Export rebound, defence to sustain growth trajectory for Bharat Forge

Margins and cash flows to remain at elevated levels on operating leverage, minimal capex

The Bharat Forge stock gained nearly 8 per cent to hit a 52-week high after the company posted better-than-expected financials for the March quarter. The management commentary which highlighted multiple growth drivers across verticals over the medium term also added to the positive sentiment for the stock.

Powered by growth across segments, the company reported a 48 per cent y-o-y uptick in revenues with domestic and exports contributing equally to the sales performance. The street had pegged the growth in the 20-30 per cent range largely driven by the commercial vehicle portfolio.

While the year ago growth is significant, it is the export performance on a sequential basis which surprised the street. While the domestic business grew by 10 per cent q-o-q, exports jumped 42 per cent. The company indicated that the same was driven by a 90 per cent growth in the industrial segment with incremental gains coming from the passenger vehicle space where sales were at all-time high levels.

One area of improvement within the industrial segment has been the oil and gas space with demand coming back on rising crude oil prices. From a peak of Rs 1,000 crore revenues on an annual basis, the segment had seen a collapse for the company denting the industrial export pie.  

In addition to this, the strong class 8 commercial vehicle orders in the March quarter also helped. However, after consistently staying over the 40,000 units per month for six months till March 2021, orders have started to trend down over the last couple of months with May orders at 22,900. While underlying demand remains strong, the company indicated that the same is due to chip shortage and the situation should improve in another two months.

Over the medium term, the US government’s $6 trillion budget with focus in multiple areas including transportation is expected to boost demand for commercial vehicles (CV), according to the management. This should translate to higher growth for the segments the company caters to within the CV space. Growth for the India truck market however is expected to be weak in the near term with recovery expected by the second half of the current financial year.

With demand improvement in export market, higher utilisation and improving mix, operating profit margins improved 310 basis points on a sequential basis to 25.5 per cent. The improvement in margins was achieved despite higher logistics costs which have move up sharply. Profitability of its international subsidiaries have also improved from 5 per cent three years ago to double digits (10 per cent) now. The company expects the trend to sustain and cash flows to improve with lower fixed costs, improving product portfolio and production scale up of aluminium forging facilities.

While the India auto revenues will see some headwinds in the near term, the prospects for the  industrial and defence segment offers support. The company has acquired Sanghvi Forgings which will help it tap growth opportunities in the infrastructure and renewal energy space.

With Kalyani Strategic Systems now a 100 per cent subsidiary, defence projects is the other growth area. The company is expected to benefit from the recent government order and setting up of greenfield units with investment of Rs 240 crore over the next two-three years.

While the medium term prospects are sound, there could be near-term headwinds for the commercial vehicle segment. This coupled with the sharp gains post Q4 results indicates that some benefits are factored in. Investors should await better entry levels into the stock before considering investment.