Buy Happy Forgings Ltd for the Target Rs 2,438 by Motilal Oswal Financial Services Ltd
Industrials and PVs to drive the next leg of growth
We met with Happy Forgings’ (HFL) management, with discussions centered around incremental growth avenues, capacity ramp-up across forgings and machining to cater to the order book, and the steady outlook for the core CV and tractor segments. The ~INR9.5b order book is expected to drive majority of topline growth over FY27-29, with PVs and industrials accounting for ~70% of the order book. While PVs and Industrials combined currently contribute 24% to revenue, management expects their contribution to rise to 45-50% over the medium term. These orders are secured at higher realizations and better margins, which, combined with the captive solar project, is expected to drive structural margin expansion over FY26-29. We expect margins to expand to 33% by FY29 from 31% currently. Driven by new order wins, higher realizations, an improving mix, operating leverage, and benefits of the captive solar plant that will come on stream in FY28, we expect HFL to record revenue/EBITDA/PAT CAGR of 25%/28%/30% over FY26-29. We reiterate our BUY rating on the stock with a TP of INR2,438 (based on 38x Sep’28E EPS).
New order wins from Industrials and PV to drive growth
* HFL has secured an incremental order book of ~INR9.5b, executable over the next 2-3 years. The Industrials segment accounts for the largest share at ~42-45%, followed by PVs and CVs at ~25% each, with the balance coming from off-Highway applications. The order book is heavily export-oriented, with ~60-65% linked to exports and ~35-40% to domestic business.
* Commercial Vehicles remains the company’s largest business segment, accounting for ~33% of 1QFY27 revenue, and has continued to demonstrate healthy growth momentum despite a mixed operating environment. The segment delivered single-digit growth on a consolidated basis, supported by strong domestic performance, which more than offset weakness in overseas markets.
* The domestic CV business was a key growth driver, registering ~18% YoY growth and significantly outperforming overall industry production trends. In contrast, the export business faced near-term headwinds, declining ~12% YoY. The weakness was not entirely demand-driven but was largely attributable to operational and logistical challenges. Longer transit times, elevated inventory levels in the distribution channel, and delays in revenue recognition impacted reported export performance during the quarter.
* The company expects export momentum to improve as supply chain constraints ease and channel inventory normalizes. For 2QFY27, management anticipates continued sequential improvement, supported by sustained domestic demand and a favorable low base effect.
* In the medium term, new order wins from leading domestic players, and growth from the underlying domestic industry, we expect the segment to record a 20% revenue CAGR over FY26-29.
* Farm Equipment was the second-largest business segment, contributing ~32% to 1QFY27 revenue. The segment continued to deliver strong performance, supported by robust volume growth in the domestic market as well as resilient export momentum despite challenging global demand conditions.
* The domestic farm equipment business witnessed healthy volume growth, benefiting from favorable industry trends and improving demand conditions. Growth in the underlying industry, supported by factors such as favorable agricultural activity, has improved rural sentiment and replacement-driven demand.
* The export business also maintained its growth trajectory despite a relatively weak demand environment across key international markets, particularly the US and Europe. The resilience in exports was primarily driven by incremental order wins from marquee global customer.
* Domestic industrials revenue grew 59% YoY in FY26, with the strong growth momentum sustaining into FY27. In 1QFY27, industrials revenue grew ~50% YoY across both domestic and export markets, with the segment now contributing ~16% of HFL’s overall revenue.
* In the near term, the focus is expected to be on ramping up existing industrial orders, improving utilization of current capacities, and converting recent order wins into revenue. The segment has already expanded significantly from being a niche business to contributing a meaningful share of revenue. Management has indicated that the Industrials segment could reach ~18–20% of revenue contribution over the next two years, even without considering the full benefit of new heavy component capacity.
* HFL is investing INR6.5b to set up a heavyweight precision components facility, which will be among the largest in Asia, capable of producing 250-3,000kg forged and fully-machined parts. The new heavy-forging line is expected to primarily serve the energy, data center, mining, wind, and earthmoving equipment sectors, where realizations are expected to be in the range of INR800-1,000/kg, vs the average realization of INR253/kg recorded in 1QFY27, due to a higher machining mix.
* For the new facility, HFL has already received orders worth INR3.5b (part of INR9.5b order book), which are expected to start generating revenues from 2HFY28. The company is also in discussions with several other customers, with expectations of more order wins as the capacity comes onstream.
* Given the company’s healthy new order wins, we expect overall revenue to record a 26% revenue CAGR over FY26-29, largely driven by 52%/70% CAGR from the Industrials/PV business over the same period.
* Valuation and view:
HFL’s cost-competitive advantage is expected to help the company drive sustainable outperformance. Given its healthy new order wins, we expect HFL to post a 25% 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 post a margin expansion to 33% over FY26-29, 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 30% earnings CAGR over FY26-29. We reiterate our BUY rating on the stock with a TP of INR2,438 (based on 38x Sep’28E EPS).
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