With a quasi defence play, Bharat Forge offers an opportunity for long-term investors

Bharat Forge is India’s biggest auto component supplier, with excellent forging and metallurgy capabilities. With an annual production capacity of 6.83 lakh MT, its products are used in domestic and overseas markets for things like PV (Passenger Vehicle), CV (Commercial Vehicle), oil and gas, building and mining, electricity, and defence. The company recently reported its Q2FY23 results on 14th November 2022 where they saw their profitability under pressure as it went on to fall 13% YoY and 6.6% QoQ.

On the technical charts, last month it gave a breakout on daily charts as it went to reach its 52-week high before Q2FY23 results, after which it has seen a major retracement. Despite the correction, some brokerages still hold a positive view of the stock which makes it worthy of analysis by investors. So, let’s now analyse the Q2FY23 performance of Bharat Forge and understand its future prospects.

Bharat Forge Q2FY23 results: PAT fell 13% YoY despite revenue rising 10% YoY

In Q2FY23 Bharat Forge’s profitability dipped YoY, however, revenue was in line with analysts’ estimates. Bharat Forge posted a 48% YoY drop in standalone net profit to Rs 142 crores compared to a net profit of Rs 270 crores in Q2FY22. Sequentially, the Q2 PAT dropped by 11.25% from Rs 160 crores posted in Q1FY23. Whereas on the revenue front, it garnered a revenue from operations of around Rs 3076 crores in Q2FY23, registering a growth of 29% YoY from Rs 2,386 crores in Q2FY22 and 7% QoQ from Rs 2,851 crores in Q1FY23.

Furthermore, both the domestic as well as international business of Bharat Forge appears to be performing soundly as it reported the highest revenue in the last 5 quarters in Q2FY23. Domestic operations closed new contracts worth Rs 850 crores in the automotive and industrial sectors. The company’s defence division also received an export order worth $155.5 million.

(Source: Investor Presentation for Q2FY23)

The company’s exports reached their best level ever throughout the quarter. However, the management claimed that lower than expected sales volumes for the aluminium forging sector had a negative influence on the performance of the European operations. Furthermore, the North American new greenfield aluminium forging facility was still ramping up and operating at utilisation rates below the EBITDA break-even point.

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Bharat Forge Q2FY23 results: EBITDA margins seen in pressure YoY

During Q2FY23, Bharat Forge’s EBITDA margins were at 14.3%, declining from 21% in Q1FY23. Raw material passing through that stifled margins were the main reasons given by the company for the fall in margins. Sequentially their margins declined 100 Bps from 15% in Q1FY23. Meanwhile, EBITDA stood at Rs 432 crores in Q2FY23, 13.4% lower from Rs 499 crores in Q2FY22 and up 1.6% QoQ from Rs 425 crores in Q1FY23.

In Indian operations, the management is bullish about defence & aerospace apart from domestic CV, and PV space. During this quarter, the company achieved Rs 80 crore of revenue from the sale of armoured vehicles.

Univest View along with Technical Analysis:

The company anticipates that despite strong demand across all categories and cooling commodity prices, Indian operations would report stable financial results for H2FY23. However, a muted set of figures are anticipated from foreign subsidiaries. Furthermore, over the following two quarters, it is anticipated that European aluminium operations’ performance will gradually improve. On the Defence & Aerospace, it has already set the target to reach Rs.1000cr from domestic and Rs.400cr from export, over the next four years.

However, analysts are optimistic about Bharat Forge on a long-term basis due to the company’s initiatives towards diversifying into other businesses. Further, its 50 EMA is still far above 100 & 200 EMA, indicating bullishness. Moreover, Bharat Forge has recently given a breakout as can be seen from the graph. This was after months of consolidation and inability to surpass resistance. Whereas the situation seems favarouble now as the company is both fundamentally as well as technically sound.

ICICI Direct said, “We retain BUY amid robust order wins in the domestic business, increasing traction being witnessed in the defence space and margin expansion on anvil amid a decline in RM prices as well as operating leverage gains. Therefore, we set Rs 1,000 as the current Target price for Bharat Forge share.”

While on Univest App, Bharat Forge has a buy rating with Neutral stance for fundamentals. Whereas the share is still bullish on long term as per Univest App. Therefore, existing investors can remain invested while fresh investors can exploit this opportunity to purchase shares of Bharat Forge, as the current retraction is expected to be temporary and is expected to continue its uptrend.

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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