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Defence ramp-up to be healthy in rest of FY24E

Valuation and View – Overall outlook steady to positive

Bharat Forge (BHFC) 1QFY24 results were ahead of our/street estimates by 8-12% on EBITDA. This was led by better than expected volumes which came in at 67.7k tons (+5% QoQ, 18 quarter high). The positive highlight of the quarters was, 1) improvement in overseas subs results as Europe posted EBITDA of Rs507m in 1QFY24 (margins of 4.4%) vs loss of Rs141m in 4QFY23. While the US operation have posted an EBITDA loss of Rs350m (turn around expected by 4QFY24). 2) sharp rampup in defence (led by exports) with the same expected to sustain in rest of FY24E with overall order book at Rs23-24b in 1QFY24 (v/s Rs20-22b in 4QFY23). The management has hinted towards sustenance of healthy demand momentum across segments going forward led by industrial and PV (auto exports)

With diverse presence, BHFC is better placed than its previous cycles to benefit from i) steady orders and ramp up in domestic/exports PVs and CVs and ii) healthy outlook for industrials (with strong wins in segments like Aerospace, defense, mining, agriculture). We raise FY24/25 EPS by 6.7-11% to factor in for higher shipment and faster defence ramp-up. We reiterate BUY with revised TP of Rs1,156 (v/s Rs978 earlier) based on 26x roll forwarded to Jun’25 consol EPS (v/s Mar’25). Reiterate BUY as one of our top picks among ancs.

Result Highlights – Healthy volumes drive operational beat

* Revenues grew 20.9% YoY (+6.5% QoQ) at ~Rs21.2b as tonnage grew 17%/4.8% YoY/QoQ at ~67.8k tons (18qtr high) while ASP grew 3.3%/1.6% YoY/QoQ at Rs313.9k/ton.

* Gross margins contracted 290bp YoY (-80bp QoQ) at 55.7% (est 56.2%). This was led by product mix which is expected to normalize in subsequent quarters. This resulted EBITDA at Rs5.7b (+24% YoY, +9% QoQ, est Rs5.3b, cons Rs5.1b). Consequently, EBITDA margins came in at 26.8% (+70bp YoY and QoQ, est 26.9%). Steady operating performance resulted Adj.PAT at Rs3.1b (+26.7% YoY, +12.8% QoQ, in-line).

* Segmental performance (1QFY24) – Auto exports (37% of sales) revenues grew 19.7% YoY to Rs7.8b. Auto domestic (16% of sales) revenues grew ~8% YoY at Rs3.35b. Non-auto (42% of sales) revenues grew 31% YoY to Rs9b led by execution of defence order.

* Overseas subs performance in 1QFY24 - the European operations posted EBITDA of Rs507m in 1QFY24 (margins of 4.4%) vs loss of Rs141m in 4QFY23. While the US operation have posted an EBITDA loss of Rs350m. Expect the US business to turn around by 4QFY24E. Capacity utilization at +50% in European operations.

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