Slowing sales in key markets could derail Bharat Forge's growth curve

While truck sales in India and the US are trending down, industrial segment could see pressure

After falling 37 per cent over the last year, Bharat Forge’s stock could see further downside due to a slowdown in the commercial vehicle segment as well as a muted outlook for other key verticals.  

The slowing North American truck sales are a key worry. Order inflows for Class 8 trucks in North America in February at 16,900 units were down 58 per cent over the year-ago period, according to trade body ACT. 

Analysts say while the calendar year (CY19) outlook for US truck production is healthy, given a large order backlog, the sharp fall in new orders hints at a slowdown in CY20.  Bharat Forge is expected to register flat heavy truck volumes in 2019-20 (FY20) and a decline of 10 per cent in 2020-21 (FY21). North American heavy trucks segment accounts for 20 per cent of Bharat Forge’s standalone revenues. 

Slowing medium and heavy commercial vehicle (M&HCV) sales in India are another pain point for the company. 

The sector has been on a downtrend over the last few months on the back of liquidity issues faced by non-banking financial companies, axle load norms, and weak demand.

 

After the Bharat Stage-VI transition, which is expected to lead to a 10 per cent rise in prices, analysts expect domestic M&HCV growth to come down with pre-buying in FY20, followed by weak sales in FY21. The combined M&HCV sales in India and North America account for 36 per cent of standalone sales.

In addition to the headwinds for its business segments, analysts highlight risks on account of adverse US regulations, especially on import tax, which could impact earnings. Exports to the US are expected to contribute about 28 per cent of Bharat Forge’s 2018-19’s standalone revenues.

A stronger rupee (or dollar devaluation) could also hurt export revenues, given that since February the rupee has appreciated over 2.5 per cent against the greenback. Analysts at Nomura believe that a 10 per cent weaker dollar-rupee rate could impact operating profit by 12 per cent and net profit by 14 per cent.

While the company has diversified from the auto segment into industrials which de-risks revenues, the company is facing some headwinds, even in the industrial segment. The US-based Caterpillar, which makes construction machinery and equipment, is witnessing moderation in machine sales. The growth rate, according to CLSA, has come down from 25 per cent over October 17-November 18 to just 9 per cent over the last three months. This, according to them, indicates potentially slower growth for Bharat Forge’s industrial export segment.  

Analysts at the IIFL say growth in the non-auto segment may not be enough to fully compensate for the impact on M&HCV sales of the company. 

While domestic passenger vehicles are not seeing high growth, the defence vertical has been slow on new order flows. The oil and gas segment, which has seen high growth over the last two financial years, is tapering off.

Given that brokerages have downgraded the stock and cut earnings per share estimates by 10-20 per cent for FY20-FY21, investors could expect some more weakness in the stock. With target prices around Rs 430, expect another 10-15 per cent downside from the current price.