Bharat Forge shareholders breathe a sigh of relief as key biz units stabilize

Shares of Bharat Forge Ltd gained 15% on Thursday after the company indicated that its domestic business has stabilized. It also reported better-than-expected results for the June quarter. Its shares are now just 5% lower compared to its pre-covid highs.

The company managed to avert operating losses and reported an earnings before interest taxes depreciation and amortization (Ebitda) of ₹1.7 crore. This was despite the fact that its plants operated at just 20% capacity utilization in the quarter. “The company was able to initiate stringent measures, which helped reduce break-even for local plants,” analysts at Edelweiss Securities Ltd said in a note.

Revenue plunged 68% from the year-ago quarter, tracking a 70% fall in shipment (business volumes). Both domestic business and exports more than halved in terms of revenue. Even so, signs of recovery are fuelling investor optimism.

The company expects revenue in the domestic business to stabilize in Q2. Revenue in this segment has contracted for five consecutive quarters now.

“We expect our domestic revenues to be flat as compared to Q2FY20, while exports will be lower than levels witnessed in Q2FY20,” B.N. Kalyani, chairman and MD, Bharat Forge, said in a statement.

In the previous fiscal, domestic business had accounted for about 40% of Bharat Forge’s revenues.

To recap, the domestic business along with exports hit a soft patch in Q1 last fiscal as BS-VI emission norms triggered inventory destocking in India. Besides, the commercial vehicle markets in the US and Europe had entered a slowdown. This was accentuated by covid-19 and the slowdown in investments in the oil & gas sector.

Bharat Forge warns the overall demand for commercial vehicles can decline 30-35% in the current fiscal, a large business segment for the company. But it expects market share gains and incremental improvement in demand in other business segments such as passenger vehicles, mining and tractors to offset that weakness.

In the international business, investments in oil & gas remain sluggish. The outlook for construction and mining is also uncertain.

But the recovery in North America Class 8 truck orders is providing a ray of hope. “Class 8 orders had been declining y-o-y since November 2018, but grew 59% in June-July. Our US colleagues have a favourable view on trucks amid a historically depressed trough,” analysts at Jefferies India Pvt. Ltd said.

Thanks to the recovery of the commercial vehicle exports segment and the government’s new defence push potentially benefiting the company, analysts at Nomura Research have raised its standalone revenue estimates by 11%/2%/16% over FY21-23.