Q3FY24 Review: Bharat Forge: Core slowing; Subs’ revival key for EPS growth

13 Feb 2024 , 12:18 PM

BHFC’s Q3 results were better than analysts of IIFL Capital Services expectations (7% Ebitda beat), but was dampened by mgmt. commentary of “moderation in growth momentum in Q4FY24 and FY25”. The “moderation” comment should hardly come as a surprise given that the underlying industries have been slowing for some time, namely i) India CV/PV, ii) US Class-8 truck order backlog, iii) EU economy, and iv) US rig count (for oil & gas revenue). The only major segment with strong outlook is Defence, backed by strong orderflow. Analysts of IIFL Capital Services were factoring in the slowdown in core growth and building 5% revenue Cagr over FY24-26. Hence, analysts of IIFL Capital Services standalone earnings estimates are largely unchanged. They are disappointed by the lack of turnaround in subsidiaries (esp. EU, US), which have hurt consol. EPS. As a result, analysts of IIFL Capital Services cut their FY24-FY26 Consol. EPS by 11%/6%/1%. They expect standalone EPS growth to be single-digit. Analysts of IIFL Capital Services projection of high growth in Consol. EPS depends on lower losses in Subs. 

Q3 Standalone Ebitda 7% above est.: 

Standalone revs grew 16% YoY, almost entirely driven by domestic non-auto (mainly defence segment). Ebitda margin expanded 190bp YoY and 230bps QoQ to 29.3% (260bp beat). Absolute Ebitda beat by 10% and 7% if analysts of IIFL Capital Services exclude Fx gains. PAT beat also came in at 10%. 

Core growth likely to moderate; analysts of IIFL Capital Services forecast 5% Cagr over FY24- 26: 

Mgmt. cautioned that growth momentum is likely to moderate in Q4FY24 and FY25, due to slowdown in underlying industries (especially India CV, Export CV, Oil & Gas). Mgmt. clarified that “moderation” implies lower growth rate and not a YoY decline. Mgmt. is confident of outperforming the underlying industries with new customers/orders/products. Mgmt. is also optimistic of multi-fold growth in Defence, Aerospace, eMobility etc. over the medium-term. 

Turnaround in Subs critical for Consol. EPS growth: 

Subs remain a drag with Q3 EPS loss of ~Rs2.5, offsetting standalone EPS of ~₹8. Although mgmt. had guided to turnaround in EU/US subs, they are running behind expectations. Analysts of IIFL Capital Services forecast Subs achieving PAT break-even in FY26; lower losses drive Consol. EPS Growth over FY24-26.