Bharat Forge: Weak demand dents performance

Uptick in margins during the quarter stands out amid falling volumes and revenues

A weak industrial segment performance both on the domestic and export fronts impacted the operating performance of Bharat Forge. Revenues for the industrial segment were down 40 per cent year-on-year (y-o-y). With a third of the revenues coming from this segment, the weak show led to overall revenues coming down 12.2 per cent y-o-y. While the international segment is likely to see sluggish demand, the company is hopeful of a pick-up in domestic industry growth on the back of orders from railways, mining, defence and aerospace. It expects demand to improve from the second quarter of FY17.

In the larger auto segment, the Street will keep an eye on the performance of the US trucks segment where the annual volume guidance for CY2016 has been revised downwards by 16 per cent from CY2015 levels of 320,000 units. The US truck segment accounts for a fifth of standalone sales. The positive in the auto segment has been the traction the company has seen in passenger vehicle sales in the US, Europe and South East Asia where its revenues have doubled over the past three quarters. In the domestic side, the company has expanded its market share in its core truck market as sales in the medium and heavy commercial vehicles segment at 28 per cent were higher than the industry sales of 22 per cent. The management expects growth in this space to be driven by scrappage policy, stricter emission norms and operator profitability.

Despite the falling volumes and revenues, the firm managed to improve operating profit margins by 80 basis points over the year-ago period and 130 basis points over the September 2015 quarter to 31.4 per cent. The operating profit margins at the standalone level were higher on the back of better product mix, cost control measures and lower raw material costs. The firm’s management indicated there was scope for further expansion on the basis of cost reduction, productivity increase, value addition and better top line growth. The margin improvement helped the stock end 1.33 per cent higher at close, while the broader markets ended in the red.

  Margins of its international subsidiaries, however, disappointed due to one-off expenditure on refurbishment and maintenance. While operating profit of the international business was down 29 per cent y-o-y, margins were down 160 basis points to 4.3 per cent. The management expects these to improve going ahead to levels of 6.5 per cent witnessed in the September quarter of FY16.

While Bharat Forge delivered results below expectations and the outlook for the industrial segment continues to be weak, the company has stuck to its FY18 standalone revenue target of Rs 7,000 crore, which will give confidence to the market. However, for it to achieve the target, the programmes associated with the ‘Make in India’ initiative as well as faster growth in its core auto market has to play out.