Bharat Forge: Stock under pressure, investors need to await growth momentum

Company decides not to give an outlook as customers turn cautious amid worries of a second Covid-19 wave

A muted September quarter, and cautious commentary by the management — especially on the exports front — weighed on the Bharat Forge stock, which shed close to 4 per cent on Wednesday, after having gained 57 per cent since the start of July. 

Though the company was expected to post muted revenues owing to pressure across segments, the 30 per cent decline over the year-ago quarter was more than what was estimated. 
 

The decline was driven by the exports segment, which fell 40 per cent compared to the year-ago level. The share of exports to overall revenues — at 62 per cent last year — fell 10 percentage points in Q2. 

Non-auto businesses, especially oil and gas, were key factors that caused weakness in the overseas business. Given the decline in crude oil prices as well as a muted fracking market, revenues from this segment have collapsed. 

The other key segment was aerospace, in which the pace of recovery was below expectations, and hence near-term outlook remains muted. To offset the fall in revenues in these segments, the firm is looking at alternative high-growth areas, such as wind energy and marine. 

It expects to use current facilities to increase revenues from these two segments 3x over the next one year.

While the ongoing downturn in the commercial vehicle market continues to be an overhang — both in the exports and Indian markets — recovery on a sequential basis has been strong, led by higher volumes, freight rates and pent-up replacement demand. 

Order bookings have been strong in North America, but these have to sustain in the coming months to aid in export growth.

The firm pointed out that the overhang of the US election is, however, over and this should improve decision-making. Customers had so far refrained from giving firm orders, which, coupled with fears of a second wave of infections in key export markets, has led Bharat Forge to be cautious on the outlook front. 

While the domestic medium and heavy commercial segment, which saw a 42 per cent YoY dip in volumes in Q2, has recovered over the past months, the company is unsure of the same being led by the festival season, which casts doubt on sustainability post-Diwali. 

Sustained growth also requires an uptick in the investment cycle, which could boost key demand areas of infrastructure, mining, and construction. Though supply chain and demand have improved, the firm expects full-fledged growth in CVs from FY22 onwards.  

The management highlighted that the firm gained market share, led by its BS-VI portfolio, as well as a faster ramp up. Though it is hopeful of a pick-up in the defence business, the pandemic led to a 5-month delay in testing procedures. 

Given the pressure owing to weak operating leverage, margins were down over 500 bps YoY to 18.8 per cent — lower than Street estimates of over 20 per cent. 

The company continues to cut costs, and these include manpower rationalisation. It is using digital initiatives to maintain continuity, while keeping costs lower. The company also indicated that the changes will take a couple of quarters to reflect on costs. 

Given the cautious tone of the management, investors should await sustained growth momentum, both in the auto and industrial segments, before considering an investment in the stock.