Bharat Forge Ltd seems to have hit a sweet spot as far as its domestic operations are concerned.
In the September quarter, the company reported a 27% increase in revenue and 29% growth in earnings before interest and tax (Ebit). On a quarter-on-quarter basis, revenue and operating profit grew by 6% and 3%, respectively. Profit after tax increased by 56.2% year-on-year to Rs 106.4 crore.
Baba Kalyani, chairman & MD, Bharat Forge. Photo: Bloomberg
On a sequential basis, growth continued to be driven by the non-auto segment, which grew by 16% to Rs 329 crore. The segment now accounts for 37.4% of net revenue, compared with 34.2% in the June quarter.
The company management pointed out in a call with analysts that the proportion of non-auto revenue is rising because its non-auto customers are now in a ramp-up mode. This growth augurs well for Bharat Forge, since it not only derisks the business, but also leads to higher realizations.
In fact, volumes grew by just 1.5% sequentially last quarter, but gross revenue rose by 6% owing to 4.5% rise in realizations. The firm says realizations increased because of a change in the product mix and price increases taken to pass through the rise in costs and currency fluctuations.
Margins, however, declined by 50 basis points quarter-on-quarter, indicating that cost pressures continue. One basis point is one-hundredth of a percentage point.
Bharat Forge operates at a capacity utilization of around 75% in its domestic capacities. Its Ebit margins in the first six months of the current fiscal are at 18%, about 75 basis points higher than the year-ago levels.
Yet, while local operations are in decent shape, the company’s overseas subsidiaries continue to languish. Revenue of its overseas subsidiaries fell by 8.7% quarter-on-quarter and earnings before interest, tax, depreciation and amortization fell by 4.8%. At the profit before tax-level, these companies barely broke even.
Revenue of the foreign subsidiaries amounted to over 70% of the revenue of the domestic operations, so they are far from insignificant. While things are much better compared with preceding years, it’s imperative that capacity utilization levels improve considerably from the current levels of 50-52%.
Bharat Forge’s shares have dropped by 27% in the past year, much higher than the 13% drop in the auto index of BSE. Investors are clearly looking for further improvement in the company’s performance.