Stock Review: Bharat Forge

METAL forgings company Bharat Forge (BFL) has reaped the benefits of restructuring of its overseas arms besides robust demand to come out of the red for the quarter ended June 30 after having reported losses in the year-ago period. The company has also outperformed the 10-stock ET auto ancillary index's 32% rise with a 38% returns over the past three months on expectations of improving financials in the coming quarters.

   The company's overseas units improved their margins last quarter and are likely to provide an upside to earnings in the coming quarters compared with year ago numbers. The turnaround in bottom line is partly attributed to increase in demand for commercial vehicles in US that accounts for half of its total exports or about 11% of total revenues. This was supported by strong doubledigit revenue growth in domestic sales coupled with improving export revenues. This helped the company boost consolidated revenue by 66% to 1,012 crore.

   Although BFL's exports performance going forward hinges on recovery in Europe besides continued demand growth from US market, the firm has seen overseas sales improve for the past three quarters and this is likely to support its revenues in the coming quarters as well.

   The company reported consolidated net profit of 62 crore.It has posted a loss of 46 crore in the quarter ended June 2009. This was due to improvement in margins that kicked off after the restructuring of its wholly owned subsidiaries last year.

   BFL restructured its European operations shutting down one of its Scottish facility and transferring operations and assets to another group company in Sweden. This was done as demand for commercial vehicles almost halved in Europe in 2009 . Such a drastic fall shrunk capacity utilisation below 40% and increased the cost of operations. The restructuring helped the firm improve operating margins from the overseas subsidiaries to 4.2% last quarter from 2.5% in the March quarter.

   BFL has a 90% share in the domestic market. Almost four-fifths of its total revenues come from selling forging to the automotive sector in India and abroad but the firm has plans to reduce its dependency on the cyclical sector by diversifying into supplying components for power and oil & gas sectors.

   With the improved outlook for international markets such as US and continued demand growth for commercial vehicles in India, the company is likely to post better numbers in the near term. BFL expects recovery in European automotive market from next year that could boost financial numbers significantly, but investors need to watch for strong signals of economic revival in Europe for factoring in its impact on the company's earnings.