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Strong Defence/Aerospace orderbook to offset weakness in CVs

In 4QFY24, Bharat Forge (BHFC) reported standalone/consolidated revenue beat of 2% / 6% was led by strong ramp-up in defence segment. Standalone EBITDAM came-in at 28.3% (+390bps YoY), 100bps below JMFe owing to unfavourable mix. Consol. EBITDAM declined 260bps QoQ to 15.4% (+340bps YoY). Management highlighted that Class 8 demand remains sluggish in both NA and EU. Outlook for domestic CV segment is flattish. While the growth in Auto segment is expected to moderate, medium-term performance is expected to be led by execution of robust order book in Defence/Aerospace (INR 52bn order book for Defence). Cost-control initiatives and positive operating leverage are likely to support margins in the international operations. We increase our consol. earnings estimate by 2% for FY26E. Maintain BUY with a Mar’25 TP of INR 1,400 (30x forward earnings vs. 25x earlier). Inability to win/execute new defence orders remains a key risk.

* 4QFY24 – Revenue ahead; margin misses estimates: BHFC’s stand. net sales stood at INR 23.3bn (+17% YoY, +3% QoQ); 2% above JMFe driven by execution of defence export orders and PV exports. Total tonnage stood at c.66.6kt (+3% YoY, -1% QoQ). Realisation increased by +4% QoQ (+13% YoY). Reported stand. EBITDAM was 28.3% (+390bps YoY, -100bps QoQ), 100bps below JMFe. Consolidated revenue stood at INR 41.6bn (+15%YoY, +8%QoQ); c.6% above JMFe. EBITDAM stood at 15.4% (+340bps YoY, - 260bps QoQ), 250bps below JMFe. Consol. EBITDA stood at INR 6.4bn (+47%YoY, -8% QoQ), 8% below JMFe. Consol. Adj. PAT stood at INR 2.3bn (+78% YoY; -11% QoQ).

* Domestic business outlook: Domestic revenue increased 32%YoY (+3% QoQ) to INR 10.8bn. CV revenue decreased 15% YoY (-6% QoQ) to INR 2.4bn. CV demand is expected to be muted untill general elections. Overall, the company expects CV industry to be flattish in FY25. PV revenue stood at INR 786mn (-4% YoY, +2% QoQ). YoY decline is owing to completion of an existing program. However, BHFC indicated that premiumization trend and new programs starting in next 2-3 qtrs are expected to drive growth. Domestic Industrial segment revenue increased 69% YoY (+6% QoQ) to INR c.7.6bn led by strong growth in Defence segment. Order pipeline remains strong led by higher capex spends. During FY24, BHFC has won new defence orders worth INR4.5bn and its defence orderbook stands at ~INR 52bn (domestic + exports; to be executed over next 3-4yrs). This is expected to drive strong growth in the medium-term. Further, the company expects to secure order for ATAG guns from Govt of India in the near-term.

* Export business outlook: Exports revenue increased 6%YoY (+3% QoQ) to INR 12.5bn. CV segment revenue stood at INR 5.2bn (+4% YoY, flattish QoQ). Management indicated that North American Class 8 truck production is likely to remain flat with a moderately negative bias in CY24. Sustainable recovery in EU market also remains elusive. PV segment revenue increased 30% YoY (flattish QoQ) to INR 3.3bn owing to healthy demand from existing and new customers for existing and new products (mkt. share gain and enhanced geographical presence). Industrials revenue declined c.7% YoY (+10% QoQ). Industrial revenue ex. O&G segment was up 35% led by strong performance in Construction, Mining, Defence and Aerospace. BHFC indicated that Aerospace segment is on the cusp of rapid growth in the medium-term (aiming to double over next 2-3 years).

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