BackWeakness in key business segments casts a shadow of gloom on Bharat Forge’s earnings
Medium, heavy commercial vehicle sales have been falling on a year-on-year basis for the last six monthsThe overall cyclical weakness in these key segments has resulted in negative sentiment on the Street
PremiumShares of components maker Bharat Forge Ltd have had no respite from their downhill run. The stock is down 27% from ₹602 on 1 October, paling in comparison to the Nifty Midcap index, which has risen marginally since then.
The stock’s descent began with news of slowdown in its key business segment, US Class 8 trucks. Latest data from Bloomberg shows that the monthly run rate of new orders for these trucks is down 72% from the peak scaled in July. Worse is the downturn in the domestic commercial vehicle (CV) cycle. Medium and heavy CV sales have been falling on a year-on-year basis for the last six months. Sticky freight rates and weak growth in movement of goods suggest that the downtrend may continue for several months.
Both the overseas and domestic CV businesses account for about two-fifths of the consolidated revenue. In Q4FY19, Bharat Forge’s volume of shipment (domestic and exports) dropped by about 6% year-on-year. Besides, the CV segment enjoys higher realizations and consequently brings better profitability to the table. Weaker volumes, therefore, led to an 80 basis point dip in Ebitda (earnings before interest, tax, depreciation and amortization) margin to 29% last quarter.
The overall cyclical weakness in these key segments has resulted in negative sentiment on the Street.
Meanwhile, inertia in industrial capex in India due to the economic slowdown, coupled with the global slowdown means that revenues from Bharat Forge’s other segments are being affected too.
A host of reasons such as destocking at the customer level in the oil and gas business and prolonged softness in CV and passenger vehicle industry point to a weak first half for FY20. Whether a pickup in the infrastructure sector and advance buying of trucks before the BS-VI emission norms will trigger a volume recovery is anybody’s guess.
Given the uncertain prospects, analysts are cautious. A Deutsche Bank research report has cut the company’s earnings per share estimate for FY20 and FY21 by 8% and 5%, respectively.
After the steep fall, the Bharat Forge stock trades at about 17 times one-year forward estimated earnings, which is a lower than the long-term average of about 25. However, what’s critical for the stock performance is the CV cycle, which is likely to remain depressed for a few quarters.
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