Add Bharat Forge Ltd for the Target Rs.1,450 By Emkay Global Financial Services Ltd
Q2 likely the bottom quarter; pace of recovery monitorable
Bharat Forge (BHFC) logged a steady Q2, with consol revenue up 9% YoY to Rs40bn and EBITDA up 12% YoY to Rs7.3bn. Margin improved by 80bps QoQ to 18%, aided by cost rationalization and better subs performance (on improved product mix which is likely to sustain). The management reiterated that Q2 likely marks the bottom of the current downcycle, with Q3 expected to maintain similar levels; gradual recovery is expected from Q4, as global destocking eases/US demand stabilizes. ATAGS execution to commence in CY26 (in 6-9M), ramping up over the next 3Y; FY27 defense revenue is expected to see an uptick from FY26 levels. Also, tariff-related headwinds in US exports would be more than offset by the industrial business across India, exports to non-US regions, and ramp up in the defense business. We believe the worst cyclical trough is largely priced-in and, hence, raise target multiple to 20x Sep-27E EV/EBITDA (vs 17x earlier). We haul up our TP by ~21% to Rs1,450 (from Rs1,200); revival remains the key monitorable. Our estimates are largely unchanged; retain ADD.
Beat across parameters; however, North America still lagging
Consol revenue rose ~9% YoY to Rs40bn. At the SA level, revenue fell 13% YoY at Rs19bn, impacted by a sharp drop in the North American CV demand. Domestic Auto revenue was flattish owing to 1% de-growth in PVs, while domestic non-auto revenue fell 7% YoY. Exports fell 20% YoY. Consol EBITDA rose 12% YoY to 7.3bn; EBITDA margin rose by 80bps QoQ to 18%, on account of lower opex/staff costs partially offset by GM contraction. Margin of subsidiaries (consol-SA) stood at 8.4% vs 5.6%/3.8% in Q1FY26/Q4FY25. PAT was up 23% YoY to Rs3bn, owing to strong margin performance.
Earnings call KTAs
1) The mgmt highlighted that Q2 marked the trough of the current downcycle; Q3 is expected to see a similar trend, while Q4 should see an uptick as global destocking eases and US demand stabilizes. 2) India MHCV demand expected to be flat for FY26, while tractor demand remains strong; defense, aerospace to be key growth drivers over FY27– 28. 3) BHFC reiterated that the US CV market slowdown continues to weigh on exports, but demand normalization is likely by early-FY27. 3) The defense order book stood at Rs110bn, excl a Rs14bn carbine order (execution to begin in 9-12M; full execution over 4Y). 4) Defense revenue recognition typically lags by 6–9M post-order, as FOMP (final order manufacturing protocol) is required before deliveries start. 5) The recent order worth Rs2.5bn, from the Navy for underwater and unmanned marine systems, was won via Kalyani Strategic Systems (KSSL), a 100% subsidiary, and will be delivered in a year. 6) ATAGS (artillery gun) execution will start from CY26, ramping up over 3Y; FY27 defense revenue expected to be meaningfully higher YoY. 7) Aerospace revenue expected to grow from Rs2.5bn in FY25 to Rs3.5bn in FY26, with strong 3-4Y visibility ahead, driven by new engine and structural component programs. 8) For the American Axles subsidiary, near-term focus (Horizon 1) is on stabilization/better profitability; Horizon 2 to focus on aggressive growth in LCV/ICV and OFH applications in India. 9) BHFC noted that tariff cost rose to Rs240mn in Q2 (Q1: Rs140mn) due to sharing US export duties.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
