Bharat Forge Share Price II CLSA believes second half of FY21 will witness strong growth

CLSA sees sequential recovery on track for Bharat Forge. CLSA maintains BUY rating with target price of Rs 580. Management indicated the outlook across all categories (ex-oil & gas) is improving but cautioned about lockdown related QoQ volatility in its export business. Bharat Forge expects demand improvement to continue in India and in exports but the trajectory could remain volatile due to potential lockdowns in the US and EU. The outlook for oil & gas remains subdued.

India surprises positively in Q2 and export recovery expected in second half of FY21:

Bharat Forge’s Q2 FY21 results came in below expectations. While the India revenue decline was limited to 14% YoY, exports declined 40% YoY driven by a higher than expected drop in global truck revenue (-52% YoY). CLSA believes this is due to a timing issue between orders and production, investors should witness stronger growth in the second half of FY21. Management indicated the outlook across all categories (ex-oil & gas) is improving but cautioned about lockdown related QoQ volatility in its export business. The underlying data points for Bharat Forge’s markets are improving and this drives our positive view on the stock.

Q2 FY21 results scorecard: strong India revenue offset by weak CV exports:

Bharat Forge’s Q2 FY21 standalone revenue was Rs 8.8 bn (-30% YoY: 5% below estimate). India was aided by flat YoY in domestic CV revenue (despite an industry production decline of 16% YoY). Export revenue was weak due to weakness in CVs as well as non auto (mainly due to oil & gas). Gross profit / tonne was flat YoY but its EBITDA margin (18.8%, -500 bps YoY) and EBITDA / tonne (Rs41k, -27% YoY) were impacted by negative operating leverage. Bharat Forge was FCF positive in first half FY21 on a standalone basis as well as at the consolidated level which resulted in a reduction in net debt from Q4 FY20.

Management expects a stronger Q3 & highlighted risk from a second Covid-19 wave:

Bharat Forge expects demand improvement to continue in India and in exports but the trajectory could remain volatile due to potential lockdowns in the US and EU. The outlook for oil & gas remains subdued. However, note oil & gas revenue has already declined to a quarterly run rate of US $3 mn-US $4 mn (vs US$25m-US$30m at its peak) and form <20% of non-auto exports (vs 50% earlier). Management is trying to offset this by winning new orders in the wind and marine segments. The current annualised revenue run rate is US $7 mn- US $8 mn and the company expects to triple this in one year.

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Business metrics for end markets appear to have bottomed:

North America Class 8 truck orders grew 107% YoY during July-Oct 2020 vs -25% YoY over Jan-June 2020 (-63% YoY in CY19). India MHCV volume has been improving every month and has recovered to -2% YoY in Oct 2020. PV exports should gain from Bharat Forge’s investment in aluminium forging which is being used for light-weighting projects. Oil & gas metrics have bottomed but construction equipment segments are starting to witness an uptick.