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Europe impacts Q2; order win momentum accelerating

BHFC posted a soft Q2 with ~10%/13% miss on Consensus revenue/EBITDA (margin down by 50bps QoQ to 17.5%), impacted by weakness in Europe. Order-win momentum accelerated (Rs12bn in Q2; Rs9.8bn in Q1), led by Defence (orderbook of Rs59bn vs Rs54bn in Q1, ex domestic artillery gun order); but Europe remains weak for now. Mgmt expects the North American business to be strong this year as well as the next. We believe the domestic MHCV outlook is improving after a weak H1, amid expected pickup in capex spends and a weak base, while potential pre-buy from H2CY25 may aid the US Class 8 market. We cut FY25E/26E/27E EPS by 9%/6%/4% on the Q2 miss and lowered margin estimate. We retain BUY and cut our TP to Rs1,700 (21x EV/EBITDA; 25x EV/EBITDA for Defence and 20x EV/EBITDA for Others).

Group performance impacted by Europe; standalone margins stable QoQ

Consol revenue dipped ~2% YoY to Rs36.9bn (below estimates), while revenue growth was seen the India Industrials business (led by Defence) and the India PV business (26% YoY /13% YoY, respectively) and the domestic CV business saw a ~16% decline. Exports revenues dipped ~9% YoY. Consol EBITDA rose 4% YoY to Rs.6.5bn, though below consensus. EBITDA margin declined by 50bps QoQ to 17.5% due to gross margin expansion being negated by higher other expenses; YoY margin expansion of ~100bps was due to a favorable mix. Adjusted PAT rose 6% YoY to Rs2.4bn.

Earnings Call KTAs

1) BHFC expects a stable H2; with domestic elections now behind and Government spend resuming, there would be a follow-on effect over the next 1-2 quarters on the CV industry after a subdued H1; outlook for PV OEMs also remains positive. 2) The company won new orders worth Rs12bn in Q2 (vs Rs9.8bn in Q1) of which Rs6.4bn pertained to Defence; the executable Defence order book now stands at Rs59bn vs Rs54bn in Q1; BHFC is confident of clocking 50% growth in the Defence business this year while maintaining profitability. 3) Current orders in Defence largely pertain to exports; the order for domestic artillery guns (~300 ATAGs with potential order quantum of ~Rs60bn; BHFC as L1 bidder, is eligible for 60% of this) is expected to materialize by end FY25. 4) BHFC is seeing strong interest from customers in North America; expects the business to be resilient in the current year and the next; the European business remains sluggish, impacted by a challenging demand environment – BHFC is downsizing some of its European operations; anticipates recovery next year, with achievement of targeted margins in this segment seen over the coming 1-2 quarters. 5) Company has ~Rs20bn cash on hand; it is seeking opportunities that expand value addition and aid diversification. 6) The Aerospace business is seen growing multifold from current levels, and the company has secured new order wins worth Rs3bn in H1, in the segment. 7) JS Autocast continues to benefit from shift of manufacturing to India, aided by a diversified product and customer portfolio; won orders worth Rs1.7bn in H1. 8) EV business to see EBITDA breakeven in coming 2-3 quarters. 9) FY25 consol capex guidance: ~Rs8bn.

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