For Bharat Forge Ltd (BFL), the fourth-quarter numbers all prove a point: the company is making the most of the global post-pandemic recovery. Little surprise then that its Q4 results beat revenue and operating profit estimates of the Street, sending the BFL stock more than 7% higher post results on Friday.
While the firm’s volume growth in the March quarter of 39% was in line with the Street’s expectations, much of the increase in revenue is due to higher realizations. This shows that the firm has been able to pass on the increase in input costs, particularly higher metal prices. Realizations grew 15% sequentially. As a result, Bharat Forge was able to clock a sharp 48.4% year-on-year increase in revenue.
A recovery in key markets of US and Europe drove export revenue as well. Its main segments of heavy trucks, both in the US and Europe, are seeing a sharp recovery post-covid-19 lockdown. Note that exports increased 42.8% y-o-y in the March quarter.
While the global automotive segment is seeing a good pick-up, a shortage of semiconductor microchips has been a worry. The management reckons that this shortage could be addressed in the next two months.
Further, the US government is expected to push through a huge infrastructure stimulus bill, which is expected to drive growth in global mining and construction sectors.
A part of Bharat Forge’s global business has been impacted due to the drop in oil prices last quarter and the subsequent low capital expenditure in oil and gas. But as oil prices are rising again, the company expects orders to improve from the shale gas sector.
Besides, the firm’s focus on pruning its overseas product portfolio while reducing fixed costs has been paying off. A forging facility in North Carolina coming onstream at the end of 2021 could further aid operating leverage.
One worry has been the domestic commercial vehicle segment. Sales of heavy commercial vehicles slowed in the first quarter, which could reflect in lower revenue. “While domestic commercial vehicle business will be impacted in the first half, we see a sharp pick-up in the second half on the back of economic recovery,” said Abhishek Jain, analyst, Dolat Capital Markets.
However, the Street was also impressed with the expansion plans being drawn up. The firm has acquired land in Khed, near Pune, Maharashtra, to house new initiatives including in defence and e-mobility. The land acquisition cost of ₹240 crore will be spread over a few years. Bharat Forge’s successful bid for Sanghvi Forgings could further enhance its manufacturing capabilities of industrial products.
Operationally, the company has been able to cut back on other operating expenses, which has helped buoy its operating margins. Higher realizations and lower costs have helped offset surging metal prices. As a result, operating margins have expanded. Earnings before interest, taxes, depreciation and amortization margins were 27.5% in Q4, up from just 12.5% a year ago.
However, the stock is now 42% higher than its pre-covid highs and its one-year forward price-earnings multiple stands at 44 times, as per data from Bloomberg. While analysts are likely to upgrade earnings for the coming year, the high valuations could be a deterrent to further stock gains.
To be sure, some sectors such as defence will play out more gradually in revenue growth. Sectors such as aerospace are also not showing much of a recovery. Besides, the stock’s valuations factor in some of the growing visibility coming from the global recovery.
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