Strong Q1 show, favourable outlook to support Bharat Forge stock

Company's outperformance in Q1 was due to strong exports, margin gains

Better than expected results in the June (Q1FY22) quarter as well as positive commentary on growth led to a 6 per cent jump in the stock price of Bharat Forge. The management indicated that September (Q2FY22) quarter growth would be better than Q1 led by both domestic and export performance which should support the stock price.

The 4 per cent sequential growth in revenues (1.2 per cent on a consolidated basis) was led by exports which grew 25 per cent. The strong exports growth was aided by both the auto and industrial segments and helped offset the 22 per cent decline in domestic revenues. Lockdown in May and restrictions especially in the southern states over a longer period dented growth in India operations. Strong showing on the exports meant that this segment now accounts for 67 per cent of sales as compared to 55 per cent in the March quarter.

Within exports, the class VIII truck demand remains robust with 14 per cent growth in production over the year ago quarter and flattish performance on a sequential basis. The company indicated that the production backlog continues to be strong and orders are robust. The management believes that the stimulus announced by the US government ($1.2 trillion infrastructure bill) would lead to a surge in overall activity; this should support sales of heavy trucks.

In the passenger vehicle business, the company continues to post strong growth and increase in market share. Rising crude oil prices have aided the recovery in the industrial segment which saw a sequential increase of 76 per cent. The segment (shale drilling) is expected to do well if the crude oil prices continue to stay at elevated levels.

While margins have expanded by 300 basis points q-o-q to 28.5 per cent on the back of a favourable product mix and cost reduction measures implemented earlier, the company indicated that profitability would be maintained at these levels. While peak margins are upwards of 30 per cent, higher research and development expenditure may offset the gains on the operating front. Though the company indicated that Q2 growth will be strong, the street will keep an eye on the impact from semiconductor shortages and rising raw material pressures.

Given the favourable outlook and steady margins, investors could take an exposure to the stock on dips for their long term portfolio.