Buy Happy Forgings Ltd for the Target Rs 2,095 by Motilal Oswal Financial Services Ltd
Strong performance amid a challenging quarter Multiple margin levers ahead
* Happy Forgings (HFL)’s 1QFY27 earnings at INR915m came in line with our estimates. While margins remained resilient in a tough quarter and were ahead of our estimates, lower-than-expected other income limited PAT growth. EBITDA margin expanded 280bp YoY to 31.3% (vs. our estimate of 30.3%), marking the fourth consecutive quarter of >30% EBITDA margin.
* Led by a better-than-expected margin performance in 1Q and a strong outlook, we have raised our FY27/FY28E EPS by 3%/9%. Given its healthy new order wins, we expect HFL to post a 30% standalone revenue CAGR over FY26-28. Further, while there could be some margin pressure due to rising input costs in the near term, we expect HFL to post a margin expansion to 33% over FY26-28, led by an improved mix, operating leverage benefits, and the benefit from solar power generation in the coming years. We, thus, expect HFL to post a 41% earnings CAGR over FY26-28. We reiterate our BUY rating on the stock with a TP of INR2,095 (based on 33x FY28E EPS).
Key highlights from the management commentary
* The total order book stands at ~INR9.5b of peak incremental annual revenue potential over the next 2-3 years. Orders are well diversified across segments, as CVs contribute to 25-30%, the Industrial segment accounts for 35-40%, PVs contribute 25-30%, and the balance contribution is spread between farm and OHV. Exports contribute to 60% of the total order book.
* Management reiterated its confidence in delivering high-teen volume growth in FY27.
* Management expects the Industrial business to double over the next 3-4 years.
* New industrial programs are likely to generate superior economics, with gross margins of 80-85% for machined crankshafts and 60-65% for forged crankshafts. 50% of the gross profits can potentially translate into EBITDA.
* Passenger vehicles are expected to contribute 12-15% of revenue over the next 3-4 years.
* The SOP for the captive solar power project is Jan’27, and it is expected to deliver a 1.0-1.5% EBITDA margin improvement once fully operational.
Valuation and view
HFL’s cost-competitive advantage is expected to help the company drive sustainable outperformance to the core. Supported by a better-than-expected margin performance in 1Q and a strong outlook, we have raised our FY27/FY28E EPS by 3%/9%. Given its healthy new order wins, we expect HFL to post a 30% standalone revenue CAGR over FY26-28. Further, while there could be some margin pressure due to rising input costs in the near term, we expect HFL to post a margin expansion to 33% over FY26-28, led by an improved mix, operating leverage benefits, and the benefit from solar power generation in the coming years. We, thus, expect HFL to post a 41% earnings CAGR over FY26-28. We reiterate our BUY rating on the stock with a TP of INR2,095 (based on 33x FY28E EPS).
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