Bharat Forge: Rising industrial segment revenue, auto recovery drive gains

With a gain of over 12 per cent in the last three months, Bharat Forge has been one of the top gainers in the auto component space. Investors have brushed aside some of the recession-related worries in the US and Europe, falling oil prices, and raw material pressures on profitability.

Among key concerns for the company has been the impact of weakening of demand in the US and Europe on the heavy commercial vehicle business. The segment accounts for a quarter of Bharat Forge’s revenues. Say analysts, led by Mumuksh Mandlesha of Emkay Research: “Constrained by flat gross domestic product growth expectation, high finance cost and increasing operating costs, there is steep deterioration in the CY23 North America Class 8 production outlook to -6 per cent (versus over 9 per cent earlier), as per Americas Commercial Transp­ortation.”

They expect the downturn to persist in CY24, with an 8 per cent drop in production, due to change in emission norms leading to notable price hikes of over 15 per cent. Class 8 truck net orders have been trending down since February with some recovery in August. Karan Kokane of Ambit Capital Research, however, believes that concerns regarding the business segments exposed to the US market (accounting for 40 per cent of standalone sales) are overdone.

While Class 8 truck order additions hit a five-month high in August, the order backlog for this segment of trucks has remained healthy at 210,000 units (7 months of peak production capacity) providing enough cushion for any near-term headwinds.

The other worry was the impact of falling crude oil prices on the oil and gas segment. From its highs of $120 a barrel in May, the price has come down by about 30 per cent.

The price, however, is comfortably higher than the required levels for the viability of shale gas sector which drives the oil and gas revenues for Bharat Forge. Shale gas rig additions in the US have continued to inch up given the recovery of crude oil prices from Covid lows.

From about 900 rigs pre-Covid, shale gas rigs fell to 250 rigs during Covid and are now at 760 rigs. In addition to the oil and gas segment, the Street will track the aerospace segment, currently contributing about 10 per cent in the industrial segment and where it has added two new customers in the past quarter.

The defence segment is the other growth driver given the new order wins for supplies of advanced towed artillery gun systems as part of the government’s localisation programme.

Brokerages have also highlighted that the energy crisis in Europe would be a big opportunity for Indian forging and casting companies such as Bharat Forge. Satish Kumar and Abbas Punjani of InCred Capital highlight that Germany’s energy woes will unleash a new wave of manufacturing outsourcing on the part of forging and casting industries.

 

Indian firms are already present in the supply chain across Europe and thus, getting incremental orders won’t be difficult for them. Bharat Forge, which is one of the key beneficiaries, is a top pick for the brokerage.

While margins had contracted in the June quarter by 636 basis points due to higher raw material costs and lower utilisation, declining prices of steel and aluminium coupled with improved demand from auto and industrial segments should help offset the raw material pressures.

At the current price, the stock is trading at 21 times its FY24 earnings estimates. Investors can consider it on dips.