 "Bharat Forge: Key segments under pressure")
The Bharat Forge stock has shed 25 per cent over the past month, to its lowest levels this year, on worries of a slowdown in heavy-commercial-vehicle sales in the North American market, as well as non-automobile segment demand. Bank of America-Merrill Lynch (BofA-ML) de-rated the stock on Tuesday, due to weaker non-auto demand and expectations of a slowdown in the US heavy truck market in 2016.
Order inflows for heavy commercial vehicles (class eight trucks) have declined 18 per cent year-on-year (y-o-y) in the March-to-August period, with August marking the sixth straight month of decline. Order inflow is the key demand indicator and affects production, with a lag of two to three quarters. Thus, while the current order book remains strong, at five times the production, slowdown in order inflows could pose a risk to sector production levels in 2016, says Kapil Singh of Nomura. North America is a key market for Bharat Forge and the heavy trucks’ segment there accounts for 20 per cent of its stand-alone revenues.
While the company will benefit from rupee depreciation and lower commodity costs, part of it will be hit as it will have to pass on some of the benefits to customers.
Exposure to segments that are cyclical in nature remains high, with 45 per cent of its revenues coming from commercial vehicles and 10 per cent from the oil and gas segment. The cyclicality of its earnings is the main reason the price-to-earnings ratio of 20 times for FY17 is beyond the comfort zone for Nomura. While there have been downgrades recently, 75 per cent of analysts still have a buy rating on the stock, given the company’s record of execution, scale, and strong management, and exposure to the emerging defence sector.
It is important for order inflows to rise if the stock is to trade at higher valuations. The stock could see pressure in the short term. Long-term investors might want to use the corrections for a better entry point.
Order inflows for heavy commercial vehicles (class eight trucks) have declined 18 per cent year-on-year (y-o-y) in the March-to-August period, with August marking the sixth straight month of decline. Order inflow is the key demand indicator and affects production, with a lag of two to three quarters. Thus, while the current order book remains strong, at five times the production, slowdown in order inflows could pose a risk to sector production levels in 2016, says Kapil Singh of Nomura. North America is a key market for Bharat Forge and the heavy trucks’ segment there accounts for 20 per cent of its stand-alone revenues.
While the company will benefit from rupee depreciation and lower commodity costs, part of it will be hit as it will have to pass on some of the benefits to customers.
Exposure to segments that are cyclical in nature remains high, with 45 per cent of its revenues coming from commercial vehicles and 10 per cent from the oil and gas segment. The cyclicality of its earnings is the main reason the price-to-earnings ratio of 20 times for FY17 is beyond the comfort zone for Nomura. While there have been downgrades recently, 75 per cent of analysts still have a buy rating on the stock, given the company’s record of execution, scale, and strong management, and exposure to the emerging defence sector.
It is important for order inflows to rise if the stock is to trade at higher valuations. The stock could see pressure in the short term. Long-term investors might want to use the corrections for a better entry point.