Bharat Forge in slow lane on poor CV sales

THE COMPASS Investors should avoid exposure as growth is unlikely before FY21

Muted performance in the September quarter (Q2), coupled with a weak outlook, led to a 9 per cent fall in the Bharat Forge stock. While the Street did not expect much from the Q2 results, the weak guidance led to a correction in the stock. The company expects the H2FY20 to be weaker than the first half, with an improvement expected only in FY21.

In addition to the situation in India, the company pointed to the slowdown in North America and Europe as the reasons for its lacklustre guidance. Within the segments it operates in, commercial vehicles (CV) have been the biggest drag on its financials. Revenues from this segment, which account for 38 per cent of overall revenues, were down 37 per cent year-onyear (YOY).

The volume crash in domestic medium and heavy commercial vehicles (Q2 industry volumes down 58 per cent YOY) led to a 67 per cent fall in CV revenues.

Sales from the segment, which came in at ~216 crore in the June 2019 quarter and ~289 crore in the September 2018 quarter, slipped to just ~93 crore in Q2FY20. A high BSIV inventory, cut in production, and the transition to BSVI are compounding problems for M&HCV suppliers such as Bharat Forge. The slowdown in Class 8 truck orders in the US has added to the pain in this segment, impacting both revenues and profitability.

The key reasons behind the M&HCV decline, according to the company, are non-availability of finance, axle load norms that increased capacity, and implementation of the goods and services tax. The company believes that the government needs to revive sentiment in the sector, with policies including scrappage and bus orders.

The industrial segment (43 per cent of revenues), too, saw a 29 per cent decline in revenues in the quarter. This was led by the exports segment, which declined 38 per cent. Orders in the oil and gas segment are reducing as exploration firms are cutting capacity, and this is expected to continue in the near term, which will peg back the company’s revenues.

What is working for the company, however, is the traction in the passenger vehicle segment. The company posted a 21 per cent increase in revenues, led by the exports segment. Though the segment contributes less than a fifth to the overall revenues, the company expects it to scale up further. Though the price correction has been steep, investors should stay away from the stock given the guidance and growth being pushed out to FY21.