Brokerage firm Kotak Institutional Equities has downgraded Bharat Forge stock to a 'sell' from a 'reduce' and trimmed the target price too to ₹660 from ₹850 earlier, a cut of 22.35 percent, as it expects a moderation in revenue growth for the company over FY23-35.
The brokerage firm has cut its FY2024-25E consolidated EPS (earnings per share) estimates by 9 percent, led by 3 percent lower revenue growth and 50-60 bps lower EBITDA margin assumptions.
Kotak expects Bharat Forge's consolidated revenues to rise at a moderate 8-9 percent CAGR in FY2023- 35E.
The stock hit its 52-week high of ₹919.50 on December 15, 2022, on BSE. As of April 6 close, the stock is down 17 percent from that level.
The brokerage firm said while the majority of the growth would be driven by newer segments (defence, casting, light-weighting and aerospace), there are limited growth prospects in the company’s core segments.
"Over FY2023-35E, we bake in (1) more than 20 percent revenue CAGR in the defence segment, given the Indian government’s focus on indigenization, (2) 15 percent revenue CAGR in the aerospace and casting businesses, driven by customer addition and newer product offerings, (3) 11-13 percent revenue CAGR in the aluminium lighting weighting business across the European Union and the US and (4) 27 percent CAGR in the EV (electric vehicle) business on a low base," said Kotak.
Kotak highlighted EV shift and elevated competition in the core segments will deter growth.
It expects standalone automotive segment revenues to increase at a mere 5 percent CAGR over FY2023-35E (nearly 37 percent of the consolidated revenues).
"We do not expect the standalone automotive business to outperform the CV (commercial vehicle) and PV (passenger vehicle) industry’s volume growth in the medium term, given elevated competitive intensity and lower profitability in the PV forging business," Kotak said.
Kotak added although Bharat Forge has been gaining market share in the export PV forging business, the pick-up in the electrification trend will weigh on growth prospects over the medium term, as the company derives more than 90 percent of its revenues from engine crankshafts.
Kotak also expects the company's oil and gas segment revenues to decline over the medium term, as oil demand may decline, given the pick-up in electrification trends in the automotive industry.
Moreover, moderation in Class 8 orders and domestic auto demand remain headwinds for the company.
"A decline in the US Class 8 order inflow over the past few months, coupled with softening freight rates and deteriorating used truck values, and rising inventories will weigh on the demand of 2HCY23 (second half of the calendar year 2023)," said Kotak.
"We expect domestic auto demand (PV, CV and tractors) growth to moderate due to (1) waning pent-up demand, (2) an increase in prices amid regulatory norm changes, (3) elevated interest rates amid moderation in economic growth, and (4) unseasonal rains and the possibility of El Nino," Kotak said.
The brokerage firm is positive on the medium-term growth prospects of the company's defence business; however, it underscored there might be a delay in revenue ramp-up in the near term, as the company is yet to receive an order for ATAGS (advanced towed artillery gun system) from the Indian government.
According to a MintGenie poll, 27 analysts on an average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
