Bharat Forge: Post a strong show in Q2, brokerages maintain mixed views

In Q2FY24, PV exports surged by 39 percent YoY, and domestic revenue grew 1.5X due to the defence business. Bharat Forge’s EBITDA margin reached 27.4 percent, a 330 bps YoY increase

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After Bharat Forge posted strong earnings for the September quarter, a majority of the brokerages are maintaining mixed views. Brokerage CLSA and Citi have a sell rating on the stock while setting target price of Rs 987 and Rs 900 a share, respectively. Meanwhile, UBS has a buy rating with a target price of Rs 1,260 a share and Morgan Stanely’s overweight stance has a target price of Rs 1,176 a share.

Citi advises caution on subsidiary margins due to uncertainty about a major Indian defense order, potential export challenges from geopolitical issues and macro trends, and high valuations leaving minimal margin for error.

CLSA praised strong execution but expressed concerns over expensive valuations. In the 2Q, the standalone performance slightly exceeded estimates, driven by impressive revenue growth in defense and exports. The defense and export segments are expanding rapidly due to new order wins, while domestic commercial vehicle (CV) and passenger vehicle (PV) businesses seem to be decelerating. Subsidiaries continue to post losses, which are affecting overall profit growth.

According to UBS, Bharat Forge reported a slightly improved Q2 performance with a continued defense ramp-up. New businesses are expected to fuel strong growth. Q2 showed growth driven by auto exports, with expanding gross margins quarter-on-quarter. A robust performance in passenger vehicle exports is anticipated, with a target of achieving 25% EBITDA margins in the defense segment.

The financials

Morgan Stanley states the company’s business outlook is consistent; they aim to boost market share in core areas, expand defense and EV segments, and enhance profitability in overseas subsidiaries. The FY25 export commercial vehicles outlook is stable (-5% as per MSe), with optimism about India CVs (+7% as per MSe), but concerns remain in renewables, particularly wind energy. In defense and industrials, management aims for nearly 25% EBITDA margins by FY25, surpassing MSe estimates of 20% and 15%, respectively.

Bharat Forge Ltd witnessed a robust 52 percent increase in its consolidated net profit for the September quarter, driven by contributions from all businesses. While consolidated net profit for the quarter stood at Rs 2,148.65 crore against Rs 1,415.56 crore a year ago, revenue soared 22.7 percent to Rs 3,774.19 crore, with a 21 percent increase in both export and domestic revenue.

In Q2FY24, PV exports surged by 39 percent YoY, and domestic revenue grew 1.5X due to the defence business. Bharat Forge’s EBITDA margin reached 27.4 percent, a 330 bps YoY increase.  The company claimed that superior operational performance was driven by an improved product mix and higher capacity utilisation.

Also Read: Bharat Forge Standalone September 2023 Net Sales at Rs 2,249.39 crore, up 20.68% Y-o-Y

The Pune-based firm also revealed that a debt reduction of Rs 307 crore brought ROCE closer to 20 percent. At a consolidated level, it has reduced its debt from Rs 2,445 crore in the last quarter to Rs 2,175 crore in the current one. It is on course to prune its debt further by Rs 500 crore in the next six months.