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Margin beats estimate, led by better product mix

Focusing on gradually ramping up presence in Industrial segment

* Happy Forgings (HFL)’s 2QFY25 result was encouraging as it reported a healthy EBITDA margin of 29.2% (+190bp YoY, est. 28%) led by a higher mix of machining and industrial segment. Despite a muted demand outlook for its core CV division, we expect HFL to continue outperforming, driven by new order ramp-up, particularly in exports and industrials, growth in new segments such as PVs, and higher value addition.

* To account for the weakness in CVs and export geographies, we have reduced our FY26E EPS estimate by 4.5%, while FY25E remains unchanged. Reiterate BUY with a TP of INR1,300 (premised on 28x Sep’26E EPS).

Machining mix improves to 88% in 1HFY25 (vs 84% in 1HFY24)

* HFL’s revenue/EBITDA/adj. PAT grew 5%/12%/21% YoY to INR3.6b/INR1.05b/INR0.67b (est. INR3.6b/INR0.99b/INR0.67b).

* In Q2FY24, its avg ASP was boosted by compensation towards air freight order of a customer. Adjusting for the same in the base quarter, revenue/EBITDA/PAT grew 6%/15%/24% YoY in 2QFY25.

* Finished goods volume for the quarter grew 3% YoY while realizations grew ~4% YoY. Realizations improved INR9/kg YoY in 1HFY25 despite a fall in raw material costs during this period. This growth was driven by a favorable product mix following an increase in the share of the industrials segment and higher machining mix.

* This resulted in the gross margin expansion of 350bp YoY (+230bp QoQ) to 58.8%. The machining mix was at 88% in 1HFY25, up from 84% in 1HFY24.

* However, higher other expenses (+170bp YoY/ +180bp QoQ; as a % of sales) limited the EBITDA margin expansion. The margin expanded 190bp YoY to 29.2% (est. 28%). Other expenses rose mainly due to higher logistics costs driven by geopolitical factors.

* 1HFY25 revenue/ EBITDA/ adj. PAT grew 4%/5%/9% YoY while we expect 2HFY25 to grow ~14%/20%/25%, led by a recovery in tractors demand outlook, execution of orders in industrials, and better margins.

* The operating cash flow grew 41% YoY; meanwhile, cash inflow stood at INR9.1m in 1HFY25 (vs. outflow of INR207m in 1HFY24) following the capex spend.

Highlights from the management interaction

* Outlook: Top-line growth in the medium term is expected at around 15- 18%, driven by new projects in the PV, CV, and industrial segments.

Exports: Direct exports currently make up 20% while 9% are indirect; this is projected to rise to 30-35% together over the next 2-3 years. Approximately 70% of orders are from global players.

* Industrial business: The business contributes 12-13% of the revenue and the company expects it to reach 18-20% over the next 2-3 years. Additionally, it aims to expand its product offerings and weight range to 1 ton, currently capped at 250 kg.

* Farm equipment: While agri segment in Europe and US is seeing a marked slowdown, HFL’s outperformance in this segment is expected to supported by healthy order inflows

* The projected annual capex for FY25 and FY26 is INR2-2.5b, primarily focused on expanding machining capacity and product development in key growth segments. Utilization of the 14k ton press line currently stands at 50-55%, and the company aims to increase this to 70% by next year.

Valuation & view

* Given its stable performance in CVs and healthy outlook for domestic tractors, we expect HFL to continue to perform well. Further, its healthy order wins in the Industrials and Exports segments will contribute to an improved mix. HFL’s superior financial track record relative to peers serves as a testament to its inherent operational efficiencies and is likely to be a key competitive advantage going forward.

* To account for the weakness in CVs and export geographies, we have reduced our FY26E EPS estimate by 4.5%, while FY25E remains unchanged. We estimate an 18%/21%/ 26% CAGR in the standalone revenue/EBITDA/PAT during FY24-27. We reiterate our BUY rating on the stock with a TP of INR1,300 (based on 28x Sep’26E EPS).

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