Key verticals to shine for Bharat Forge in 2017

The bottoming out of the US heavy truck segment and rising crude oil prices should boost export revenues

The Bharat Forge stock has gained 10 per cent over the past fortnight as orders for US heavy duty trucks rose for the first time in two years. North American truck orders (class 8) for November were up 18 per cent year-on-year, while over October this was 41 per cent higher. 

This is expected to benefit the company as the North American commercial vehicle (CV) market accounts for 20 per cent of standalone revenues and has been reporting muted numbers. The company has also diversified into class 6 and class 7 trucks and the higher demand for heavier trucks will improve its overall volumes.  

The recent acquisition of US-based Walker Forge Tennessee, a maker of steel and high alloy steel engine and chassis components for customers in the automotive and industrial segments, should give Bharat Forge a manufacturing footprint in the US. The acquisition will aid the process of increasing its market share in the North American market across the CV, passenger vehicle and industrial segments. 

On the oil & gas side, higher crude oil prices should help the company boost its non-auto revenues. The firm had earlier indicated it was witnessing some green shoots, especially on the shale gas segment. Oil & gas was identified as one of the key verticals in the non-auto business a couple of years ago and was expected to generate $100 million in revenues by 2020. However, the collapse of crude oil prices meant that the sales from this stream dried up. This, along with lower US truck sales, was the key reason for its underperformance over the past few quarters. 

While increase in domestic CV sales ahead of the BS-IV implementation from April 1 will be a positive, one of the key domestic triggers for the company would be any order wins in the defence segment by the Kalyani group, the promoter of Bharat Forge. Given that forging components will be supplied by Bharat Forge, the Street will keep an eye out for any defence-related uptick. 

With indications of bottoming out of the North American heavy truck market as well as the higher commodity prices, the stock has re-rated in recent months. At the current level, it is available at 29 times its FY18 estimates. Although the prospects of the company are expected to look up both in the exports and domestic market, the stock is already factoring in a major part of the recovery. Given that the stock is up 33 per cent since August, investors can consider it on dips.