Q2FY24 Review: Bharat Forge: Standalone steady; Subs’ losses continue

7 Nov 2023 , 12:59 PM

Bharat Forge’s (BHFC) Q2 standalone results were in line with analysts of IIFL Capital Services estimates. Subsidiary performance stayed weak, with very little improvement in profitability. Standalone growth is being driven by deliveries against defence orders and growth in ‘Export-PV’ segment. Defence has some more room for growth. However, analysts of IIFL Capital Services see strong possibility of ‘Export-CV’ declining in FY25, due to sharp fall in US Class 8 truck order backlog. ‘India-CV’ may peak in FY25, with risk of a down-cycle in FY26. As a result, they expect standalone growth to stay low in FY25/FY26, after ~20% growth in FY23/FY24. Subs are seeing strong revenue growth, but profitability continues to be an issue. Analysts of IIFL Capital Services cut their FY24/FY25/FY26 EPS by 15%/5%/3%, primarily due to slow earnings recovery in Subs. BHFC stock has re-rated post new order wins in Defence (now at 33x FY25 PE). Yet, EPS estimates have seen downgrades.

Q2 standalone results in line with estimates: 

Q2 standalone rev grew 21%/6% YoY/QoQ (in-line). Gross margin improved 100bps QoQ to 56.7% (est. 56.0%), due to better revenue mix (higher exports). Reported Ebitda margin expanded 120bps QoQ to 27.0% (50bps beat). Absolute Ebitda and PAT came largely in line with analysts of IIFL Capital Services estimates. 

Defence ramping up, but CV may weaken in FY25/FY26: 

Standalone growth is being driven by Defence and ‘Export-PV’ segments. BHFC’s sub KSSL has defence order book of Rs30bn, which would be executed over the next 24 months. This implies defence revenue against these orders can scale up to Rs3.75bn per quarter (vs. Rs2.5bn in Q2). BHFC saw a spurt in revenue in the ‘Export-PV’ segment, which mgmt. is confident of sustaining. However, analysts of IIFL Capital Services feel CV segments are peaking in US/India. US Class 8 truck order backlog has come off sharply; they may see a decline in production in CY24/FY25. ‘India-CV’ may peak in FY25, with risk of a down-cycle in FY26. As a result, analysts of IIFL Capital Services forecast single-digit growth in standalone revenue in FY25/FY26.

Subs remain a drag; turnaround getting delayed: 

Subs’ losses (measured as Consol., less Standalone) widened QoQ in Q2FY24. In aggregate, subs in India and Overseas clocked Ebitda margin of 1%. With depreciation at ~6% of rev, these subs may take time to contribute positively to earnings.