Cautious India CV outlook could keep Bharat Forge stock under pressure

On the operating front, margins expanded both sequentially and over the year ago levels
Bharat Forge reported a sequential uptick in revenues in the December quarter (Q3), led by strong growth in the domestic business, which accounts for over 60 per cent of consolidated revenues. 

This came on the back of a 25-per-cent rise in volumes (tonnage). Revenues from the India commercial vehicle (CV) segment grew 49 per cent year-on-year (YoY), led by a pick-up in economic activity. 

Though CV demand is expected to pick up pace with an increase in infrastructure, mining, and construction projects, the management is cautious about near-term prospects, as retail sales were not in line with wholesale numbers. Demand from Europe and the US CV markets, however, remain strong and this is expected to continue, given the orders in the heavy truck segment.

The oil and gas (O&G) vertical rem­ains a drag. Sales in the industrial segment of its international business were down 50 per cent sequen­tially because of weak demand in O&G. 

From a peak revenue of $30 million a quarter, the vertical is now reporting sales of $3 million. The firm is looking at metals and mining, and renewables to offset this fall.

Even as it expects cyclical recovery in its traditional business segments, the company indicated that there could be strong traction in new initiatives such as defence, e-mobility solutions, and aluminium cast­ing business segments. 

In addition to electric vehicle componen­ts, the company expects revenues from the defence segment both in the form of recurring business and fresh projects. 

On the operating front, margins expanded both sequentially and over the year-ago levels. Higher volumes helped even as lower tax incentives, higher power and transportation costs, and lower blended realisations limited margin expansion. 

Realisations hit multi-year lows because of the adverse product mix, led by lower exports and higher proportion of the less profitable passenger vehicle sales. This trend is expected to reverse in the coming quarters, according to the management. 

Given the company’s cautious tone on the India CV business and new initiatives that could take time to yield higher revenues, investors should await consistent growth metrics before looking at an investment in the company.  

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