Aerospace And Defense Investments Will Improve Future Prospects As US Operations Progress

Key Takeaways

• Significant investments in aerospace and defense markets position Bharat Forge for future revenue growth and increased profitability.
  
• Strategic efficiency improvements in U.S. operations and strong performance of Indian subsidiaries enhance prospects for earnings and margin growth.
  
• Overseas challenges, market uncertainties, and potential cost pressures could impact margins, while high-capex projects may strain cash flows despite promising growth.

Catalysts

Engages in the manufacture and sale of forged and machined components in India and internationally.

• The new business verticals in casting and aerospace are expected to continue performing well, with significant investments in aerospace to increase business in the sector, potentially impacting future revenue growth.
  
• In the ferrous casting space, anticipated customer traction and improved margins by 250-300 basis points over the next two years may boost net margins.
  
• A solid defense order book of ₹5,700 crores with potential future contracts, especially from exports, positions the defense segment for revenue growth.
  
• The U.S. operations are expected to see a good progression in the next six months due to a strategic focus on improving efficiencies and cost reductions, potentially leading to better earnings.
  
• The Indian subsidiaries, particularly JSA, have shown robust performance, with significant revenue growth and margin improvement, indicating potential for future margins and earnings growth.

Bharat Forge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bharat Forge's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 10.9% in 3 years time.
• Analysts expect earnings to reach ₹23.9 billion (and earnings per share of ₹50.17) by about March 2028, up from ₹9.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹26.5 billion in earnings, and the most bearish expecting ₹15.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.8x on those 2028 earnings, down from 60.6x today. This future PE is greater than the current PE for the IN Auto Components industry at 27.1x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.42%, as per the Simply Wall St company report.

Bharat Forge Future Earnings Per Share Growth

Risks

• The overseas operations, particularly in Europe, are facing challenges due to weak demand and policy uncertainty, which may lead to sustained PBT losses around ₹90 crores, impacting net margins and consolidated earnings.
  
• The transition from EV to IC and related demand slowdown in both Europe and the U.S. are creating uncertainties in market conditions, affecting revenue stability and potentially causing an unpredictable revenue stream.
  
• The defense order book, despite having potential, carries risks due to the long contractual timelines that may lead to revenue lumpiness and delayed revenue realization, impacting short-term earnings expectations.
  
• Potential U.S. tariffs on steel and aluminum could introduce cost pressures, with uncertain pass-through ability, thereby affecting profit margins and net earnings.
  
• High-capex projects, particularly in the aerospace and defense verticals, while promising growth, could strain cash flows and lead to increased leverage if market conditions do not favor revenue growth quickly enough.

Valuation

• The analysts have a consensus price target of ₹1239.72 for Bharat Forge based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1800.0, and the most bearish reporting a price target of just ₹920.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹220.5 billion, earnings will come to ₹23.9 billion, and it would be trading on a PE ratio of 37.8x, assuming you use a discount rate of 14.4%.
• Given the current share price of ₹1133.85, the analyst price target of ₹1239.72 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.