Bharat Forge Share Price: CLSA reiterates BUY rating and Rs 580 target price. CLSA hosted Bharat Forge management at the 23rd Annual CITIC CLSA India Investors’ Forum. The commentary indicated a strong sequential recovery should continue in both India and export markets except for lockdown-related short-term volatility. Bharat Forge is witnessing strong traction in the US and India truck segments. While oil and gas (O&G) could remain weak near-term, management is trying to increase revenues from segments such as wind energy and marine. Bharat Forge will also try to use its strong FCF (Free Cash Flow) and balance sheet to look at potential inorganic opportunities, especially in India.

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Business metrics across end markets are showing signs of improvement:

Management mentioned the US truck market recovery surprised positively, which should lead to a strong pick up in the next few quarters. India truck demand recovery would need new investments but the management also acknowledged that current levels are at a cyclical low. While Industrials is witnessing a recovery in both India and exports, the Oil & Gas segment is unlikely to revert to peak ( US $120- 130 m/year) in the near term (currently at US $30 mn). Bharat Forge plans to expand further into aluminium forging capacities and expects to triple its revenues in the next 5-6 years.

Cost cuts to support margins despite weaker mix and lower export incentives:

Management expects Bharat Forge margins to recover from current low levels despite inferior mix (lower O&G revenues) and lower export incentives (withdrawal of Merchandise Exports from India Scheme (MEIS) scheme). The company plans to increase digital adoption in the shop floor and optimise downtime using preventive management systems. The semi-variable costs should also taper as volumes pick up, led by positive operating leverage.

Using balance sheet strength to explore inorganic opportunities:

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Bharat Forge wants to use its strong cash position to look for inorganic opportunities, especially in India. However, unlike the FY05-06 phase, the company does not want to acquire distressed assets and try to turn them around. It would look for opportunities in both the Auto and Industrial segments, which could bring meaningful revenue upside and synergies on product or processes. Management mindful of ESG (Environmental, Social and Governance) even as it increases focus on the defence segment Management indicated that it is working on an ESG policy statement that would outline the areas of defence manufacturing in which it would enter. Bharat Forge has been working on defence products (especially towed guns) over the past eight years. It believes new orders and revenues could ramp up in the coming two to three years, driven by the government imposed import bans.