ET Intelligence Group: Big trucks should mean a rich haul for Bharat Forge. India's biggest forging company, which gets half its revenue by selling powertrain and chassis components to global truck makers, is harnessing the uptrend in the freight industry to ensure its premium valuations stay where they are.

The stock is trading at 26 times its FY20 earnings, a 30 per cent premium to the five-year average.

Earnings visibility is emerging from the continued buoyancy in North American sales that make up a fifth of the total standalone revenue for the company. Order inflows for US class 8 truck — a gauge of new orders for the truck in North America — reached a record at 53,100 units in August , a gain of 161 per cent YoY and surpassed the previous peak of 52,194 units in March 2006.

Large fleet operators are placing their orders ahead of schedule to reserve built slots in the market where demand is well above capacity. Typically, the average upcycle of commercial vehicles is around two-three years. Therefore, there is some apprehension about the sustainability of the order inflows due to the peaking of the US class 8 truck cycle.
However, thanks to strengthening order inflow, Americas Commercial Transportation (ACT), a forecaster for CV volumes in the US, expects that order flows will decline in 2020 from an earlier forecast of 2019.

Furthermore, the order book increased to nine months from seven months. This suggests that production of truck makers will be robust for the next year too. In the June quarter, US truck sales volume grew 21 per cent to ?352 crore. Given the current momentum, the Street is factoring revenue growth of 25-30 per cent for the current fiscal. The company's management has guided for the class 8 truck growth in excess of 28 per cent in 2018 and that is likely to remain strong in 2019.