Bharat Forge faces earnings downgrades

To raise revenues from aviation, railways and increase exposure to passenger vehicle segment

Slowdown in US truck sales, oil and gas and mining sectors, which constitute about 40 per cent of its standalone revenues, have led analysts to cut Bharat Forge’s earnings estimates. Though the management has stuck to its FY18 target of Rs 7,000 crore in standalone revenues, given the slowdown in key verticals, analysts are not sure and feel the company will fall short and achieve about Rs 6,000 crore. With FY15 revenues of Rs 4,500 crore, the company will have to grow 20-25 per cent annually to hit the Rs 7,000-crore target in the next couple of years. Standalone revenues account for 70 per cent of consolidated revenues.

The company has outlined areas which will drive its growth over the next three years, including passenger car forging revenues, aviation segment and import substitution projects of Indian Railways.

While analysts are bullish on the long-term prospects and structural growth story, the near-term bearishness has translated into analyst downgrades resulting in five per cent cut in consolidated earnings over FY16-18.

Following Tuesday’s concal with investors and analysts, the stock has fallen over four per cent on Wednesday to hit its 52-week low of Rs 772.85, to close at Rs 793.05. The Street’s concern in the near-term includes the slowdown in the North American heavy truck market, which accounts for a significant 20 per cent of its FY15 standalone revenues. Order inflows for class 8 trucks in North America fell by a steep 59 per cent in November. Order inflows have now declined for nine consecutive months in that market. Analysts at Nomura who have already cut their North American commercial vehicle volume growth estimates (for FY17 and FY18) to no growth or fall in growth believe that there could be further downsides to even these low estimates. The management has indicated that the US heavy truck sales will fall by about six per cent in FY17. The earnings downgrades and cut in earnings per share over FY16-18 is largely due to the muted growth estimates for the US heavy truck forging market.

The couple of bright spots are the aviation and defence sectors. With tenders for $5 billion worth of orders for defence systems to be floated shortly, this is another area which could translate to an opportunity worth about $125 million annually for forging components in the next decade.