The auto parts maker is staring at falling demand both in home and overseas markets.
With the three biggest car makers in the US on the verge of bankruptcy and the country slipping into a recession car sales are not exactly speeding along. The story’s not as bad for European auto majors though demand could start to flag even in the best markets there.
The weakening global demand for automobiles will make life difficult for the likes of auto component maker Bharat Forge whose client list includes the top auto manufacturers on both continents. Around 65 per cent of the firm’s consolidated revenues are earned from supplies to original equipment manufacturers on these continents.
What’s more the domestic auto market is in a big slump putting the Pune-based ancillary player in a bit of a spot since 70 per cent of its revenues from the home market are derived from supplies to this space. Already, makers of commercial vehicles (CV) have scaled back production after selling smaller volumes in October and November.
So, even if the Rs 4,752 crore Bharat Forge had a fairly good run in the first half of 2008-09, the second half will be far more challenging. While the company had started de-risking its model couple of years back, non-auto components contribute just about 16 per cent to stand-alone revenues.
The plants at Baramati and Mundhwa, to make parts for marine applications and energy, are yet to run at full capacity –scaling up could take another two years. So it will be a while before the high margin non-auto parts contribute meaningfully to revenues.
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Consolidated revenues for the firm were up a good 26 per cent in the first half of 2008-09, but the net profit stood at just Rs 81 crore after taking into account notional foreign exchange losses to the tune of Rs 158 crore. In the current year, revenues are expected to grow by about 8 per cent over Rs 4,752 crore recorded in 2007-08 while profits could remain flat at around Rs 301 crore.
The stock has underperformed the market with the Street concerned about the firm’s outstanding foreign currency convertible bonds, of $60 million, due to be converted in April 2010, at strike prices of Rs 336 and Rs 384 per share. Also, the company has been unable to go ahead with its rights issue.