Truck segment recovery across markets could sustain Bharat Forge's rally

Rebound in oil and gas vertical, passenger vehicle volume growth are other triggers

The Bharat Forge stock hit its 52-week high on Friday on robust commercial vehicle sales data in the North American market for November as well as on expectations of a recovery in the Indian truck market. The stock has gained 9 per cent since the start of the month adding to the over 60 per cent gains it has notched up over the last six months. 

The immediate trigger for the recent rally is the surge in North American Class 8 truck orders. Preliminary net orders in this heavy commercial vehicle category were at just under 52,000 orders which was up 33 per cent over October and nearly three times the year ago orders. 

Industry body ACT Research which provides this data indicated that the rise was linked to freight rates hitting record levels in the last three months and expected carrier profits to follow on this account. Net orders for November were the third highest ever in the Class 8 category and is also a reflection . Higher orders in this category is positive for Bharat Forge as heavy duty trucks in the North American market account for a fifth of its standalone revenues. 

Similarly, expectations of a recovery in Indian commercial vehicle segment is another positive for the company. Medium and heavy commercial vehicle segment has been the worst affected auto segment over the last few quarters. While FY21 year to date volumes are down 60 per cent over the year ago period, the pace of decline is reducing in recent months, with November sales down by about 10 per cent. 

With freight rates up 4 per cent month-on-month at the start of December and operator profitability showing a cumulative increase of 15 per cent over October to December period, according to analysts at Nomura Research, demand is expected to bounce back strongly in FY22. The analysts are expecting FY21 to end with a volume fall of 33 per cent while FY22 volume growth is pegged at 50 per cent plus rate.

The recovery in the passenger vehicle segment both in India and overseas should also help as the company is gaining market share across segments and clients. Auto accounts for about 60 per cent of Bharat Forge’s consolidated revenues 

In the non-auto segment, the rising crude oil prices should help the company’s oil and gas segment. Crude oil prices were headed for the fifth straight week of gains with Brent crude trading around the $49 mark a barrel. The sharp fall in crude oil prices had led to collapse of the segment revenues for Bharat Forge. Further, a rise in prices could help shale gas producers (key customers of Bharat Forge) and turn their operations viable. 

The company has been looking at growth areas such as renewable energy to make up for the shortfall in the energy vertical. In addition to this, traction in defence business especially artillery gun trials which were delayed due to pandemic could be another potential revenue contributor (opportunity pegged at Rs 1,000 crore annually) in the medium term. 

Given the rising volume across key segments and operating leverage coming into play, Bharat Forge’s revenue and margin trajectory should improve going ahead. Investors with a long term horizon can consider the stock.