Bharat Forge: Decline in North American truck market may impact sales

Weak ordering likely to impact Bharat Forge's revenue growth a few quarters down the line

Bharat Forge has been a key beneficiary of a pick-up in demand for trucks in the US. The company has been reporting double-digit growth in the US on higher volumes from the passenger vehicle segment, client addition in truck segment and penetration into new non-automobile  segments. Over the past 12 months, the stock has returned 89 per cent. However, for the past three months, order inflows for the Class-8 trucks in North America have been declining. Quoting data from Freight Transport Research, analysts claim orders for these trucks declined 23 per cent year-on-year in May, 10 per cent in April and nine per cent in March.

After two years of strong growth, order inflows have begun weakening, which would have an impact on Bharat Forge's top line. Bharat Forge derives 15 per cent of its revenue from North American heavy trucks segment and a slowdown in this could have an impact on sales growth in FY16. According to Nomura, “Order inflow is a lead demand indicator and impacts production with a lag of two to three quarters. Therefore, while the current order book remains quite strong (6.2 times production levels), slowdown in order inflows could pose a risk to industry production levels in 2016.”

Bharat Forge has ambitions of growing its annual revenue to Rs 7,000 crore in the next couple of years. Also, it has successfully diversified into different segments to broad-base growth. However, cyclical segments such as heavy commercial vehicles have meaningful share in overall revenues, which is why a slowdown is a risk. While FY16 could see 15 per cent growth in the heavy trucks segment in FY16, this could slow down to five per cent in FY17, some analysts believe.

The company conveyed to investors at a recent Morgan Stanley summit that it expected the North American truck market to grow 10 per cent and European truck market to expand by 3-5 per cent in 2015. The European truck market accounts for eight to 10 per cent of sales. Additionally, weakening demand in oil and gas has already started impacting revenues. The sector contributes 10 per cent of Bharat Forge's sales. The company believes the decline will be offset by entry into new segments such as aviation and locomotives.

While Morgan Stanley continues to be overweight on the stock, Nomura is uncomfortable with price/earnings multiple higher than 20 times for the stock.