Bharat Forge’s diversification bet starts to pay off; stock zooms 7%

Bharat Forge Ltd's shares were on investors' radar on Friday after they jumped 7% on the NSE in morning trade. Investors are excited about the company's stellar June quarter performance and the management's commentary.

The company's standalone earnings were ahead of analysts' expectations on the revenue growth front and were aided by solid traction in its auto business and easing cost of raw materials.

In a post-earnings conference call held on Thursday, the company's management said that demand for commercial vehicles was stable in the US and Europe, in spite of a recessionary environment. On the flip side, passenger vehicle volumes are facing some challenges due to supply chain constraints. Nonetheless, its industrial business now accounts for around 40% of the standalone revenue and the management expects this segment to be one of the biggest growth drivers over the few years.

Investors would remember that Bharat Forge has been foraying into non-auto segments and analysts feel that its diversification efforts are yielding results. Analysts at Motilal Oswal Financial Services Ltd highlight that over the last decade, the company has broadened its revenue stream by entering new segments (non-auto) and markets across the globe, resulting in a decline in the share of the auto business to around 62% in FY20 from around 80% in FY07.

Further, its overseas subsidiaries are expected to showcase a turnaround in earnings. The company is targeting to generate 8-8.5% Ebitda margins in overseas arms. Ebitda is short for earnings before interest, tax, depreciation and amortization.

"While its core business is seeing a sharp cyclical recovery, the management’s initiatives to diversify into aluminum, light-weighting, and EV components have started to fructify. FY23 will see the first full-year contribution from its recently acquired businesses," added the Motilal Oswal report.

Sharing the optimism, analysts at JM Financial Institutional Securities Ltd note that cost-optimisation initiatives and the benefit of the recent softening of commodity prices are likely to support margins going forward. That said, prolonged supply constraints, significant correction in crude oil price and profit unsustainability at international subsidiaries are key risks, said the domestic brokerage house.