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Sowmya Sundar

SHAREHOLDERS in Bharat Forge can pare exposures in the stock, which has been constantly edging up on the back of improved export prospects. At Rs 252, the stock trades at 17 times its trailing 12-month earnings per share. The current valuations reflect the growth achieved in the past few quarters. Valuations appear on the high side, as sustaining the same growth in the future might be difficult. There might be some upside left in the next two-three weeks in the run up to the March quarter results. Shareholders can cut exposures on any uptrend and re-enter later at lower valuations.

Given the not-so-promising growth prospects in the domestic market, Bharat Forge heavily depends on the export market for its growth. In addition to automobiles, the company has been slowly moving into other user segments such as oil and gas. These initiatives resulted in the doubling of export revenues in the last couple of years.

In the past three-four quarters, exports more than doubled and now constitute close to 40 per cent of the turnover. Any further increase in the export-to-sales ratio would increase the risk element in the stock as the revenue and profitability would be exposed to the vagaries of the international markets. Their primary market, the US, where it caters to almost 50 per cent of the heavy truck segment, is yet to show signs of a recovery. The efforts to diversify geographically by cutting exposures in the US region and moving to fresh territories such as China could help it maintain ground in the overseas market.

The long-term agreements entered into with certain international firms for sourcing components and forgings would ensure steady revenue from these firms in the next three-four years. But any major growth in exports appears limited and also riskier.

On the domestic front, though commercial vehicle sales continue to remain buoyant, the sales figures for cars and multi-utility vehicles have started showing some weakness after a buoyant growth in 2002. Moreover, some automobile companies source their component requirements from their captive production capacities, reducing the scope for players such as Bharat Forge.

The domestic market is also competitive on the pricing front. Under these circumstances, growth prospects in the domestic market do not appear too promising. The high debt burden and interest costs too are worrying as they eat into the return to shareholders.

Despite conscious efforts towards debt reduction, the gearing is still on the high side at close to two times the shareholder funds.

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