Bharat Forge Ltd’s performance has improved steadily in the past four quarters. In the first three quarters of fiscal 2010, stand-alone revenue grew by 19% sequentially. In the March quarter, it grew 10.7% sequentially and 92% on a year-on-year (y-o-y) basis to Rs562.4 crore.

The robust growth came from a recovery in both domestic and export markets. The firm said a strong recovery in domestic commercial vehicle sales, higher revenue from the non-auto segment and a recovery in the US market boosted sales. However, European market conditions are not encouraging yet.

Higher volumes led to better operating leverage for the flagship company of the $2.4 billion (Rs11,280 crore) Kalyani group. Although raw material costs, employee costs and manufacturing expenses rose in absolute terms in the March quarter from a year earlier, they were lower as a percentage of sales. Consequently, its operating profit margin at 25.3% rose by 0.8% sequentially and by around 10% on a y-o-y basis.

Bharat Forge’s net profit, too, rose by 77.4% sequentially to Rs61.3 crore. Comparison on a y-o-y basis is not appropriate as the year-ago period included a huge foreign exchange gain of Rs98.9 crore, while it incurred a loss of Rs70 lakh on this front in the March quarter. Given that the auto sector’s recovery gained momentum only in the second half of 2009-10, full-year revenue fell by 10% on a stand-alone basis to Rs1,856.4 crore and by 30% on a consolidated basis to Rs3,327.6 crore.

The consolidated figures reflect the performance of its overseas subsidiaries, which are yet to gain sales momentum. This, coupled with one-time restructuring costs of its subsidiaries (Rs74.2 crore), led to a net loss of Rs76.4 crore at the consolidated level. However, restructuring is expected to pay off in the ensuing quarters in the form of better operating margins.

The outlook for the firm appears bright. Sector analysts expect 12-15% growth in its automotive business, which accounts for nearly 80% of its revenue. It is also optimistic about its non-automotive business (20%), which supplies machined parts and forgings to sectors such as aerospace, railways and construction. It expects this segment to account for nearly 40% of its revenue by fiscal 2012.

By sheer size and diversity of operations, Bharat Forge is among the top picks in the forging sector. The share trades at Rs260, which is around 20 times its estimated stand-alone fiscal 2011 earnings. A change in its valuation, however, hinges on the European market recovery and ramp-up of revenue from the non-automotive segment.

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