Bharat Forge: The bottoming out effect

June quarter results were disappointing; stock gained on expectations the worst is over

Management commentary from Bharat Forge on the bottoming out of sales on a sequential basis and better growth outlook over the medium term helped the stock rise 13 per cent in trade on Friday, even as the June quarter numbers were weak. Bharat Forge, which manufactures forgings and components for a wide range of industries, saw its stand-alone sales decline 19 per cent (Rs 957 crore), while operating profit (Rs 254 crore) was lower by 31 per cent (margins fell 450 basis points to 25.4 per cent), and net profit fell almost 38 per cent to Rs 122 crore on a year-on-year basis. Profit margin contracted due to lower volumes, weak product mix and fall in export revenues. The fall in exports, especially for oil & gas, has hurt the company given the higher value addition component of the business.

The worrying part, of course, was export revenue (43 per cent of standalone sales), which fell 40 per cent. While oil & gas vertical sales fell 70 per cent, commercial vehicle vertical sales were down 33 per cent, given the slowdown in the Class 8 trucks in the US. About 70 per cent of exports accrue from the automobile space. Export revenues were the biggest drag on the standalone sales. The company indicated the outlook for the US commercial vehicle space continues to be muted. Bharat Forge, however, is expected to do better and gain market share given its focus on new product lines and higher outsourcing by original equipment manufacturers. Passenger vehicle exports (though a smaller component) will be a big growth driver for the company. Also, usage of idle capacity owing to muted oil & gas exports for verticals such as aerospace where demand is better, should improve utilisation from 65 per cent currently.

At the domestic level, its sales to commercial vehicle makers grew 32 per cent outperforming the sector’s 16 per cent growth. And, the momentum should remain healthy. The company believes truck sales (for the sector) should grow 15-20 per cent in FY17. Sales to passenger vehicle makers were up only four per cent year-on-year given the regulatory issues (diesel bans) and higher excise duty, which impacted the company’s volumes. However, strong tractor sales, as well as higher spending due to pay commission pay-outs, is expected to keep demand strong.

While the company is confident of business growth across major segments, given the current run rate of Rs 950 crore, its standalone revenue target of Rs 7,000 crore by FY18 looks difficult to achieve. The company indicated that one of the key components of the target was a ramp-up of the oil & gas vertical from $100 million to $250 million. However, revenues from  these are down to single digits. That could put a spanner on the company’s ability to reach the stated number.