Teji Mandi: COVID hits Bharat Forge hard but management remains confident to come out stronger than before
Teji Mandi: COVID hits Bharat Forge hard but management remains confident to come out stronger than before
Bharat Forge

Bharat Forge reported a consolidated loss in the last quarter of Financial Year 2020, with a sharp fall in standalone revenue and margins and continued losses in subsidiaries. The EBITDA margin of 16.8% in the last quarter is at an 11-year low is much lower than recent downturns. The near-term outlook for the Commercial Vehicle (CV) segments (India, US, EU) is very weak, so is the case with the Oil & Gas segment. Management commentary implies a downwards revision in Financial Year 2021 revenue and a sharper focus on reducing debt and cost.

Teji Mandi: COVID hits Bharat Forge hard but management remains confident to come out stronger than before
Teji Mandi

Margins impacted due to high fixed cost base and revenue plunge in the last quarter of Financial Year 2020

While the revenue dip in the last quarter was broadly in line with the street's expectations, Bharat Forge saw a deeper impact of costs, which led to a sharp miss in the EBITDA margin. Additionally, investment in its electric truck JV Tevva faced impairment of Rs 89 crore with no funding support from UK government and forex loss of Rs 38 crore as compared to a gain of ~Rs35 crore since last year which led to a loss in Profit.

Teji Mandi: COVID hits Bharat Forge hard but management remains confident to come out stronger than before
Teji Mandi

The decline in all segments impacted sales

Revenues declined 47% since last year to Rs 880 crore, as tonnage/realizations declined ~36%/17.6% since last year. Domestic/export revenues declined 44%/49% led by a decline in all sub-segments.

Teji Mandi: COVID hits Bharat Forge hard but management remains confident to come out stronger than before
Teji Mandi

From Management's Desk

The outlook for the domestic automotive sector in the Financial Year 2021 is uncertain in the backdrop of COVID 19 impact on various factors that influence demand off-take. Any government intervention will go a long way toward reviving sentiment.

In the passenger vehicle segment, the company continues to perform better than the underlying market. The revenues from Passenger Vehicles declined by 4.6% against an industry decline of 15% on the back of new customer addition and increasing market share.

In the near term, it is difficult to predict the traction from the domestic automotive market while we are confident of increasing our content per vehicle in the medium to long term.

Teji Mandi: COVID hits Bharat Forge hard but management remains confident to come out stronger than before
Teji Mandi

Downward factor

Recovery in the US market remains key

Sustained weakness in domestic auto pose risk

The slowdown in the economy

Teji or Mandi?

Bharat Forge has established itself as a dominant player in domestic and global industrial and auto forgings segments with lead market share amongst many global OEMs. They have successfully diversified revenue base beyond auto forgings making significant inroads into oil and gas, defence, aerospace, and transportation.

While the ongoing cycle is negative for its core business, some ramp-up is visible in the Passenger Vehicle segment. Near-term outlook also looks challenging, but our take is Teji as we believe that Bharat Forge is much better placed than previous cycles with new products and customer additions. Moreover, focus on cost control and lowered CAPEX should keep the balance sheet in good health.

Teji Mandi is a proactive investment manager for everyone. To read more of our research, please visit https://tejimandi.com/research

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