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BHFC’s Q2FY24 EBITDA margin was up 118bps QoQ to 27% (PAT in line with Consensus). While we take cognizance of the Defence ramp-up (build 20% SA revenue contribution in FY26E vs. ~5% in FY23), the outlook for underlying CV industries (global and domestic) and industrial exports is softening (global CV OEMs have projected ~8-15% industry decline in developed markets in 2024; domestic CV growth to moderate on a high base; industrial exports outlook muted as well). We build ~17% FY23-26E EPS CAGR (trim FY24E EPS on global CV-market decline; growth upside from the Defence ramp-up over FY25E-26E largely offset by its margin-dilutive nature). Amid balanced risk-reward (trades near LTA EV/EBITDA), we maintain HOLD, with revised TP of Rs1,030/sh at ~16.5x standalone FY26E EV/EBITDA (rolled-over; previous TP: Rs920/sh).

Bharat Forge: Financial Snapshot (Standalone)

Higher gross margin drives healthy EBITDA expansion QoQ

Standalone revenue grew ~21% YoY to Rs22.49bn (largely in-line). Growth on YoY basis was led by Domestic Non-Auto (up 50%; largely from Defence) and PV exports (up 39%). EBITDA grew 34% YoY to ~Rs6.1bn (~3% above estimate), with EBITDA margin up by 118bps QoQ to 27% (Emkay: 26.2%), amid higher than expected gross-margin expansion (up ~100bps QoQ). The management attributed margin expansion to better mix and cost initiatives. Adjusted PAT grew ~30% YoY to Rs3.48bn (in line with Consensus estimates.

Earnings call KTAs

1) Barring global disturbances, BHFC expects the business momentum to endure in H2FY24. 2) Outlook for the North America Class 8 truck industry in FY25E is flattish (300- 310K units), though Company expects positive momentum in the domestic CV market. Company has been winning market share in export CVs amid new product introduction and entry into newer geographies. 3) Outlook for the export Industrials segment is also flattish, with India Industrials outlook positive – except for some slowness in the Renewable Energy category. 4) Expects the PV vertical to be a strong growth driver across exports as well as domestic operations. 5) New business wins in H1FY24 for Standalone operations are placed at Rs7.4bn, including Rs3bn from the e-mobility vertical. 6) Kalyani Strategic Systems (KSSL; defence vertical) secured new business wins worth Rs11bn in Q2, with the executable order book now placed at Rs30bn over 24 months; the domestic order for artillery guns (ATAGs) remains work in progress; Company expects movement on this front soon. 7) In Q2, capacity utilization in the US/European aluminium business stood at ~50%/~70%, respectively; aims to scale up these businesses to mid-teen margin levels by FY25, driven by new product introduction, greater value addition and improved pricing. 8) For Defence and domestic Industrial subsidiaries, BHFC aims to achieve ~25% EBITDA margins close to FY25E

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