Class 8 truck order decline may impact near-term outlook for Bharat Forge

Brokerages are positive on prospects given strong outlook for oil and gas segment and recovery in domestic CV business

The Bharat Forge scrip slipped 2.6 per cent in trade after Class 8 orders in the North American market saw a 26 per cent month-on-month dip in September. The drop comes after orders for these heavy trucks hit a five-month high in August. Analysts highlight the base effect, tapering of demand situation and acute shortage of components especially semiconductors as the reasons for the dip in orders.

While pent-up demand constrained by lower output could spillover to CY22, the near-term concerns on supply could be an overhang on the stock  as the North American heavy truck segment accounts for about a fifth of the company’s standalone revenues.

The supply shortage could also reflect in the September quarter results. Analysts at Kotak Institutional Equities expect export segment revenues to remain flattish on a sequential basis led by 15 per cent decline in PV segment revenues due to chip shortage issue and 5 per cent qoq decline in CV segment revenues in the September quarter.

Brokerages are however bullish about prospects in the long term. Says Mitul Shah, head of research at Reliance Securities, “The long term outlook for class 8 trucks remains positive with 20 per cent growth in CY21 and CY22.” The growth outlook is being driven by expectation of a healthy CV upcycle in the North American market. The US government’s infrastructure package could keep truck demand elevated.

What could aid the company are the prospects in the oil and gas segment given that crude oil prices have surpassed the $80 per barrel mark. Volatility in the crude oil prices and sharp correction last year had dented performance of the company in this high margin business.

This coupled with an uptick in domestic medium and heavy commercial vehicles which has been less impacted due to the chip shortage than other segments and order flow in the defence business could lead to upgrades for the stock.

While long term prospects from auto and diversified industrial segments are positive, some of the gains are reflected in the stock which has gained over 55 per cent over the last year. Investors can consider the stock on dips for their long-term portfolios.