Emkay Global Financial has given Hold recommendation for Bharat Forge with a target price of Rs. 785 in its research report issued on Aug 28, 2022
Emkay Global Financial’s research report on Bharat Forge
The demand outlook for CY22 provided by 23 global entities, including CV/PV OEMs, non-auto companies and industry associations, indicates tapering growth for forging companies. Weakening of the European and US economies does not bode too well for the HCV segment, which contributes over 25% to BHFC’s revenue. Constrained by flat GDP growth expectation, high finance cost and increasing operating costs, there is steep deterioration in the CY23 North America Class 8 production outlook to -6% (vs. +9% earlier), as per Americas Commercial Transportation. This downturn is likely to persist in CY24, with 8% drop in production, due to change in emission norms leading to notable price hikes of +15%. In comparison, India’s MHCV segment would see strong 28% growth in CY22. The global PV segment is likely to clock positive growth. The order book is healthy, but a muted H1CY22 and weakening macro outlook have led to reduction in growth expectations for CY22/23. The outlook for the industrial segments remains robust, owing to higher commodity prices and an upturn in the oil & gas segment, which is likely to see >35% growth in CY22.
We retain HOLD on Bharat Forge with Sep-23 TP of Rs785, based on 24x Sep-24E EPS for standalone operations, factoring-in the limited upside potential and weak outlook for global CVs. Our valuation multiple is DCF based which also considers 15% premium for upside from nascent segments. Historically, valuation has been under pressure in global CV down-cycles.