Bharat Forge: odds stack up; risk to earnings growth now higher

Bharat Forge Ltd’s mounting challenges echo the global impact of the covid-19 pandemic. New orders for US Class 8 trucks hit a 25-year low in April, falling 72% from a year ago. On top of it, industry experts estimated a double-digit drop in commercial vehicle (CV) sales in 2020 in spite of a dull 2019.

Further, orders from Europe, another key market, are also drying up. On the home turf, the nationwide lockdown brought already dismal CV sales to a standstill in April. Given that the CV sector accounts for about one-fourth of stand-alone revenue, disappointing sales and bleak outlook for the coming quarters have dampened investor sentiment for Bharat Forge.

That’s not all. Falling crude oil price and high inventory levels are also a risk for the global components maker. News reports suggest sharp cuts in capital expenditure and overhead costs by multinational oil and gas giants such as Schlumberger Ltd and Halliburton Co. This would hurt order flows from the segment, a non-auto diversification that was beginning to pay off well for Bharat Forge.

A report by Edelweiss Securities Ltd forecasts that Bharat Forge is unlikely to see growth in FY21, notwithstanding the low base of FY20 (estimates show a 30% fall from the year-ago period), putting consensus earnings at risk. The brokerage firm has trimmed its already conservative earnings per share estimate for FY21 and FY22 by 35% and 30%, respectively.

With weak sales persisting, poor operating leverage and a stretched working capital cycle would drag profitability for a few quarters. Industry experts said the cyclical recovery expected in the second half of FY21 will be delayed by at least six months to a year.

True, Bharat Forge’s strong balance sheet, cash and bank balance, and cost-control measures have helped it weather many stormy auto cycles. “What sets the firm apart is its ability to sustain competitive niche across a large gamut of high value-add products, which has helped it fortify its balance sheet over the years,” added the Edelweiss report.

Unfortunately, covid-19 has nipped the green shoots of recovery seen in end-2019. The Bharat Forge stock, too, which rose 25% between September and December, has fallen about 42% year to date.