Bharat Forge- Banking on exports

Bharat Forge: Banking on exports

Bharat Forge, india’s casting & forging company held at its analyst meet in Pune recently. The company aims to expand its defence business manifold from sub-US$100mn per annum currently. It intends to achieve this through diversification of its portfolio offerings and catering to both domestic and export markets. The company is aiming at >12% revenue CAGR in the coming 5-10 years, led by diversification into EV-related products and expansion in the defence segments.

In the defence business (under artillery systems), BHFC is ready with protected vehicles, armoured vehicles, unmanned vehicles and ammunitions. The recently-won US$155mn export order for 48km strike range advanced towed artillery gun system is just the beginning of the company’s defence business, with orders from both domestic and export markets set to increase manifold in the coming years.

In the aluminium-parts-related business, with forging capacity of 9mn pieces per annum spread across Germany and the US, BHFC is looking forward to ~40% revenue mix of its foreign subsidiaries along with its aluminium casting (2,000T capacity) business.

In the aerospace domain, the company has been internally developing a gas turbine engine for past 5 years and it is expected to be ready for commercial purposes by next year.

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BHFC is aiming to reduce the element of cyclicality in its business through expansion in the emobility and defence segments, revenue CAGR at >12% and pre-tax RoCE at >20% (vs last 10-year mean of ~16%), we believe. We rollover by a quarter with keeping our estimates unchanged. We maintain ADD on BHFC with a DCF-based TP of `904.

Key takeaways from investor meet and our views:

* With the recent US$155mn export order for artillery gun system as the beginning of the defence exhttps://www.financialexpress.com/express-mobility/indian-auto-component-exports-excelled-despite-economic-slowdown/2909282/port business, BHFC is looking forward to see its export revenue jump manifold in next 2-3 years. We believe the export surge would be a good cushion to face the potential domestic CV downcycle post FY25 estimates. In terms of profitability, we believe BHFC is very much dependent on the quantum of value-addition in the final assembly and its pricing power in the target export markets.

* Aerospace and oil&gas segments have performed below expectations in past five years due to external market factors. Going ahead, BHFC is aiming at expanding its e-mobility business beyond the e-2W brand Tork to power electronics, traction motors and energy storage along with light-weighting solutions. Tork motors have opened dealer outlets in Bangalore, Hyderabad and Chennai and recently received FAME-2 certification, thus helping it get subsidies in order to push sales. BHFC is also planning to sell retrofit kits to convert 8-13T GVW diesel trucks to etrucks and would start making the kit from CY23 in a Chakan-based facility. Also, BHFC would be addressing the light-weighting components for EV through its aluminium forging business, targeting both domestic and global markets. The company is aiming at 40% revenue mix of its foreign subsidiaries from the aluminium business with a potential Ebitda margin of 16% at optimum utilisation of >75%+ vs 20% levels currently.

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* Bharat Forge is aiming to reduce its business cyclicality along with cross-cycle business growth through diversification and expansion in the defence, aerospace, e-mobility and aluminium verticals over and above enhancing market share and parts per vehicle for its traditional steel forging business.