Bharat Forge rating – Buy: Sharp recovery expected over next 2-3 years

Cyclical recoveries across key businesses and contributions from the new businesses are expected to propel a sharp recovery for Bharat Forge (BHFC) over the next 2–3 years. This along with a ramp-up in the overseas aluminum forging business is likely to result in a consolidated EPS CAGR of 24% over FY22-25e. We see upside to our estimates from (a) the US aluminum capacity, (b) the recent acquisitions in the industrial business and (c) foray into the e-mobility business. The stock trades at 25.4x/19.6x FY23e/FY24e consolidated EPS, respectively. We maintain our Buy rating with a TP of Rs 860 (based on 26x Mar’24e EPS), implying 33% potential upside. BHFC is our top pick in the auto component industry.

First year of cyclical recovery in the core business curbed by chip shortages
After witnessing a cyclical downturn until FY21, accentuated by the COVID impact, BHFC is undergoing a cyclical recovery in its core businesses in both domestic as well as international markets. Although chip shortages are impairing the CV/PV production across geographies, underlying demand momentum remains strong in the Auto business. While the underlying commercial vehicle industry (US+EU) volumes declined 30% from the previous peak, BHFC’s revenue was almost higher by 20% from its peak quarterly CV export revenue. Non-autos exports have seen a smart recovery fueled by a sharp revival (albeit, ~25% lower than the previous peak) in shale oil business for BHFC as well as a strong traction visible in construction and mining segments.

Aluminum forgings – a play on lightweighting the EVs/ICE
Stricter CO2 emission regulations globally and the advent of EVs are leading to an increase in aluminum usage. BHFC’s overseas subsidiaries are witnessing a strong demand for aluminum-forged components for chassis from EVs and hybrid PVs and hence it has doubled its capacity to 40k tons from 20k tons. With all capacities on stream and already fully booked, the aluminum forgings business is expected to ramp-up to EUR200-220 m in the next 3-4 years from EUR59m in CY20. This business has enjoyed an Ebitda margin of 13-15% in the past, which should further improve with scale.

Estimate 24% EPS CAGR over FY22-25
We estimate BHFC’s consolidated revenue/Ebitda/PAT to report 10%/17%/ 24% CAGR over FY22E-25, respectively. Our estimates are yet to factor in a) the US aluminum forging business (~10k tons capacity), and b) the recent acquisitions of Sanghvi Forgings and JS Autocast. These two businesses can add ~Rs 1.4 bn to PAT or ~8% to our current estimate of FY25 consolidated PAT.