Buy Happy Forgings Ltd For Target Rs.2,250 by Motilal Oswal Financial Services Ltd
Demand remains strong, while margin takes a hit Unwinding of the AI trade unlikely to weigh on growth
* Happy Forgings (HFL)’s 2QFY27 PAT at INR975m came in line with our estimates. While margins were below our estimate of 30.6% and 2HFY27 margins are expected to remain under pressure on account of commodity inflation, recovery is likely in FY28 and FY29.
* Due to lower than expected margins and a softer margin outlook for the balance of FY27, we cut our earnings estimate for FY27 by 5.4%. Given its healthy new order wins, we expect HFL to post a 24% standalone revenue CAGR over FY26-29. Further, while there could be some margin pressure due to rising input costs in the near term, we expect HFL to expand margins to 33% over FY26-29, led by an improved mix, operating leverage benefits, and benefits from solar power generation in the coming years. We, thus, expect HFL to post a 29% earnings CAGR over FY26-29. We reiterate our BUY rating on the stock with a TP of INR2,250 (based on 36x Sep-28E EPS).
Key highlights from the management commentary
* HFL expects FY27 volume growth guidance to be met, with export revenues improving from 3QFY27 as North American CV and PV programs ramp up. The opportunity pipeline across PV, industrials, and exports could add revenue equivalent to the current revenue base over the next 3–4 years.
* Industrials grew over 50% in H1FY27 and now contribute 16% of revenue. The company has secured ~INR3b of annual data-center engine orders with visibility until 2033 and is targeting nearly INR5b of incremental orders by Mar’27 from a ~INR10b RFQ.
* Around 80% of input and operating cost inflation has been passed through, while machining mix increased to 90% from 88% in FY26. Management expects EBITDA/kg to improve further through better mix, higher value addition, and operating efficiencies, with FY27 margins broadly in line with FY26 despite nearterm RM and freight pressure.
* The company is entering a higher capex phase, with the ongoing INR6.5b ultraheavy component project supplemented by another INR5b investment across FY28–FY29. Capacity is likely to rise to ~217k T forging and ~116k T machining over 2.0–2.5 years, aided by order visibility across PV, industrials and export CV.
* The SOP for the captive solar power project is scheduled for Jan’27, and it is expected to deliver an EBITDA margin improvement of 1.0-1.5% once fully operational.
Valuation and view
Due to lower than expected margins and a softer margin outlook for the balance of FY27, we cut our earnings estimate for FY27 by 5.4%. Given its healthy new order wins, we expect HFL to post a 24% standalone revenue CAGR over FY26-29. Further, while there could be some margin pressure due to rising input costs in the near term, we expect HFL to expand margins to 33% over FY26-29, led by an improved mix, operating leverage benefits, and benefits from solar power generation in the coming years. We, thus, expect HFL to post a 29% earnings CAGR over FY26-29. We reiterate our BUY rating on the stock with a TP of INR2,250 (based on 36x Sep-28E EPS).
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