Higher revenue visibility to drive Bharat Forge's prospects

The Bharat Forge stock has been hitting its 52-week highs on expectations of stronger growth in FY18 and FY19, led by both the auto and industrial segments. Recent quarterly results, including that of the September quarter (Q2), have increased investor confidence. Most brokerages have increased their earnings estimates as well as target prices given the recovery in key segments.

While there are multiple triggers, the company’s Q2 results have been the most recent. Led by a better product mix, especially industrial exports, the company reported better-than-expected performance especially at the operating profit level. Better product mix and improving leverage saw its margins come in at 30 per cent, bearing estimates. Overall revenues were up 48 per cent, led by a 27 per cent improvement in volumes and higher exports. The share of the higher-margin industrial exports segment to revenues more than doubled from 12 per cent in Q2 of FY17 to 27 per cent in Q2 of FY18. The company’s important non-auto customers such as Halliburton, Cummins and Caterpillar are witnessing strong growth, and given rising investments, this should rub off on suppliers such as Bharat Forge. The recovery in the shale gas segment has been sharp and rising crude oil prices should help improve revenues and margins of its customers in this segment.

The other growth engine would be auto (commercial vehicles or CV) exports, especially to the US market. After falling growth over the past couple of years, Class-8 truck order inflows improved 69 per cent year-on-year in the first seven months of FY18. Given the traction in order inflows and higher production since the start of the current fiscal year, analysts at Nomura expect Bharat Forge’s CV exports to the US to grow 15 per cent in FY18 and 25 per cent in FY19. Exports form half of the company’s revenues.

In the domestic segment, the company is expected to benefit from the recovery in medium and heavy commercial vehicles, given overloading restrictions. The company is increasing its supplies to existing and new customers, both in India and international markets, thus gaining share in the passenger vehicles market. Higher orders from the defence, railways and aerospace segments, which are currently small, should help increase revenues from the domestic industrial space.

The company is building a new plant in Andhra Pradesh to manufacture products based on aluminium and other metals, which are expected to help bring down the weight of vehicles, reduce emissions and improve fuel efficiency. The products would cater to the auto, engineering and aerospace segments, among other. While the prospects are bright, the stock which has gained 64 per cent over the past year, is trading at 29 times its FY19 earnings estimates. Buy on dips.