Bharat Forge: Weighed down by lower demand

With N America heavy truck orders at low and non-auto in distress, near-term outlook is muted

The Bharat Forge stock slipped five per cent after a steep fall in orders of class-eight trucks in North America, its key market accounting for 20 per cent of stand-alone revenues. Stand-alone revenues account for 70 per cent of Bharat Forge's consolidated revenue. March's order inflows, according to Freight Transportation Research, fell 36 per cent year-on-year to 15,800 units, the lowest March order inflows in six years.

The situation is expected to be muted as the consultancy expects order inflows to remain below 20,000 units for the next few months. Volumes in this heavy truck segment have fallen for 13 months in a row now, and analysts expect steep production cuts by original equipment manufacturers, given the increasing gap between production and retail sales.

Given the uncertain demand and low freight availability, buying decisions by fleet operators are delayed. Freight is goods that are transported by ships, planes, trains or lorries/trucks. Analysts at Nomura who had recently cut their FY17 and FY18 commercial vehicle volume estimates (to minus 15 per cent and zero, respectively) for the company's North American market, say that given weak economic scenario, a further downside in volumes is likely.

To counter this, the company has been looking at growing passenger vehicle business. From three per cent of exports a year and a half ago, it now accounts for nine-10 per cent. The company is looking to push up its export share to 20 per cent by FY18.

The other step to counter cyclicality and slowdown in the automobile business is the diversification into non-auto space (35 per cent of total revenues). While this is a good move, it might take time to play out and the short term could see some pressure. Spark Capital analysts say the benefits of diversification efforts into new segments and customers, stable to strong growth in new passenger vehicles, steady commercial vehicle volumes (domestic), and domestic non-auto segment (primarily railways) would bear fruit, but with a gestation period.

However, despite the diversification into non-auto business, its overall cyclical exposure is high, say Nomura analysts. The company derives 45 per cent of its revenues from commercial vehicles and 10 per cent from the oil and gas space.

Despite the fall in the stock price, Nomura has a neutral rating (target price Rs 774) given earnings cyclicality. Analysts say the potential upside from the domestic non-auto segment is balanced out due to the risks to exports, which form 65 per cent of stand-alone revenues. Given the pressure in the oil and gas segment and the time required to scale up non-auto revenues, analysts expect exports to grow at a muted three per cent over FY15-18.