Fresh initiatives and business mix shift positives for Bharat Forge stock

Topics Bharat Forge

Bharat Forge gained about 3 per cent on Monday on expectations that product diversification and building new revenue streams will help de-risk its business over the medium term. The company has plans to invest Rs 1,500 crore- Rs 1,600 crore over the next couple of years towards building its capacities across key geographies of India, the US, and Germany, especially in areas such as aluminium forging, transmission products, and e-mobility products. 

In the non-auto space, the company is planning to expand its defence and aerospace revenues two folds from the FY19 levels of Rs 480 crore.

The company has invested in companies which are suppliers or makers of EVs, such as Tork Motors, Tewa, and Refu Electronik. While Tork Motors plans to launch an e-bike in the March quarter of FY20, Tewa Motors provides electric powertrain solutions for commercial vehicles (CVs) in the 7.5-14 tonne category. 

Finally, the company is working on electric powertrain-related equipment as part of a joint venture with Refu Electronik. Bharat Forge is expecting as much as a fifth of its overall revenues in the long term to come from these investments and new product areas.

The focus on new areas would mean that the revenue mix of the company over the next five years is expected to shift from commercial vehicles and industrial segments (currently 44 per cent each) to passenger vehicles and new initiatives. The share of the larger segments is expected to come down to 25-30 per cent, helping the company move away from its cyclical segments.

While these are positives for the company, in the near term, it has its task cut out given the slowdown in the CV space, both in the US and India. CVs is the single biggest segment for the company and given the domestic demand woes and falling sales graph of class 8 trucks in the US, the company sales and margins will be hit sharply in the coming quarters. 

The other key business of oil and gas remains subdued given the muted demand for fracking products and increased operating efficiency of the existing fracking operations.

While the stock is trading below its historic price-to-earnings averages, investors should tread with caution given the slowdown in its key segments and the gestation period for its new businesses.

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