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To diversify its client base, Bharat Forge has moved into forging and machining of high-value parts for non-automotive buyers.

Parvatha Vardhini C

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Shareholders can continue to stay invested in the Bharat Forge stock. Fresh exposures need not be considered at this point in time as the company is faced with the twin challenges of a slowdown in the US commercial vehicles industry and a pause in the domestic auto industry’s growth.

But the company’s conscious efforts to de-risk its exports business and the foray into the non-automotive sector hold promise over the long term, suggesting that investors need not part with their holdings in the stock. At the current market price of Rs 276, the stock trades at around 15 times estimated consolidated earnings for 2010.

To weather the US slowdown, the company has adopted a two-fold strategy. One, it has reduced the export of heavy truck chassis components and has instead concentrated on the supply of passenger car components.

From about 50 per cent of the total exports in 2006-07, the export of truck components has come down to around 38 per cent this year while passenger car component exports have increased by about 10 percentage points during the same period.

Two, the company has focussed on increasing its Europe business. For the year-ended March 2008, exports to Europe constituted almost half the total exports as against 31 per cent the previous year.

In a bid to diversify client base and shield their businesses from cyclicality in the automotive industry, several auto component makers are diversifying by supplying to sectors outside of automobiles. This entails high-value products that also bring in better margins.

Bharat Forge has moved into forging and machining of high-value parts required for the oil and gas, Railways, aerospace and Defence sectors.

The company has recently ventured into the capital goods sector as well. This February, it entered into a joint venture with NTPC (National Thermal Power Corporation) to manufacture forgings, castings, fittings and high-pressure pipings required for power and other industries.

It plans to invest Rs 200 crore initially in this joint venture which will also look at manufacturing power plant equipmentin the near future. Non-auto components business currently contributes around 20 per cent to the revenues but the company plans to double that by 2012.

To serve this end, the company is setting up plants at Baramati and Pune which are expected to commence production in the second half of the current financial year.

To fund this expansion into the non-auto segment, Bharat Forge is also considering a rights issue of non-convertible debentures with detachable warrants for Rs 400 crore. They are also looking at acquiring small and medium companies in the non-auto space.

On a standalone basis, net sales grew by 12.3 per cent year on year to Rs 580 crore during the fourth quarter, backed by a 23 per cent growth in exports.

Net profits, however, fell 18 per cent to Rs 52.5 crore after excluding extra-ordinary income (profit) of Rs 30.3 crore arising from the consolidation of its overseas operations (excluding Bharat Forge America) into one company, CDP Bharat Forge.

The bottomline has been hit by a Rs 15.8 crore foreign exchange loss on restatement of its foreign currency debt.

The company’s fully-owned subsidiaries registered a 4 per cent decline in sales in the fourth quarter. Net profits too fell by about 30 per cent compared to the same period last year.

This can be attributed partly to the subdued performance from Bharat Forge America, which has been hit by the slowdown in US truck sales. Operating margins for the subsidiaries too are at a thin 7.2 per cent, which the company aims to improve to 12 per cent in the next two-three years.

To achieve this, it has embarked on a process of product rationalisation to pull out low-margin products and change product lines, if necessary.

This exercise will help improve margins, but low synergies with the parent company and operations in mature markets such as the US and Europe may pose challenges to a significant improvement in their performance in the immediate future.

Revenue growth for the subsidiaries have so far been lacklustre and earnings have not gained traction since they were acquired, beginning 2004.

But a marked shift to the Europe geography and, hence, the access to a wider clientele indicate that subsidiary earnings may improve in the medium term.

This, along with the revenue flows expected from the non-automotive business, make the stock worth holding on to in the castings and forgings space.

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