Bharat Forge rides on diverse product mix, customer base

Bharat Forge, the Pune-based automotive component maker, has been one of the top-performing companies in its segment.

Photograph: Courtesy, Bharat Forge

The company’s stock price is up 39.3 per cent since the beginning of the 2023 calendar year, surpassing other leading automotive component makers such as Bosch and Samvardhana Motherson International.

The stock also outperformed the benchmark BSE Sensex, which is up 17.3 per cent year to date so far.

The rally has been driven by investors’ expectations of continued growth in Bharat Forge’s bread-and-butter business of automotive forgings and a faster ramp-up of volumes in its relatively newer segments such as defence, mining, and aerospace.

Analysts believe Bharat Forge’s diverse product portfolio and customer base provide it with better growth visibility compared to many of its automotive-focused peers.

“With its diverse presence, Bharat Forge is better placed than in its previous cycles to benefit from the ramp-up in domestic and export of passenger and commercial vehicles, and a healthy outlook for industrials with strong order wins in segments such as defence, aerospace, mining, and agriculture,” wrote analysts at Yes Securities post the company’s results for the July-September 2023 quarter.

The brokerage expects a healthy ramp-up in its defence business during the rest of FY24.

While the company’s standalone volumes were up at a healthy 15 per cent year-on-year (Y-o-Y) in Q2FY24, and consolidated net sales were up 22.7 per cent Y-o-Y in the quarter, brokerages say that the overall demand commentary was mixed.

The outlook for the India business remains positive while overseas business growth is anticipated to remain flattish.

This is significant as nearly two-thirds of Bharat Forge’s revenues either come from exports from its Indian operations or its subsidiaries in the European Union, North America, and China.

This has led brokerages to trim their forward earnings.

“We cut our Bharat Forge earnings per share estimate for FY24 and FY25 by 8 per cent and 3 per cent respectively to factor in a slower-than-expected ramp-up in overseas subsidiaries,” wrote an analyst at Motilal Oswal Financial Services post the company’s Q2FY24 results.

Analysts at Prabhudas Lilladher cut their FY24E earnings for Bharat Forge by 7 per cent due to a miss on revenue and margins at its overseas subsidiaries.

Bharat Forge’s consolidated net profit was up 55.7 per cent to Rs 227.23 crore, driven by higher volumes and nearly a 150 basis points improvement in operating margins due to gains from lower metal prices.

The consolidated operating margins were up 150 basis points Y-o-Y to 17.8 per cent of revenues in the second quarter, benefitting from lower metal prices.

In comparison, the company’s standalone net profit was up 29 per cent Y-o-Y to Rs 346 crore in Q2FY24, while net sales were up 20.7 per cent Y-o-Y to Rs 2,250 crore during the quarter.

The operating margins at its standalone business were up around 70 basis points Y-o-Y to 28.8 per cent in the second quarter.

Bharat Forge is currently trading at a trailing price-to-earnings multiple of 85.3X and a price-to-book value of 8X, making it one of the most expensive stocks in the automotive space, given its subpar returns on its equity of 9.5 per cent.

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