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Bharat Forge sees potential in defence sector; overseas unit's performance weighs

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Bharat Forge seems to grab the opportunities in defence sector as its core business segments which are commercial vehicle (CV), passenger vehicle (PV) and Oil & Gas are cyclical and currently in differing demand rebound cycles.

Bharat Forge sees potential in defence sector; overseas unit's performance weighs
Bharat Forge's share price has gained over 15 percent since the government announced restrictions on import of 101 weapons and military equipment in August. The management is trying to pivot and create a larger pie of revenues from stable segments like defence, aerospace, etc, according to ICICI Securities.
The government has prepared a list of certain items for which the embargo on imports is planned to be progressively implemented between 2020 and 2024.
“The aerospace segment outlook remains uncertain due to Covid-19 pandemic; however, recent defence procurement policy shift has raised investor confidence in Bharat Forge’s potential to win artillery guns’ orders,” the brokerage house noted.
It estimates Bharat Forge’s defence business to clock superior EBIT margins of more than 25 percent factoring in significant labour cost advantage and higher asset efficiency.
As per reports, the Indian Army artillery regiments need in excess of 1,600 towed artillery guns (155 mm calibre). According to the brokerage’s assessment of potential pricing (ASP) of Rs 15 crore per system, the potential ordering opportunity could be Rs 24,300 crore. Under the new procurement policy, local manufacturers may stand to gain a higher share of orders.
For Bharat Forge, it is believed that forging component supplies such as gun barrel remains another stream of potential revenue for non-OFB suppliers.
Meanwhile, the company’s execution track record in its overseas subsidiaries continues to remain weak. The overseas performance going ahead also has headwinds such as European truck market slowdown and is thus likely to drag consolidated earnings/RoCEs recovery in the medium term.
“We believe management needs to relook at the continued business case in its weak European business entities which have been consistently falling short of the cost of capital hurdle rate,” ICICI Securities said.
The class-8 truck demand (exports) is likely to scale back more than 300,000 units by CY22, however, domestic truck market is unlikely to scale FY18 peak volumes before FY24/25. Oil & gas segment is also unlikely to recover back to FY18/19 revenue levels anytime soon.
ICICI Securities has upgraded its rating on Bharat Forge to Reduce from Sell and raised the target price to Rs 412 from Rs 337 earlier.

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