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Defence order wins strong; Downgrade to ADD

Valuation and View – Diversified revenue base to cushion weak auto

Bharat Forge (BHFC) 4QFY24 results were in-line to our/street. This was led by better-than-expected ASPs at ~Rs349.5k/ton (+13.1% YoY/ +4.2% QoQ, 21 quarter high, est Rs334k), partially offset by weak tonnage at 66.6k tons (+3% YoY/ -1.3% QoQ, est 69k tons). The key highlight of the quarters was, 1) ramp-up in defence business with FY24 revenues at ~Rs15.6b with cumulative order book at ~Rs45b (vs Rs20b/Rs30b indicated in 3Q/2Q) led by execution of exports orders (80% of revenues), 2) The overseas subs performance led by EU with margins at ~2.9% in 4QFY24 (vs ~2.1% in 3Q and -1.3% in 4QFY23 and ~3.2% in FY24) while US subs is still muted. The management has hinted towards improved profitability in overseas subs over FY25E led by cost efficiencies and improved utilization. With diverse presence, BHFC is better placed than its previous cycles to benefit from 1) improving defence orders and ramp up in domestic/exports PVs, ii) stable to positive outlook for industrials (with strong wins in segments like Aerospace, mining, railways and agriculture). We maintain FY25E EPS while increase FY26E EPS by ~6% for gradual improvement in global subs. With recent sharp valuations expansion, we downgrade the stock to ADD (vs BUY) with revised TP of Rs1,531 (v/s Rs1,292 earlier) based on 33x to Mar’26 EPS. BHFC trades at 38.3x/30.7x of FY25/26 consol EPS (v/s ~42x 10 year LPA), limiting overall upside while reflecting diversifying profit pools (execution in industrial segment led by defense, aerospace).

Result Highlights – In-line operating performance

* SA Revenues grew 16.6% YoY (+2.9% QoQ) at ~Rs23.3b (est Rs23.1b) as tonnage grew 3%/-0.9% YoY/QoQ at ~66.6k tons while ASP grew 13.1%/4.2% YoY/QoQ at Rs349.5k/ton (est Rs334k/ton). Defence revenues at ~Rs15.6b in FY24.

* Gross margins expanded ~200bp YoY (+50bp QoQ) at 58.6% (est 58%), led by higher share of systems and sub-systems in industrial and defence segments. This resulted EBITDA at ~Rs6.54b (+25.1% YoY, +1.3% QoQ, est Rs6.5b). Consequently, EBITDA margins came in at 28.1% (+190bp YoY, -40bp QoQ, est 28.2%). Steady operating performance resulted Adj.PAT at ~Rs4b (+44.8% YoY, +5.8% QoQ, est Rs3.7b, cons Rs3.8b).

* Overseas subs performance - Europe operations EBITDAM at 2.9% (v/s 2.1% in 3Q and 3.2% FY24), US at -14.9% (v/s breakeven in 3Q and -11% in FY24). US subs had one off which impacted EBITDA. Capacity utilization in Aluminum business at ~60% in the US and ~75% in Europe. Expect US subs to see profitability improving in 2 quarters.

* FY24 performance – Revenue/EBITDA/Adj.PAT grew 21.5%/44.7%/71.1%.

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