New Defense And Aerospace Orders Will Boost Future Prospects

Key Takeaways

• Strong growth in defense and aerospace is expected, driven by substantial new orders and market share expansion, enhancing revenue and margins.
  
• Strategic M&A prospects and geographic diversification aim to broaden product lines, improve margins, and sustain growth.
  
• Challenges in European demand and customer issues, along with delayed aero-sector growth and U.S. investments, may strain revenues, earnings visibility, and cash flows.

Catalysts

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

• Bharat Forge's defense segment shows strong growth potential, with new orders and a substantial pipeline expected to increase revenues significantly over the next few years. This robust future order book, primarily from exports, underlines expectations for continued revenue expansion.
  
• The company's aerospace business is expected to experience exponential growth, becoming multiple times its current size due to significant new order wins and market share gains. This expansion is likely to drive increases in both revenue and net margins as the business ramps up.
  
• With a stronger balance sheet and reduced financial leverage, Bharat Forge is positioned to pursue strategic M&A opportunities. These acquisitions are expected to enhance revenue and potentially improve margins by expanding product lines and entering new markets and geographies.
  
• The commercial vehicle segment is anticipated to reach EBITDA breakeven in the next 2 to 3 quarters despite current challenges, which should positively impact earnings and help improve overall profit margins.
  
• Diversification of revenue streams across geographies and sectors, such as defense and aerospace, along with the utilization of existing capacity, is expected to sustain growth, improve operational efficiency, and enhance net margins in the long run.

Bharat Forge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bharat Forge's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 11.6% in 3 years time.
• Analysts expect earnings to reach ₹27.9 billion (and earnings per share of ₹59.88) by about December 2027, up from ₹9.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.3x on those 2027 earnings, down from 67.8x today. This future PE is greater than the current PE for the IN Auto Components industry at 19.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.02%, as per the Simply Wall St company report.

Bharat Forge Future Earnings Per Share Growth

Risks

• Weak demand environment in Europe and specific customer-related issues impacting European and North American utilization could affect future revenues and earnings, as these regions are currently struggling with demand and utilization issues.
  
• The aerospace sector, while expected to grow, may take time to fully ramp up, and any delays in realizing new orders or adjustments could result in lumpy quarterly performances, impacting consistent revenue streams and net margins.
  
• The completion of existing export orders without immediate replacement could lead to temporary drops in revenues, and potential delays in converting new orders into tangible sales might affect earnings visibility.
  
• Significant investments in U.S. operations with delayed benefits could strain cash flows and impact net margins if expected productivity and revenue enhancements take longer to realize.
  
• Ongoing issues in European operations and the necessity of downsizing could lead to restructuring costs and potential negative earnings impacts until the business environment stabilizes and profitability is improved.

Valuation

• The analysts have a consensus price target of ₹1469.08 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 ₹1859.0, 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 2027, revenues will be ₹239.5 billion, earnings will come to ₹27.9 billion, and it would be trading on a PE ratio of 36.3x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹1379.35, the analyst's price target of ₹1469.08 is 6.1% 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.