To boost its non-automotive industrial business, which accounts for around 40% of its total revenue, automotive components giant Bharat Forge Ltd has made a second acquisition in less than a year.
Bharat Forge will acquire 100% equity in casting company JS Autocast Foundry India Pvt. ltd. The size of the transaction was not disclosed, but management expects it to be accretive to earnings per share in the first year itself. The deal is expected to close during Q1FY23. Investors will recall that in June 2021, Bharat Forge acquired Sanghvi Forging and Engineering Ltd to expand its product offering in the renewable energy and wind sector.
Analysts believe these acquisitions are a step in the right direction, given the business synergies and access to new markets. That said, significant earnings growth would only occur gradually.
“With these two acquisitions and growing cleantech opportunities, Bharat Forge’s revenue target for its non-automotive segment is achievable. Furthermore, we estimate that in the medium term, these acquisitions will help the industrial segment’s renewable portfolio (currently very small) to grow to around ₹700 crore-750 crore,” said Mansi Lall, analyst at Prabhudas Lilladher Ltd.
Management reiterated its goal of doubling industrial revenues (excluding oil and gas) in three years, it told analysts on a conference call after the deal was announced. He further added that JS Auto generates nearly 45% of its revenue from overseas markets. The company’s current capacity utilization is around 60%, and debottlenecking efforts can add up to 25% more capacity. JS Auto’s sales have grown at a CAGR of 18% over the past five years for ₹259 crores in FY21, management said. CAGR is short for Compound Annual Growth Rate. Additionally, JS Auto has negligible net debt on its books, which bodes well for Bharat Forge’s balance sheet.
Speaking of earnings impact, analysts at Dolat Capital Markets Pvt. Ltd estimates that the purchase of JS Auto will add 5-6% revenue to Bharat Forge’s stand-alone business from FY23. On a consolidated basis, FY23 revenue and Ebitda could see increases of 4% and 2%, respectively, said ICICI Securities Ltd.
Ebitda is the abbreviation of earnings before interest, taxes, depreciation and amortization.
Meanwhile, over the past year, Bharat Forge’s stock has risen around 8%, beating Nifty Auto’s returns of 4%. Going forward, the demand outlook for commercial vehicle space and any impact of the Russian-Ukrainian conflict on the company’s manufacturing base in Europe would be key.
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