- Strong topline growth in Q3 FY19 driven by realisation
- Growth in industrial segment both in India and international markets
- Operating margin maintained despite raw material pricing pressures
- Business outlook for the company is positive
- Valuations attractive
Bharat Forge (BFL), a leading auto-ancillary metal forging company, posted a robust set of numbers for Q3 FY19. The company reported significant revenue growth, riding on a rich product mix, and maintained its operating profitability.
The positive outlook for industrials and Class 8 (really heavy trucks) truck demand in the US, Bharat Stage-VI led demand in domestic market, growth avenues in other areas and reasonable valuations make it an ideal investment call.
The company posted a strong year-on-year (YoY) revenue growth of 21.7 percent, led by 18.6 percent and 2.6 percent growth in realisation and volume, respectively. Realisation improved due to rich product mix and raw material (RM) cost pass-through.- Export business
Growth in export revenue at 24.9 percent was the key performance driver. Within exports, US grew 20.5 percent on the back of a recovery in North America’s industrial segment and significant improvement in US Class 8 truck segment. European market witnessed significant growth (31.8 percent) in net revenue.
Commercial vehicle and industrial segments grew 22 and 35.2 percent, respectively, whereas passenger vehicle segment saw a degrowth of 1.9 percent. Growth in the industrial segment was on the back of traction coming in from aerospace, oil and defence segments. Decline in the PV segment is due to implementation of Worldwide Harmonised Light Vehicle (WLTP) test norms and model switch overs.- Domestic business
Domestic business grew 17.6 percent driven by strong industrial demand, up 31.8 percent. However, the CV segment saw muted YoY growth of 1.3 percent. Passenger vehicle segment grew 8.8 percent.
Despite inflationary pressures, BFL was able to maintain its earnings before interest, tax, depreciation and amortisation (EBITDA) margin at 28.8 percent.Outlook positive for M&HCV in the domestic market space
In the last couple of months, the domestic market continued to face challenges on the back of a weakening macro-economic environment leading to muted sentiment for the automobile sector, including the CV segment. Subdued market sentiment was on account of liquidity problems, financing issues, rising interest rates and slowdown in economic activity. This was, further, aggravated by the lag impact of the new axle load norms.
What could be near-term growth drivers for the company? Upcoming BS-VI emission norms, to be implemented from April 2020, is expected to lead to bringing forward of demand as new BS-VI compliant vehicles would be 10-15 percent more expensive than current vehicles. This should occur in Q2 and Q3 of FY20.Strong international markets
There has been significant slowdown in Class 8 truck demand in North America in the last 2-3 months. The management highlighted that decline in demand was on the back of order cancellation from original equipment manufacturers (OEMs) as they are running at full capacity. It expects no slowdown for CY19 and sees 3-5 percent growth in US Class 8 truck orders in CY19, benefiting from this order backlog.Diversification through multiple avenues
On the aerospace and defence front, the management is planning to shift from forged components to fully machined components. A plant for the same has been commissioned and is expected to be ramped up soon. The current run-rate is $20 million per quarter and the company is targeting $100 million in revenue from this space over the next 4-5 years.
In the oil and gas space, BFL caters to the sub-sector of shale fracking, where it has a very strong market share. Highest revenue from this space is to the tune of $40 million a quarter. The company is working on new products and customers, which would lead to strong growth in coming years.Greenfield expansion – focus on the future
The company is expanding its expanding its forging and machining capacity at Baramati for both cars and trucks. It is also setting up a greenfield facility at Vellore for lightweight components, initially manufactured using aluminium and magnesium. The management said it can generate a topline of Rs 1,000 crore from these facilities at full ramp-up.Valuations at reasonable levelsThe stock has de-rated significantly on the back of weak demand outlook and market volatility. It has corrected 41 percent from its 52-week high, making valuations attractive. The counter is currently trading at 20.3 times and 17.6 times FY19 and FY20 projected consolidated earnings, respectively.
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