Pune-headquartered manufacturer of forged and machined auto components has been riding the wave of revival in the auto manufacturing segment. This is evident in the firm’s share price which has rallied over three times since early August last year – from Rs 195 levels to Rs 795 now. In fact, since April 1, 2014 to September 20, 2014, the stock price has gone up by over 100%.
Bharat Forge is among handful of companies in the diversified auto ancillary space that has seen a good uptick on demand side.
“Export demand is firing on all cylinders, courtesy of non-auto demand in key export markets in the energy and utilities space, combined with a recovery in the US heavy duty CV (commercial vehicle) market. At present, the company is benefitting from an industrial recovery in the US. In terms of domestic demand, we are close to a much-awaited recovery in the CV cycle, with favourable base led high growth set to reflect in the monthly numbers pretty soon,” said Basudeb Banerjee and Saksham Kaushal of Antique Stock Broking in their report.
Revenue growth for the company over the last year has come on the back of higher exports which for the June quarter constitute 56% of its standalone revenues of Rs 964 crore. After bottoming out in March quarter of 2013, export revenues have grown steadily, with average growth in the last three quarters ending June 2014 at 52%. Export growth in the last few quarters have been driven by higher sales in the North American market, both in CV as well as industrial segments. Strong pre-buying in the heavy trucks segments in the December quarter of 2013 ahead of the new emission norms implementation in Europe helped sales in that geography.
“Although we operated at sub-optimal utilisation levels through FY2013-14, it was one of the better years in terms of performance in the history of Bharat Forge,” said Baba Kalyani, Chairman, Bharat Forge in the company’s annual report.
While exports have been the mainstay for revenue growth, domestic revenues (sales in India) have seen a downtrend with average net sales under Rs 400 crore a quarter over the last five quarters. After posting Rs 2,052 crore revenues in FY12, domestic revenues have been sluggish in FY13 as well as FY14 posting Rs 1,500 crore in both years.
The flattish growth was due to its dependence on the medium and heavy commercial vehicle segment which is facing severe downturn with volumes down 21% in FY14. Going ahead, a recovery in the CV segment coupled with progress of its non-auto business should see domestic revenues catch up. Since domestic revenues account for about a third of consolidated sales, a recovery will boost overall numbers of Bharat Forge. Investors will also keenly watch the progress of the company’s joint venture with Alstom to manufacture equipment for the power sector. This venture is expected to be operational next year and has orders worth Rs 5,500 crore.
With strong revenue growth and higher realisations, margins too have been looking up touching a record high number of 29.4% in the June 2014 quarter on the back of an improved product mix, favourable currency and increased utilisation. Analysts at Standard Chartered Securities expect margins to stabilise at 28% levels on the back of operating leverage due to increased utilisation, value added components in the auto business and faster growth in non-auto business. The proportion of non-auto business, which fetches higher margins, constitutes about 46% of revenues as compared to 39% a year ago.
Given the revenue growth and improving margins, net profits are likely to triple by FY15 from FY13 number of Rs 247 crore. The stock has already been re-rated making investors richer three times in a little over a year’s time and at current price of Rs 795 trades at 19.6 times its FY16 estimated earnings. Most of the expected gains going ahead seem to be factored in the current price.
The management has also chalked out an aggressive road going ahead. Kalyani says that from 2004 to 2014, the company’s industrial segment has witnessed a revenue jump of nearly 10 times - from around $27 million in FY 2003-04 to around $230 million in FY 2013-14. “The industrial segment has grown from 21% to 41% (of revenues). The company aims to double this revenue in the next 4 to 5 years to around $500 million. This will create five different verticals across oil & gas, power, rail & marine, construction & mining and aerospace each contributing around $100 million,” he said.
