Fundamental analysis of Bharat Forge Ltd

Dear friends, If I ask you what makes a film a superhit, is it just the actors? No, it's teamwork, including directors, scriptwriters, producers, and many more people. However, we generally give credit to actors. If we apply the same analogy in the business, when you buy a favorite car, have you thought about who manufactures the components of that car? Today, we are going to discuss the fundamentals of a company that manufactures some of the very critical components for the automobile sector all over the world, including chassis components, engine components, etc. In fact, this company is not just present in the auto sector but it has also diversified into other sectors including e-mobility, power, Oil & gas, mining, defense, aerospace, etc. And there is going to be huge demand from each of these sectors, and being a mid-cap company it is expected to grow multiple times in the future.  In this article, we will cover Bharat Forge's business promoter and leadership, future growth prospects, key risks, and competitors, and finally, we'll cover the financials along with valuation. But before we proceed, let me clarify that this article is only for educational purposes. Alright, let's get started.

Fundamental analysis of Bharat Forge
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Company Profile & its Business

Incorporated in 1961 Bharat Forge a part of the Kalyani group, is the largest forging company not only in India but also the largest forging company in the world. Forging is basically a process where it gives shape to a metal and these metal products are used in every single industry. In fact, just a car itself has hundreds of such metal components. If you are a Mechanical Engineer, you will be able to relate to it anyways, let's not get into the technicals so Bharat Forge's business is mainly divided into 2 areas- 

1. Automotive Segment

The automotive segment is further divided into passenger vehicles and commercial vehicles where it manufactures engine parts such as crank shorts, connecting roads, and fuel injection systems, then chassis parts such as front axle beams, steering knuckles, transmission components, etc. Bharat Forge is the largest exporter of auto components from India and one of the leading chassis-competent manufacturers in the world with top-tier clients including the Daimler Group (which is the parent company of Mercedes-Benz), Volkswagen Group ( which is the parent company of Audi, Bentley, Porsche, and BUGATTI, and many popular cars). 

2. Industrial Segment. 

Bharat Forge's industrial segment includes various sectors including power, where it manufactured critical components for both conventional and renewable energy sectors, then competence for the Oil & Gas sector, Railway sector, Marine sector, Construction sector, and so on.

Earlier Bharat Forge had the majority of business from the automotive segment. However, the company has now diversified into the industrial sector and this company also caters to the aerospace sector. Until last year, aerospace had just a 2% contribution to the business, but today it contributes nearly 10% in the industrial segment. 

Revenue breakup

Overall if you look at the revenue breakup in FY 22, 57% of revenues are from the automotive segment and 43% from the industrial segment; And within automobiles, 42% is from commercial vehicles and 15% is from passenger vehicles. 

If you look into the business break up by geography in FY 22, 37% of revenues were from India, 43% from North America, 18% from Europe, and the remaining 2% from others. Bharat Forge has a total of 15 manufacturing facilities 8 in India, 5 in Europe, and 2 in the US. This helps them work closely with the customer in each of these regions.


Promoter & Leadership

If you look at the promoter and leadership of the company, Mr.B N Kalyani is the Chairman and MD of the company. He is the person who made Bharat Forge the global leader in its sector. He has done Mech Eng. at Birla Institute of Technology and Science (BITS) Pilani (Rajasthan) India, in 1970 and has done his masters from the most prestigious technical Institute in the world, Massachusetts Institute of Technology (MIT), Cambridge United States. He has been leading the company since 1972. So he has 50 years of experience in the sector, that simply exceptional. He has a son Mr. Amit Kalyani, who is the Deputy MD of the company. He holds a B.E. degree in Mech Eng. from Bucknell University, Pennsylvania, USA and he's also a Harvard Business School OPM graduate. Mr. Amit is associated with Bharat Forge since 1999. Overall, Bharat Forge has a very strong business profile with global leadership and has very experienced and competent leadership. 


