North American Free Trade Agreement (NAFTA) Class 8 Trucks recorded a whopping 40% year-on-year (y-o-y) decline in April 2016 to around 14,000 units, according to brokerage firm Edelweiss. The decline is also steep at 15% on a quarter-on-quarter (q-o-q) basis. Such trucks are critical for Bharat Forge as it derives 20% of its revenue from North America trucks segment. In November 2014, the NAFTA Class 8 trucks reported an extraordinary rise of nearly 100% y-o-y (Source: Bloomberg). Since then, there has been a decline in the growth rates. The trucks have reported negative growth on a y-o-y basis since March 2015. According to brokerage firm Edelweiss, commentaries Pacific Car and Foundry Company, Daimler and Volvo indicate a 20-25% decline in NAFTA class 8 market from 15% earlier.
While Bharat Forge will get hit in the North America, it has established its presence in European market through a number of acquisitions; and Europe has shown positive signs by reporting 30% year to date (YTD) growth in heavy duty market, which is in contrast to the NAFTA Class 8 Trucks. Exports accounted for around 68% of Bharat Forge's revenues in FY14-15 based on consolidated numbers. Commercial vehicles are a significant contributor to export sales. They accounted for 59% of its export sales in FY14-15.
The company has entered the US passenger vehicles market in order to open new revenue stream and diversify risk. Its plans include expanding into global aerospace segment. Recently, aircraft manufacturer Boeing, has awarded a contract to the company to procure titanium forgings for its Boeing 777 aircraft. Bharat Forge has been already supplying titanium flap-track forgings for the Boeing 737. The company will also supply forgings for the 737 MAX, scheduled to enter service in 2017. It has significant plans for investments into the defence space too.
Bharat Forge is one of the largest commercial forgings company in the world. Its return on equity (RoE) stands at around 21% based on trailing 12 months earnings on a standalone basis. It trades at around 25 times its trailing 12 months standalone earnings. The debt equity ratio for as on 31 March 2015 stood at 0.74 based on consolidated results.
The stock has had an extraordinary run for two years since August 2013, when it touched a low of Rs185. From then, it touched a high of Rs1,288 in August 2015, delivering stupendous returns of nearly 600%. The stock has been under pressure in the last eight months. During this period, it has declined by 40% from a price of Rs1,288 in mid-August to Rs780 currently. The company has informed the exchanges that that a meeting of the Board of Directors will be held on 17 May 2016, to consider the audited financial results of the Company for the quarter and year ended on March 31, 2016 and to consider recommendation of final dividend.