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Upgrade to BUY on robust Defense wins, healthy growth outlook

BHFC reported a steady Q4 (17% standalone rev. growth; margins slightly ahead of estimates at 28.3%). The company continues to post robust order wins in Defense (order book now at Rs52bn vs. Rs20bn in Q3; largely exports for now, with domestic artillery gun orders yet to follow), even as base business outlook has also improved vs. earlier expectations (sees flattish performance in CVs; witnessing strong market share gains in other businesses). We build 13%/28% revenue/EPS CAGR over FY24-26E (upgrade EPS by 20%/12% in FY265E/26E backed by higher revenues and improvement in margins incl. at overseas subsidiaries). We upgrade to BUY from REDUCE with revised TP Rs1,650 (Rs1,100 earlier); we assign 21x FY26E EV/EBITDA on consolidated basis (25x EV/EBITDA to defense and 20x EV/EBITDA to other businesses).

In-line revenue performance; margins slightly ahead of estimates

Standalone revenue grew ~17% YoY to Rs23.3bn (largely in-line); standalone margins declined by 99bps QoQ to 28.3% (vs. 28% estimate); the QoQ decline was on account of higher other expenses, with gross margins up by ~50bps. Consolidated revenues rose 14.7% YoY, with margins at 15.4% vs 18% in Q3, impacted by one-offs in overseas subsidiaries. BHFC declared a final dividend of Rs6.5/share for FY24.

Earnings call KTAs

1) Company has won orders worth Rs63bn across businesses, incl. Defense, industrial castings and others; of this, the executable order book for Defense stands at Rs52bn (vs. Rs20bn as of Q3) – this is to be executed over 3-4 years. 2) Defense revenues in FY24 stood at Rs15.6bn; over 80% of the current Defense order book pertains to exports, with orders for domestic artillery guns (ATAGs) not yet part of it; Company believes orders for ATAGs will perhaps come through post-elections; current Defense capacity of 100 guns per annum and 500 vehicles a month can be scaled up to 200-250 guns per annum and 1,000 vehicles per month; profitability in this business is seen as being similar to overall levels. 3) India is seeing strong traction from businesses moving away from China as well as other regions; outlook shared by BHFC customers is now stronger than anticipated earlier; Company is also winning market share in existing as well as new products. 4) Domestic CVs are expected to be flat in FY25; US truck market is expected to be stable, with moderately negative bias in CY24. 5) BHFC would continue scaling up newer businesses like Defense, industrial castings, EVs, and Aerospace (Aerospace/JS Auto revenues seen doubling over the next 3/4 years, resp.). 6) US manufacturing operations saw 50% utilization in Q2 (Europe at 75%); utilization in US to reach 100% in 2 quarters (phase 1, with upcoming phase 2 capacity to be fully utilized by FY27); Company expects Europe to continue posting positive EBITDA this year, with US reaching EBITDA-positive status by Q4FY25; overseas subsidiaries to reach double-digit EBITDA by end-FY25; 8) FY25 capex: Rs8-10bn; expects to clock 20% RoCE in 2 years.

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