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Defence outshine weakness in other segments

Valuation and View – Diversified revenue base to cushion weak auto

Bharat Forge (BHFC) 1QFY25 results were in-line to our/street. ASP came in lower at ~Rs346.4k/ton (+10.4% YoY/ -0.9% QoQ, est Rs356k), partially offset by better tonnage at 67.5k tons (-0.4% YoY/ +1.3% QoQ, est 66.7k tons). The key highlight of the quarters was, ramp-up in defence business with 1QFY25 revenues at Rs6.42b (vs ~Rs15.6b in FY24) with cumulative order book at ~R54b (vs ~Rs51.9b in FY24) as it added Rs7.75b orders in 1QFY25. However, the overseas subs performance continued to be below par led by EU with margins at ~3.5% in 1QFY25 (~2.9% in 4QFY24 and ~4.4% in 1QFY24) while US subs is still some time away for EBITDA breakeven (1QFY25 EBITDA loss at Rs235m. The management has hinted towards improved profitability in overseas subs over FY25E led by pricing support both in EU/US for Alu forgings, cost efficiencies and improved utilization.

With diverse presence, BHFC is better placed than its previous cycles as it to benefit from 1) improving defence orders and ramp up in domestic/exports PVs, 2) positive outlook for industrials (with strong wins in Aerospace, mining, and recovery in O&G). We largely maintain FY25/26E EPS as we continue to expect sharp defence ramp-up would cushion weakness in non-defence vertical. The recent correction in the stock do provide limited upside on the stock as our SOTP based TP value the co at Rs1,770 (v/s Rs1,570 earlier) based on 50x to defence business at Rs993/share and 23x to other base business at Rs777/share on Mar’26 EPS. BHFC trades at 48.3x/39.1x 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 9.9% YoY (+0.4% QoQ) at ~Rs23.4b (est ~Rs23.8b) as tonnage degrew 0.4% YoY/+1.3% QoQ at ~67.5k tons while ASP grew 10.4%/-0.0% YoY/QoQ at Rs346.4k/ton.

* Gross margins expanded 250bp YoY (-40bp QoQ) at 58.2% (est 58.6%). This resulted EBITDA at ~Rs6.58b (+15.2% YoY, +0.6% QoQ, est Rs6.7b). Consequently, EBITDA margins came in at 28.1% (+130bp YoY and flat QoQ, est 28.3%). Steady operating performance resulted Adj.PAT at ~Rs3.7b (+20.5% YoY, -6.1% QoQ, est ~Rs4.1b). Co reported exceptional cost of Rs1.45b due to provision for impairment of an investment in Tork and VRS at Mundhwa plant.

* Overseas subs performance - Europe operations EBITDAM at 3.5% (vs 4.4% in 1QFY24, 2.9% in 4QFY24), US EBITDA loss at Rs235m (vs loss of Rs349m in 1QFY24 and loss of Rs341m in 4QFY24) whereas overall EBITDA margins for overseas subs came in at ~1% (vs 1.7% in 4Q and 1.2% in 1QFY24).

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