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Operationally in-line; dependency on core business to reduce further

Announced INR6.5b capex for heavy forgings, commissioning by FY27

* Happy Forgings’ (HFL) 3QFY25 results were operationally in line, though Adj. PAT was lower due to lower other income. Despite weakness in the domestic CV industry and subdued exports, revenue grew 4% YoY, while EBITDA margin expanded 80bp YoY to 28.6%, driven by growth in its industrials division, which continues to support profitability.

* In line with its plan to expand in the heavyweight industrials division, HFL has announced a capex of up to INR6.5b. This will not only drive long-term growth but will also de-risk exposure from its cyclical CV/FE segment and expand margins. New plant is likely to be commissioned by FY27, catering to diverse non-auto industries such as power, marine, and mining.

* Our FY25E/26E EPS estimates remain largely unchanged, as weakness in CV and exports is expected to be offset by growth in Industrials and rampup of new capacities. We reiterate our BUY rating on the stock with a TP of INR1,140 (based on 28x Dec’26E EPS).

ASP-led revenue growth of 4% YoY amid flat volumes

* HFL’s revenue/EBITDA/adj. PAT grew 4%/7%/11% YoY to INR3.5b/INR1.02b/INR0.65b (est. INR3.6b/INR1.05b/INR0.68b). 9MFY25 revenue/ EBITDA/ adj. PAT grew 4%/5%/10% YoY.

* During the quarter, revenue from the CV segment (both domestic and exports), coupled with farm equipment and off-highway (exports), declined. However, this was partially offset by better demand in industrials and growth in the PV segment.

* Overall volume growth for the quarter remained flat while realizations improved ~4% YoY.

* Gross margins expanded 250bp (-90bp QoQ) to 58%, mainly due to a better mix (higher machining mix at 88% in 9MFY25, up from 84% in 9MFY24).

* This has resulted in a margin expansion of 80bp YoY to 28.6% (est. 29.2%).

* Lower other income led to Adj. PAT miss at INR645m (up 11% YoY, est. INR683m).

* Excluding the impact of high-realization on one order (due to air freight) in 9MFY24 and a non-recurring income of INR480m (post-tax) in 9MFY25, Revenue, EBITDA, and PAT grew 5.5%, 8.2%, and 14.3% YoY, respectively.

* Machining mix for 9MFY25 improved to 88% (84% in 9MFY24). Share of exports stood at 19% in 9MFY25 (flat YoY).

Highlights from the management interaction

* CVs: Domestic CV sector remained weak due to fund release delays and slow financing, with M&HCV volumes down 7% YoY in 9MFY25. Recovery is expected in 4Q, driven by infra push and export incentives. HFL launched new CV products on its 14k-ton press line, with revenues expected from April onwards.

* Industrial Segment: Despite a global industrial slowdown, this segment is expected to contribute 18-20% of total revenue over the next two years (from 14% currently), with the potential to exceed 30% in 4-5 years if new capex ramps up on expected lines.

* Exports & Tariffs: Exports contribute ~19% directly and ~9% indirectly to revenue. While the EU and NA CV and FE sectors are experiencing a downturn, HFL’s direct exposure to NA remains low at ~4%. Testing for new PV segment products is ongoing as planned, with no immediate tariff concerns.

* Capex: HFL announced an INR6.5b capex plan to establish advanced forging capabilities for heavyweight components (>250kg), catering to power generation, marine, mining, oil & gas, wind energy, and aerospace & defense. The company is targeting 7-8% of the INR100b global market, currently dominated by a European player with a 40% share.

Valuation & view

* HFL is expected to outperform the industry, driven by new client additions, product expansion, and capacity growth. Strong order wins in Industrials and Exports will enhance the business mix. Its superior financial track record vs. its peers reflects strong operational efficiencies, providing a key competitive edge.

* Our FY25E/26E EPS estimates remain largely unchanged as weakness in CV and exports is expected to be offset by growth in Industrials and the ramp-up of new capacities. We estimate a 13%/14%/ 18% CAGR in the standalone revenue/EBITDA/PAT during FY24-27. We reiterate our BUY rating on the stock with a TP of INR1,140 (based on 28x Dec’26E EPS).

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