Bharat Forge shares fall after Q2 prints. Should you buy this auto stock?

Bharat Forge erased early gains and dropped by nearly 5% after the company disappointed streets in terms of margins for the quarter ending September 30, 2022 (Q2FY23) period. In the second quarter, Bharat Forge's profitability dipped on a year-on-year basis, however, revenue was in line with estimates. Also, the company's long-term debt increased in Q2. However, analysts are optimistic about Bharat Forge on a long-term basis due to the company's initiatives towards diversifying into other businesses.

On BSE, Bharat Forge shares are currently trading at ₹854.30 apiece down by ₹32.40 or 3.65% at the time of writing. After the Q2 announcement, the shares dipped by at least 4.96% to an intraday low of ₹842.75 apiece. In the early trading hours of Monday, the shares rose to an intraday high of ₹895.90 apiece --- which was slightly shy of the 52-week high of ₹896.40 apiece --- before correcting.

At the current price level, Bharat Forge's market cap is around ₹39,790 crore.

In Q2FY23, in terms of profitability, Bharat Forge posted a 13.99% drop in standalone net profit to ₹268.12 crore compared to a PAT of ₹311.76 crore in the same period a year ago. Sequentially, the Q2 PAT grew by 10.04% from ₹243.37 crore posted in Q1FY23.

The company's top-line front was healthy. It garnered a standalone revenue from operations of around ₹1,863.94 crore in Q2FY23 --- registering a growth of 16.02% from ₹1,606.59 crore in Q2FY22 --- and also climbed by 5.94% from ₹1,759.39 crore in Q1FY23.

During the quarter under review, Bharat Forge's EBITDA margins were at 24.3% -- declining from 26.1% in Q1FY23. The company attributed the decline in margins primarily on account of unfavourable product mix (including the supply of Kalyani M4 vehicles to the MoD) and Raw Material pass thru suppressing margins. Meanwhile, EBITDA stood at ₹452.3 crore in Q2FY23 -- lower from ₹455.3 crore in Q2FY22 and ₹460 crore in Q1FY23.

On segment-wise performance, the company recorded revenue of ₹242.8 crore in domestic commercial vehicles in Q2FY23 higher than ₹165.9 crore in Q2FY22. While commercial vehicles export plunged to ₹463 crore in Q2FY23 against ₹478 crore in Q2 of the previous fiscal. Meanwhile, in passenger vehicles, domestic revenue soared to ₹99.3 crore in Q2FY23 versus ₹79.9 crore a year ago same quarter, while exports in this segment came in at ₹242.3 crore against ₹107.3 crore in Q2FY22. Industrial segment domestic revenue rose to ₹339.6 crore in Q2FY23 versus ₹298.9 crore in Q2FY22, while its export came in at ₹361.1 crore slightly lower from ₹368.4 crore in Q2FY22.

In its earnings report, Bharat Forge said, in Q2 FY23, the Indian operations secured new business worth~ ₹850 crore across automotive & industrial applications, driven by market share gains in the PV business and new product introduction in the Industrial space. KSSL, the defence vertical of the company secured an export order worth $155.50 million to supply Artillery Gun system to a non-conflict zone. This contract is to be executed in 3 years.

Further, Bharat Forge highlighted that its long-term debt has increased to ₹2,510.2 crore in Q2FY23 compared to ₹2,315.1 crore as of March 31, 2022.

On a geographical basis, Bharat Forge mentioned that the performance of the European operations has been adversely impacted mainly by lower-than-anticipated sales volumes for the Aluminium forging business. The new Greenfield Aluminium Forging facility in North America is still in a ramp-up phase and operating at utilization levels below EBITDA break-even levels.

It said, "We continue to expect this business to turn around in second half of the fiscal."

Should you invest in Bharat Forge shares after the Q2 results?

For Q3FY23, Bharat Forge said that they expect stable performance across both the domestic and export markets driven by higher-end market demand as compared to Q2 FY23. Also, it said, the European Aluminum operations performance will show a gradual recovery over the next two quarters.

Mansi Lall – Research Analyst, Prabhudas Lilladher said, "Standalone revenue at ₹18.6bn (+6% QoQ) came slightly above our estimates of ₹18.4bn. We believe this was led by improved realizations caused by USD appreciation. We await more clarity on volumes. However, gross margins significantly disappointed at 55.6% (-310bps QoQ). We await clarity on the raw material cost situation. This caused EBITDA margin contraction of 40bps QoQ to 24.3. this came much below our estimates of 26.2% and street estimates of 26.6%."

On the outlook ahead, Lall said, "We remain positive on BHFC as the domestic CV demand trend is now improving after several years of decline. Though CV exports are currently facing headwinds, the long-term outlook is positive. Further, we remain positive about the industrial business. The company's initiatives towards diversifying into other businesses will further aid revenue growth.”

Meanwhile, Mitul Shah - head of Research at Reliance Securities said, "We expect healthy growth in domestic M&HCV industry as well as likely improvement in Class 8 trucks on expectation of semiconductor ease in 2HFY23E. We believe that with strong top-line performance and declining commodity cost, the company would be able to expand its margins from the current low level and improve return ratio. BHFC’s leadership position in automotive forgings, focus on diversification and expected cyclical recovery in the core segments, supports our positive view. At present, we have a BUY recommendation on Bharat Forge."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.