Efforts to trim costs, optimize efficiency should bear fruit as economies recover
Industrial and auto sector may show signs of recovery only in second half of FY21
On the back of a steep decline in December quarter profits, Kalyani-group’s flagship company Bharat Forge Ltd painted a dismal outlook.
The stock that has been volatile through the last two quarters fell 2.3% on Tuesday. After all, a 60% and 81% YoY drop in reported net profit (Q3FY20) at the standalone and consolidated level respectively are not palatable for the investor.
Clearly, uncertainty over demand uptick in global and domestic commercial and passenger vehicle sales is taking a toll on the global forgings company. This, along with trade tensions that are impacting demand in non-auto businesses, poses a risk to its near-term earnings growth.
The effect is already seen in the steep decline in profitability in spite of a drop in overall expenses. Q3FY20’s standalone earnings before interest, tax, depreciation and amortization (Ebitda) plunged around 700 basis points (bps) to 22% from a year-ago. This fell short of Bloomberg’s consensus by about 300 bps. One basis point is one hundredth of a percentage point.
Even at the consolidated level, which includes international operations, Bharat Forge’s Ebitda margin dropped by 400 bps year-on-year to 13%. This was also way lower than the Street’s estimate of 18%.
The problem is no different from that seen in the last few quarters. Sales drop across markets and business segments led to severe revenue contraction of about 37% at the standalone level and 26% at the consolidated level, respectively. Both volumes and realisations plummeted to dent revenue.
In the analysts’ call held on Monday, Bharat Forge delineated numerous challenges that hit performance. On home ground, the medium and heavy commercial vehicles (CV) inventory is high. So, destocking will continue till BS-VI transition. In overseas markets, falling sales of North American Class-8 trucks is not new. This hit order flows amid subdued demand from the oil and gas and other industrial segments.
Therefore, revenue fell across businesses- a 40% yoy drop in commercial vehicle revenue, 44% in industrials and a 9% growth in passenger vehicles (PV).
That said, efforts of the company to trim costs, optimize efficiency and look at new horizons, be it defence or industrial, should bear fruit as economies recover.
JM Financial Services Ltd, in its 10 February report, said "Domestic CV is expected to witness a revival during second half of FY21 and PV export is likely to sustain its momentum. International subsidiaries will benefit as product mix shifts towards aluminium and cost reduction measures are implemented by FY21-end."
The brokerage, however, has a subdued revenue and earnings compounded annual earnings growth estimate of 2% and 6% respectively over FY19-22. Most brokerages have even cut earlier forecasts by 10-12% for FY21 from earlier levels.
Clearly, it is a rough road ahead for Bharat Forge over several quarters. Both industrial and auto sector demand may show signs of recovery only in the second half of FY21. Until then, investors could be pessimistic about earnings traction in the company.