Bharat Forge: Some US sales' respite amid headwinds

Higher demand momentum in auto, industrial segments crucial both in US, India for growth trajectory

The other issue is the slow moving domestic medium and heavy commercial vehicles (M&HCV) segment, also important for Bharat Forge, being 17 per cent of standalone revenue. Analysts at Nomura say they see structural headwinds to growth due to sharp increases (seven to eight per cent) in prices from April 1, on higher emission norms and strong pre-buying in March, when companies had to liquidate older BS-III standard vehicles' inventory at high discounts. And, due to demand uncertainty after implementation of the national goods and services tax from July.

The near-term outlook for the CV segment is muted, with sharp discounts (after the Supreme Court's verdict on non-registration of BS-III vehicles) and other costs related to recalls and upgrade. These could lead to an almost 200 basis point correction in the margins of M&HCV manufacturers, believes ratings agency ICRA. Thus, 37 per cent of standalone revenue could see some problems.

Analysts say its other businesses, in railways or aerospace, are promising but too small at less than two per cent of revenue to impact or change the company’s financials in FY18. What could help are any orders from the military for the Kalyani group, which will mean an opportunity for Bharat Forge to supply components.
 

While analysts believe FY17 would be a muted growth year for Bharat Forge, FY18 could be better. They point to increasing content per vehicle and market share, which will help the company exceed industry growth over the longer term. Within the non-automotive space, it is to be seen if the shale gas segment, impacted by falling crude oil prices, becomes viable and recovers. This will decide the order flow for this segment.

For the March quarter, analysts at ICICI Securities expect revenue to grow seven per cent over a year before, driven by domestic growth and sequential improvement in export. The operating profit margin is expected to be marginally up at around the 27 per cent mark.

Nonetheless, at the current level, the stock (up 37 per cent over the past year) is trading at 32 times its FY18 earnings estimate and is expensive. Investors could look at the scrip on dips.