News of falling commercial vehicle (CV) sales across the globe does not augur well for Bharat Forge Ltd. After all, CVs account for about half the auto component maker’s total sales.
This has already taken a toll on the company’s stock performance. In the past one year, the share price has fallen by 25%, underperforming benchmark indices, such as the Nifty 50 and Nifty Auto, by a wide margin.
The downtrend is unlikely to reverse soon. There is no respite from the plunging US Class 8 truck orders, which accounts for nearly one-fifth of the company’s total sales. Since January, the monthly run rate of orders is down by 60-70%, compared to the year-ago period.
The impact for Bharat Forge will come with a lag. The management is confident of a reversal in falling US truck sales by the end of this calendar year. However, analysts say that the global economic slowdown will hit fleet expansion in the US, Europe, and even parts of Asia.
Things are hardly any better on the home turf. The 30% drop in medium and heavy commercial vehicle sales in April-September is unlikely to ease in the near term. It is the fourth quarter of a slowdown in sales. Analysts say the CV slowdown cycle can stretch between seven and 11 quarters. This time around, India’s transition to BS VI emission norms by April 2020 brings more uncertainty in sales recovery, given that the price of trucks will increase substantially.
Note that the auto parts maker’s domestic and international revenue had already taken a beating in Q1 FY20, falling by 16% and 22%, respectively, year-on-year.
Bharat Forge has been taking steps to diversify into industrial products, catering to the oil and gas, aerospace, and defence segments, besides aiming to increase content per car in passenger vehicles.
However, this is insufficient to alleviate the pressure of the steep downturn in CVs. Earnings before interest, tax, depreciation and amortization in Q1 FY20 fell by 25% year-on-year.
With capacity utilization at 65%, analysts say that Q2 may be worse, given the negative operating leverage.
The silver lining is that FY20 earnings will get a leg-up from savings in corporate tax outflow. After all, Bharat Forge was among the highest tax paying firms with an effective tax incidence for FY19 of 34%.