Bharat Forge share price today: Nomura Maintain Neutral rating; raise target price to Rs 649, implying 1% upside

Bharat Forge share price today: Nomura says Bharat Forge Q3 FY21 shows that CV segment is on a strong rebound; new segments are needed to offset Oil & Gas slowdown. Nomura Maintain Neutral rating; raise target price to Rs 649, implying 1% upside. Q3 FY21 standalone revenue of Bharat Forge at Rs 10.3 bn, -4% yoy and EBITDA margin at 22.5% were broadly in line. Overseas subs reported PBT of 82 mn. The current share price of Bharat Forge is Rs 644, up Rs 4 or 0.6%.

Bharat Forge Management commentary:

Bharat Forge Management says that Domestic and exports continue to see strong recovery. However, the oil & gas segment is unlikely to recover. Revenues were impacted due to the lack of export incentives, which are likely to be restored from Q4 FY21F. Bharat Forge is looking at new sectors like EV components (power electronics, control and battery management systems), light weighting business (USD250mn potential by FY25F) and defense as new areas of growth. Gross margin should improve as capacity utilization moves up.

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Nomura’s view on Bharat Forge:

Domestic MHCVs will likely recover strongly over FY22-24F. Also, export CV orders indicate a recovery back to peak by FY22/23F. Loss of oil & gas business can be covered up in the medium term from new segments. However, Bharat Forge may need to look at areas beyond metal forging to grow beyond cyclical recovery.

Nomura Forecasts on Bharat Forge:

In standalone, factoring in likely faster revival in domestic and export CVs, we raise our revenue forecasts by 20%/7% for FY22/23F. With likely higher operating leverage and upside from export incentives, Nomura raised EBITDA margin forecasts to 27.2%/28.7% ( 23.5% / 27.2% previously ), leading to EBITDA increases of 40%/12% in FY22/23F.

Valuation of Bharat Forge:

Nomura raise target price to Rs 649, maintain Neutral Given the strong upcycle, potential from new segments and the government’s production linked incentive (PLI) scheme, Nomura raise Bharat Forge’s EV/EBITDA multiple to 14x FY23F EBITDA (from 12x) at the upper end of Nomura’s expected trading band of 10- 14x. The stock currently trades at a similar valuation; thus, Nomura maintains a Neutral rating. Nomura prefers Motherson Sumi and Minda Industries in the auto components space.