Will new streams float Bharat Forge’s boat?

The company aims to achieve consolidated revenue compound annual growth rate of 12-15% over FY22-30. By FY30, it expects to clock an Ebitda (earnings before interest, taxes, depreciation and amortization) margin of over 20%. Ebitda margin was around 19% in FY22, but fell to 14.5% in the half-year ended September with Europe business facing headwinds.

In fact, the dull macro environment in the US and Europe remains a key near-term concern. This could weigh heavily on the company’s export business, which formed nearly 75% of consolidated revenue in FY22. The export segment is largely margin accretive and a continued weakness here is undesired. However, the new businesses incubated in the last 5-10 years are at their inflection points and could dilute weakness expected in its core business, point out analysts at Motilal Oswal Financial Services.

As such, the company could be a key beneficiary of the government’s increasing thrust on indigenization in the defence sector. It expects to receive orders for advanced towed artillery gun system from the government by either March or April. It already has export orders for artillery guns worth $155 million.

“Currently unmanned ground vehicle is being tested by Indian army and the company is also developing unmanned marine vehicles where the average selling price opportunity is 10x,” said analysts at JM Financial Institutional Securities in a report on 11 December.

Further, BFL is well poised to capitalize on the shift towards electric vehicles (EVs). EVs have more aluminium content and hence would steer growth in both the domestic and export segments of its aluminium forging business. The company expects this vertical to contribute 40-45% of overseas sales by 2024. Aluminium forgings currently account for about 25% of international revenues.

As things stand, BFL is also supplying components to EVs globally. Here, it plans to focus on four key areas – power electronics, traction/drivetrain, mechanical and energy storage. While its core businesses, passenger vehicles (PV) and commercial vehicles (CV) face risk from an EV disruption, this threat would have a large impact only in the long run.

Meanwhile, BFL’s recent acquisition, JS Autocast Foundry India Pvt. Ltd, manufacturer of high-grade machined ductile iron castings, is seeing healthy traction in demand. These are used in wind energy, hydraulics, automotive and power generation sectors. Here, BFL can leverage on JS Autocast’s strength and make the most of cross-selling opportunities.

BFL’s core business is on a solid footing in the domestic market. Demand for PVs is robust while CV segment is seeing a strong upcycle. Hereon, successful and timely execution of the strategies remain vital.

Analysts at Kotak Institutional Equities believe that the BFL stock is adequately pricing in tailwinds from defence and industrial casting segments. However, the challenges which the company may face in ramping-up its business in aerospace, e-mobility and light-weighting segments (which has happened for its new business segments in the past) are being ignored, they added.

In CY22 so far, shares of BFL have risen by 25%, compared to a 6% gain in the Nifty 500 index.

The stock is currently near its 52-week high of ₹896.70 apiece. Given this, large upsides appear capped.