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Bharat Forge in acceleration mode

Ram Prasad Sahu / Mumbai 09 Oct 17 | 08:11 PM

The stock of Bharat Forge touched a fresh 52-week high on multiple triggers, both in the Indian and US market segments. Key verticals of its auto and industrial business, be it commercial vehicles, passenger cars or oil and gas, are after many years witnessing higher demand at the same time. The immediate triggers are the sales of medium and heavy commercial trucks both in the US (class 8 vehicles) and in India. The commercial vehicles (CV) business is the single-largest segment for the company, accounting for about 40% of consolidated revenues. CV makers are the key clients of the company and higher sales of trucks translates to increased volumes and margins for the firm.

First the US market. Order inflows for class 8 trucks at 22,100 units were up 62% in September, compared to the year-ago period. At the current rate, order inflows for the current calendar year would be 5% higher than in 2016. While strong sales are a positive, expectations of a further improvement is a bigger trigger. Industry body Freight Transportation Research, which collates the data, believes that orders are set to rise even more in the fourth quarter as strong freight demand and a growing economy spur truck firms to expand their fleets. Analysts at Nomura expect the company to post a 15% growth in CV export revenues, each in FY18 and FY19. Given that the company derives 20% of its standalone revenue from the North American heavy trucks segment, high volumes and sales in this segment will boost revenues. 

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Similarly, there are signs that the Indian medium and heavy CV (M&HCV) market could see higher volume momentum going ahead. After a sluggish start in the current fiscal year, M&HCV sales have grown over 25% each for the months of August and September on the back of overloading restrictions, replacement demand and jump in truck rentals. This trend is expected to continue in the coming months. 

In the non-CV space, strong growth in US car sales in September is also a positive and should help Bharat Forge improve its share in this segment. Car sales, up 6% year-on-year (y-o-y) to 1.52 million, were the highest for the current year. 

In addition to the auto segment, the other key factor is improving crude oil prices, which should reflect in higher orders for the company. Oil and gas revenues had collapsed last year and was responsible for lower non-auto exports of Bharat Forge, but has been improving over the past couple of quarters. In fact, exports to the US had doubled in the June 2017 quarter to Rs 432 crore driven by oil and gas and commercial vehicle revenues.

Though CV is by far the largest segment, analysts at Nomura believe that aerospace, rail, import substitution and the passenger car business should start contributing meaningfully to the top line. The company’s defence segment, too, is expected to do well after it won its first few orders worth Rs 200 crore.

The higher domestic and export growth in key sectors is expected to reflect positively in the September quarter numbers of the company. Analysts at Quant Capital say revenues would jump 45% y-o-y to Rs 1,290 crore on the back of strong traction from domestic as well as the export business across segments. Higher volumes and a favourable mix would translate to margin expansion of 100-150 basis points at the operating profit level, both on a sequential as well as y-o-y basis to 29.8%. 

Overall, profits are expected to rise by over 25% on an average, each in FY18 and FY19 compared to flattish growth to decline in the previous two fiscal years, indicating strong earnings ahead. 

While there are multiple triggers, the recent gains of 15% in the share price since the start of September suggests investors could await some correction for a better opportunity. 

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