The Russia-Ukraine war has led to a surge in prices of metals, such as steel and aluminium, which are crucial to the auto and auto ancillary sector. While this means margin pressures, companies with exposure to Europe could face increased challenges. A case in point is Bharat Forge Ltd, which has manufacturing facilities in Europe.
“Bharat Forge’s operations in Europe are currently facing the brunt of the ongoing crisis with truck orders likely to get impacted," said Mansi Lall, an analyst at Prabhudas Lilladher Pvt. Ltd.
There are, however, some offsetting factors. “The recent acquisitions by the company have helped sentiments for the stock," Lall said.
In the past one year, Bharat Forge’s shares have gained 14%, surpassing the Nifty Auto index’s 3% returns. The company acquired Sanghvi Forging and Engineering in June 2021 to expand its presence in the renewable energy and wind sector. Recently, it had announced plans to acquire JS Autocast Foundry India, a manufacturer of castings for end-use in wind, hydraulic, off-highway, and automotive industries.
Through these acquisitions, Bharat Forge aims to capitalize on the opportunities in the renewable sector. This, along with the recovery seen across the industrial segment, would support its aim of doubling the division’s revenue (excluding oil & gas) in the next three years.
The increased infrastructure spend by governments in India and the international markets augurs well for the construction and mining business. The oil & gas business is expected to see a strong recovery, supported by higher oil prices.
Bharat Forge’s automotive segment, which contributed about 53% to standalone revenue in the nine months ended December (9MFY22), is seeing a demand revival. The commercial vehicle (CV) segment is experiencing a strong cyclical upturn after the last downcycle. Robust CV demand in overseas markets will bode well for Bharat Forge as auto revenue from these markets contributed 37% to 9MFY22 standalone revenue.
“The heavy CV segment is expected to grow strongly by up to 12% in CY22 in the North American and European regions. In addition, the India CV segment is likely to grow by up to 30% in CY22," said analysts at Emkay Global Financial Services Ltd in a report on 19 March.
Demand in India continues to be muted in the passenger vehicle (PV) segment, but the global outlook is promising. Emkay expects the global PV segment to record high single-digit growth in 2022.
Meanwhile, the company stands to benefit from the shift towards electric vehicles (EVs).
“There are many growth opportunities for Bharat Forge in the EV segment as aluminium forgings are widely used in the making of EVs which is a lightweight material. Also, the company is working on systems and software to be used in EVs," said Lall.
Bharat Forge’s aluminium forgings business is also expected to increase to €200 million-€220 million in the next three-four years from €59 million in 2020, according to a Motilal Oswal Financial Services report.
The demand outlook is relatively better, but margin pressures remain. Along with higher input costs, the sky-high energy prices would hurt margins as forging is an energy-intensive activity.
In view of this, analysts at Emkay reduced their earnings estimates for FY23-24. The brokerage has reduced the target price of the stock to ₹840 based on 25x price-to-earnings multiple (27x earlier) for the standalone business on March 2024 earnings per share. “We have reduced the target multiple, factoring in margin pressures over the next two years," said Emkay analysts.
