Sluggish CV sales weigh on Bharat Forge's Q2 performance

A better performance in the second half of this financial year could have a positive impact on the stock

Bharat Forge delivered September quarter performance in line with Street expectations. Overall sales fell 20% year-on-year (y-o-y) to Rs 935 crore largely due to a 30% fall in export revenues. What aggravated the situation for the company is the slowdown in the domestic commercial vehicle (CV) segment, which was exhibiting a strong volume trend till a quarter back. The proportion of domestic and export revenues are about the same for the company.

Domestic sales were down 6.5% y-o-y but the fall was a sharper 12.7% on a sequential basis due to the CV slowdown. While domestic CV sales were flat y-o-y, CV exports were down 28%. CVs are the biggest segment for the company accounting for 55% of overall revenue.

 

Export revenues on a sequential basis, however, were up 10.7% driven by scaling up of passenger vehicle business and recovery in the industrial segment. The higher sequential growth, according to the management, indicates that export woes are bottoming out and there are some green shoots in terms of oil and gas sector especially on the shale gas front.

Though Ebidta (earnings before interest, taxes, depreciation and amortisation) margins fell on by 160 basis points y-o-y, they were up on a sequential basis by 50 basis points to 27%. The sequential gain can be attributed to rationalisation of manpower and fixed costs over the last few quarters as well as cost reduction measures taken earlier which are helping now. Net profit was down 26% y-o-y, but up 4% sequentially.

On the outlook, the company indicated that it is gaining market share in the CV segment in the US and is also diversifying into other segments such as Class 6 and Class 7 trucks. Prior to this, its presence was limited to Class 8 trucks. It expects growth to come back over the next two to three quarters in this segment. On the domestic side, uncertainty on the GST (goods and services tax) front and timing of implementation impacted sales, but the management expect growth in the second half of FY17 to be much higher than the first half.

Bharat Forge has also decided to divest its power joint venture with Alstom (now GE) for about $35 million.

In this backdrop, a higher proportion of analysts has a hold or sell rating on the stock than buy as of now. But any signs of recovery in the CV space as well as in the non-auto exports will be positive for the stock.