Recovery in US commercial vehicle sales to support Bharat Forge's revenues

Some of the gains could be offset by weak India business and the oil and gas vertical

Bharat Forge has gained over 22 per cent since the beginning of August on signs of recovery in Europe and the US, and of medium and heavy commercial vehicle (CV) sales. Expectations of orders from the defence sector, for artillery guns especially, also helped boost sentiment.

Brokerages have highlighted some improvement in Indian passenger and commercial vehicles market, which could help improve supplies to automakers. 

The immediate trigger for the company would be the increase in heavy duty truck orders (Class 8 trucks) in North America, which account for a fifth of its standalone revenues. These orders were up 65 per cent in September over August, and 160 per cent compared to the year-ago period. At 32,000 units, this was the highest since October 2018.

Brokerages expect this positive trend to continue. According to industry body FTR, the expectation of economic and freight recovery is leading to higher orders, which are a combination of replacement demand and demand growth in areas where capacity is tightening.

The other positive is the expectation of defence orders after the Indian government placed 101 items in the negative list for imports, including artillery guns. The company has four platforms for artillery guns. Given the requirement of over 1,600 towed artillery guns, analysts at ICICI Securities estimate the opportunity to worth Rs 23,400 crore.

Given the government procurement, net working capital requirements tend to be higher, though margins above 25 per cent levels are healthy. Bharat Forge’s share of the orders, execution and progress, given budgetary constraints, could impact the company’s prospects. 

However, the firm could also face headwinds in domestic CV sales and the oil and gas vertical. Though automakers have reported better-than-expected wholesale volumes on a low base, retail sales remain weak. Analysts at Nomura Research say fleet operator profitability has worsened further as freight rates fell 4-5 per cent, despite a 2 per cent fall in diesel price. Additionally, challenges related to availability of finance and weak economic activity could keep near-term demand weak. 

Muted crude oil prices are expected to keep the firm’s oil and gas vertical under pressure as shale gas operators, who are clients, struggle to remain viable. While Bharat Forge is making efforts to increase the non-auto pie with contributions from power, aerospace and rail, revenues are expected to scale gradually.

Though the recovery in Class 8 trucks is positive, investors should be cautious given the lack of clarity on pickup in the India business, weak oil and gas outlook and lack of traction in other non-auto businesses. 

The September quarter will reflect sequential improvement, but sales and operating profit are expected to fall by 23-33 per cent, compared with the year-ago period.