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Home and away, Bharat Forge rides pickup in truck demand

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ET Intelligence Group: Big trucks should mean a rich haul for Bharat Forge.

India’s biggest forging company, which gets half its revenue by selling powertrain and chassis components to global truck makers, is harnessing the uptrend in the freight industry to ensure its premium valuations stay where they are. The stock is trading at 26 times its FY20 earnings, a 30 per cent premium to the five-year average. Earnings visibility is emerging from the continued buoyancy in North American sales that make up a fifth of the total standalone revenue for the company.

Order inflows for US class 8 truck — a gauge of new orders for the truck in North America — reached a record at 53,100 units in August , a gain of 161 per cent YoY and surpassed the previous peak of 52,194 units in March 2006. Large fleet operators are placing their orders ahead of schedule to reserve built slots in the market where demand is well above capacity.

Typically, the average upcycle of commercial vehicles is around two-three years.

Therefore, there is some apprehension about the sustainability of the order inflows due to the peaking of the US class 8 truck cycle. However, thanks to strengthening order inflow, Americas Commercial Transportation (ACT), a forecaster for CV volumes in the US, expects that order flows will decline in 2020 from an earlier forecast of 2019. Furthermore, the order book increased to nine months from seven months.

This suggests that production of truck makers will be robust for the next year too.

In the June quarter, US truck sales volume grew 21 per cent to 352 crore.

Given the current momentum, the Street is factoring revenue growth of 25-30 per cent for the current fiscal.

The company’s management has guided for the class 8 truck growth in excess of 28 per cent in 2018 and that is likely to remain strong in 2019. On the domestic truck side, the strength in volume growth is supported by higher requirement from the construction, infrastructure and white goods segment.

Truck makers have recently revised their volume growth guidance despite some disruption expected from changes in axle norms.

ETIG’s interaction with suppliers to Indian truck makers suggests that first half growth of medium and heavy commercial vehicle is expected to be 35-40 per cent, and is likely to moderate to 10 per cent in the second half due to the high base impact of last year.

Bharat Forge’s revenue from the supply to domestic truck makers rose 50 per cent in the first quarter. The non-auto revenue is gradually picking up, particularly from the oil gas business.

This segment accounts for nearly 10 per cent of the total revenues.

It supplies some high value components used in the fracking or oil originated from shale oil. The auto and non-auto export business accounts for nearly 60 per cent of the total revenue of the company.

Hence, the depreciation in the rupee may improve the realisation and operating margins of the company.

In the June quarter, the realisation climbed 2.7 per cent to 2.21 lakh per ton and operating margin rose 120 basis points to 29 per cent.




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