Buy Happy Forgings Ltd For Target Rs. 1,000 By JM Financial Services
Margin above estimate; Global demand weakness weighs on outlook
In 4QFY25, Happy Forgings (HFL) reported EBITDA margin of 29.1%, 60bps above JMFe, primarily due to lower RM cost. The domestic CV segment was impacted by lower MHCV production, and is expected to recover in FY26, supported by new infrastructure investments. Tractor segment is likely to sustain its positive momentum going ahead. Industrial and PV segment continued perform well, with management expecting their combined revenue share to exceed 25% in the medium-term. However, global demand remains muted owing to macroeconomic headwinds and tariff-related uncertainties. Margins are likely to remain under pressure due to weak export demand and initial ramp-up cost related to new facilities. We have cut our revenue growth estimates by 12% / 10% and EPS estimates by 17% / 16% for FY26E / FY27E from our previous estimates. We maintain BUY with Mar’27 TP of INR 1,000 (29x FY27E). Pick-up in exports (CVs / Farm / OHV) remains a key monitorable.
* 4QFY25 – Margin above estimates: HFL reported revenue of INR 3.5bn (+3% YoY, flat QoQ), 2% above JMFe. EBITDA came-in at INR 1.02bn (+5%YoY, flat QoQ). EBITDA margin stood at 29.1% (+80bps YoY, +40bps QoQ), 60bps above JMFe, primarily due to lower than expected RM costs. PAT stood at INR 676mn (+3% YoY, +5% QoQ), 9% above JMFe due to higher than expected other income.
* Operational update: During 4QFY25, HFL’s volumes grew c.7% YoY at 14,342 MT. Realisation declined by c.4% YoY to c.INR245/kg. Contribution of machined products reduced to 84% in 4QFY25 (88% in 4QFY24). Exports continued to remain a drag with c.23% YoY decline while domestic revenue grew by c.9% YoY. Its overall revenue growth of c.3% in 4Q was led by growth in the Industrials, OHV, and FE segments. Share of industrials business increased to 14% in FY25 (vs. 11% in FY24). In FY25, HFL announced new orders worth over INR 16bn in the PV and Industrial segments, to be executed over the next 5-8 years, with annual peak sales potential of above INR 2.5bn.
* Demand outlook: In the domestic market, the CV segment was impacted by lower MHCV production, but is expected to recover in FY26, supported by infrastructure push and improved financing availability. The farm segment remained healthy, with momentum expected to continue going ahead. The off-highway segment saw moderate growth in FY25 and is likely to sustain demand given ongoing infrastructure and real estate development. Internationally, demand across CV, farm, and off-highway segments remained weak, led by macroeconomic headwinds, inventory correction, and tariffrelated pressures. These headwinds are expected to persist in the near-term. Despite this, the company expects 15-18% revenue growth over the medium term, driven by new product launches / order inflows and entry into new markts. Further, it expects revenue contribution from Industrials and PV to cross 25% in the medium-term (vs. 18% in FY25).
* Margin outlook: We expect margin to remain under pressure, impacted by weak export demand and initial ramp-up cost related to new facilities (heavyweight components forging facilities to commence in FY27). We transfer coverage to Saksham Kaushal.
* Other highlights: 1) Capacity utilisation currently stands at 57% / 83% for Forging / Machining. 2) Capex guidance for FY26 is INR 4bn (including solar-related investments). The company is setting up 3 new facilities: a) 4k ton press line for its forging facility, b) ring mill with production expected to commence in 3QFY26, and c) industrial line for wind pinions and heavy axle shafts for NA market, with production expected to commence in 4QFY26. 3) HFL highlighted that INR 6.5bn capex plan (spread over 2-3 years) remains on track. This investment will support the establishment of advanced forging capabilities to serve requirements of heavy forged and machined components (>250 Kgs) in the non-automotive industrial segments (Power generation, Marine, Mining, High-HP farm equipment, etc.). HFL expects this capacity to be operational in FY27. An additional INR 800mn has been earmarked to scale PV segment. 4) It is also evaluating inorganic growth opportunities, specifically targeting companies with EBITDA in the range of INR 0.5-1bn.
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SEBI Registration Number is INM000010361
