Recovery at overseas subsidiaries improves outlook for Bharat Forge

Recovery at overseas subsidiaries improves outlook for Bharat Forge

Kalyani Group flagship Bharat Forge Ltd is stepping up efforts to boost revenue from overseas markets. After tightening operations at overseas subsidiaries through restructuring, any incremental sales will add to consolidated profit.

Bharat Forge has a host of international subsidiaries in five countries, catering mainly to the auto and engineering sectors. Most of these have been in the red given the long-drawn global recession. The management expects 25% growth in the next 12 months from these entities. Optimism stems from the recovery in the US and strong traction in Europe’s auto markets, specifically in the commercial vehicle (CV) segment.

The sales ramp-up has led to better production volumes in the last few quarters. Capacity utilization rose from 35% a couple of years ago to about 55%. Consequently, during the December quarter, the profit margin from the subsidiaries rose to about 6% from 2.6% a year ago.

Interestingly, Bharat Forge’s restructuring efforts and stringent cost control have reduced break-even levels, mainly at the European arms, to 55% from 65% when they were acquired. Any incremental sales going forward, therefore, will add to consolidated profitability and be earnings accretive. European operations are expected to churn out profits at the net level from fiscal 2012. But concerns remain on the US operations, where expenses were incurred in the December quarter for a union settlement.

China has been profitable in three successive quarters. But, while the management is confident of a strong sales momentum, recent reports of a slowdown in the Chinese auto segment could impact performance.

Meanwhile, export income from the stand-alone entity was 80% higher in the December quarter from a year ago and comprises around one-third of revenue.

At the consolidated level, about half its revenue accrues from overseas markets.

But domestic sales performance has been a dampener. A 6% contraction in domestic sales during the December quarter was perhaps a reflection of a blip in CV production. A recent report by Prabhudas Lilladher Pvt. Ltd said, “Management expects the domestic CV growth to slow down to 10-12% in FY12."

Of course, supporting its strategy to boost exports is the attempt to de-risk its business from dependence on the auto segment. Income from the non-auto segment has doubled from five years ago to constitute 40% of revenue. This is led by demand from core economic sectors such as oil and gas, railways, power and aerospace. But growth in the non-auto segment hinges on the capital expenditure growth in the country, which has lagged in the recent past.

Needless to say, while higher utilization gives better leverage, headwinds are visible with rising raw material prices that could weigh on profitability.

Bharat Forge shares command a better valuation than most other auto component makers. An increasing scale of operations and its attempt to de-risk business, along with its recent entry into the manufacture of critical power equipment, are likely to give the company greater visibility as an engineering conglomerate, compared with a mere auto component maker a decade ago.

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