BackRisks foreseen to Bharat Forge’s robust revenue growth
At this juncture, while the fallout of the euro zone economic issues is hard to predict, the slowdown in American trucks will hurt exports for auto components from India, if it persists
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Shares of auto-component maker Bharat Forge Ltd have returned 62% in the last one year, zooming past a 9% return by the BSE Sensex and an 18% return by the BSE Auto index. The surge in the stock price was steered by strong sales growth in the North American and European markets, albeit on a low base.
Recent data has sounded the alarm bells on revenue from North America. A Nomura Research report highlights a slowdown in order inflows for Class 8 trucks (the largest size trucks) for the fourth consecutive month in North America. “Order inflows fell 9-25% year-on-year (y-o-y) over the months March to June 2015," says the report, after clocking robust growth in the last two years. This is relevant to Bharat Forge as about 15% of its revenue comes from the North American heavy trucks segment. The concerns are justified as this affects actual production with a lag of two to three quarters.
Meanwhile, passenger car recovery is yet to gain traction in the region. In the March quarter, there was a drop in revenue from the American region’s oil and gas segment, too. This is a division that helped Bharat Forge de-risk from the mainstream auto business.
Further, the European region, which accounts for about one-fifth of the firm’s revenue, looks shaky with the Greece crisis. Analysts say that at this juncture, while the fallout of the euro zone economic issues is hard to predict, the slowdown in American trucks will hurt exports for auto components from India, if it persists. What could partially alleviate these concerns is a sustained recovery in truck sales in India. The domestic market accounts for about 40% of Bharat Forge’s revenue.
That said, the company is still on a strong footing, with operating margin comfortably above 25% in the last few quarters. A lower revenue growth may be the fallout of lower growth in the overseas markets. And this may pull down the rate of profit growth. Note also that in the last six consecutive quarters, the firm has clocked a net profit growth of 60%-plus y-o-y, which may be hard to maintain on a higher base.
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