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In-line result; demand commentary a mixed bag

Wins orders of INR7.4b for SA business in 1H (incl. INR3b for e-mobility)

* Bharat Forge (BHFC)’s 2QFY24 standalone performance was in line. The company reported record high shipment tonnage at 70.3k tons during the quarter, registering 15% YoY growth. However, the overall demand commentary was a mixed bag, as outlook for the India business remains positive while overseas business growth is anticipated to remain flattish.

* We cut our EPS by 8%/ 3% for FY24E/25E to factor in slower-than-expected ramp up in overseas subsidiaries. Reiterate BUY with a TP of INR1,250 (based on 27x Dec-25E consolidated EPS + INR133 for two gun platforms).

Foreign subsidiary losses widen sequentially

* BHFC’s 2QFY24 standalone revenue/EBITDA/adj. PAT grew 21%/36%/29% YoY to INR22.5b/INR6.2b/INR3.5b (vs. est. INR22.8b/INR6.1b/INR3.6b). 1HFY24 revenue/EBITDA/adj. PAT grew 21%/28%/28% YoY.

* Tonnage grew 15% YoY to 70.3k tons (vs. est. 70.9k tons). Net realizations grew 5% YoY to ~INR320k (v/s est. INR322k), benefitting from the mix.

* Net revenue grew 21% YoY to INR22.5b (v/s est. INR22.8b). Both domestic and export revenue grew 21% YoY each. Auto segment grew 15% YoY, whereas non-autos grew 33% YoY.

* Gross margin expanded 110bp YoY (+100bp QoQ) to 56.7% (v/s est. 56.1%) led by better product mix and cost reduction initiatives. EBITDA margin improved 310bp YoY to 27.4% (v/s est. 26.8%).

* Further, a slightly higher-than-estimated interest cost and FX loss restricted adj. PAT growth to 29% YoY at INR3.5b (v/s est. INR3.6b).

* Foreign subsidiaries reported a loss of INR1.15b (v/s INR1.16m PBT in 2QFY23 and loss of INR930m in 1QFY24) primarily due to losses in the US/EU aluminum forging operations.

* FCFF stood at INR6.3b (v/s INR651m in 1HFY23) led by a strong CFO of INR7.5b (v/s INR1.9b in 1HFY23) and controlled capex of INR1.2b similar to last year’s levels.

Highlights from the management interaction

* Outlook- i) CVs: Positive outlook for the India business while it is expected to remain flattish for the US business next year, ii) Industrials: the US business is likely to remain flattish next year. In India, while outlook is expected to remain positive, there are structural challenges for the businesses such as wind energy and some softness in construction mining.

* Defense: Reported revenue of INR2b in 2QFY24 (vs. INR2.5b in 1QFY24). KSSL won orders worth INR11b during the quarter for multiple products and customers, taking the total executable order pipeline to INR30b that will be executed over the next two years.

* BHFC has won INR5b of new business in 2QFY24 for the industrials and CV divisions. Order wins for 1HFY24 stood at INR7.4b, including INR3b for emobility platforms.

* Overseas subsidiaries (combining both the US and EU) reported EBITDA of INR90m in 2QFY24 vs. operating loss of INR340m in 2QFY23. The EU subsidiaries reported EBITDA of INR350m (down sequentially due to holiday season in the EU), while the US operations posted operating loss of INR260m.

Valuation and view

* While BHFC’s core India business is on the growth path, it’s worth noting that the underlying macro environment in the US and EU is showing signs of weakening. However, the newly established businesses incubated over the last 5-10 years have reached pivotal moments and they have the potential to offset the anticipated challenges in core operations. The Defense segment is poised for significant growth, with execution already underway. The e-mobility sector presents a substantial opportunity and possesses foundational elements, but the competitive landscape is yet to evolve.

* We cut our EPS by 8%/ 3% for FY24E/25E to factor in the slower-than-expected ramp up in the US and EU facilities. We estimate a consolidated revenue/ EBITDA/PAT CAGR of 13%/37%/82% over FY23-25E. The stock trades at 39.0x/ 27.8x FY24E/FY25E consolidated EPS. Reiterate BUY with a TP of INR1,250 (based on 27x Dec-25E consolidated EPS + INR133 for two gun platforms).

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