In cyclical industries such as autos and auto components, diversification both in terms of geography and product pays off. One would not normally have expected the Kalyani Group company Bharat Forge Ltd to turn out a strong June quarter, given the sluggishness in its core area of business—the auto sector and more specifically the medium and heavy commercial vehicles (M&HCVs) in the domestic market. But the firm pulled off a 9.2% gain in stand-alone net revenue to 936.4 crore. Ironically, this was driven by a strong rise in export volume when developed markets are battling recession. A buoyant market in the US was the key contributor—its share in June quarter revenue jumped to 27% from around 18% a year ago. The company’s conscious drive to increase the share of non-auto products helped, as both US and Europe clocked in strong sales in this segment. Analysts reckon that across its range of products exported, Bharat Forge is now a major low-cost sourcing option for developed markets. Higher volumes backed by the depreciated rupee translated into 30% growth in export revenue. This offset the 6% dip in domestic revenue during the quarter.

More importantly, Bharat Forge’s average realization rose. A superior product mix and higher degree of machining (which adds higher value to the product) led to this. Costs did not go off-gear. And higher realization brought in a 110 basis points increase in operating margin to 25.1% over a year. Stand-alone operating profit, too, expanded by about 14% to 235.1 crore.

However, what soured the performance at the consolidated level is the poor performance of its overseas subsidiaries, mainly in China, where only 40% of the plant capacity was utilized. A report by Brics Securities Ltd explains that a 45% year-on-year decline in the Chinese M&HCV segment and the fact that its primary client (FAW) has been losing market share in the last two years, has hit operations in the region. Likewise, performance at its European and Brazilian operations was not encouraging. Overseas subsidiaries posted a minor pre-tax loss, which dragged consolidated profit down. Profit before tax at the consolidated level was flat at 152 crore, while revenue saw a marginal 5% gain from the year-ago period, to 1,643 crore. The stock, an outperformer against benchmark indices, has fallen by around 7% in the last 10 days since the earnings were announced. The outlook, too, is not encouraging. The domestic commercial vehicle sector is expected to post a demand contraction of 10-15%. Export growth could be challenging too, given the auto slowdown in European and Chinese markets, and a flattish US market. Any appreciation in the rupee versus the dollar could lower revenue and margin expansion, too.