Downgrades due to Covid-19 to keep Bharat Forge stock under pressure

Stock down 5% on weak truck and oil and gas outlook

Bharat Forge has witnessed multiple downgrades because of the impact of the Covid-19 pandemic on two of its key businesses — medium and heavy commercial vehicles (M&HCVs), and oil and gas. The segments account for half its standalone revenues. While most analysts had expected a recovery in the second half of 2020-21 (FY21), the pandemic and the disruption caused by it are expected to push any recovery to 2021-22. The company, which is expected to end 2019-20 with a revenue decline of 26 per cent year-on-year, could see a similar fall in revenues even in FY21. Earnings estimates for FY21 have also been cut by over 60 per cent.

The key near-term headwind for the company would be a delay in the revival of the truck business. Truck sales in India — which have been in the slow lane — are expected to witness steep decline in March. Though there is negligible Bharat Stage-IV truck inventory, cancellation of orders and the slowdown caused by the 

Covid-19 pandemic would delay the revival of private capital expenditure and consumption, hampering demand for trucks.

 

 

The recovery in Class 8 trucks orders in the North American market from November last year, too, can see reversal. From an initial sale estimate of 240,000 Class 8 trucks for CY20, there is apprehension that offtake will reduce by up to 15 per cent. The slowdown in European trucks and car sales, too, will hit the company’s revenues.

The other impact for the company is likely to be in the non-auto or industrial segment. Within this, the oil and gas segment, which accounted for about 18 per cent of revenues in 2018-19, has shrunk to a third. Crude oil prices had recently hit an 18-year low on worries that the impact of the pandemic could be prolonged and this would keep oil prices subdued. Bharat Forge caters to shale gas firms in the US and muted oil prices have made operations unviable.

The muted outlook has weighed on the stock price, which fell 5 per cent on Tuesday, even as the front line indices were up by nearly 4 per cent. Positives for the stock, as compared to 2008, are low leverage and a more diversified business model, which may help when demand bounces back.