Bharat Forge Share Price soars 7% - Maintain Buy: Truck cycle recovery has begun, says UBS

UBS maintains Buy rating on Bharat Forge with a price target of Rs 538. UBS says Bharat Forge remains top pick in auto components as key beneficiary of global and India industrial recovery. UBS expects strong sequential recovery in revenues for Bharat Forge in H2 FY21 and strong 40% yoy growth in FY22.

UBS raises estimates on a faster truck cycle recovery

Commentary from global truck OEMs (Original Equipment Manufacturers) has been encouraging with indications of freight activity coming back to normal. UBS sees a similar trend in India. India overall revenues have already stabilized in Q2 FY21 (co. guidance to be flat YoY) and are likely to improve further as the truck market improves sequentially. In FY19, Bharat Forge clocked global truck revenues (including India) of Rs 27 bn, which is expected to fall to Rs 12 bn in the current year. UBS says Bharat Forge remains top pick in auto components as key beneficiary of global and India industrial recovery. Valuations at 20x FY23E PE (10.5x EV/EBITDA), are attractive driven by medium growth opportunities in auto transmission components, aerospace and Defence.

U.S. trucks – OEM forecast, Class 8 orders support strong recovery

PACCAR (Pacific Car and Foundry Company) substantially raised its CY20 forecast by 25k units (at mid-point) to 200k units. Class 8 truck orders grew sharply by 107% yoy in Q3 CY20, after 7 quarters of decline, while retail and builds have also bounced back sharply QoQ, although still down more than 30% YoY. Truck orders in Q3 CY20 are now ahead of retail volumes after 6 quarters. UBS expects strong sequential recovery in revenues for Bharat Forge in H2 FY21 and strong 40%yoy growth in FY22.

Remain bullish on India truck recovery; Raising estimates

UBS expects India MHCV (Medium and Heavy commercial vehicles) volumes. to grow 82%/30% in FY22/23 after a sharp 42%/45% decline in FY20/21E. While UBS raises their estimates on the back of faster recovery in truck revenues, they reduce their industrial growth forecast as the Oil & Gas segment (shale) continues to remain under severe pressure. However, UBS expects margins to recover strongly in FY22 driven by productivity improvement as a result of investments as well as shifting some of the manufacturing to lower cost plant at Baramati.

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Valuation: Raise Price Target to Rs 538 from Rs 490

UBS values the forging business at 14x EV/EBITDA in line with the last 5 year average for the company. UBS raised their price target, raised estimates and rolled forward by 2 months to the average of FY22-23.