Higher exports to drive revenue for Bharat Forge

Rebound in non-automobile segments holds key

The Bharat Forge stock jumped 2.3 per cent on Thursday after the sales of North American Class 8 trucks jumped 50 per cent year-on-year in August (14 per cent over July).

Industry body FTR Transportation Intelligence had reported that the Class 8 category, the heaviest segment among trucks, received orders for 20,700 units.

Truck sales have been moving north since January, signalling a recovery after 24 months of falling figures. Sales of North American commercial vehicles account for 20 per cent of Bharat Forge’s standalone revenue and is one of its most profitable segments.

Another trigger is passenger vehicle sales. It contributed 12 per cent to FY17 exports and is gaining traction among global carmakers. The company expects more orders, led by value-added components such as machining, higher demand from lightweight components, as carmakers move to manufacture lighter vehicles, and new products for hybrid and electric vehicles.

In the industrial segment, oil & gas is seen as the primary revenue growth driver. Despite moderating crude oil prices, falling cost of production in the US shale oil industry has made the business viable, enhancing prospects for component suppliers. With rig counts increasing, the company is expected to receive more orders for the shale-fracking pump parts it makes.

On the domestic industrial business, growth is coming from the orders placed by PSUs under the ‘Make in India’ initiative. A recent government notification mandates a specific domestic procurement proportion for all orders by PSUs under the petroleum ministry. Analysts at JM Financial said Bharat Forge would be a prime beneficiary, given the high capex (capital expenditure) intensity of the oil & gas sector, with Oil and Natural Gas Corporation’s capex outlay alone pegged at Rs 30,000 crore for FY18. Though railways, aerospace and defence contribute less than five per cent to the company’s revenues, they will emerge as the key growth drivers once orders flow in. Bharat Forge is also looking at acquisitions to improve its revenue share from the industrial segment, with the management indicating an interest in acquiring PSUs such as BEML (Bharat Earth Movers Ltd). Given BEML’s presence in railways (Metro projects), defence and mining and construction, the acquisition will boost Bharat Forge’s order book and market share.

However, the muted performance of the domestic medium and heavy commercial space (M&HCV) remains a concern area. Barring August, M&HCV sales have been sluggish on account of weak demand. While the first half of FY18 is likely to be subdued, higher replacement demand and stronger festive season-led orders could reverse the sales trends for domestic trucks.