The stock has increased by nearly 39% so far in CY2021, outperforming the Nifty 100 index, which has gained 20% during this time. As such, demand prospects are upbeat
Bharat Forge Ltd’s shares are having a good run. The stock has increased by nearly 39% so far in CY2021, outperforming the Nifty 100 index, which has gained 20% during this time. As such, demand prospects are upbeat.
Analysts expect revenue growth for FY22 to be robust driven by a strong performance in the automotive and industrial segments. “Moreover, customer additions, higher content and portfolio expansion should boost growth. Nascent segments such as defence, railways, aerospace, e-mobility and light-weighting solutions are expected to see robust growth," said analysts from Emkay Global Financial Services Ltd in a report on 23 August.
FY22 revenue growth would also get support from a favourable base. FY21 standalone revenues declined by 20% year-on-year (y-o-y) because of the adverse impact of covid.
It helps that FY22 has begun on an upbeat note. Standalone earnings before interest, tax, depreciation and amortization (Ebitda) margin for the June quarter (Q1) expanded sequentially to 28.5%, which surpassed estimates. This was helped by better-than-expected sequential revenue growth of nearly 5%. Sequentially, revenues from exports have increased, while domestic revenues have declined because of the impact of covid 2.0.
Further, Ebitda margins of overseas subsidiaries at 11.7% were healthy as well. Management commentary has been encouraging.
“Looking ahead into Q2, we expect overall growth to continue, supported by recovery in the domestic medium and heavy commercial vehicle market and sustained improvement in demand levels in the export market," said its chairman and managing director (CMD) B.N. Kalyani at the time of announcing the Q1 results. “Potential impact on end demand because of supply issues pertaining to semiconductors and the sustained increase of input costs are factors to keep track of in the coming months."
Bharat Forge is expected to benefit from the cyclical demand recovery in its core businesses. “We believe Bharat Forge is at the cusp of an upcycle, with key segments of domestic trucks/US trucks set to witness strong revival in FY22-23E and revival in higher-margin oil and gas segment," said analysts from Ambit Capital Pvt. Ltd. “We expect overseas subsidiaries’ Ebitda margin to stabilize at about 12.5% by FY23-24, led by continued cost-control focus and ramp-up of aluminium forgings capacity."
Bharat Forge’s shares trade at around 25 times estimated earnings for FY23, based on Bloomberg data. The sharp appreciation this year may curtail significant upsides from a near-term perspective.
Slower-than-expected recovery in the US class 8 truck and other industrial businesses remains a risk ahead. In general, the potential adverse impact of the third covid wave that could hit the country is another risk.
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