Bharat Forge: Only partly better

The slowdown in overseas markets persists, so it could be a while before the auto-parts maker is back on track.

Bharat Forge plans to raise up to $150 million (approximately Rs 730 crore) through equity or equity-linked securities to meet long-term capital requirements. Since the stock has done well to rally from its lows — it had fallen to nearly Rs 80 — to Rs 225 levels at present, it’s a good time to issue shares, even if it results in dilution of the equity base by 10-12 per cent.

While the home market for automobiles is showing signs of recovery, the weakness in the overseas markets could continue to impact the auto-parts maker probably for another year. The Rs 4,774-crore company’s revenues came off sharply in the June 2009 quarter to Rs 360 crore, a drop of 44 per cent year-on-year, with exports particularly badly hit (by over 50 per cent). That wasn’t really unexpected given the poor demand in the overseas markets.

In fact, consolidated revenues plunged 54 per cent year-on-year to Rs 600 crore. The weak top line, together with high outflows on interest and other expenses, resulted in the company posting a loss. If the Pune-based company’s revenues rose sequentially — with both domestic business and exports reporting a reasonably good growth — and if the operating profit margins showed a sequential improvement to 20.9 per cent from 14.6 per cent in the March 2009 quarter, it was largely due to some improvement in the core business, favourable currency movements and a higher contribution from the non-automotive parts division. Nevertheless, the domestic commercial vehicles market appears to have bottomed out and the demand for medium and light vehicles has been improving over the past few months.

However, it could be a while before the European and the US truck markets recover; industry watchers believe this could happen sometime in 2010-11 with the European market lagging the US market.

The company has managed to sustain margins at its overseas subsidiaries by restructuring operations but the benefits of these initiatives should come through only next year. So, it’s surprising that the stock has had such a sharp run-up; at Rs 225, the stock trades at over 20 times estimated 2010-11 and is expensive.