In recent times, Bharat Forge Ltd’s performance has mirrored that of the Indian cricket team—tiger at home and a lamb abroad.
Baba Kalyani, chairman, Bharat Forge.
In the December quarter, for instance, the local units showed a revenue gain of 21% from a year ago and a 24.8% increase in net profit to Rs 103.1 crore. But the stock continues to languish and trail the auto index of BSE because the firm’s overseas subsidiaries aren’t performing as expected. The overseas units, spread over five countries, account for 40-42% of Bharat Forge’s total revenue.
At the beginning of the year, the firm had said it expected overseas entities to grow revenue by 25% over the next 12 months. In the first nine months of the fiscal, these units recorded 21.3% growth in revenue over a year ago. However, that hides the fact that growth has been tapering off. There is a caveat. Exports from local units grew 29.3% in the December quarter.
In the June quarter, the Bharat Forge’s overseas units showed a sales gain of 38.1% over a year ago. That dipped to 23.4% in the September quarter and to 5.6% in the December quarter. One reason for this is lower capacity utilization in China, the company said. Overall capacity utilization in foreign factories continues to hover at 50-55%, the same as in the September quarter.
That level of capacity utilization is not enough to boost profit. Although the company reported a 10.8% rise in operating profit in the December quarter, profit before tax (PBT) of foreign units dipped 50.7% from a year ago. That came on top of a 17% year-on-year dip in PBT in the September quarter.
For domestic units, however, capacity utilization was around 80%. The resultant scale effect plus a change in product mix and value-addition (like supplying machined parts instead of just raw forgings) meant that Bharat Forge was able to post a rise in operating margins. This metric rose to 24.6% in the December quarter, an increase of 30 basis points from a year ago.
That said, the outlook depends essentially on the auto sector, and particularly commercial vehicles. Growth in this category is moderating locally and the company’s own consumers have guided for 10-12% growth for the industry in the next fiscal. That is a comedown from the 18.6% growth seen so far this fiscal. Sure, exports may bail out Bharat Forge; the consensus seems to be that the US market would grow at 15-18%, while the European market may shrink.
Also See | Quarterly performance (PDF)