In a bid to give a fillip to its non-automobile industrial business, which forms about 40% of its total revenues, auto components giant Bharat Forge Ltd has made a second acquisition in less than a year.
Bharat Forge will acquire 100% stake in casting company JS Autocast Foundry India Pvt. Ltd. The deal size has not been disclosed, but the management expects it to be earnings per share accretive from the first year itself. The deal is slated to close in Q1FY23. Investors would remember that in June 2021, Bharat Forge had acquired Sanghvi Forging and Engineering Ltd to expand its product offering in the renewable energy and wind sector.
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Analysts say these acquisitions are steps in the right direction, given the business synergies and access to new markets. That said, meaningful earnings growth would come only gradually.
“With these two acquisitions and increasing opportunities in the clean technology space, Bharat Forge’s revenue goal for its non-auto segment is doable. Also, we estimate that over the medium term, these acquisitions will help the renewable portfolio of the industrial segment (currently very small) to become around ₹700 crore-750 crore,” said Mansi Lall, analyst at Prabhudas Lilladher Ltd.
The management has reiterated its aim of doubling industrial revenues (excluding oil & gas) in three years, it told analysts in a call held after announcing this deal. It further added that JS Auto generates nearly 45% of its revenues from the overseas markets. The company’s current capacity utilization stands at around 60% and de-bottlenecking efforts can further add up to 25% capacity. The sales of JS Auto grew at a CAGR of 18% over the past five years to ₹259 crore in FY21, the management said. CAGR is short for compounded annual growth rate. Also, JS Auto has negligible net debt on its books which bodes well for the balance sheet for Bharat Forge.
Speaking of earnings impact, analysts at Dolat Capital Markets Pvt. Ltd estimate the JS Auto buy to add 5-6% revenue to Bharat Forge’s standalone business from FY23 onward. On a consolidated basis, FY23 revenue and Ebitda could see additions of 4% and 2%, respectively, said ICICI Securities Ltd.
Ebitda is short for earnings before interest, taxes, depreciation and amortization.
Meanwhile, in the last one year, the stock of Bharat Forge rose by about 8%, beating Nifty Auto’s 4% returns. Going ahead, demand outlook for the commercial vehicles space and any impact from the Russia-Ukraine conflict on the company’s manufacturing base in Europe would be key.
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