This Mid Cap Forgings Company Has A 'Buy' Call By HDFC Securities For 23% Gains

The brokerage firm HDFC Securities has reiterated the stock of Bharat Forge as its preferred CV pick. The firm has maintained its previous 'Buy' rating on the stock and continued with the earlier price target of Rs. 1000, resulting in an upside of 23 percent for potential investors considering last traded price of Rs.809.7.

Q2FY22 financials:

Q2 revenue, at Rs16 billion, was up a healthy 82% YoY,
17% QoQ, as shipment tonnage came in at 57k (+40% YoY, 4% QoQ). Exports contribution was higher at 59% of sales vs 52% YoY. Despite firm steel prices, the EBIDTA margin came as a positive price at 30.2 percent, increasing 170 bps QoQ.

Key highlights:

(1) Chip shortage slated to impact exports in the next quarter:

There is abundant backlog of Class 8 trucks, nonetheless exports shall be weak owing to chip scarcity that would likely be met in CY22E.

(2) Revenue from oil and gas segment saw a quarterly growth:

The oil & gas segment revenue ramped up further to Rs. 2 billion (vs. Rs. 1.7bn in Q1FY22). There is a view that increased focus on natural gas would benefit Bharat Forge in the medium term.

(2) Defense segment:

In the defense sector, the company's focus remains on artillery guns, armoured vehicles, and mounted guns. The company has received orders for the vehicles and in respect of the Garuda 155 mm gun and the mounted guns- these are in advanced stage of development. The company targets to mop up 10 percent of revenue from the sector in the next 2 years.

(4) DFC to impact domestic CV segment: Management stated that commissioning of
DFC is impacting medium-term demand for MHCVs in India. This is partially offset by higher demand for ICVs due to ecommerce-led demand.

Key triggers for future price performance of Bharat Forge:

(1) Recovery in India infra spends

(2) Passing of the USD 500bn+ trillion
infra spend bill, which will increase demand for heavy equipment such as construction equipment, trucks, etc.

(3) Rramp-up in India defense - targeted to reach 10% of turnover in the next two years.

Valuations: "We reiterate Bharat Forge as our
preferred pick in CVs due to its global OEM base. We maintain BUY with a TP of INR 1,000 on 35x Sep-23 EPS (we roll forward our TP timeframe to Sep)", says the brokerage.

Disclaimer:

The stock is picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.