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Weak demand leads to margin pressure Multiple headwinds ahead

• In 1QFY26, BHFC standalone PAT declined 10.6% YoY to INR3.4b (below expectations) due to weaker than expected demand. Key highlight of the quarter was the improvement in the performance of its overseas subsidiaries.
• Considering the weak 1Q performance and a weak outlook for most of its key segments, we have lowered our FY26/FY27 EPS estimates by 12%/15%. Management has noted that FY26 is likely to be challenging amid tariff-led uncertainties and changes in emission regulation in North America. Given these factors, the stock at 44x/34.4x FY26E/FY27E consolidated EPS appears fairly valued. We reiterate our Neutral rating with a TP of INR1,060 (based on 30x Jun’27E consolidated EPS).

Weak demand drives margin pressure, overseas margin improves

• Standalone revenue declined 10% YoY/2.7% QoQ to INR21.0b, impacted by weak export demand (down 12.7% QoQ/8.1% YoY), particularly in North America due to emission regulation delays and tariff-related challenges.
• Domestic revenue declined 9.7% YoY due to a high base in defense and aerospace. In domestic business, the non-auto segment declined 21% YoY to INR5.7b, below our estimate of INR6.2b. While domestic CV declined 2% YoY (in line), domestic PV grew 19% YoY to INR 973m (ahead of our estimate of INR 857m).
• In exports, the ramp-up in CVs and non-auto was lower than estimated. CV exports declined 15% YoY to INR 4.5b (est. INR5.1b) and non-auto revenue declined 7% YoY to INR3.4b (est. INR4b). PV exports grew 5% YoY to INR2.9b (in line).
• Standalone EBITDA margin stood at 27.9% (est. 28.1%), down 120bp QoQ and 20bp YoY, impacted by lower utilization, an unfavorable product mix and adverse currency. Additionally, the company absorbed nearly INR140m in tariff-related expenses, which hurt margins.
• Overall, adjusted PAT declined 10.6% YoY (down 6.2% QoQ) to INR3.4b, lower than our estimate of INR3.9b.
• Consolidated revenue declined 4.8% YoY to INR39.1b, though grew 1.5% QoQ. Consolidated EBITDA stood at INR6.7b, down 9.2% YoY; however, it improved QoQ primarily due to increased profitability of overseas business and a reduction in losses of Kalyani Powertrain.
• Overseas subsidiaries’ margins improved to 3.9% in 1Q from 1% YoY led by improved utilization levels. Europe subsidiaries’ margin increased to 3.1% (from 1.2% YoY), while US subsidiaries’ margin surged to 6.1% (from 1.3% YoY).

Highlights from the management interaction

• 2Q outlook remains cautious as the impact of new revised tariffs on Indian exports would be reflected in 2Q. Based on customer feedback, BHFC expects demand to revive in 2H. Over the medium to long term, management has stated that the primary focus will shift back to India operations from overseas, as India manufacturing will become more lucrative, driven by opportunities from machine tools and emerging sectors in the domestic market.
• US accounted for about one-third of exports from Indian manufacturing in 1Q.
• BHFC does not plan to set up a manufacturing facility anywhere outside India in the near term. Competitive landscape remains stable since, among major competitors in BHFC’s crankshaft business, India faces the lowest tariff rates from the US.
• Management expects strong growth of over 20% in the aerospace business in FY26, based on the order backlog.
• Defense business has an order backlog of ~INR95b. BHFC has emerged as an L1 bidder for another tender to supply carbines with an order size of INR14b.
• Management aims to get into the server manufacturing business; however, this is still in the early stages and the primary focus would be on serving a niche customer base before scaling up capabilities and addressing the mass market.

Valuation and view

Given the weak 1Q performance and an expected weak outlook for most of its key segments, we have lowered our FY26/FY27 EPS estimates by 12% / 15%. Management has noted that FY26 is likely to be challenging amid tariff-led uncertainties and changes in emission regulation in North America. Given these factors, the stock at 44x/34.4x FY26E/FY27E consolidated EPS appears fairly valued. We reiterate our Neutral rating with a TP of INR1,060 (based on 30x Jun’27E consolidated EPS).

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