Bharat Forge Ltd, the Kalyani group’s flagship firm, put up a strong show in the September quarter due to better demand in both domestic and overseas markets. Its performance contributed to a 5.8% jump in its share on Monday, outperforming the broad market’s flat performance.

The automobile component company’s operating profit margin of 29.1% was a main highlight, as it was 274 basis points (bps) higher than a year ago. One bps is one-hundredth of a percentage point. It also exceeded Bloomberg’s consensus estimates by about 110 bps. This improvement was a result of cost savings and higher operating leverage, as the company clocked good sales across most of its units.

Bharat Forge reported a 23% increase in volumes in its stand-alone results, while a favourable product mix helped improve realizations. Net revenue rose by 34.7% to 1,138.3 crore—higher than the Street’s forecast. Exports pushed its performance up with a 50% year-on-year jump in revenue, although domestic markets too did their bit with a 14% rise.

A management statement attributed strong volume growth in passenger vehicles and improving commercial vehicle sales after 30 months of lull as being the pillars of growth. Exports were fuelled by the North American market, where higher construction activity and freight demand led to commercial vehicle sales recovering. Company sources, however, believe that there could be growth concerns in the European markets, where recovery is taking time. The industrial segment comprises nearly half the revenue, from around 37% a year ago.

For the quarter, however, higher sales percolated to an 18.8% rise in operating profit on a stand-alone basis. Meanwhile, strong cash flows helped to ease the balance sheet pressures as high cost debt was repaid. Importantly, this will continue in the coming quarters improving the financial health further. Return ratios, too, improved over the last few quarters on the back of strong business volumes and cost-efficiencies. Return on net worth rose from 15% to 21%, while return on capital employed also jumped from 16% to 22%.

Bharat Forge’s strength has been its resilience through the economic downturn. It has successfully restructured its overseas subsidiaries, although the performance during the quarter has declined mainly due to sluggishness in European commercial vehicle sales.

Analysts are confident of a 50%-plus growth in annual compounded earnings over the next two years. The investor confidence is mirrored in the strong rally in Bharat Forge shares over the past six months. At its current price of 885.5, the stock has doubled since April. While not much is expected of the overseas subsidiaries in the near to medium term, Bharat Forge’s stand-alone business will drive growth enough to justify the rich valuation of 23 times one-year estimated earnings forecast.