Q1FY24 Review: Bharat Forge: Defence driving growth, even as core may slow

10 Aug 2023 , 11:03 AM

Bharat Forge’s Q1 Standalone Ebitda (excl. Fx) beat IIFL Capital Services est. by 20%. Revenue growth was robust (+21% YoY), coming in 15% above IIFL Capital Services estimates, led by earlier-than-expected deliveries against defence orders. Subsidiary losses continued to drag consol. PAT; however, the loss narrowed QoQ. Looking into FY24, analysts of IIFL Capital Services expect defence (export orders) to account for bulk of the revenue growth (standalone level), while other segments (CV, PV, industrial) would be relatively slow. Mgmt indicated that the worst is behind for overseas subs. European operations are likely to Ebitda-positive in FY24 as a whole, and US subs would break even in Q3/Q4. Despite the Q1 beat, analysts of IIFL Capital Services maintain their FY24/FY25 estimates as they were already building sharp ramp-up in Defence revenue over the course of FY24. Retain ADD (TP Rs980). Key catalysts for the stock would be confirmed orders for artillery guns from Indian Government and turnaround in Subs. 

Q1 Standalone Ebitda (excl. Fx) beat by 20%: 

Standalone revenue grew 21%/7% YoY/QoQ, and came in 15% above analysts of IIFL Capital Services est. Earlier-than expected deliveries against Defence orders spiked Industrial segment (+72% YoY). Reported Ebitda margin expanded 140bps QoQ to 25.8%. If analysts of IIFL Capital Services exclude Fx impact from Q4 and Q1, margin came off 20bps QoQ to 26.0% (est. 25.0%). Adjusted Ebitda beat their estimate by 20%. 

Defence to lead growth in FY24/25; other segments not as strong: 

Analysts of IIFL Capital Services expect India CV + PV revenue to grow about 13% in FY24. A similar trajectory would be seen in export CV +PV. They believe the fastest growing segment in FY24 would be Non-auto, driven by the ramp-up of Defence. In recent quarters, BHFC + KSSL (subsidiary) have won orders worth ~Rs23bn, which will translate into revenue over 18-24 months. If BHFC wins 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 are improving and operating expenses are likely to moderate. With improvement in Subs, mgmt is targeting highteen margins on Consol. basis vs. 14% in FY23 and 15% in Q1FY24.