Shares of Bharat Forge Ltd are up nearly 8% in the past two days on NSE. The company ended FY22 with a decent performance in the March quarter (Q4FY22). Commentary on the trade outlook is also optimistic. However, the picture is not quite rosy.

Management indicated that the demand environment in the automotive segment is strong in India and in international markets. In passenger vehicle exports, it guided revenue growth of 30% in FY23. Rising infrastructure activity bodes well for India’s commercial vehicle (CV) segment, while demand outlook for CV exports is aided by low order book cancellation rates from car manufacturers.

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Thus, Bharat Forge’s overall order book is healthy. In FY22, Domestic Operations won new orders worth 1,000 crore in automotive and industrial sectors. In international operations, it secured new orders worth $150 million in steel and aluminum forging operations in North America. It secured an order from a global electric vehicle (EV) automaker for the supply of aluminum castings. It also obtained its first order from an Indian car manufacturer for the supply of DC-DC (direct current) converters. Analysts believe better traction from the EV segment is a key catalyst for the stock here.

“Bharat Forge is expected to peak its aluminum forging capacity utilization in Europe with growing demand for electric/hybrid vehicles,” ICICI Securities analysts said in a May 16 report.

In FY23, management expects a ramp-up of the aluminum business in the United States and an increased revenue contribution from entering new verticals. Sanghvi Forging and Engineering, acquired last year, is expected to see 50% revenue growth in FY23. In addition, Bharat Forge aims to triple revenue over five years from JS Autocast Foundry India, its latest acquisition.

In its fourth quarter results, standalone revenue grew 28% year over year (yoy) to 1,674 crores led by 79% growth in the industrial segment and nearly 7% growth in the automotive segment. Gross margin narrowed 303 basis points (bps) year-on-year due to higher input costs, but lower Ebitda (earnings before interest, tax, depreciation and amortization) margin was lower at 171 bps at 25.8%, helped by operating leverage. One basis point equals 0.01%.

About 55% of its own-source revenue comes from cyclical segments and with the risk of a global recession, analysts at Kotak Institutional Equities expect a better entry point into the stock. However, the stock’s correction over the past month prompted analysts to raise their rating to reduce the sell-off. “We have reduced our consolidated earnings per share estimates for fiscal year 2023-24E by 1-11% on lower EBITDA margin assumptions,” they said in a May 16 report.

Consolidated free cash flow turned negative in FY22 due to higher working capital. Margin pressures could dampen sentiment for Bharat Forge stock, which is down around 20% from its 52-week high in 847.95 on November 10. The automotive industry is struggling with supply constraints and high commodity costs. “Bharat Forge’s CV export remains impacted by semiconductor shortages in Class 8 trucks. This could limit the stock’s rally,” said Prabhudas Lilladher analyst Mansi Lall. In the fourth quarter, CV exports grew only 2% year-on-year.

Additionally, as analysts at Jefferies India have pointed out, “U.S. truck production is supported by the short-term backlog, but rising interest rates and high inflation are hurting the economic outlook and could impact new truck orders and industrial exports from Bharat Forge. India and new businesses should do well, but they are unlikely to increase inventories if export growth falters.” Industrial export revenue accounted for 22% of total own-source revenue in the fourth quarter.

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