BackCyclical concerns mask Bharat Forge’s robust Q3 results
The sore point is the cyclical nature of the truck segment, which comprises about 40-45% of Bharat Forge's standalone revenueBharat Forge shares slid 1.4% on Wednesday, taking the fall in its shares since September to 27%
PremiumAuto component maker Bharat Forge Ltd’s impressive December quarter (Q3) results failed to lift investor sentiment pessimism on the stock. The company’s shares slid 1.4% on Wednesday, taking the fall in its shares since September to 27%.
The sore point is the cyclical nature of the truck segment, which comprises about 40-45% of its standalone revenue. That truck sales in India have been slowing since July is already known. Adding to this is the concern about declining orders of US Class 8 trucks in the past few months. Meanwhile, softer commodity and crude oil prices have raised questions on the ramp-up of orders in Bharat Forge’s industrial segment.
Interestingly, the Q3 results do not reflect these concerns, yet. Net revenue of the standalone entity grew 22% on the back of robust exports and domestic sales. Even Ebitda (earnings before interest, tax, depreciation and amortization) beat Bloomberg’s consensus forecast, rising 18% year-on-year to ₹487 crore.
However, the company’s press release spelt out a slowdown in domestic auto demand in the last couple of months due to “tightening credit environment, revision in axle load norms and sharp increase in fuel prices along with subdued freight rates".
The bigger worry is the recent double-digit contraction in US Class 8 truck orders. This normally impacts Bharat Forge’s export revenues, going by past performance. The 25% growth in export revenue in Q3 was partly due to currency gains, apart from higher shipment volume.
In any case, the current order slowdown would perhaps manifest in weaker revenue growth only a few quarters hence. For now, the management was optimistic and stated in an analysts’ call that production in 2019 will exceed that of the previous year.
On the whole, overseas subsidiaries’ Ebitda contracted 16.8% year-on-year, with a margin drop of 250 basis points, which the management attributed to “seasonality and change in WLTP (Worldwide Harmonised Light Vehicle Test Procedure) norms". Exports to the passenger vehicle (PV) segment hit a temporary roadblock due to this.
One hundred basis points equal one percentage point.
The 80 basis point dip in stand-alone Ebitda margins was due to higher raw material costs. Fall in commodity prices would bring relief on this count in the quarters ahead.
To be sure, the overall gloom in medium-term auto forecasts has already led to analysts downgrading earnings. A CLSA report in January said the long-term structural story of Bharat Forge is good, given its improving capabilities, growth from new businesses (PV exports, aerospace, defence, etc.) and large headroom to grow industrial exports. But these benefits will play out gradually, while a cyclical slowdown across key segments will impede earnings growth and drag down the stock in the near term. Such concerns are bound to weigh on the stock that at ₹477 trades at 16 times FY21 earnings.
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