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    Bharat Forge’s growth may be capped despite improved September quarter results

  • China Aluminium Network
  • Post Time: 2018/11/8
  • Click Amount: 167

    The upside for India’s largest forging company; Bharat Forge is likely to remain capped in the medium term despite its September quarter results beating Street estimates. Revenue growth is expected to moderate from commercial vehicle makers for domestic and overseas customers as the current year is likely to be a peak year for revenue growth in the current cycle.

    The supply to commercial vehicle makers accounts for nearly 41 per cent of the total revenues of the company.

    In the September quarter, domestic and overseas commercial vehicle segment’s revenue grew 23 per cent and 27 per cent respectively. The growth of commercial vehicle in the September quarter may continue for the next half of the current fiscal.

    However, moderation in revenue may start from the next fiscal year, according to the previous life-cycle of commercial vehicles. The domestic commercial vehicle upcycle is typically spread over 4.2 years, according to CLSA data since 1979. The current CV upcycle is already in the fourth year and between FY15-18 volumes grew 17 per cent annually.

    Similarly, the average upcycle in the US market is around two years and the current upcycle has already completed 1.8 years. The class 8 order—a gauge of order inflows for heavy trucks in the North America—grew 111 per cent to 510,000 units since the beginning of the year, while production was at 275,000 units.

    Given the lag of 6-8 months between order inflow and production, revenue growth from overseas commercial vehicle segment is expected to remain robust till the next fiscal year.

    In a post earnings call, Bharat Forge’s management indicated that US Class 8 production of 320,000-335,000 units for 2018 and it does not expect any moderation in the coming month. On the domestic side, the company’s management expects strong momentum to continue till FY20.

    The moderation was factored in with the street pegging revenue growth of domestic segment between 17-20 per cent and 12-15 per cent for the current and next fiscal year, respectively. Similarly, overseas revenue growth is expected to be 24-25 per cent and 12-15 per cent in the same period.

    The industrial export segment, where it supplies forged components mainly to oil drillers in the US, may face more headwinds if crude prices continue to soften and that might impact demand of parts from the oil drillers. Revenue growth of its critical customer Halliburton has already dropped to the low double digits in the past few quarters.

    Industrial exports account for nearly a quarter of the total standalone revenue for the company and typically fetch superior margins than the conventional business.

    In the next 12-18 months, the company’s earnings growth surprise will be dependent on the scalability of the passenger and defence segments.

    Passenger car revenue grew 129 per cent to Rs 119 crore in September and accounted for nearly 10 per cent of the total standalone revenue. The company is expecting revenue from the segment to double in the next two-three years. It has added a new passenger vehicle maker in India and a foreign aluminium chassis parts client.

    In the defence segment, order and execution of artillery guns will determine revenue growth. During the September quarter, 70 per cent of the domestic industrial segment revenue was contributed by defence jobs.

    The stock is trading at 20 times its estimated FY20 earnings, in line with its 10-year average P/E. The Street, in the medium term, continues to ascribe current P/E unless more clarity emerges from revenue growth from passenger and defence order segments which can offset the expected moderation in the commercial vehicle business.

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