Bharat Forge: Headwinds in domestic CV segment offset positive US growth

A strong demand for North American class 8 trucks has turned out to be positive for Bharat Forge. Factors such as an uptick in demand for the heavy duty trucks and a revival in oil and gas-related orders are expected to boost the company’s export revenue for the June quarter (Q1) by 53 per cent year-on-year (y-o-y).

Orders for class 8 trucks increased 38 per cent y-o-y in June to 17,600 units. This comes on the back of five months of double-digit growth on a weak base.

According to Shyam Sundar Sriram and Vivek Kumar of JM Financial, a healthy order backlog amid rising truck orders will translate into a significant pick-up in production volumes in 2018. Production lags order inflows by six-eight months. A healthy order book is important as the North American heavy truck segment contributes 20 per cent of Bharat Forge’s standalone revenue.

Analysts at Nomura have factored in a 15 per cent growth in commercial vehicle (CV) exports in FY18 and a 25 per cent growth in FY19. An uptick in truck volumes is positive (indicates a pick-up in economic activity) and augurs well for passenger vehicles and industrial exports to the US.

The challenge, however, is in the domestic commercial vehicle segment.

Analysts at Nomura said there were structural headwinds to growth due to sharp (up to 10 per cent) increase in price from April 1, 2017, on higher emission standards, pre-buying in March, demand uncertainty and efficiency gains after the implementation of the goods and services tax from July 1.

Domestic medium and heavy commercial vehicles (M&HCVs) are expected to contribute about 16 per cent to the company’s standalone revenue in FY18.

Analysts expect the industry’s M&HCV volumes to decline this financial year. But, Bharat Forge is expected to outperform the sector or put up a flat show or grow marginally on the back of higher content per vehicle and value-added components. While the company’s sub-segments such as railways, aerospace and defence are also expected to contribute to the top line, they would be gradually scaling up over a period of time. Also, it is too small a contribution (less than 5 per cent of revenue) to offset the domestic CV pressure.

The near-term trigger for the market is the June quarter results. Analysts expect the firm’s standalone revenue to grow 12 per cent over the year-ago period. One would also watch out for the management’s outlook on the domestic CV market and timeline for recovery. Given the market share gains, any correction in the stock price would be a good opportunity to buy.