Strong exports drive Bharat Forge earnings

Bharat Forge Ltd’s (BFL’s) March quarter earnings allayed investor concerns that its reliance on overseas markets would affect performance adversely. Exports, which comprise nearly half of total stand-alone sales, grew 27.7%—several notches higher than the domestic market, which grew 13.8% from a year ago. On the whole, net sales for the quarter grew 18.9% to Rs 977.1 crore from a year ago, albeit only a tad above the immediate preceding quarter.

Much of the export growth came from the US, where commercial vehicle volume grew a strong 50%, as an ageing fleet was due to be replaced. What’s more, the outlook seems strong for 2012, as the present volume is still 30% below the peak recorded in 2006. On the other hand, although European commercial vehicle sales increased by around 10% in 2011, it is expected to remain soft through the current year.

Further, conscious efforts to diversify into non-auto segments such as marine, rail, and oil and gas have paid off, as it accounts for one-third of revenue and minimizes reliance on the auto segment.

The strong volume helped the company offset costs, which rose in absolute terms. As a percentage of sales, manufacturing expenses rose about 100 basis points (bps) from a year ago. A basis point is one-hundredth of a percentage point. But there was a similar decrease in raw material costs. BFL’s stand-alone performance recorded an operating margin of around 25.6%, which was nearly 150 bps higher than a year ago. Operating profit, therefore, rose around 26% to Rs 251 crore for the quarter.

However, not all is well with its overseas subsidiaries. March quarter sales grew just 2% from a year ago, even as operations posted a slim operating margin of around 5.6%. According to the management, a 10% drop in commercial vehicle offtake in Chinese markets led to lower capacity utilization of the units there, which in turn affected the performance of its international operations.

During the quarter, the company charged Rs 70.5 crore (exceptional items) towards impairment of investments in US operations (acquisition was made in 2005). Adjusting for this, net profit for the quarter rose around 25% to Rs 125.6 crore. The full-year net profit at Rs 420.2 crore came largely from stand-alone operations, well-entrenched in auto and non-auto segments.

Naturally, turbulence in the Indian economy in the last two quarters could moderate earnings momentum going forward. The management view of stress in Europe and China implies no near-term respite in overseas operations.

The BFL stock, which trades at around Rs 318, has outperformed the BSE Sensex, as the firm’s growth rates have outperformed the industry average. Besides, the company has a strong balance sheet with a low gearing of 0.8 at the consolidated level and an interest cover (profit/interest) ratio of 6.5. Yet, the stock’s range-bound price over the last three months reflects the concerns for the business over the near term.

We welcome your comments at marktomarket@livemint.com