Industrial segment likely to drive growth of Bharat Forge stock

The stock of auto component major Bharat Forge was up 7.3 per cent on Friday after a strong show in the June quarter, steady demand in the auto segment and higher growth opportunities in the industrial business.

Given the cyclical recovery across businesses and ongoing de-risking of revenues, revenue growth is expected to be stable at low double digits. However, profit growth is expected to be twice that of its top line growth over the next three years.

The June quarter numbers were better than estimates with sales being led by gains on the volume as well as the realisation fronts.

Volumes were up about a per cent while realisations — on the back of improved mix and pass through of raw material costs — rose 4 per cent on a sequential basis. Overall sequential revenue growth of 5 per cent was largely due to the 12 per cent rise in exports, which accounted for 60 per cent of the top line.

Export growth is expected to remain strong in the current financial year, given the stable truck demand from the US and EU markets. The company has secured orders for Class 7/Class 8 trucks for the North American market till the end of next year (CY23). It expects Class 8 truck volumes in the US for CY22 to be 300,000 units compared to CY21’s 270,000 units.

While the passenger vehicles’ business was hit by semiconductor shortage, demand for premium passenger vehicles in Europe remains stable. The company’s focus on adding new lines of business beyond steel forgings is expected to drive revenues, improve profitability and enhance capital efficiencies. 

Say Jinesh Gandhi and Aniket Desai of Motilal Oswal Research, “While its core business is seeing a sharp cyclical recovery, the management’s initiatives to diversify into aluminum, light-weighting, and EV components have started to fructify. FY23 will see the first full-year contribution from its recently-acquired businesses.”

What could help derisk its revenue base further is the traction in the industrial segment or non-auto segment, which posted a 42 per cent year-on-year (YoY) growth in Q1 compared to the auto segment’s 20 per cent. The industrial segment, which accounts for 40 per cent of revenues, has an order book of Rs 1,400 crore.

Within the business, aerospace is becoming a key driver of growth and is on track to hit the $10 million-sales mark in FY23. The business now accounts for 10 per cent of the industrial segment as compared to 2 per cent last year.

While the outlook for oil and gas remains steady, the other business within the industrial segment that could see good growth is defence space. It contributes Rs 400-500 crore to the revenues. The management expects this business to see a threefold jump over the next couple of years.

Given the diversified revenue base and multiple growth levers, ICICI Securities believes the company is well positioned to overcome the adverse environment seamlessly. This is owing to its strong balance sheet, giving it the capability to do strategic mergers and acquisitions and grow profitably.

While prospects for the stock are bright, recent gains and target prices in the Rs 850-900 range offer limited upsides. Investors can consider the stock, which trades at 21 times its FY24 earnings estimates, on dips.