Bharat Forge Limited (NSEI:BHARATFORG), a auto components company based in India, saw a double-digit share price rise of over 10% in the past couple of months on the NSEI. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, could the stock still be trading at a relatively cheap price? Today I will analyse the most recent data on Bharat Forge’s outlook and valuation to see if the opportunity still exists. View our latest analysis for Bharat Forge
What’s the opportunity in Bharat Forge?
According to my relative valuation model, the stock is currently overvalued. I’ve used the price-to-equity ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 47.5x is currently well-above the industry average of 30.5x, meaning that it is trading at a more expensive price relative to its peers. Furthermore, Bharat Forge’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. If you believe the share price should eventually reach its true value, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range.
What kind of growth will Bharat Forge generate?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 94.94% over the next couple of years, the future seems bright for Bharat Forge. It looks like higher cash flows is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? It seems like the market has well and truly priced in Bharat Forge’s positive outlook, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe Bharat Forge should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping an eye on Bharat Forge for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for Bharat Forge, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.