Stock pick: Bharat Forge to see strong growth

With a 5% q-o-q increase in revenue during the first quarter of 2021-22, Bharat Forge was able to beat street expectations. A 25% q-o-q increase in exports helped Bharat Forge to achieve this feat. Though the reported net profit fell by 19% q-o-q, the same was because of an exceptional item (`62 crore VRS outlay) and after adjusting for this, net profit grew by 11% q-o-q.Bharat Forge is in a sweet spot now because of the cyclical recovery in its core business segments. Though the first quarter domestic revenues were impacted by the second wave, it should improve now because of the improving covid situation. Heavy commercial vehicles demand is increasing in North America and Europe on the back of increased freight activities. Due to semiconductor shortages, heavy truck manufacturers across the globe are not able to meet the demand and its order backlog has now stretched to 10 months now. With more than 30% of its revenues coming from the US, a US infra package can be a further boost. Bharat Forge is also a prime candidate for incentives under the production linked incentive (PLI) scheme. Revenue from its oil and gas division also tripled in the first quarter due to pick-up -up in drilling activity amid higher oil prices and this trend is expected for a few more years. Demand improvements happening now in construction and industrial equipments divisions are also expected to remain for some more years.To maintain its leadership position in automotive forgings Bharat Forge is taking new initiatives on the electric vehicles front. These initiatives, for electric 2 wheelers and commercial vehicles, are expected to yield fruit from 2022-23. Bharat Forge is also ready for inorganic growth and the recent acquisition of Sanghvi Forgings is a good example for this. Bharat Forge plans to triple Sanghvi Forging’s capacity by debottlenecking it with a cost of `20-25 crore and make it profitable from the third quarter of 2021-22.Bharat Forge is also focussing on diversification to other fields such as defence, railways, aerospace, etc. In addition to providing additional growth, these new segments are also expected to act as counter balance to the cyclical heavy trucks and oil & gas segments. Since Bharat Forge is free cash flow (FCF) generating company, these new investments will be met through internal accruals.86114305 Selection MethodologyWe pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.(Graphics by Sadhana Saxena/ET Prime)

from Economic Times https://ift.tt/3hmtqqH