Bharat Forge rating: Nomura tags it Neutral, says stock trading towards higher end of band

Published On: 09, Dec 2017 | Source:

Order inflows for Class 8 trucks in North America (NA) remained strong, up 71% y-o-y (-9% m-m) to 32,400 units in November-17, according to preliminary data from Freight Transportation Research (FTR). While November is usually a slower month compared to October, our seasonally adjusted rate (SAAR) is still higher by ~4% m-m, indicating healthy orders. In terms of trends, order inflows for the past six months annualise to ~290k units (vs production of 225k units in CY16).
Thus, for Bharat Forge (BHFC), the full impact of this should be visible in FY19F, where we have factored in 25% growth in US truck revenues, partly offset by flat growth in Europe. Current order inflows are running above FY16 levels, but are still below previous highs seen in FY15. BHFC derives 15% of its stand-alone revenues from the NA heavy trucks segment.

BHFC continues to benefit from strong growth in the domestic segment, led by government infrastructure spending, overloading restrictions and economic recovery driving truck demand, especially for higher-tonnage vehicles.
Also, non-auto growth remains strong, led by order wins in defence and heavy  machinery. Exports in the non-auto  segment would benefit from the
improving outlook for the oil and gas industry in North America.

However, the stock is currently trading at ~27.5x/24x FY19F/20F EPS, after factoring in the ~21% EPS CAGR over FY17-20F, which is towards the higher end of its trading band.

In our coverage universe, Motherson Sumi’s (MSS IN, BUY) subsidiary PKC (unlisted) commands ~62% market share in the NA HD segment and would also be a key beneficiary, in our view.

Valuation methodology

We value BHFC on a P/E basis and apply a ~28x target P/E multiple to our FY20F consolidated EPS estimate and discount it
back to Nov-18 to arrive at a target price of Rs 741.


Key downside risks: Adverse US regulations (import tax, dollar devaluation) could impact earnings — Exports to US should contribute 28% of BHFC’s FY19F standalone revenues. Any government regulation to impose import tax or devalue the dollar could hurt BHFC’s profitability. Our sensitivity analysis indicates ~10% weaker USD/INR could impact Ebitda by 12% and EPS by 14%.
Key upside risks: Strong new order wins in the non-auto segment in India — BHFC’s promoter Kalyani Group is vying for various opportunities in the defence segment. Order wins by the promoter entity would present significant upside for BHFC related to the supply of components.