By Suhani Adilabadkar

Pune based Bharat Forge (which is in five stock screeners today) has metamorphosed into India’s largest forging company. With 10 manufacturing locations across five countries, the company services mainly the automotive, construction, defence, oil and gas, mining sand aerospace.

Bharat Forge has transitioned from being a chassis supplier to a powertrain solutions provider with US, Europe and India as its major
regional revenue growth centres. While Indian revenues contributed the largest chunk of about 43% in the June quarter, the fastest growth of 35% YoY was reported by Europe constituting 17% of total revenues.

India has grown a healthy 20% whereas US region 31%, contributing 39% YoY of total revenues. Bharat Forge derived around half of its revenues from automotive business and another two fifth from industrials in its June quarter. Passenger cars made up the smallest chunk of 11% and its contribution has been increasing over the past two years with passenger car component exports rising 145% YoY.

Quick Takes

• Profit After Tax more than doubled on quarterly basis or 134% and grew 34% YoY. PAT stood at Rs. 234 cr in Q1 FY19 compared to Rs. 100 cr and Rs. 175 cr in March and corresponding June quarter the previous year respectively.
• The company derives more than 50% of its revenues from US and Europe spread across all  three segments, automotive, industrials and passenger cars. Moreover, 15% of the company’s total revenues are derived from US Class 8 (Heavy Duty) trucks.
• Over the years, Bharat Forge appears to have de-risked its business both geographically and also with respect to sector and product mix evident from its 2018 revenues.
• Bharat Forge has laid out capex plan of around Rs. 900 cr for the current and next year for Indian operations and $55 million for its Aluminium facility in US.

Financial Performance (Standalone)

As we await September quarter results, June FY19 was the seventh consecutive quarter reporting strong sequential revenue growth.
Standalone revenues stood at Rs. 1480 cr rising 23% YoY in Q1 FY19. Breaking up geographically, domestic revenues and exports sales jumped 19% and 26% YoY to Rs. 600 cr and Rs. 844 cr respectively.

The automotive segment grew 33% YOY followed by passenger cars at a phenomenal 75%, while industrials were relatively flattish rising just 4% YoY. Though revenues were constant sequentially, Profit After Tax more than doubled QoQ at 134% and grew 34% YoY.  The March quarter had witnessed PAT declining 52% YoY due to exceptional item of Rs. 133 cr as impairment provision.

What to look out for: weak investor sentiment

Bharat Forge is at its year low. Though this can be partly attributed to midcap correction mania, trade war drama, rising US interest rates and crude rising in the past few weeks, the 52% dip in PAT for the March quarter with respect to impairment provision of Rs. 133 cr for its investments in oil exploration and EPC contracts in railways took away the sheen of its premium valuation.

During this tumultuous period, Bharat Forge’s business model, mildly skewed as it is towards US and European markets, has made it vulnerable to stock market chaos. The company derives more than 50% of its revenues from US and Europe.

As a result, Bharat Forge stock lost 3% as North American truck sales were down 19% sequentially in September after reporting strong growth in months of July and August. With this backdrop, apart from global factors, its revenue guidance oscillates as per US and Europe growth and their domestic economic policies.

Over the years, Bharat Forge has de-risked its business both geographically and also with respect to sector and product mix evident from its 2018 revenues. The largest revenue generator was the Indian CV business constituting 21% of total revenues followed by
Oil and Gas contributing 16%. Next in line, Indian industrial business also made up 16%, US CV at 15% and export industrials constituted 12% of total revenues.

Revenue dependence on auto segment has been further reduced as 48% of Rs. 1620 Cr new business acquired in FY16-18 was from industrials and 40% from passenger cars.

Capex Plans and Future growth Prospects
Bharat Forge has laid out a capex plan of around Rs. 900 cr for the current and next year exclusively for Indian operations and $55 million for its Aluminium facility in US. Apart from its regular capex, the company has made investments in Tevva Motors which provides electric powertrain solutions for CVs and Tork Motors, an EV two wheeler startup.

The company is spearheading its transformation over the next 5-7 years by focussing on three core future growth areas, defence,
centre for light weighting technology and EV mobility. Defence contributed about Rs.150 cr last year and is expected to provide strong future export growth.

A centre for light weighting technology which has been initiated by setting up aluminium forging facility will be expanded in
future through carbon fibre addition. The third and most crucial one is the EV space where the company aims to focus on passenger cars globally through Tevva and take advantage of untapped two wheeler Indian mass market though Tork alliance.