Bharat Forge's underperformance may continue as truck orders keep low

Uncertainty on revival of demand is a key overhang for the stock

Weak class-8 truck data in the US, uncertain demand outlook, and margin pressures could be headwinds for auto component major Bharat Forge. The stock has shed about 4.4 per cent since the beginning of the month and has underperformed both the peer index, BSE Auto, and the benchmark BSE Sensex over the last six months.

Disruptions in the supply chain and volatile commodity prices led to a 51 per cent year-on-year fall in class-8 truck orders in the past two months. In May, truck orders hit a seven-month low of 13,300 units, a 43 per cent decline YoY.

Though there was some improvement on the supply front, the progress stalled because of disruptions in China and Russia, according to trade body FTR. While demand for new trucks remains healthy, automakers are not placing new orders because of inflated and variable cost of commodities and other components, FTR believes. Orders have remai­ned low with most global commercial vehicle (CV) makers expecting improvement in chip supplies only in the second half of the current year.

Improvement in European demand and class 8 orders in North America will be a big trigger for Bharat Forge. Exports constituted 59 per cent of its revenue in financial year 2021-22 (FY22). CV exports (a significant chunk of which is class 8 trucks) make up about half the overall exports of the company. HDFC Securities expects strong export momentum for the company over the FY22-24 period.

Aniket Mhatre and Sonaal Sharma of HDFC Securities say export growth will be driven by strong CV demand in the US and Europe as the semiconductor chip shortage eases. Another key trigger is an increase in new order wins in passenger vehicles, with the management guiding for 30 per cent growth in FY23.
 

Another factor that could drive gains is a revival of dom­estic commercial and passenger vehicle volumes. Demand, according to Vivek Kumar and Ronak Mehta of JM Financial, remains robust in the domestic CV market, led by improving fleet operator profitability on gradual freight increase and correction in fuel prices, the government’s thrust on infrastructure development, and new order wins. Domestic CV revenue is expected to grow 30 per cent annually over the next couple of years.

Within the non-auto space, the oil and gas segment could be a strong growth driver, given the current healthy demand, which is expected to sustain with crude oil prices staying well above $100 a barrel.

JM Financial says the US rig count has been rising over the past few months, which augurs well for Bharat Forge. In the India market, focus on import substitution opportunities (in capital goods) and ramp-up of operations at the Nellore plant will drive growth. The brokerage expects 19 per cent revenue growth annually for the non-auto business over FY22-24.

While brokerages are positive on Bharat Forge’s prospects, Emkay Research, which has a ‘buy’ rating on the stock, has cut its FY23 and FY24 earnings per share estimates by 3-5 per cent to account for some moderation in the demand outlook (especially CY23) and lower margins. The cautious tone of the brokerage is on account of concerns about a Europe/US recession with Bloomberg pegging the same with a probability of 30 per cent. “In a bear-case recession scenario, if we build in a 15 per cent drop in exports, excluding oil and gas exports, earnings per share estimates drop by 16 per cent,” say analysts at the brokerage.

At the current price, the stock is trading at 22 times its FY24 consensus earnings estimates. Investors should await auto volume revival trends across domestic and export markets and further traction in non-auto business before considering the stock.