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Bharat Forge: Core intact, new verticals promising

Bharat Forge stock is up nearly 14% over the last week on higher sales of heavy trucks in the US market, opportunities in the defence sector and strong December quarter results. 

The recent trigger has been the all-time high US sales of Class 8 type of trucks in December. The company has over 50% market share for parts such as engine/chassis components for Class 8 Trucks, which are among the heaviest commercial vehicles in the US market. Higher orders, according to analysts, indicate healthier economic activity. This is expected to lead to an improvement in demand. 

Puneet Gulati of HSBC says lower fuel costs will help improve profitability of trucks and encourage more buying in the US market. The US commercial vehicle market contributes about 15% to standalone revenues of Bhart Forge. Overall, the CV business is nearly half of standalone revenues. In this context, a revival in domestic sales of CVs should also help boost volumes and utilisation as well as market share across US/EU and India.

Rising utilisation is one of the reasons why analysts are bullish on the stock. Deutsche Bank analysts say that the company has utilised the downturn to enhance capabilities and improve efficiencies and its EBITDA/tonne is 50% higher than in past periods of similar capacity utilisation. 

The company is also expected to benefit from higher defence expenditure and could be a key player in the artillery and specialised vehicle segment. Bharat Forge is looking at doubling the proportion of non-auto to overall revenues from just under 30% in FY13. The Street will keep an eye out for any new orders in the key verticals of aerospace, railways and construction. However, the risk here could be short-term hiccups given the sharp fall in crude oil prices. Oil and gas is an important vertical and lower prices could impact orders.

The stock, which has doubled over the last one year, is currently trading at 24.6 times its FY16 estimates. The near term trigger is the strong US performance, which is likely to reflect in the December quarter sales. Analysts expect standalone revenues to improve 43% year-on-year due to higher exports (US Class 8 truck demand) and non-auto sales. With better product mix on the exports front, Ebdita margin for the quarter could move up 261 basis points on year-on-year basis to 28.4%. 

Given the triggers and the opportunities going ahead, most analysts (nearly 75%) have a ‘Buy’ rating on the stock. However, investors should tread with caution on some of the themes such as defence, which are long-term in nature and such orders might take time to materialize.

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