Stock Review: BHARAT FORGE

IMPROVED exports and sustained demand from the domestic market boosted the net proft of metal forgings company, Bharat Forge (BFL), during the September 2010 quarter. The company, however, reported a sequential drop in its performance, which can be a concern going ahead. During the September quarter, BFL nearly doubled its standalone net profit to . 68 crore on a 68% increase in revenue over the year-ago period. On a consolidated basis, the firm posted a 56% growth in sales to . 1,111 crore with the bottomline swinging to a net profit of . 60 crore compared with a loss of . 40 crore in the year-ago period.

The growth in topline was aided by demand from automobile companies besides traction in the non-auto forgings segment. Automotive demand, that drives its topline and bottomline performance at present, is enjoying continuous growth in the domestic market besides a strong rebound in sales of commercial vehicles in the US that accounts for half of its total exports, or about 18% of total revenues. However, the European operations are still facing poor demand, and this has been a drag for the company.

The turnaround in the consolidated earnings is due to improvement in margins that kicked off after the restructuring of its wholly owned subsidiaries in Europe last year. The firm has seen overseas sales improve for the last three quarters and this is likely to support sales and earnings growth in the coming quarters. However, on a sequential basis, the company's consolidated sales and profit growth has decelerated due to annual holidays and annual maintenance expenses in Europe.

The company has been primarily an auto component play for investors. But it has been trying to diversify by supplying components for power and oil & gas sectors and the contribution of non-auto business now constitutes almost a third of its total sales.

Going forward, the company is expected to see topline growth from auto component business as demand for commercial vehicles is ex-pected to continue albeit at a slower pace. At the same time, increased thrust by the government on the infrastructure sector will enable BFL to boost business from the non-automotive segment. The company's earnings growth will, however, continue to bank on how its European operations cut costs in the face of poor demand and whether the US revenue continues to grow from hereon.