Eyeing a recovery

Though Bharat Forge is taking the right steps to counter the downturn, its recovery is a medium-term prospect

Despite the gloomy economic outlook in its key markets and an Rs 46 crore loss in the June quarter, the stock price of Bharat Forge (BFL) has run up 71 per cent from its July lows. The markets seem to have been impressed by the recent announcements of the company on the potential of the non-auto businesses and the board approval for a $150 million equity issue.

The proceeds will be used in funding its three JVs – two with Alstom for power plant equipment and one with Areva to make forgings for the nuclear power sector. The management expects to start production of the Alstom JV in 2011-12 and estimates revenues of about Rs 5,000 crore a year. While the non-auto JVs hold promise and is expected to double its revenue share of the overall business to 40 per cent by 2011-12, the next two years, however, are a big challenge.

Weak exports

The declining graph of auto sales in Europe and the US, which account for more than two-thirds of Bharat Forge’s business, continues to take a heavy toll on the company. Though US vehicle sales are coming off from their lows, they are yet to turn into positive territory. Vehicle sales were down 31 per cent y-o-y in July, 2009 while they experienced a steeper 48 per cent y-o-y fall for the January to July period. European vehicle sales were down 35 per cent y-o-y in June as compared to 37 per cent for the January to June period. The Bharat Forge management does not expect a recovery in calendar year 2009.

Amit Kalyani, executive director, BFL believes that though the rapid fall in sales experienced during the earlier part of the year has been arrested, European and American commercial vehicle sales will see a fall vis-à-vis 2008. He expects a gradual recovery. Analysts estimate that emission norms and government programmes should improve demand. With production centres across the globe working below capacity,the slow down has had a dampening effect on its financials.

Work in progress

Though BFL’s consolidated revenues were down 54 per cent y-o-y to Rs 602 crore on the back of falling exports, they grew 23 per cent on a sequential basis. Exports (40 per cent of sales for Q1FY10) have grown sequentially by 20 per cent though they saw a steep 52 per cent fall y-o-y. Thanks to the improvement in the domestic CV market and better export realisation due to currency movement, Ebidta margins improved to 21 per cent from 15 per cent in the March quarter. The management expects margins to be maintained or inch up with higher capacity utilisation.

While keeping the overseas plants running at optimum levels is the key concern, Kalyani believes that capacity utilisation should touch the 50 per cent in the fourth quarter of the current fiscal on the back of a recovery in the domestic CV business. The domestic capacities are currently at breakeven levels of 30 per cent. While the company is on the right track through cost rationalisation and non-auto diversification, expect pressures to continue in the short to medium term. At Rs 216, the stock trades at 21 times its 2010-11 estimated EPS of around Rs 10.5 and can be considered at sharp falls.