Shares of Bharat Forge Ltd rose by 8% on Tuesday after it announced that its board had approved raising up to $150 million (Rs730 crore) by issuing equity shares or an equity-linked instrument. On Wednesday, the shares corrected by over 5%—the markets’ way of acknowledging that the previous day’s reaction was overdone.
For the week, though, the stock was down 3.2%. It’s not just this week; the company’s shares have been on a roller coaster ride for the past few months.
They rose from the March lows of Rs77.50 to cross Rs190 by end-May, before correcting to the sub-Rs130 levels last month. Then, in less than a month’s time, the stock nearly doubled to the Rs250 levels, before correcting to current levels of Rs219. During this time, the firm has reported weak results for the March and June quarters, and so it’s interesting that valuations have nearly trebled compared with the March lows.
For the June quarter, the company reported a consolidated loss of Rs20.3 crore before tax and exceptionals.
In the year-ago period, the firm had a profit of Rs131.6 crore. Sales more than halved on a year-on-year (y-o-y) basis, with the majority of the pain being felt by various overseas subsidiaries of the company. The Indian unit’s sales grew at a lower rate of 43.7% y-o-y and it reported a profit of Rs16.3 crore before tax and exceptionals.
There has been some excitement about the fact that the performance wasn’t as bad as the March quarter, when the company had a consolidated loss of Rs54.7 crore before tax and exceptionals. All of this improvement has come out in the Indian unit, with sales improving 23% sequentially, and profit margins improving by about 550 basis points. Overseas operations continued to suffer, with revenues falling 25% sequentially, and losses continuing at around 15% of sales.
Graphics: Sandeep Bhatnagar / Mint.
The company’s overseas subsidiaries have suffered immensely owing to the global slowdown and the sharp cuts in auto production. Bharat Forge has gone on a restructuring mode and has written off Rs16 crore in the June quarter as restructuring and redundancy costs. (The losses mentioned above are before accounting for this exceptional item.) These costs will be charged through the year and hence there could be a write-off of Rs64 crore. Note that Bharat Forge reported a net profit of Rs58 crore in the year till March.
Because of the losses suffered on account of the global slowdown, the company has said that it will focus on the non-auto part of the forging business. This segment accounted for about 21% of consolidated revenues in the previous fiscal year and the company intends to increase it to 40% by fiscal 2012. The fund-raising initiative is to finance growth of this segment.
This is the main reason the markets have been apparently excited about Bharat Forge stock in recent months. But there’s a big difference between stated intent and execution. Last month the company said the capacity utilization at its two new non-automative plants has been subdued because of weak market conditions, and that the ramp-up of production at these facilities will be slower than earlier projected.
This is not to say that the company’s non-auto initiatives won’t bear fruit, but as far as the market reaction goes, it seems to be a case of putting the cart before the horse.
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