Despite its diversification into non-auto businesses, over half of Bharat Forge Ltd’s fortunes are dependent on the commercial vehicles industry. In that backdrop, the weakness in truck sales in North America is bad news for the company and its investors. Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd wrote in a note to clients that order inflows for Class 8 trucks fell by 43% year-on-year in February. This makes it a five-year low as far as sales in February go, Nomura’s analysts point out, based on data released by Freight Transportation Research (FTR).
This news comes on the back of an already weak performance in Bharat Forge’s exports in the December quarter. A fifth of its stand-alone revenue comes from supplies to heavy truck manufacturers in North America. The company’s export revenues fell by 14% year-on-year last quarter.
The data from FTR is the latest in a string of bad news for the sector. Barely a month ago, the world’s second largest truck maker, Volvo AB, cut its 2016 growth forecast in North America by 7% due to a slowdown in demand. A similar sentiment was echoed by Daimler AG.
And while Bharat Forge’s diversification into non-auto components was meant to counter the cyclicality of the auto business, things haven’t worked out well. Sales from the industrial segment fell by 18% year-on-year in the first three quarters of the year, as “continued weakness in the global commodities and its allied sectors affected demand”, the company said in a presentation to investors last month.
Fortunately for auto ancillary firms such as Bharat Forge, the revival in domestic commercial vehicle sales has partially offset the pain. And plummeting raw material costs supported profitability in spite of weak sales growth.
Having said that, domestic markets also have their share of challenges such as stiff competition, which could thwart growth numbers. It’s hardly surprising that Bharat Forge shares have lost more than a third of their value in the past year. Nomura’s analysts say, “Although Bharat Forge has done well over the past few years by diversifying into non-auto businesses, its overall cyclical exposure remains quite high. The cyclicality of its earnings is the main reason why we maintain our neutral rating despite the correction in the stock price.”
The writer does not own shares in the above-mentioned companies.