Bharat Forge: Core intact, new verticals promising

Recovery in CV business and new orders expected to boost margins

The Bharat Forge stock gained about 14 per cent over the past week on higher sales of heavy trucks in the US, defence sector and other 'Make in India' opportunities and expectations of strong December quarter results. The recent trigger has been an all-time high US sales of Class-8 type trucks in December.

The company has about 50 per cent market share of the parts such as engine/chassis components for these, among the heaviest commercial vehicles (CVs) in the US market. Higher orders, according to analysts, indicate healthier economic activity and should lead to an improvement in demand.

Puneet Gulati of HSBC says lower fuel costs will help improve profitability of trucks and encourage more buying in US. The CV market of the US contributes about 15 per cent to Bharat Forge's standalone revenue. Overall, the CV business is about half of standalone revenue. In this context, a revival in domestic sales should help boost volumes, capacity utilisation and market share across the US, European Union and India.

Rising utilisation is one reason why analysts are bullish on the stock. Deutsche Bank analysts say the company has utilised the downturn to enhance capabilities and improve efficiencies. Its earnings before interest, taxes, depreciation, and amortisation (ebitda)/tonne is 50 per cent higher than in past periods of similar capacity utilisation.

The company is also expected to benefit from India's higher defence expenditure and it could be a key player in artillery and specialised vehicles. Bharat Forge is looking at doubling the proportion of non-automobiles to overall revenues, from below 30 per cent in FY13. The Street will keep an eye on any new orders in aerospace, railways and construction. The risk here could be short-term hiccups, given the sharp fall in crude oil prices. Oil and gas is an important vertical and lower prices could impact orders.

The stock, doubled over the past year, is currently trading at 24.6 times the FY16 estimates. The near-term trigger is the strong US performance, likely to reflect in the December quarter sales. Analysts expect standalone revenue to improve 43 per cent over a year, due to higher exports (US Class-8 truck demand) and non-automobile sales. Given the better product mix on exports, the Ebitda margin for the quarter could move up 260 basis points over a year to 28.4 per cent. Given the triggers and opportunities, most analysts (nearly 75 per cent) have a 'buy' on the stock. However, investors should tread with caution on some of the themes such as defence, which are long-term in nature, and where orders might take time to materialise.