What to trade tomorrow

  Bharat Forge may be a good buy

The December quarter performance of Bharat Forge Ltd surpassed the Street’s forecast on all counts, including a net profit that more than doubled from a year back. What’s more, in nine months, the auto component maker crossed the net profit clocked in 12 months of the previous year. Twin benefits from a revival in the domestic truck market and a growth in market share in north America pushed up revenue. If domestic revenue rose by 24%, exports were even better at 53%. The 43.9% jump in net revenue was the result of a 25% rise in shipment volumes and 19% improvement in average realization. Efforts to forge ahead in non-auto industries helped, too. As the management said in the analysts’ call, assets were made to sweat more, leading to higher productivity. This, along with better sales mix—higher commercial vehicle and non-auto sales—led to higher operating cash flows. Operating profit, which beat Bloomberg’s forecast by 15%, was also a strong 70% up from a year back. Operating margin at 30.6% surged 480 basis points (bps) from the year-ago period, again beating a 20-broker consensus estimate by 230 bps. One basis point is 0.01%.

Bharat Forge’s performance, when seen against the current economic backdrop, becomes more meaningful. The domestic economy as well as overseas regions, especially north America, are yet to see the full benefits of a revival from auto and industrial slowdown. This implies considerable headroom for the firm to clock better performance in the quarters ahead, which could trigger earnings upgrades in the near term. Meanwhile, there seems to be little to worry on the balance sheet front as the company has a comfortable debt to equity ratio of 0.3 at the stand-alone level. Aggressive repayment timelines indicated, along with strong cash flows, could strengthen the balance sheet further. It’s not surprising then that the stock has surged 2.5 times since April. Strong results and investor confidence about future prospects is mirrored in Bharat Forge’s stock performance. It rose 3% to Rs.1,065.7 on Monday even when the benchmark Sensex closed lower.



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