Exports may remain growth mainstay for Bharat Forge

With the domestic commercial vehicle market going through a lean patch posting its worst quarter in three years, it was exports and non-automobile revenue contribution that helped Bharat Forge post good numbers for the December quarter.

Driven by a strong show on the exports front, the company recorded a revenue growth of 23.7 per cent year-on-year to Rs 832 crore. Exports, which accounted for about 58 per cent of sales, surged 54.5 per cent to Rs 480 crore. Purchase of commercial vehicles before the emission norms took effect in 2014 in Europe helped the company report a 90 per cent growth in that market. What helped overall sales grow was also the non-automobile segment (45 per cent of revenues), that jumped 48 per cent year-on-year to Rs 340 crore, led by oil and gas, railways and energy sectors.

While exports were helped by the economic recovery in the US and pre-buying in Europe, going ahead, the Bharat Forge management believes that the replacement demand will be the key for growth in North America while CY14 will be better than CY13 in Europe. The March quarter, however, may be soft, given the pre-buying in the December quarter.

While the management is hopeful of a moderate uptick over the next three-four months, analysts are sceptical. Kotak Institutional Equities has a cautious stance on revenue growth in the near term due to subdued commercial vehicle demand and capex cycle in India.

Despite the poor demand, environment in the commercial vehicle space and muted domestic show, the company managed to improve its operating profit margins. Superior product-mix, better cost control and currency gains saw operating profit grow 54.6 per cent to Rs 215 crore; margins improved 520 basis points year-on-year to 25.8 per cent.

Good operational performance and higher other income helped net profit grow 98 per cent year-on-year to Rs 94 crore for the quarter.

The performance of its subsidiaries all put together was better as the company discontinued the operations at Bharat Forge America and sold its Chinese joint venture stake. The company sold its 52 per cent stake in FAW Bharat Forge for Rs 175 crore. Prabhudas Lilladher’s Surjit Arora believes that exiting a loss-making venture is a key positive for the company as it was a drag on the consolidated financials. The Chinese JV also had a debt of Rs 500 crore, which would get reduced from the company's overall debt burden.

The research firm has a positive view on the company, given its strong free cash flow generation estimated at Rs 800 crore to Rs 900 crore per year over the next two years. The target price for the stock, which is trading at 16 times its FY15 earnings, is pegged at Rs 382 (Rs 362 for the stand-alone business while the rest is for subsidiaries).