Future Growth Prospects

If you look at the future growth prospects, one of the biggest growth drivers for Bharat Forge is defense and electric vehicle initiatives. Bharat Forge has a 49% stake in a subsidiary named Tork Motors that has successfully launched an e-motorbike named KRATOS. Currently, it has received  2000 orders and in the testing phase. So Bharat Forge is betting on the EV revolution with its own electric bike. Moreover, Bharat Forge was also selected under the government PLI scheme for advanced automotive technology products. The company has also won orders for developing components for electric commercial vehicles in the light truck segment. For FY 23 company is planning to launch a suite of products and subsystems for EV applications. Bharat Forge has consolidated all e-mobility solutions under a single entity called Kalyani Powertrain Limited. Bharat Forge is also getting good traction from the defense and aerospace sector. The company has been a supplier of critical components to the Indian defense sector and global aerospace sector. But the recent move from the Indian Government to focus on indigenous domestic manufacture for the defense and aerospace sector has opened huge opportunities for Bharat Forge. The company has successfully productionalized and shipped Kalyani M4 armoured vehicle to the Indian Army for United Nations Peacekeeping mission. The company has also added new products in the aerospace sector, Bharat Forge is working towards consolidating all initiatives in these businesses under its 100% subsidiary - Kalyani Strategic System Limited. Bharat Forge also started a new greenfield facility in the US to cater to aluminum forging requirements for global customers. The facility has recently started in FY 23 and currently running at a low utilization level and also resulting in lower profitability for the company, as it is the 1st year of operation. Going forward once this facility starts contributing positively, it will add more to the company's top line as well as the bottom line. Bharat Forge has also made a new acquisition last year, it acquired J S Auto Pvt Ltd company for Rs 490 Cr which primarily operates in the industrial casting space. 

This will strengthen Bharat Forge's capability industrial segment and would untapped market across sectors like wind energy, hydraulics, construction, mining, etc. Overall, there is an immense growth opportunity for Bharat Forge in the EV segment, defense &  aerospace sector, as well as the industrial sector including green energy space, construction sector, etc. in both India as well as globally. On top of that, there is a strong recovering the auto sector which has struggled in the last few years but it seems that the situation is improving. So that would also be a positive development for Bharat Forge.


Key Risk

Now if you look at the key risk,

High input cost

1st risk is high input cost. input cost has been a big challenge for the company due to rising metal prices and gas prices. Although there is a fall in metal prices, but gas prices are still high. High gas prices have severely impacted the European business and it would continue to be a key risk in terms of impacting the profitability of the company.

Supply Chain Constraint

2nd risk is supply chain constraint. In the recent past, the auto sector has faced multiple challenges due to supply chain disruption during COVID and then during Russia Ukraine war. As a result, there was a huge shortage of semiconductors. Although the situation has improved, but any disruption in the global supply chain can impact the demand from the end industry for Bharat Forge, especially the auto sector. Also, the fact that Bharat Forge generates good revenue from the US and Europe which contributed 55% of total revenue last year and there are chances of recession or rather slowdown in the US and Europe that could impact the business of the company in the short term. 


Competitors

If you look at the competitors of Bharat Forge, it includes Sona BLW Precision Forgings Ltd, Mahindra CIE Automotive Ltd, and Ramkrishna Forgings Ltd.


Financial

Now, let us look at the financials of  Bharat Forge. 

Revenue

If you look at the revenue of Bharat Forge Ltd, its revenues have grown from 6396 Cr in FY 17 to 8358 Cr in FY 18, then 10,100 Cr in FY 19, Although due to COVID its revenue fell down to 8056 Cr in FY 20 and then 6336 Cr in FY 21, however, was the economy opened up revenue jumped to 10,400 Cr in FY 22 and latest revenue is 11,200 Cr. 

Profits

If we look at the Bharat Forge profitability, it was 711 Cr in FY 17 then jumped to 754 Cr in FY 18, and then 1033 Cr in FY 19, and then due to COVID, the profitability fell down to 349 Cr in FY 20 and then -127 Cr in FY 21, however, was the economy opened up profit jumped to 1077 Cr in FY 22 and latest trailing 12-month  profit is 1085 Cr. One of the reasons, why profit has not grown much in the trailing 12 months is that company has recently invested in its US facility that has opened up; and it is running at a low utilization level, due to that it is actually in loss currently. Once that facility start running in full swing it would start contributing to the profitability of the company. 

