Is Bharat Forge a Multibagger Stock?

In one of our recent articles, we had written about how the government’s historic announcement placing the acquisition of 101 weapon systems and platforms from foreign countries under a negative arms imports are likely to give a much-needed thrust to India’s domestic defence industries like BEL, L&T and Bharat Forge. You can check out the article on whether you should invest in BEL here.

Now let’s take a look at another prominent player in India’s defence industry, Bharat Forge.

Established in 1966, Bharat Forge is one of the largest forging companies in the world catering to diverse sectors including Automotive, Railways, Aerospace, Marine, Oil & Gas, Power, Construction and Mining. Bharat Forge has a global presence across ten manufacturing locations spread across India, Germany, Sweden, France and North America.

The company is part of the USD 3 billion Kalyani Group conglomerate. It offers full-service supply capability to customers across the world ranging from concept and product design, engineering, manufacturing, testing & validation.

Before we proceed further to take a look at the company\’s defence portfolio, here is an exciting story of how Bharat Forge ventured into defence equipment.

During the Kargil war of 1999, Indian army decided to use the Bofors artillery guns to flush out enemies perched on mountains. This proved to be a very effective strategy. However, there was one problem, and it was a shortage of artillery shells for the Bofors gun. The defence ministry asked Bharat Forge to chip in and make 1 lakh artillery shells at short notice.

Bharat Forge\’s ability to produce high-quality products at short notice, not only raised its global recognition in the auto parts industry but also opened up new windows of opportunities for the company. However, it was only a decade later during the global slowdown of 2008 that the company diversified into the production of defence equipment.

Bharat Forge was one of the first domestic companies to realize the potential of the government\’s Make in India initiative to encourage greater private participation in the defence sector and has made significant strides in this domain.

Does Bharat Forge have the potential to become a multibagger stock?

To understand the answer to this question, let’s first take a look at the strengths of the company.

Bharat Forge has a visionary management, a necessary factor for multibagger stocks

A farsighted and visionary management can take the company towards higher levels of success and is one of the essential pre-requisites for a potential multibagger stock.

There is absolutely no doubt that Bharat Forge is managed by visionary management with a proven track record because Bharat Forge is the market leader in forging in India and ranks among the top forging companies in the world.

In a media interview, Baba Kalyani, managing director of Bharat Forge once said: \”The company has always made shifts in every 5 to 10 years into what it thought the future was going to be\”.

Bharat Forge has a strong product portfolio

If you look at any multibagger stock, you will find one thing in common. The company has a strong customer loyalty/demand for its product/services. With India ranking among the top automobile producing countries in the world, there is a huge demand for auto components manufactured by the company. Besides Bharat Forge is also one of the largest exporters of auto components from India catering to global markets.

Coming to company’s defence product portfolio, Bharat Forge has developed four artillery gun platforms which are currently in various stages of testing, with one in the final stage of testing with the Indian army as per media reports.

The recent defence embargo in imported defence systems includes the towed artillery gun (155mm x 52 Calibre). Having developed such Advanced Towed Artillery Gun (ATAG) indigenously called Bharat 52, Bharat Forge stands to gain significantly from the import ban on weapon systems. Weighing 15 tonnes, Bharat 52\’s firing range exceeds 48 kms and has a self-propelled ground speed of 20 km per hour and is claimed to be even better than the Bofors artillery gun which has a range of 38 km.

Apart from artillery guns, Bharat Forge is also into development of armoured vehicles, speciality vehicles and plans to enter electronics and high-end technology in defence.

Now let\’s take a look at the important financials of Bharat Forge:

Equities & Liabilities	MAR 2020	MAR 2019	MAR 2018	MAR 2017	MAR 2016
Assets
Share Capital	93.13	93.13	93.13	46.57	46.57
Reserves & Surplus	5,126.61	5,282.93	4,558.58	4,069.80	3,366.65
Current Liabilities	3,967.39	4,108.82	3,753.88	3,206.16	2,868.78
Other Liabilities	2,375.71	2,157.35	1,610.83	1,560.78	2,009.96
Total Liabilities	11,562.84	11,642.23	10,016.42	8,883.31	8,291.96
Fixed Assets	4,973.97	4,420.39	3,800.57	3,687.83	3,498.71
Current Assets	5,271.05	5,538.90	4,580.87	4,220.05	4,254.37
Other Assets	1,317.82	1,682.94	1,634.98	975.43	538.88
Total Assets	11,562.84	11,642.23	10,016.42	8,883.31	8,291.96

                                                                                                                     Source: Moneycontrol

Debt levels of Bharat Forge

Low or zero debt levels can help a company in rewarding its shareholders from time to time in the form of dividends or use the company\’s funds for scaling up its operations. On the contrary, any company with massive debts will have to use its surplus funds to pay large sums of interest.

	MAR 2020	MAR 2019	MAR 2018	MAR 2017	MAR 2016
Debt to Equity (x)	0.74	0.70	0.58	0.56	0.86

Bharat Forge has a good dividend track record

Bharat Forge has consistently declared dividends over the last five years. For the last financial year, Bharat Forge had declared a dividend of Rs 3.5 per share which in terms of the current market price of Rs 510, amounts to a dividend yield of 0.68%.

Latest updates of the company

In Feb 2021, the company has bagged an order from the Indian Ministry of Defence for the supply of 200 Kalyani M4 vehicles under emergency procurement protocols. The value of the order is worth Rs 177.95 crore. 

Few days back, the company had announced a partnership with Paramount Group to manufacture armoured vehicles in the country an agreement for the same was inked between the two groups during the International Defence Expo held in Abu Dhabi. Paramount Group is a global aerospace and technology company.

The Kalyani M4 armoured vehicle India specific requirements will be manufactured at the Bharat Forge\’s Pune factory and is a based on a design of M4 armoured vehicle, originally manufactured by Paramount Group

The armoured vehicle is designed to operate in extreme weather conditions and can protect soldiers from blasts protection from up to 50 kg TNT side blast, or IED or roadside bombs.

With an operating range of approximately 800 km, it is designed to carry 8 soldiers with a maximum payload of 2.3 tonnes.

Bottom line – Is Bharat Forge a multibagger stock?

From a fundamental perspective, the stock of Bharat Forge has several positives like low debt, consistent dividend, proactive management and a scalable business model all of which are vital components of a multibagger stock. However, degrowth in revenue, profits and operating profit margin in recent results (QoQ) is a matter of concern. With a P/E ratio of 40.99 as compared to the industry P/E ratio of 93.83, the stock currently appears to be overvalued. Therefore, before investing an investor should look at all the pros and cons and invest wisely. For investing in 20-25 multibagger stocks chosen after detailed research click here.

Disclaimer:

The only objective of this article is to help investors understand whether Bharat Forge has the potential to become a multibagger stock in the long run by looking at its fundamentals and should not be considered as an advice to invest in the stock of Bharat Forge.

This article was last updated on 25/02/21.

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