Target: ₹860

CMP: ₹653

Cyclical recoveries across key businesses and contributions from the new businesses are expected to propel a sharp recovery for Bharat Forge (BHFC) over the next 2–3 years. This along with a ramp-up in the overseas aluminum forging business is likely to result in a consolidated EPS CAGR of 24 per cent over FY22-25.

After witnessing a cyclical downturn until FY21, accentuated by the Covid impact, BHFC is undergoing a cyclical recovery in its core businesses in both domestic as well as international markets. Although chip shortages are impairing the CV/PV production across geographies, underlying demand momentum remains strong in the Auto business.

Stricter CO2 emission regulations globally and the advent of electric vehicles (EVs) are leading to an increase in aluminum usage. BHFC’s overseas subsidiaries are witnessing a strong demand of aluminum-forged components for chassis from EVs and hybrid PVs and hence, the company has doubled its capacity to 40k tons from 20k tons (10k ton additions in the EU to 30k tons and 10k tons Greenfield plant in the US).

We see upside to our estimates from: the US aluminium capacity; the recent acquisitions in the industrial business; and foray into the e-mobility business. The stock trades at 25.4x/19.6x FY23/FY24 consolidated EPS, respectively.

BHFC sees tremendous opportunities in industrial space (renewable, off-highway, and others) and has invested in expanding its capacities (via Sanghvi Forgings) and capabilities (via JS Autocast) through acquisitions in the last nine months.

We maintain our Buy rating with a TP of ₹860 (based on 26x Mar’24E EPS), implying 33 per cent potential upside. BHFC is our top pick in the auto component industry.