Auto component manufacturer and Kalyani Group flagship Bharat Forge Ltd (BFL) has borne the brunt of a prolonged slowdown in the overseas commercial vehicle market. But although the September quarter was nothing to write home about, it offers a cue that the worst is behind the company.
Shipment in tonnage was 15% lower than a year back. In revenue terms, exports plummeted 30% and domestic sales too retraced by 6%. There was no respite on the realization front too, which was 6% lower. Consolidated revenue therefore wound down by 20% to Rs935.9 crore.
One key reason for low exports in spite of the company’s strong brand equity with original equipment makers is its significant exposure to the Class 8 North American truck market, where sales are at the lowest since 2008. In its recent report, Nomura Research said that this is a negative for BFL, as the segment accounted for nearly 17% of its fiscal year 2017 stand-alone revenue.
In spite of these odds, the company has been able to utilize two-thirds of its capacity. Hence, the operating margin at 26.5% is a few basis points lower from a year back.
Analysts believe that BFL’s research and marketing expertise of adding new products and bringing new clients under its umbrella has helped maintain scale of operations through tough times. In an investor conference call after the results were announced last week, the management said it added some clients in the passenger vehicle segment in the domestic market. The uptrend here should be able to at least partially offset the steep decline in the North American belt.
Already the company’s operations have recovered when compared to the June quarter, especially in terms of profitability. This explains why BFL’s stock price has steadily moved up after the quarterly results were announced, notwithstanding a 26% decline in net profit.
Shares of BFL currently change hands at about Rs899 apiece, which is still rich at 22 times projected FY18 earnings. The firm’s ability to increase value addition in its products portfolio will drive margins as the industry turns around. This will then make a strong case for higher valuation.