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Europe drags; defence stumbles

Bharat Forge’s (BHFC IN) consolidated revenue contracted 10.1%/5.8% YoY/QoQ to INR 34.7bn and standalone revenue by 7.4%/6.7% YoY/QoQ to INR 20.9 bn. This was led by a dip in domestic industrial revenue by 13%/20% YoY/QoQ. And exports PV & CV revenue was down 5%/26% YoY respectively , owing to demand challenges in Europe. Defence revenues came in at INR 3.4bn in Q3. Defence orders are lumpy in some quarters and in that context, Q3 was weak. Led by weak demand in Europe, EBITDA margin at European operations contracted by 280bps QoQ to 1.1%, while US operations continued to steadily improve with EBITDA margin at -3% (-11.3% in Q2FY25). The management expects FY26E consolidated revenues to remain flattish given that the weakness in Europe will be partially offset by expected recovery in US Class 8. We cut consolidated EPS estimates by ~4-12% in FY25E-27E, led by weaker outlook for the EU. So, we pare TP to INR 1,155 on 30x FY27E consolidated EPS as we roll forward. We reiterate Accumulate

Expect Defence to revive; see green-shoots in Aerospace: Defence revenue came in at INR 3.4bn, down 32% QoQ in Q3FY25 (hit by lumpy execution of defence orders), with an executable orderbook of INR 57.1bn. New orders worth ~INR 1bn further strengthened its pipeline, while ATAGS orders are expected in 3-4 months, driving long-term growth. Series production and revenue realization may commence in 15-18 months. The Aerospace segment is on an upward trajectory, backed by investments in landing gear machining and a precision ring mill.

Europe to remain a drag; expect flat consolidated revenue growth: BHFC anticipates a stronger Q4FY25 for India’s CV market, while the CV segment in North America is set to improve by ~10% in H2FY26. Outlook for Europe is uncertain due to elections and policy shifts. Restructuring decisions for European operations are expected in six months, with losses likely to stay elevated for 2-3 quarters before improving. Policy shifts in the US market adds to uncertainty. Owing to these positives and negatives, BHFC expects FY26 consolidated revenue to remain flat. Note that, European operations contribute 26% to total revenues and 2% to EBITDA (in Q3FY25).

Reiterate Accumulate with a lower TP of INR 1,155: There were expectations that the European business would turn around, which would be a significant delta in subsidiary performance over FY26-27. However, BHFC acknowledged that turning around European operations is proving to be difficult and restructuring of operations is likely in the next six months.

The Defence business may revive after a brief pause in Q3FY25. We are monitoring the cyclicality of Class 8 truck market in the US (management sounded positive on growth) and underperformance in the PV and CV segments in India. We reiterate Accumulate and lower our TP to INR 1,155 from INR 1,523 on 30x FY27E P/E, led by weaker outlook for the EU.

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