 1,000 crores in cash reserves.

Concall Highlights

• Bharat Forge secured orders worth about Rs 550 crores in Q3FY24, with a mixed outlook for different markets.
• US commercial vehicle demand is expected to be flat, with pre-buy activity anticipated in 2024-26 due to emission norm changes.
• European demand is uncertain, but growth is expected in PV and industrial segments.
• E-mobility and aluminium casting businesses are expected to contribute to profitability.
• The defence order pipeline is healthy, with orders worth around Rs 2,000 crores, largely for exports.
• Aerospace revenues are expected to double annually for the next 2-3 years, with exports accounting for over 80% of segment revenues.
• Non-auto exports, particularly in oil and gas, declined due to significant destocking at the customer end.
• Domestic PV revenues were muted due to the completion of several programs.
• JS Auto Vestas business in Russia has decreased, but orders worth about Rs 200 crores have been acquired across end-user segments.
• Capex stands at Rs 500 crores, covering both Indian and overseas operations.
• Capacity utilisation is approximately 50% in the US and around 70% in Europe.
• Subsidiaries’ performance is expected to yield overall mid to high single-digit margins.
• European operations reported an EBITDA of Rs 21.8 crores in Q3FY24, aiming to elevate aluminium business EBITDA margins to mid-teens by FY25.

Valuation and Outlook

Bharat Forge, a leading forging company based in Pune, reported lower than expected consolidated EBITDA in Q3FY24, mainly due to weaker revenue and profitability in the EU business. 

The near-term outlook is challenging, with limited growth opportunities in core businesses due to increased competition in export markets and the potential impact of electrification in some segments like PVs and tractors, as well as the oil and gas sector. 

However, the domestic business showed resilience in the India CV segment, supported by government infrastructure initiatives. The India PV business expects growth from premiumization and the rise in Utility Vehicles. While the Industrial segment performed well, sales to the Agri sector and Construction Mining declined. Overseas operations saw improvements in the Aluminium business in Europe, with similar expectations for the US plant. Looking ahead, moderate growth is anticipated in both domestic and export markets, with Bharat Forge aiming to outperform the market through its diversified business and efforts to expand into new sectors and markets.