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Bharat Forge: Some US sales' respite amid headwinds

Higher demand momentum in auto, industrial segments crucial both in US, India for growth trajectory

Ram Prasad Sahu  |  Mumbai 

Bharat Forge: US sales offers some respite amidst headwinds
Bharat Forge hit a 52-week high last week, after news that its North American Class 8 truck order inflow in March was in positive territory for a third month, a growth rate of 41 per cent year-on-year.

Investors, however, should not hurry to own the stock, though the company’s longer-term prospects look good. Analysts believe the recent growth is on a low base and production has been outstripping demand, as there is overcapacity in the market.

Also, the order uptick is driven more by anticipation of recovery in US freight markets than by robust economic activity. Freight rates have largely remained flattish, with spot rates still considerably below contract rates. Growth in this calendar year is expected to be flat as compared to last year, a worry. The North American heavy trucks segment accounts for a fifth of the company’s standalone revenue.

The management has, however, said it believes the North American heavy truck market’s slump has bottomed out and is showing some recovery from last year. In this market, the company is also looking at expanding its footprint. In November, it acquired Walker Forge Tennessee, which helped expand its product portfolio and customer base in passenger cars and commercial vehicles, as well as on the industrial business front. A lot, however, will depend on how strong the growth is for both the automotive and non-auto segments in the US.


The other issue is the slow moving domestic medium and heavy commercial (M&HCV) segment, also important for Bharat Forge, being 17 per cent of standalone revenue. Analysts at say they see structural headwinds to growth due to sharp increases (seven to eight per cent) in prices from April 1, on higher emission norms and strong pre-buying in March, when had to liquidate older BS-III standard vehicles' inventory at high discounts. And, due to demand uncertainty after implementation of the national goods and services tax from July.

The near-term outlook for the CV segment is muted, with sharp discounts (after the Supreme Court's verdict on non-registration of BS-III vehicles) and other costs related to recalls and upgrade. These could lead to an almost 200 basis point correction in the margins of M&HCV manufacturers, believes ratings agency Thus, 37 per cent of standalone revenue could see some problems.

Analysts say its other businesses, in railways or aerospace, are promising but too small at less than two per cent of revenue to impact or change the company’s financials in FY18. What could help are any orders from the military for the Kalyani group, which will mean an opportunity for to supply components.
While analysts believe FY17 would be a muted growth year for Bharat Forge, FY18 could be better. They point to increasing content per vehicle and market share, which will help the company exceed industry growth over the longer term. Within the non-automotive space, it is to be seen if the shale gas segment, impacted by falling crude oil prices, becomes viable and recovers. This will decide the order flow for this segment.

For the March quarter, analysts at ICICI Securities expect revenue to grow seven per cent over a year before, driven by domestic growth and sequential improvement in export. The operating profit margin is expected to be marginally up at around the 27 per cent mark.

Nonetheless, at the current level, the stock (up 37 per cent over the past year) is trading at 32 times its FY18 earnings estimate and is expensive. Investors could look at the scrip on dips.