The consolidated earnings of Bharat Forge in October-December quarter (Q3FY23) missed estimates, largely due to higher-than-expected interest burden although operational numbers (including standalone numbers) were close to consensus.
However, the management guidance was positive and appears to be based on logic.
Essentially standalone performances of the company met expectations but there were operating losses at overseas subsidiaries. There are also significant risks to exports given a global slowdown and this is a serious issue given Bharat Forge’s strong export profile since exports contribute over 60 per cent of revenues.
The standalone net sales stood at Rs 1,950 crore, up 22 per cent year-on-year (YoY), and up 5 per cent quarter-on-quarter (QoQ). The total volume (in tonnes) stood at around 63,000 tonnes (up 18 per cent YoY, and up 3 per cent QoQ). Realisation increased 4 per cent YoY per tonne (up 2 per cent QoQ). The EBITDA margin was at 27.4 per cent (up 200 basis points YoY, and up 310 bps QoQ), driven by better product mix.
The Consolidated EBITDA margin stood at 14 per cent (down 700 bps YoY, and flat QoQ) owing to higher raw materials costs and the slow ramp-up of the recently commissioned Aluminium forgings unit in the US. The consolidated EBITDA stood at Rs 470 crore (down 7 per cent YoY, and up 9 per cent QoQ). The consolidated adjusted PAT stood at Rs 78.7 crore ( down 69 per cent YoY; and down 45 per cent QoQ).
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Exports revenue increased 35 per cent YoY (up 9 per cent QoQ) to Rs 1,170 crore, due to demand from Passenger Vehicles (PV), Oil & Gas and Aerospace segments. The Commercial Vehicles (CV) segment revenue was Rs 490 crore (up 27 per cent YoY, up 5 per cent QoQ).
Management guidance is that Class 8 truck demand remains steady and the company has order to fulfil till end of next fiscal. Truck volumes in the EU also remain healthy. PV segment revenue more than doubled to Rs 260 crore. Industrial revenue stood at Rs 410 crore (up 16 per cent YoY, up 14 per cent QoQ).
The management believes FY24 could be a turnaround year for the following reasons:
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- It is seeing strong demand in auto, in both domestic and export markets
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- A sharp uptick is expected in the defence segment, led by new order wins in exports worth Rs 2,000 crore and an order win for Advanced Towed Artillery Gun System ATAGS
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- Huge outsourcing opportunities in the renewables segment on the back of the recent acquisitions of Sanghvi Forgings (where it targets 2x revenue expansion in 2023-24 and of JS Auto (where new order wins are worth Rs 250 crore)
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- Turnarounds in overseas subsidiaries as there’s a ramp-up of new Aluminium forgings lines in US and Europe, with capacities fully booked with confirmed orders
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- Growth opportunities in aerospace
In Q3FY23, overseas manufacturing subsidiaries revenue stood at Rs 1,070 crore (up 33 per cent YoY, up 13 per cent QoQ). But there was lower capacity utilisation (only 50 per cent) in Germany. There was a delay in ramping up of the US Aluminium forging plant. However, capacity is now fully booked and the company expects strong ramp-up and order execution. The guidance is for healthy margins from international operations in FY24.
The stock has fallen 6 per cent to Rs 835 after the results. There are ‘buy’ recommendations from various analysts with fair value and price targets of Rs 850, Rs 928, Rs 960. Given the global weakness, be cautious about fulfilment of the overseas revenue and margin targets in the near future.