Bharat Forge Tumbles As Heavy Truck Sales Fall In U.S.

Shares of axle maker Bharat Forge Ltd., India's largest exporter of automotive parts, fell the most in two years as sales of heavy trucks declined to their lowest in 14 months in the U.S.

Preliminary order data for North America Class 8 trucks show sales of 27,900 units of multi-axle 15-tonne rigs in November, according to ACT Research. That's a 36 percent drop over the previous month and 15 percent lower than a year earlier.

Bharat Forge tumbled as much as 10 percent, the most since November 2016, while Ramkrishna Forgings Ltd. fell up to 5 percent. U.S. commercial vehicle segment contributed 15 percent of Bharat Forge's revenue in the year ended March, according to its filings.

The company's revenue's sensitivity to U.S. exports is high and the bottom line's is even higher, according to Amit Mahawar, analyst at broking firm Edelweiss Securities. “This will have a bearing on profitability, despite gradual reaping of diversification benefits.”

Bharat Forge, in its analyst call after the September-quarter earnings, had guided for U.S. Class 8 volumes of 320,000 in 2018 and 335,000 in 2019.

Nomura expects the orders to fall due to excess output in the past. Truck production rate in the U.S. has averaged at 30,000 units a month for the past five months versus the average order intake of 42,000 units, according to Nomura. The brokerage expects the cycle to peak out in the first half of the next financial year 2019-20 as production lags orders by six to seven months.

Bharat Forge is trading at 20 times its earnings estimate for FY20 after factoring in nearly 13 percent earnings growth over FY20-21, Kapil Singh, research analyst at Nomura wrote. That's expensive, he said. Nomura has a neutral rating on the stock with a target price of Rs 667 apiece—implying an upside of 24 percent from the current levels.

The average return potential for the stock is 30 percent, according to Bloomberg. More than 72.7 percent analysts have a ‘Buy' rating on the stock and 21.2 percent rate it a ‘Hold'; only 6 percent recommend ‘Sell'.