Bharat Forge: Earnings cut on weak exports

Robust domestic sales of medium and heavy commercial vehicles could provide some cushion

The Bharat Forge stock shed 2.4 per cent on Thursday on export worries, both on account of declining truck sales in the North American market and falling industrial demand globally. This, coupled with 49 per cent stake sale in its defence subsidiary, Kalyani Strategic Systems, to promoter group, has not gone down well with the Street.

However, the reason most analysts have cut their revenue and net profit estimates is the slowdown in the Class 8 truck segment in North America, which contributed 23 per cent to sales in FY16. In the first half of the calendar year, Class 8 truck volumes are down 42 per cent over a year, with analysts expecting them to be down 25 per cent for the full year. This, coupled with flat truck sales (M&HCV; medium and heavy commercial vehicle) in Western Europe and weak capital expenditure (capex) in the developed world will exacerbate the top line pressure for Bharat Forge, believe analysts at Morgan Stanley.

The other moving part is industrial exports. CLSA analysts say Caterpillar’s (US-based $10-billion conglomerate) monthly retail sales is a leading indicator of Bharat Forge’s industrial exports and this number is declining. This suggests continuing pressures especially in areas such as mining, oil and gas and construction.

The two segments form half of the company’s standalone exports.

The fallout of a weak export outlook is downside risk to margins, which the management has guided at 28-30 per cent. Analysts say with export share of revenue expected to fall from 57 per cent in FY16 to 49 per cent by FY18, margins could come in at the lower end of the forecast.

The sale of stake in the defence subsidiary to the promoter group is also a negative surprise, according to CLSA. While Kalyani Strategic was not making any profits, there were hopes some defence opportunities could fructify in the coming years. However, a section of analysts also believe the forgings opportunity would still come. The jury is out on this.

The bright spot is the domestic M&HCV space, up 20 per cent over the past few months. Bharat Forge, being the key supplier to automobile makers, should benefit through higher volumes. Improving tractor sales is also positive.

Further, an improvement in the domestic industrial segment should give a boost to the non-auto part of the business, 35 per cent of revenue.

Overall, most analysts have cut their earnings estimates for FY17 by at least 10 per cent, largely due to concerns on exports, which will remain an overhang in the near term.