Supply disruptions in key segments could cap gains for Bharat Forge

Muted heavy truck numbers in North American market, passenger vehicle sales impacted too

The Bharat Forge stock could remain under pressure in the near term on the back of supply disruptions both for its truck segment as well as passenger vehicles and moderating crude oil prices. The stock is down about 16 per cent from its highs in November.

Among the near-term negatives are muted heavy truck numbers in the North American market. For the third consecutive month, Class 8 truck orders have shown a decline as compared to the year ago period. For November, truck orders at 9,500 units are down 82 per cent y-o-y and 41 per cent lower than October orders. This is the lowest level for orders for the month in seven years.

However, analysts say the decline in orders are largely due to the lack of component supplies especially semiconductors and not due to demand concerns. Given the uncertainty on the supply situation, truck makers are postponing their purchasing as higher orders could lead to larger backlogs.

Most analysts believe that the supply concerns will impact order activity in the near term but expect a recovery in CY2022. Analysts at Emkay Research believe that the heavy commercial vehicle segment could increase by 16 per cent in CY22  in the North America and Europe regions. In addition to pending orders, growth is expected to be aided by better freight availability and improving transporter profitability, they add.

While there are some near-term headwinds in the export markets, the street expects the domestic truck market to see a revival. Analysts at Nomura Research highlight price hike by Tata Motors, sharp improvement in truck operator profitability index and firm freight rates to boost demand. This is expected to be favourable for suppliers such as Bharat Forge.

Similarly, the outlook for passenger vehicle sales led by lower channel inventory, healthy order book and expectations of economic recovery.

On the industrial segment, though crude oil prices have corrected and dropped below $80, they remain at healthy levels even after the fall. Brent crude prices have been moving up and are currently at $75 a barrel, which should support sales in the segment with fracking activity expected to see an uptick. Among other segments, improvement in the economy and order activity could aid revenues in defence, aerospace, railways and power among others.

While the medium term story for Bharat Forge remains strong, given the near-term headwinds, investors should await a recovery before considering the stock.