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Margin maintained despite weak demand

Healthy order backlog to drive outperformance going forward

• Happy Forgings’ (HFL) 1QFY26 PAT at INR657m was in line with our estimate. Sluggish demand in CV, farm and off-highway segments led to a dip in exports, while domestic revenue grew YoY due to healthy demand in key segments.
• We have marginally tweaked our estimates. We expect HFL to post a CAGR of 13%/15%/16% in standalone revenue/EBITDA/PAT during FY25- 27E. HFL’s superior financial track record compared to its peers serves as a testament to its inherent operational efficiencies and is likely to be a key competitive advantage going forward. We reiterate our BUY rating on the stock with a TP of INR1,118 (based on 27x Jun’27E EPS).

Margins stable despite multiple headwinds

• Standalone revenue grew 3.6% YoY (flat QoQ) to INR3.54b (in line with estimates), entirely driven by 3.8% YoY growth in volumes to 14,457 metric tons. ASP remained flat YoY. ASP remained flat YoY despite the 3- 3.5% raw material contraction (impact of INR 4-5 per kg)
• Domestic revenue was up 7% YoY, led by healthy demand across its key segments. In contrast, exports were impacted by sluggish demand in CV, farm and off-Highway segments, as well as uncertainty around tariffs in certain geographies.
• Gross margins expanded 230bp YoY (10bp QoQ) to 58.8%, aided by reduced input costs.
• EBITDA margins remained flat YoY at 28.6% (in line with estimates). EBITDA rose 3.6% YoY to ~INR1b, which was in line with our estimate.
• Sectoral mix for this quarter stood at 39%/6%/32%/10%/13% for CV/PV/Farm/Off-highway/Industrial segments. CV share of the mix decreased YoY, whereas PV segment grew 300bp.
• This quarter saw 59% capacity utilization in forgings vs. last year’s 57%. While the machining capacity grew YoY by ~2% to 58,200 units, capacity utilization dipped to 77% from 83% YoY.
• HFL has announced investment of INR6.5b for setting up advanced forging capabilities in the heavyweight components segment (weighing 250- 3000kg). This facility will be the largest of its kind in Asia and the second largest globally. The plant is expected to be commissioned by FY27.

Highlights from the management interaction

• Management expects to outperform the domestic CV industry in 2H on the back of its new order wins. Revenue growth guidance for domestic CVs stands at high single digits.
• However, CV outlook in Europe remains weak, with expectation of 10% decline in CV production for CY25.
• On the back of positive rural sentiment, HFL expects the momentum in the domestic tractor industry to sustain at least till Diwali. Overall, HFL expects the industry to post 4-7% growth in FY26.
• However, the US and Europe tractor market declined in high single digits in Q1. Large OEMs expect a 5-15% volume drop in tractor for CY25.
• In 1Q, HFL has won new orders from two large European OEMs. This includes an order worth INR2.5b (INR500-600m p.a.) from the largest tractor OEM in Europe.
• PV segment remains its key growth driver and is on track to reach 8-10% of revenue in two years, with a planned scale-up and capacity expansion (INR800m planned in FY26).
• A key order win in Industrials was an INR6b deal to supply components for wind energy installation. There is another large order in the pipeline worth INR1.8b for fully machined products for data centers, for which capex is ongoing. In defense, HFL has started participating in tenders and quoted for certain projects.
• The planned capex for FY26 stands at INR3b, excluding the solar plant investment (INR600-700m for solar CPP with four acres of land already bought).

Valuation and view

• HFL is expected to outperform the industry, driven by new client additions, product expansion, and capacity growth. A recovery in domestic CV demand, healthy tractor outlook and strong order wins in Industrials and PVs should help to offset the weakness in export markets in the near term.
• We have marginally tweaked our estimates. We expect HFL to post a CAGR of 13%/15%/16% in standalone revenue/EBITDA/PAT during FY25-27E. HFL’s superior financial track record compared to its peers serves as a testament to its inherent operational efficiencies and is likely to be a key competitive advantage going forward. We reiterate our BUY rating on the stock with a TP of INR1,118 (based on 27x Jun’27E EPS).

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