Investors should wait as muted outlook to cap upside in Bharat Forge

Investor expectations in Bharat Forge, which had a strong FY19, have to be tempered, given the cautious near-term outlook for the company. The management outlined demand worries in the current quarter (June quarter) in the domestic and the overseas markets for auto and industrial segments. While there is a slowdown in the commercial vehicle segment in India and moderation in Class 8 truck orders in the US market, there are headwinds for car sales globally. Global economic uncertainty, volatile crude oil prices and issues related to shale transportation are expected to impact production. 

Lower volumes for the commercial vehicle sector in recent months are reflected in the 4-6 per cent fall in shipment tonnages for the company's domestic operations. Significant inventory due to revised axle norms, delay in purchase decisions ahead of the election, weak freight markets, and tight financing markets were responsible for the slowdown. Despite the near-term weakness, the Street is expecting some revival in the segment on the back of a pick up in infrastructure activity and pre-buying ahead of the implementation of BS VI emission norms from April next year. The company expects to benefit from value growth during the technology transition to the new norms. 

The other worry for the company is the slowdown in the Class 8 commercial vehicle orders in the US market. Orders in April were half, as against the year-ago period, and the lowest in three years. This is the third consecutive month that they have slipped below 20,000 units. The company expects orders to stabilise in the second half of the year. Revenues in the company's defence and aerospace segment doubled over the last year. While scaling up of defence business is slow and is tied to government approvals, the company is hopeful of more orders going ahead. 

Though the stock gained over 9 per cent intra-day on record annual revenues and profit, the stock corrected a bit to end 6.7 per cent higher.  Investors should wait for consistent growth before taking an exposure to this stock.