Even though Bharat Forge’s performance in the July-September quarter broadly met Street estimates and defence orders are on the rise, the subdued outlook for its global business has prompted some brokerages to adopt a cautious stance on the company.
Analysts have reduced the company’s earnings per share (EPS) estimates to account for the slow recovery of its overseas subsidiaries.
Valuations are also trading at long-term averages, which could limit potential upsides.
The revenue performance for the standalone operations was robust, with a 21 per cent growth.
This was driven by a 19-quarter high volume of 70,316 tonnes, up 15 per cent from the year-ago quarter.
Realisations also saw a 5 per cent increase to Rs 3.2 lakh, thanks to a better product mix.
While the automotive segment grew by 15 per cent year-on-year (Y-o-Y), the industrial segment’s growth was more than twice that.
The company’s gross margins expanded by 110 basis points (bps) Y-o-Y to 56.7 per cent, thanks to an improved product mix and cost reduction measures.
With the strong top-line performance and gross margin expansion, operating profit margins improved by 310 bps Y-o-Y to 27.4 per cent.
The company’s overseas operations reported a loss of Rs 115 crore due to losses in the aluminum forging operations in the US and the European Union (EU).
Motilal Oswal Research has reduced its EPS estimates by 8 per cent for 2023-24 and 3 per cent for 2024-25 to account for the slower-than-expected ramp-up in overseas subsidiaries.
“While Bharat Forge’s core India business is on a growth path, it’s worth noting that the underlying macroeconomic environment in the US and EU is showing signs of weakening,” said analysts at the brokerage, led by Jinesh Gandhi.
One area of strength for Bharat Forge is the defence business.
The company secured orders worth Rs 1,100 crore in the September quarter.
Its order book in this segment now stands at Rs 3,000 crore to be executed over the next two years.
While scaling up this line of business is positive, Emkay Research highlights multiple headwinds for the company.
Analysts of the brokerage, led by Jaimin Desai, state, “While we take cognizance of the defence ramp-up and build a contribution of 20 per cent to standalone revenues by 2025-26 compared to 5 per cent in 2022-23, the outlook for the underlying commercial vehicle industries (global and domestic) and industrial exports is softening.”
Global commercial vehicle makers have projected an 8-15 per cent industry decline in developed markets in 2024.
Domestic commercial vehicle growth is expected to moderate on a high base, with the industrial export outlook remaining muted as well.
Prabhudas Lilladher Research, however, believes that the company has multiple growth drivers in the domestic and export automotive segments (upcycle in the commercial vehicle industry and easing chip shortage helping passenger vehicles).
A strong order book leading to robust growth in the high-margin non-automotive segment, contribution from defence and renewable segments, and rising traction in the electric mobility division are some of the factors driving the positive stance of the brokerage.
Given the global headwinds, investors should await a correction or better valuations before considering the stock.
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