Bharat Forge stock rating ‘Buy’- New defence orders, aerospace backlog, other factors to help co beat slowdown

Bharat Forge stock rating ‘Buy’: New defence orders, aerospace backlog, other factors to help co beat slowdown

HDFC Securities has maintained its ‘buy’ rating on Bharat Forge stock with a target price of Rs 998, implying a 22% upside from the current level — citing the company’s multiple growth drivers that could offset the slowdown. Investors’ concerns — that a likely slowdown in the US in CY24 could to derail Bharat Forge’s growth momentum — are seemingly overdone, given that it has multiple growth drivers to offset this slowdown, HDFC Institutional Equities analysts said in a note. “Despite the expected slowdown in US Class8, we expect the standalone entity to post 13% revenue CAGR over FY23-25E, ” said the note.

According to the report, some of the key drivers influencing the overall growth of the company are the new defense orders, which are anticipated to drive significant revenue growth, projecting an increase from INR 3.5 billion in FY23 to INR 17 billion by FY25E in this segment, and the substantial order backlog in the aerospace sector which would boost the revenue growth, from INR 1.7 billion to INR 5 billion over the next four years.

Stable long term revenue growth offers hope

According to the report, the targets set by management for FY30 include revenue growth of 12–15% CAGR, a sustainable consolidated EBIDTA margin above 20%, and the consolidated RoCE at 25%. “Its target to have stable revenue growth over the long term is also testimony to the fact that it has been able to transform itself from a cyclical entity to a stable revenue stream, given its well-diversified mix, the report added.

While the overseas subsidiaries in FY23 experienced losses due to startup costs and the inability to fully pass on rising cost pressures to OEMs, these issues appear to have been resolved. “Management expects the new Europe AL plant to break even in Q1 and the US plant by Q3. On the back of a strong order backlog for AL-based components, we expect overseas subs margin to recover back to 10% by FY25E,” said the report.