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Bharat Forge stock faces earnings pressure on multiple concerns

Fall in truck volumes and pressure on non-auto segments are the negatives

bharat forge
Ram Prasad Sahu Mumbai
Last Updated : Jan 09 2019 | 1:29 AM IST
Auto component companies such as Bharat Forge, Motherson Sumi and Ramkrishna Forgings, which cater to the North American heavy truck market, will be impacted by the slowdown in volumes that have declined 42 per cent year-on-year in December 2018. After hitting a high in August last year, Class 8 truck volumes in the North American market are down for the second consecutive month and are among the lowest levels in nearly two years.  

The segment is critical for players such as Bharat Forge as it accounts for 20 per cent of the company’s standalone revenues and is among its more profitable segments. Motherson Sumi has an exposure to the US market through its subsidiary PKC. 

The company has 62 per cent market share in the North American heavy duty trucks segment, and is expected to contribute about 7.5 per cent to the company’s FY19 consolidated revenues. For Ramkrishna Forging, exports account for about 30 per cent of revenues and of this the North American market accounted for nearly 80 per cent. 

Analysts believe there could be a downcycle ahead given the rise in order cancellations and this will impact revenues in the coming quarters. For Bharat Forge, the slowing truck sales in North America is not the only concern. It has been hemmed in by falling medium and heavy commercial vehicle sales in the domestic segment as well. After posting a 25 per cent growth year on year over the last nine months, M&HCV volumes fell 21 per cent in December and the trend is expected to continue given higher borrowing costs, increased running costs and relaxation in axle load norms. Domestic and export revenue from trucks account for 40-45 per cent of Bharat Forge’s standalone revenues.

The sharp correction in crude oil prices will also impact the forging company’s revenues as this was one of the fastest growing non-auto segments. Analysts at CLSA who have downgraded the stock believe that the industrial export segment, which forms 25-30 per cent of Bharat Forge revenues, has high exposure to oil & gas and other commodities. The segment has seen a strong cyclical recovery in the last two years, but the recent fall in commodity prices is clouding the outlook. Further a depreciating currency was a positive for the company given large exports but the recent recovery in the rupee will also mean limited gains on the currency front. 

Given the multiple headwinds, analysts have cut Bharat Forge’s earnings by 16-24 per cent over the next couple of fiscals as they believe that the company is at the start of a downgrade cycle.

Given the pressure on earnings (profit growth of just 13 per cent over the next couple of years), analysts at Nomura believe that the stock, which is down 22 per cent since the start of November, is expensive at over 16 times its FY20 earnings estimates. They however find Motherson Sumi’s valuations at 18 times FY20 estimates attractive as the company is expected to post a 22 per cent net profit growth over the FY18-21 period. Given the pressure on volumes across all segments in the domestic auto market and select segments in key export markets of the US and EU, investors should await for a demand uptick before taking an exposure to large auto component makers.


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