The shares of one of India’s largest manufacturers and exporters of automotive components fell by 5.6 percent after analysts from different brokerage firms maintained mixed ratings on the company despite strong Q2 results.
On Tuesday, Bharat Forge shares closed at Rs 1,057.80 a share, down 1.94 percent from the previous close price, with a market capitalization of Rs 49,110 crores.
The company’s net profit improved by 52 percent year on year in Q2FY24 to Rs 214 crore from Rs 141 crore in Q2FY23. Furthermore, revenue from operations climbed by 23 percent to Rs 3,076 crore from Rs 3,774 crore in the previous year’s equivalent period.
In H1 FY24, the company’s standalone business secured new orders worth Rs 740 Crores across various segments including Rs 300 Crores for E-Mobility programs.
The defense business continues to move from strength to strength in terms of execution and order wins. During the quarter, the company’s defense vertical, KSSL secured new business worth Rs 1,100 Crores taking the executable order book to Rs 3,000 Cores, over the coming 24 months.
The company’s passenger vehicles sector accounts for almost 25 percent of exports and the company’s exports have risen due to order wins from newer geographies & customers.
Analysts from different brokerage firms maintained mixed views on Bharat Forge even after the company reported a strong set of September quarter numbers.
Global brokerages CLSA and Citi have a ‘Sell’ rating on the counter while setting target prices of Rs 987 and Rs 900 per share, respectively.
The rationale behind providing negative recommendations is
Citi has cautioned on the company’s subsidiary margins due to uncertainty about a major Indian defense order, potential export challenges from geopolitical issues and macro trends, and high valuations leaving a minimal margin for error.
CLSA has expressed concerns over expensive valuations. The brokerage said that subsidiaries continue to post losses, which are affecting the overall profit growth.
UBS and Motilal Oswal, have a ‘Buy’ rating on Bharat Forge with a target price of Rs 1,260 per share, with an upside of 17 percent and Rs 1,250 per share with an upside of 16 percent respectively.
The rationale behind providing positive recommendations is
The UBS reported that Bharat Forge reported a slight improvement in the September quarter due to continued defense ramp-up.
Brokerage anticipates a robust performance in passenger vehicle exports, with a target of achieving 25 percent EBITDA margins in the defence segment.
Motilal mentioned that The defence segment is poised for significant growth, with execution already underway. The e-mobility sector offers significant possibilities and contains basic features, but the competitive landscape is yet to evolve.
Further, Morgan Stanley maintains ‘Overweight’ on the stock, with a target of Rs 1,178 per share with an upside of 10 percent, while Jefferies has an ‘Underperform’ rating with a target of Rs 850 a share, with a downside of 21 percent.
Morgan Stanley says that the company aims to boost market share in core areas, scale up defence and EV segments, and enhance profitability in overseas subsidiaries.
Jefferies forecasted Bharat Forge’s structural story is concerned with cyclical headwinds in exports and rich valuations. Also, the brokerage noted that the timing of the long-awaited domestic gun order remained uncertain.
Morgan Stanley forecasts a flat FY25 export commercial vehicle outlook, with confidence about India’s CVs but concerns about renewables, notably wind energy. In defence and industrials, management aims for nearly 25% EBITDA margins by FY25, surpassing MSe estimates of 20% and 15%, respectively.
The Indian defence manufacturing industry is a key economic sector. As of 2021, India has the world’s third-largest defence spending and aims to sell equipment worth US$ 15 billion by 2026.
The Indian government has set a target of Rs 1.75 lakh crore in defence manufacturing by 2025, which includes Rs 35,000 crore in exports. The budget spending for FY23 has been set at Rs 5.3 trillion, a 10% increase over the previous year.
Since the last year, Indian military sector companies have received a good order book, and the Indian government has initiated a significant effort for localisation, so India’s defence sector has become appealing to investors.
However, analysts from multiple brokerages caution that high valuations, execution problems, competitive challenges, and cash flow generation issues could risk the defence sector stocks, what is your thought on this?.
Written by Omkar Chitnis
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