Auto component firms piggyback on Class 8 truck demand in US
The recent surge in Class 8 truck sales in the US is expected to drive revenue growth of firms such as Bharat Forge, Ramkrishna Forgings, Motherson Sumi and GNA Axles
The fortunes of some of India’s auto component firms are closely linked to the US market. For instance, the recent surge in heavy-duty truck sales in the US, commonly referred to as Class 8 trucks, is expected to drive revenue growth of firms such as Bharat Forge Ltd, Ramkrishna Forgings Ltd, Motherson Sumi Systems Ltd and GNA Axles Ltd.
The demand cycle for Class 8 trucks turned the corner in August 2017 after underperforming earlier. Order flows for this segment in August rose by 153% over a year ago, compared to a growth of 50% in August 2017, exceeding all estimates.
Data forecast by Americas Commercial Transportation Research Co. Llc (ACT) shows that it could get better from these levels too. The present monthly order flows were seen only in March 2006. A Nomura Research report highlights ACT’s view that the strong orders in June, July and August are likely pulling large fleet orders ahead in their schedule, as “truckers race to reserve build slots in a market where demand is running well above capacity”. Other analysts too concede that the uptrend in this segment is likely to last for two years.
This growth in demand should be music to the ears of Indian component makers. Bharat Forge is among the foremost whose prospects will improve, as nearly a fifth of its stand-alone revenue in FY18 was from orders catering to this segment. That was also the reason when the Class 8 segment did poorly, the adverse impact was visible in Bharat Forge’s March 2017 quarter revenues. Its North American sales had fallen by nearly 42% over a year ago, as Class 8 truck sales were declining.
Another firm which stands to benefit is Motherson Sumi Systems, whose overseas subsidiary PKC commands 62% share of supplies to heavy-duty trucks in the region. There are others too such as GNA Axles and Ramkrishna Forgings.
Apart from rising demand, the depreciating Indian currency too could boost revenue in rupee terms. Their home market is also on a roll, especially the commercial vehicles’ segment. “Most of these component exporters are also relieved that the depreciating rupee will offset the pressure of rising input costs felt in the last few months,” adds Bharat Gianani, an analyst at Sharekhan Ltd.
It does not come as a surprise then that shares of these firms have been gaining ground in the past few months. They may continue to roll along this path as long as the North American truck order flow retains its ascent.