Q4FY23 Review: Bharat Forge: Defence, lower losses in Subs to drive EPS growth

Bharat Forge’s Q4 Standalone Ebitda (excl. Fx) missed our est. by 4%. Although revenue growth was strong (+19% YoY), it missed estimates by 3%. Subsidiary losses continued to drag consol. PAT; however, the loss narrowed QoQ. Looking into FY24, we expect defence (export orders) and aerospace to account for almost half of the revenue growth (standalone level). Other segments (CV,PV, industrial) would see steady growth. Mgmt. indicated that the worst is behind for overseas subs. European operations are likely to break-even in Q1FY24 and US subs would turn black in Q2/Q3. Analysts of IIFL Capital Services have trimmed their FY24 Consol. EPS by 5% (1% Ebitda cut) but retained FY25 EPS. 

Q4 Standalone Ebitda (excl. Fx) miss by 4%: 

Standalone Rev grew 19%/2% YoY/QoQ, and came in 3% below IIFL est. Better than expected export sales (+26% YoY) were offset by miss in domestic sales (+10% YoY). Reported Ebitda margin contracted 300bps QoQ to 24.4%. If analysts of IIFL Capital Services exclude Fx impact from Q3 and Q4, margin expanded 90bps QoQ to 26.2% (est. 26.7%). Adjusted Ebitda missed analysts of IIFL Capital Services’ estimate by 4%.

Defence to drive growth in FY24; other segments steady: 

Analysts of IIFL Capital Services expect India CV + PV revenue to grow about 10% in FY24. A similar trajectory would be seen in export CV +PV. Analyst of IIFL Capital Services believe the fastest-growing segment in FY24 would be Non-auto, driven by the ramp-up of Defence segment. In recent quarters, BHFC + its subsidiary KSSL have won orders worth ~Rs20bn, which will translate into revenue over a 2.5yr period, starting FY24. If BHFC wins confirmed orders for artillery guns from the Indian government, it would push up growth even further.

Subsidiary losses hurt FY23 Consol. EPS; Mgmt confident of turnaround: 

Over FY14-FY19, Consol. EPS was 95-105% of Standalone EPS. Subsidiary losses widened in FY23 and dragged down Consol. EPS by 50% vs Standalone. The worst seems to be behind for overseas subs. Capacity utilisation of plants is set to improve and operating expenses are likely to moderate. European operations are likely to break-even in Q1FY24 and US subs would turn black in Q2/Q3. Mgmt is confident of achieving double-digit Ebitda margin in Subs over the medium term.

Analysts of IIFL Capital Services maintain add with target price of Rs 910.