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Industrial business outlook improves

Defence orders and PV exports aid in 17% YoY growth

Bharat Forge (BHFC IN) Q4 standalone revenue grew 17% YoY and 3% QoQ to INR 23.3bn, led by 6% exports revenue growth and 38% growth in domestic revenue. Key drivers include domestic industrial, up 94% YoY, propped up by supply to Kalyani Strategic Systems (KSSL), and exports PV segments, up 30% YoY. The underperformer was the domestic CV segment, which contracted 15% due to lower CV industry volume YoY. Volume sales improved 3% YoY but fell 1% QoQ to 66,619 tonne, with a 13% YoY rise in realization. Standalone EBITDA rose 35% YoY but flat QoQ, with margin expanding 388bp YoY to 28.3%. Consolidated revenue rose 15% YoY and 8% QoQ to INR 41.6bn while margin declined 260bp to 15.4%.

Defence revenue at INR 15.6bn in FY24; order book at INR 51.9bn

The defence segment clocked in revenue of ~INR 15.6bn in FY24 and more than 80% of this revenue is exports. The company secured new orders worth ~INR 44.9bn across artillery systems, armored vehicles, and consumables. The executable orderbook stands at ~INR 51.9bn as on FY24 for the next 3-4 years. The above new orders do not include the domestic Advanced Towed Artillery Gun System (ATAGS) orders. The defence business will be moved to subsidiary KSSL in FY25. Returns on this business would be comparable to the manufacturing business.

Valuations: reiterate Accumulate with a higher TP of INR 1,550

The entry into defence and new EV mobility pared down dependence on CV powertrain. Defence revenue in FY24 was robust at INR 15bn (vs our previous assumption of INR 10bn) and outstanding orderbook was INR 52bn to be executed in the next 36-48 months. Improving defence order visibility and orderbook translating into production may bear fruit during FY25-27 coupled with rising revenue for the aerospace vertical. We are monitoring cyclicality of Class 8 truck market in the US and underperformance in the PV & CV segments in India, which may restrict valuation. We expect a revenue CAGR of ~13% and an EBITDA CAGR of 18% during FY24-26E. We retain Accumulate and raise our TP to INR 1,550 from INR 1,202 on 35x (from 30x) June 2026E P/E as we roll forward.

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