BackBharat Forge: overseas markets steal the show
Exports along with cost-cutting strategies and strong growth in overseas subsidiaries helped the firm surpass Street expectations
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The slowdown in the domestic auto market was certain to be a drag on Bharat Forge Ltd’s (BFL) performance during the September quarter, as has been the case in the recent past. But exports along with cost-cutting strategies and strong growth in overseas subsidiaries helped the Kalyani group auto components maker surpass expectations on the Street.
Higher export realizations in the standalone company, when compared to the year-ago period, offset overall volume contraction in the standalone entity. The 2.6% fall in net revenue to ₹ 845.1 crore would have been worse but for exports, as domestic revenue declined by 7.2% due to poor demand from the auto sector, mainly commercial vehicles. The management attributed the 250 basis point (bps) improvement in operating margin at 26.4% to cost-cutting measures too. One basis point is one-hundredth of a percentage point.
Operating profit rose by 7.4% to ₹ 222.8 crore. However, net profit declined by 6.3% to ₹ 94.2 crore, as a result of interest costs and lower other income.
The key surprise was the continued improvement in overseas subsidiaries. Europe and Asia-Pacific registered a growth of 68.7% and 25.9%, respectively, as auto demand remained stable. The US business, however, registered a contraction. The wholly-owned subsidiaries posted a 38.8% growth in revenue compared with a year ago, with profit margin improving from 0.7% to 5.5%. But the joint venture in China posted a lacklustre performance.
Interestingly, capacity utilization in Europe has significantly improved and is now around 68%. This should trickle down to higher profitability in the ensuing quarters as cost-efficiencies kick in with operating leverage.
That said, recovery in the domestic commercial vehicles segment is critical to BFL. Of course, as stated in a report by brokerage Prabhudas Lilladher Pvt. Ltd, given the current utilization level, the firm is able to deliver an operating profit of around ₹ 50 a kg, which is commendable, given the state of the commercial vehicle industry.
Meanwhile, strong cash flows against a backdrop of no major capex in the near to medium term augur well for the stock. That is perhaps why the stock, which trades at ₹ 285, has soared in the last few months, returning 40% since April.
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