Muted outlook, weak Dec quarter results to weigh on Bharat Forge stock

Falling crude oil prices and lower CV demand have dented company financials

A muted outlook and weak December quarter results led to a 3.7 per cent fall in the stock of Bharat Forge. Sluggish demand across segments saw volume in terms of tonnage fall 30 per cent year-on-year (YoY). While weakness was evident in exports, the overall decline in revenues of 36 per cent was led by the domestic segment, which reported a 39.5 per cent fall.

The company indicated that the demand scenario over the next couple of quarters will be soft. While the transition to BS-VI emission standards, which come into force on April 1, is responsible for the uncertainty in the domestic market, it is the weak consumer demand in North America and Europe which is pegging back sales outside India.  

For the quarter, the decline was led by the domestic commercial vehicle (CV) segment. The sharp decline in orders by CV makers and the need to maintain lower inventory ahead of the transition affected the company.

The industrial segment, too, witnessed a sharp correction with reported revenues, especially in the exports business, down over 52 per cent. The correction in crude oil prices dented the demand both in the shale gas segment, as well as related orders from the mining and construction segment. Given the price trends, demand from this segment is expected to remain soft in the near term.

The only bright spot was the passenger vehicle segment, which is the smallest of the three segments and accounts for less than a fifth of the overall revenue. The company posted 9 per cent growth in its revenue. Growth in the segment is expected to pick up from the current quarter.

Weak demand and sub-par utilisation of its facilities meant negative operating leverage, which impacted its operating profit margins. The metric was down over 600 basis points as compared to the year-ago quarter and 170 basis points on a sequential basis. The company believes that cost-cutting efforts and tailwinds on the commodities front should help it improve margins by the second half of FY21.

While the recovery is expected to take a couple of quarters, the company highlighted that the situation is close to bottoming out, with growth expected from FY21. Key triggers for Bharat Forge include the uptick in the aluminium forging, which fetches higher margins, better growth from the passenger vehicle business, and e-mobility solutions, as well as a recovery in its subsidiary financials.