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Operating performance in line

Positives appear fully priced in

* Bharat Forge’s (BHFC) 4QFY24 standalone performance was in line with our estimates. Management sounded quite positive about demand in FY25, led by the scaling up of defense orders, stable US Class 8 orders, and turnarounds in overseas subsidiaries.

* While the earnings outlook is positive, it seems fully priced in at valuations of 36x/29x FY25E/FY26E, after the recent sharp run up in the stock. We hence downgrade the stock to Neutral with a TP of INR1,370 (based on 28x Mar’26E consolidated EPS).

Losses in subsidiaries rise sequentially

* BHFC’s 4QFY24 standalone revenue/EBITDA/adj. PAT grew 17%/25%/45% YoY to INR23.3b/INR6.5b/INR4.0b (vs. est. INR23.7b/INR6.8b/INR3.9b). FY24 revenue/EBITDA/adj. PAT grew 18%/28%/33.5% YoY.

* Tonnage grew 3% YoY to 66.6k tons (est. 69.5k tons). Net realizations improved 13% YoY to ~INR349.5k (est. INR340.9k), led by an improved mix.

* Overall revenue growth of 17% YoY was driven by execution on defense export orders and PV exports. Domestic/export revenue grew 38%/6% YoY. The auto segment grew 4.5% YoY, whereas non-autos grew 38% YoY. 

* Gross margin improved 200bp YoY to 58.6% (vs. est. 58%).

* EBITDA margin improved 190bp YoY to 28.1% (est. 28.5%) due to an improved product mix.

* Further, lower interest costs coupled with FX gains led to an in-line adj. PAT of INR4b, reporting 45% YoY growth.

* The Board declared a final dividend of INR6.5/share (total INR9/share in FY24 vs. INR5.5/share in FY23).

* Foreign subsidiaries posted losses of INR1.3b in 4QFY24 (vs. INR1.1b loss in 3QFY24 and loss of INR1.3b in 4QFY23). ? Consolidated FCFF stood at INR1.1b in FY24 (vs. INR3.25b in FY23) despite generating a better operating cash flow of INR16.8b (vs. INR13.4b in FY23). Capex for FY24 stood at INR15.5b (vs. INR9.7b in FY23).

Highlights from the management interaction

* Demand outlook: There is an encouraging traction visible from global OEMs for moving supplies to India from other geographies, including China and Europe. The impact of the Red Sea crisis has reduced, and there is a stronger outlook from the customers than anticipated earlier. There is a stable demand commentary by OEMs for North America Class 8 trucks, while domestic CV volume is likely to be flattish YoY for FY25.

* Defense: 80% of the order book of INR51.92b comes from exports. Execution is expected to happen over the next 3-4 years. This does not include the domestic ATAG opportunity, which is likely to be awarded post-elections.

Valuation and view

* With an order book of INR51.9b to be executed over the next 3-4 years, BHFC’s defense business is expected to be its key growth driver over FY24-26E. Further, strong traction in outsourcing opportunities from China and Europe to India, especially in the Industrials’ segment, is likely to be the other key driver for BHFC going forward. It expects its aerospace business to double in the next 3-4 years. With the capacity ramp-up of overseas subsidiaries and new order wins with better pricing, its performance is likely to improve over FY24-26.

* On account of a better-than-expected scale up of defense orders, we raise our earnings estimates by 1-3% for FY25-26. We estimate a consolidated revenue/ EBITDA/PAT CAGR of 12%/25%/54% over FY24-26. After the recent sharp run up, the stock at 36x/29x FY25E/FY26E consolidated EPS appears fairly valued. We hence downgrade the stock to Neutral with a TP of INR1,370 (based on 28x Mar’26E consolidated EPS).

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