Production loss to be minimal despite semi-conductor Shortage: Bharat ForgePratik Mate
Update on Indian Equity Market:
On Monday, markets ended higher with Nifty closing 34 points higher to close at 16,130, TATASTEEL(3.7%), BAJFINANCE (3.4%) M&M (2.4%) were the top gainers on the index while MARUTI (-2.6%),SHREECEM (-2.3%) and EICHERMOT (-2.3%) were the top losers for the day. Among the sectoral indices, METAL (1.5%), OIL & GAS (0.9%) and FINANCIAL SERVICES (0.4%) were the top gainers, while MEDIA (-1.4%), PSU BANK (-1%) and AUTO (-0.9%) were the top losers.
Excerpts of an interview with Baba Kalyani, CMD of Bharat Forge on CNBCTV18 dated 13th August 2021:
- Despite mounting input cost inflation, Company managed to expand its margins by 100 bps sequentially and posted robust growth on both Revenue and Net profit Fronts in Q1FY22
- Semi-Conductor shortage is a universal phenomenon that’s affecting industries and businesses across the world. In the case of OEMs, most of them have taken adequate steps to address this issue.
- In the short term, everyone is suffering some loss in production, however, the company expects no adverse impact on production in the medium-long term. The company reiterated that the situation was outside the control of anyone and its a matter of when and not if the issue will be resolved,
- He stated that the industry has resorted to rationing of semiconductors to produce higher-value products. This will impact the supply in the short term.
- A lot of Passenger vehicle manufacturers have resorted to reducing the production of lower end passenger cars against higher value cars that offer better realisations.
- Cost Reduction was the company’s important priority in the past 2 years and the company has optimised costs through downsizing, IoT and WC Management, to produce the best margins this company has seen.
- The company has a strong balance sheet and healthy cash balance, the company plans to take forward its growth through inorganic acquisitions aimed at future technologies like e-mobility, renewables etc as the company gears itself for the future.
Asset Multiplier Comments:
- The Semi-Conductor shortage will be dealt with sooner rather than later, barring any major disruptions, OEM and the entire Auto and Ancillary sector is recovering well.
- Bharat Forge has managed to improve its margins and its plans to grow across all segments through strategic investments as it gets ready for the future are on the right track.
Consensus Estimates (Source: market screener website):
- The closing price of Bharat Forge was ₹803/- as of 16-August-2021. It traded at 45x/29x /26x the EPS estimate of ₹18/₹ 28/₹ 31 for FY22E/23E/24E.
- The consensus price target is ₹ 900/- which trades at 30x the EPS estimate for FY24E of ₹ 31/-
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