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Valuation and View – Diversified revenue base to cushion weak auto

Bharat Forge (BHFC) 2QFY25 results were largely in-line to our/street. Weak tonnage at 64.1k tons (-9% YoY/ -5% QoQ, est 68.1k tons) was offset by better gross margins at 59.2% (+250bp YoY, est 58.7%). The key highlight of the quarters was, ramp-up in defence business with 2QFY25 revenues at ~Rs5.1b (vs Rs6.42b in 1Q and ~Rs15.6b in FY24) with cumulative order book at ~R59b (vs ~Rs54b in 1QFY25) as it added Rs6.4b orders in 2QFY. QoQ decline in revenues was led by completion of exports orders. However, the overseas subs performance continued to be mixed bag led by EU with margins at ~3.9% in 2QFY25 (vs ~3.5% in 1QFY25) while US subs is still some time away for EBITDA breakeven with 2Q EBITDA loss at Rs216m. The management has hinted towards improved profitability in overseas subs over FY25E led by pricing support both in EU/US for Alu forgings, cost efficiencies and improved utilization. Aerospace vertical order wins at Rs3b (vs revenues of ~Rs1b in 1HFY25).

With diverse presence, BHFC is better placed than its previous cycles as it to benefit from 1) improving defence orders and ramp up in domestic/exports PVs, 2) positive outlook for industrials (with strong wins in Aerospace, mining, and recovery in O&G). We largely maintain FY25/26E EPS as we continue to expect sharp defence ramp-up would cushion weakness in non-defence vertical. The recent correction in the stock largely factors in near-term challenges and do offer decent upside on the stock as our SOTP based TP value the co at Rs1,624 (v/s Rs1,678 earlier) based on 50x to defence business at Rs852/share and 21x to other base business at Rs772/share on Mar’27 EPS. BHFC trades at 33x/28x of FY26/27 consol EPS (v/s ~42x 10-year LPA), supporting overall upside while reflecting diversifying profit pools (execution in industrial segment led by defense, aerospace).

Result Highlights – Margins delivery resilient

* SA Revenues were flat YoY (-3.9% QoQ) at ~Rs22.5b (est Rs23.9b) as tonnage degrew 9% YoY/-5% QoQ at ~64.1k tons while ASP grew 9.8%/+1.2% YoY/QoQ at Rs350.5k/ton. Domestic revenues grew ~12% YoY while exports fell ~9% YoY led by weak Europe CVs. Ex of Europe CV export grew 14% YoY led by NA.

* Gross margins expanded 250bp YoY at 59.2% (est 58.7%). This resulted EBITDA at ~Rs6.5b (+4.8% YoY, est Rs6.8b). EBITDA margins came in at 28.8% (+140bp YoY, est 28.5%). Margins expansion was driven by better product mix. Steady operating performance resulted Adj.PAT at ~Rs3.5b (+0.6% YoY, est ~Rs4.1b).

* Overseas subs performance - Europe EBITDAM at 3.9% (vs 3.5% in 2QFY24), US EBITDA loss at USD216m (vs loss of Rs263m in 2QFY24) whereas overall EBITDA margins for overseas subs came in at ~1.4% (vs 0.7% in 2QFY24).

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