Despite strong show, Street sees re-rating potential in Bharat Forge

Written by fe Bureau | Mumbai | Updated: Sep 3 2014, 07:51am hrs
Bharat Forge is riding high on expected demand recovery in the domestic automobile sector even as the company's industrial business also contributes to margin expansion. Increased revenue visibility on the back of robust order backlog and an improved product mix have turned the mid-cap stock a favourite among investors and analysts.

Not surprisingly, while at least five broking houses, including IIFL and Standard Chartered, have upgraded their rating on the stock since July, currently two-third of analysts tracking the stock have assigned it a 'buy' rating, up from 52% in January this year, as per a Bloomberg compilation.

For the year so far, the stock price has witnessed a more than two-fold jump as the Street took note of the robust financial performance of the auto ancillary company. A general turnaround in sentiment on hopes of an economic revival, which could help the commercial vehicle industry, has also supported the buying interest.

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In fiscal 2013-2014, the company reported a 30% y-o-y jump in consolidated net sales to Rs 6,716.1 crore, while its net profit more than doubled to Rs 498.5 crore. Over the last five years, Bharat Forge has demonstrated a stellar financial performance with the net earnings growth rising by a compounded annual growth rate of 64%. Currently, various analyst estimates peg the company to report a 30-40% CAGR in its earnings over the next 2-3 fiscals.

The Pune-based forging company, which earns close to 60% of its revenues from the auto ancillary segment, has successfully managed to diversify its business operations over the last couple of years, with increased contribution from the passenger vehicle and industrial segments.

The company's effort to increase the contribution of exports to total sales has also played its part, with the same seeing a 39% y-o-y growth in the top line in the quarter ended June 2014, compared to a 10.6% y-o-y growth in domestic revenue.

The industrial business segment trough, which the company provides machined components to oil & gas, railways, and mining sectors is a high margin business is seen growing faster than the auto segment. Improved operating leverage due to higher capacity utilization, low planned capex and improving product mix are seen as the margin driver for the company going ahead.

On Tuesday, the stock hit its lifetime high of Rs 818.30 before closing the session at Rs 814.75, reflecting a year-to-date gain of 148%. The stock now trades at about 16% premium to its long-term trailing 12-month earnings multiple.

The intense year-to-date price gain notwithstanding, experts believe that a recovery in the domestic commercial vehicle demand and an export driven pick-up in its non-auto industrial business could lead to further re-rating of the stock.