OPM%

If you look at the margins of the company, it is at 18% in FY 17 then jumped to 21% in FY 18, and then 20% in FY 19;  Although it fell down during COVID, the margins fell down to a level of 13% in FY 20, and consistently13% in FY 21, however, when the economy opened up, margins jumped to 19% in FY 22 and latest trailing 12-month  margins are 18%. Interestingly, if you see even after the increase in input price in terms of raw material and gas rises company has been able to sustain its margin which shows the inherent strength in the business of the company. 

ROC & ROCE

If you look at the ROC and ROCE of the company, it was well in the range of 15% to18% during pre-COVID, and then of course it fell down during COVID and in FY 22 ROE is at 16.4% and ROCE is 12.3%. Now one of the reasons why profitability is on the lower side is because the company has recently invested in a new facility in the US and acquired a new company. So all these investments would start showing results and its profitability is expected to increase further.

Debt to Equity Ratio

If you look at the debt to equity, its current debt to equity is 0.91.

Reserves

If you look at the reserves of the company, it has consistently grown and the latest reserves are 6476 Cr. 


Shareholding Pattern

If you look at that shareholding pattern now this is very interesting promoter shareholding has been more or less consistent in 12 quarters What 46.25 and latest it is 45.25.    If you look at FIIs and if you look at just compare it with 12 quarters ago, it was 19.1, and latest it is 18.2 however, FIIs had actually increased their shareholding in the company till June 21 quarter, and then during the global sell-off, they started selling from Indian market also and due to that their shareholding reduced. However, DIIs have captured this opportunity with both hands if you see their shareholding was just 12.13. So, DII shareholding was 12.13 on June 21 and today it increased to 24.33. So, DIIs holding has literally doubled in the last 4 quarters, and it is not just DIIs of purchase when FIIs have sold, even the public shareholding has reduced from 17.16 to 11.44. And remember if the public is selling and either DIIs or FIIs or Promoters are buying then it shows the future of the company is very bright. 


Valuation

If you look at the share price movement of the company. So if you look at the last 5-year of movement, Bharat Forge was trading at levels of Rs 750 and then because of the global sell-off and the automobile sector, the entire automobile sector saw a huge slowdown. Even Bharat Forge's share price tanked by nearly 50% and of course, COVID happened so the share tanked even further. However, post-COVID recovery shares started gaining momentum and jumped to levels of nearly Rs 850. But if you look at the last 1 year of movement, there has been a consolidation phase in the company; Although it touched a low of nearly Rs 595 and since then the share is up 26%. But still, at current levels, it is trading at Rs 765 and the PE ratio of the company is 32.67 which is looking pretty attractive.


Conclusion

Overall, Bharat Forge is a fundamentally super strong company with very competent and experienced leadership. Being the number one forging company in the world itself speak about the quality of its business. The company has an experience of over 50 years in the industry with some of the top clients all over the world. And forging sector has a good entry barrier, it is not easy to own and produce machine components. As far as the future is concerned, the future of automobiles is electric and there is the immense growth potential for Bharat Forge in this sector. The company has also launched its own electric two-wheeler named KRATOS. Moreover, the company is also manufacturing components for the EV segment. The government's focus on indigenization for defense and aerospace has opened a new world of opportunities for Bharat Forge in the defense and aerospace segment. The company is also growing both organically and inorganically with the acquisition. It has recently started a new manufacturing plant in the US and has recently acquired J S Autocast for Rs 490 Cr which would help Bharat Forge expand its business in sectors like wind energy hydraulics, construction, mining, etc. As far as financials are concerned, the revenue and profit growth was subdued in the past few years due to the slowdown in the auto sector. However, the auto sector is now recovering and that will result in better growth for the company along with the growth from the industrial segment. And the way mutual fund houses are consistently accumulating the shares of Bharat Forge clearly says the future prospects are bright. Currently, Bharat Forge has a market cap of around 36,000 Crore which makes it a mid-cap company that is trading at levels of Rs 770  and commands a PE ratio of 33 which is looking reasonable. So, overall  Bharat Forge is looking very interesting and can be considered as a part of your long-term portfolio. Although in the short term, there could be some more challenges due to the uncertain economic environment. But any dip in this stock will only create by opportunity. I hope you'll find this analysis useful.

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