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Defence ramp-up to be healthy in rest of FY24E

Valuation and View – Overall outlook steady to positive

Bharat Forge (BHFC) 2QFY24 results were ahead of our/street estimates by 4-9% on EBITDA. This was led by better-than-expected volumes which came in at 70.3k tons (+2% QoQ, 19 quarter high) and ASP at ~Rs320k (est Rs310k, +5% YoY/ ~2% QoQ). The positive highlight of the quarters was, 1) continued traction in the defence business with cumulative order book at ~Rs30b (v/s Rs22-23b in 1QFY24), 2) The overseas subs performance led by EU were stable (due to seasonality) with margins at ~3.5% in 2Q (v/s 4.4% in 1Q) while US subs reported loss of Rs260m (v/s Rs350m QoQ) as utilization improved to ~50% (expect break even at 70-75%). The management has hinted towards sustenance of healthy demand momentum across segments going forward led by industrial (domestic) and PV (auto exports).

With diverse presence, BHFC is better placed than its previous cycles to benefit from i) steady orders and ramp up in domestic/exports PVs and CVs and ii) healthy outlook for industrials (with strong wins in segments like Aerospace, defense, mining, agriculture). We cut FY24 EPS by 3.7% while revise FY25/26 EPS by ~2% to factor in for higher shipment and faster defence ramp-up. We reiterate BUY as one of our preferred bet among ancs with revised TP of Rs1,295 (v/s Rs1,267 earlier) based on 27x to Mar’26 EPS. BHFC trades at 25.3x/22.5x of FY24/25 consol EPS (v/s 41x 1

Result Highlights – Healthy volumes drive EBITDA margins beat at 27.1% (est 26%)

* SA Revenues grew 20.7% YoY (+5.7% QoQ) at ~Rs22.5b (est Rs21.5b) as tonnage grew 15%/4% YoY/QoQ at ~70.3k tons (19qtr high) while ASP grew 4.9%/1.9% YoY/QoQ at Rs319.9k/ton.

* Gross margins expanded 110bp YoY (+100bp QoQ) at 56.7% (est 55.1%). This resulted EBITDA at ~Rs6.1b (+34.7% YoY, +7% QoQ, est Rs5.6b, consRs5.9b). Consequently, EBITDA margins came in at 27.1% (+280bp YoY and +30bp QoQ, est 26%).

* Healthy operating performance resulted Adj.PAT at ~Rs3.5b (+30% YoY, +12% QoQ, est Rs3.1b, cons Rs3.4b).

* Overseas subs performance - Europe operations EBITDA at 3.5% (v/s 4.5% QoQ) whereas overall EBITDA margins for overseas subs came in at 0.7% (v/s 1.2% QoQ).

* 1HFY24 performance – Revenue/EBITA/PAT grew 20.8%/29.3%/28.5%.

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