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Good results, but growth concerns weigh on Bharat Forge shares

Good results, but growth concerns weigh on Bharat Forge shares
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First Published: Tue, May 24 2011. 11 02 PM IST
Updated: Tue, May 24 2011. 11 02 PM IST
Bharat Forge Ltd recorded a strong March quarter performance led by revenue growth across the board—in domestic and international automotive markets as well as the non-auto business. Stand-alone net revenue for the quarter rose 46% over the year ago.
On the domestic front, the firm rode the commercial vehicles boom. Likewise, European and US sales, each of which account for about one-fifth of the stand-alone revenue, forged ahead as the company added new products when demand for trucks was just looking up in these markets.
Also See | Forging ahead (PDF)
Even on a consolidated basis, revenue for the quarter was up 43% from the year ago as its host of international subsidiaries, largely in the European region, fared well.
Stronger volumes typically offset cost pressures. Added to this, Bharat Forge commands a pass-through clause for material cost escalations that protects profit margins to some extent. So, while commodity prices surged, raw material costs as a percentage of sales rose by a mere 70 basis points from a year ago and were lower sequentially. But higher other expenses to sales, which the management claims was a one-time correction of costs, brought down the stand-alone operating margin for the quarter by 80 basis points from a year ago to 24.2%. One basis point is one-hundredth of a percentage point.
The firm’s stand-alone operating profit jumped 42% during the period. Together with this, higher capacity utilization and the smart turnaround in its overseas units saw operating profit rising by two-and-a-half times at the consolidated level for the March quarter.
Adding to profit was the increasing share of its non-auto segment, whose contribution has steadily risen over the last few quarters. Within this segment, traction in value-added machining products could improve profitability going forward.
Meanwhile, the management is confident of 70-80% growth in the US auto market and around 15-20% on the European turf. But this did not enthuse the Street, despite the fact that the firm posted a consolidated net profit of Rs302 crore for fiscal 2011, compared with a loss of Rs6.3 crore in the previous year.
Bharat Forge’s shares, whose performance has more or less mirrored the Sensex in the last 15 months, slid on Tuesday, despite the benchmark index holding out in the session. A key reason could be the expected slowdown in the commercial vehicles segment, a key ingredient in the company’s profitability. Analysts believe that the mediocre and lower-than-expected revenue growth of about 7% compared with the preceding quarter, could mean that there is higher inventory with the automobile companies, corroborating concerns of lower growth rates.
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Graphic by Naveen Kumar Saini/Mint
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First Published: Tue, May 24 2011. 11 02 PM IST