Bharat Forge stocks reel under demand pressure on sharp fall in truck sales

Sales of heavy trucks in US, India decline in November; commercial vehicles also register a fall locally

The Bharat Forge stock was down 8.5 per cent, hitting a one-year low, on demand concerns after November sales of trucks both in North America and India — its two largest markets — fell sharply. 

While the preliminary sales data of class 8 trucks in North America indicates that sales were down 15 per cent year-on-year, sales of medium and heavy commercial vehicles (M&HCVs) in India also fell by a similar number. 

Commercial vehicles account for about 45 per cent of Bharat Forge’s stand-alone revenues. 

The fall in North American heavy truck sales to their lowest in 14 months could prove to be a dampener for Bharat Forge, both on account of revenue as well as margin impact, as the region is one of its most profitable. 

On the domestic front, the company will be impacted by the slowdown in truck sales that have fallen for a second month in a row; brokerages have taken a cautious view.

IIFL’s Joseph George and Suraj Chheda say the risk of a sharp slowdown in truck sales, on account of fuel prices and rising interest rates with a tightening credit market, is reflected in the November figures. 

They now see a downside risk to the muted volume growth estimate of 3 per cent, for the second half of FY19.  

What compounds the auto outlook for the company is the ongoing trade war between China and the US. While a resolution should help, the uncertainty will impact the sales to passenger vehicle makers, which has been one of its fastest-growing verticals.

Further, the company’s non-auto revenues could be affected by falling oil and gas prices. 

This vertical was among the key drivers of the firm’s non-auto growth over the last few quarters. 

Unlike other auto component makers, however, the company has diversified its revenues streams with 40 per cent coming from non-auto segments that should de-risk its business to an extent. 

Among non-auto businesses, oil and gas, aerospace, railways, and defence form the key sub-segments.  

Given the expectation of slowing sales in India and overseas markets, volumes and revenues over the next few quarters are expected to be under pressure. 

Given the headwinds, investors should avoid exposure to the stock.