Kalyani Group flagship company Bharat Forge Ltd’s shares fell 7% on the bourses as soon as it declared the June quarter results on Tuesday. Clearly, the firm has not been spared the adverse impact of global industrial slowdown and, more importantly, of the domestic auto crisis.
The 9% drop in stand-alone net revenue to ₹1,347 crore disappointed analysts who had pencilled in a year-on-year growth of 8-10%. Total tonnage shipped out of the company’s facilities was lower by 8.9%.
On the home turf, revenue from the medium and heavy commercial vehicle segment plunged 30% year-on-year. This segment is the worst hit in the auto industry with a double-digit sales drop after a robust FY19.
But the pain in international markets was more. The industrial segment suffered the biggest hit on account of “inventory de-stocking in the oil and gas business and production constraints in North America’s oil and gas markets", the company said in media release.
On the whole, the international business contracted by 13.6%, more than twice the drop in the domestic business. Looks like business in Europe was adversely affected during the quarter. Revenue dropped by 26% from a year earlier, while North America was more stable.
To be sure, declining revenue and rising costs dent profitability. For Bharat Forge, raw material cost increase as a percentage of sales rose due to negative operating leverage. Therefore, Ebitda (earnings before interest, tax, depreciation and amortization) margin took a tailspin, narrowing by 3 percentage points to 26.1%, way below Bloomberg’s 12-broker average estimate of 28.9%. The upshot: An 18% year-on-year drop in Ebitda to ₹352 crore, which again was 25% below analysts’ forecasts.
The moot question is when will things get better for the world’s largest forging company.
Bharat Forge expects a recovery in the second half of FY20, though this hinges on some stimulus or support from the government. Fortunately, the domestic industrial segment has been stable except for some slowdown in tractor sales.
Meanwhile, the company’s de-risking strategy in the international oil and gas business involves addition of new products, new customers and inorganic growth opportunities.
Be that as it may, the 25% year-on-year drop in net profit to ₹174.1 crore left little to be desired. In any case, the Bharat Forge stock have been southbound since December when orders from one of its key markets—the US Class 8 trucks—started falling. At ₹400.50, the stock trades at 15 times the estimated FY21 earnings. With hardly any earnings growth envisaged over the next 12-18 months, the stock is not likely to win investor fancy in the near term.