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Defense to remain growth driver

Near-term demand weak for other segments

We met BHFC’s management team recently to understand the company’s growth outlook in the coming years. Key growth drivers for BHFC would be: 1) the robust order backlog of INR54b in defense exports to be executable over the next three years, along with the prospects of the beginning of domestic defense orders soon; 2) with new order wins and multiple initiatives, JS Autocast (JSA) is likely to emerge as one of the fastest growing businesses of BHFC; 3) the aerospace segment is set to clock strong growth in the coming years; 4) PV exports are likely to moderate in FY25E, but they should pick up from FY26 onward given a healthy order backlog. However, CVs (both domestic and exports) and domestic PVs are likely to see weak growth. Given the weakness in Europe, the turnaround in overseas subsidiaries may happen with a lag of a couple of quarters. We estimate a CAGR of 13%/26%/54% in consolidated revenue/EBITDA/PAT over FY24-26. However, at 45.5x/34x FY25E/FY26E PER, we believe the current valuation fully prices in the positive factors. We remain Neutral with a revised TP of INR1,470 (based on 30x Sep’26E consolidated EPS).

Standalone entity updates

We believe that the defense segment will continue to be the key growth driver for the standalone business in FY25E as other segments are facing relatively weak demand in the near term.

Defense – likely to be the key growth driver for standalone entity

* BHFC has an order backlog of INR54b in defense exports to be executable over the next three years. These orders are spread across artillery guns, vehicles and consumables.

* Globally, there is huge requirement for replacement of guns. Even shells are in short supply, and BHFC is seeing a healthy order intake over the past few quarters.

* As per management, India needs almost 4k guns of various types, including towed, mounted, self-propelled, etc. BHFC can produce these guns as it has developed capability to produce nine different gun platforms over the years. BHFC is now building the capability to manufacture over 250 guns and 1,000 vehicles per annum.

* The domestic guns order of INR45b (divided between BHFC and Tata Advanced Systems) is likely to start anytime soon.

* Given the significant growth opportunities in domestic and exports, its defense business is likely to be the key growth driver for BHFC, at least for the next couple of years, if not more.

CV domestic business update:

* Domestic CV industry continues to see weak demand so far YTD, with the top three CV peers posting a 2% YoY decline for YTD.

* However, the management expects MHCV demand to pick up from 3Q onward and drive an improved 2H for the business. Overall, for FY25E, the CV segment is likely to post flat or marginal growth for BHFC.

CV export business update:

* The outlook for the European CV market remains subdued given the ongoing slowdown in Europe.

*  As a result, the management expects flat or marginal growth from this segment over the next couple of years.

*  Given the change in emission norms expected in CY27, this market is likely to see pre-buying in CY26.

PV domestic business update:

*  The domestic PV industry continues to see relatively weak demand amid rising inventory levels.

*  Overall, BHFC’s PV segment is likely to grow largely in line with the industry.

PV export business update:

*  After posting a solid 41% CAGR in the last three years, this segment is likely to see growth moderation in FY25E as witnessed in 1Q results (1% YoY decline).

*  The current slowdown is also due to a weak demand environment in Europe and Brazil.

*  This segment is likely to regain its lost momentum from FY26 onward as its new orders go into production.

Non-auto exports: Oil and gas:

*  This segment’s revenue declined to as low as USD70mn in FY24; however, it is picking up and is likely to see healthy growth in FY25.

*  However, BHFC continues to supply to a single customer here.

*  The macro situation has not improved yet to support strong sustainable growth in the long run.

Aerospace segment:

*  Leveraging its metallurgical expertise, BHFC has gained considerable proficiency in metal forming technology for building super-alloys, which will facilitate the development of complex engine parts and air-frame components in the future.

*  BHFC’s aerospace business is on the cusp of achieving a significant breakthrough. Its continued efforts in this segment are set to yield substantial growth.

*  This segment posted INR2.4b in revenues in FY24. The management expects this business to grow 15-20% in FY25 and in strong double digits in FY26.

Subsidary update:

JS Autocast (JSA):

*  JSA would continue to be a strong growth driver, as per the management.

*  Beyond its anchor customers, JSA is now diversifying its customer base. Given a healthy order backlog, the management expects JSA to post healthy double-digit growth over the next 2-3 years.

*  JSA achieved INR5.4b in revenues in FY24. The management expects JSA to reach INR10b in the next few years.

*  Further, several initiatives focused on value addition, operational efficiency, capacity expansion and new product development are underway at JSA. BHFC also plans to scale up its machining capabilities significantly in response to strong demand for fully machined castings. These initiatives are expected to improve operational performance of JSA in the coming years.

Overseas subsidiaries performance

*  In Europe, the management has initiated repricing steps with customers, which should conclude by FY25 end.

*  Utilization was 70% in Europe and 50% in the US in 1Q.

*  In the US, a slowdown in offtake from one of the OEMs has hurt its performance in 1Q. BHFC would continue to work on productivity improvement in this business. It expects a fairly strong improvement to be visible in the US subsidiary from 4Q onward.

*  However, the ongoing slowdown is likely to impact the performance of overseas subsidiaries for a couple of quarters.

*  Demand for steel forgings in overseas subs remains weak. The management is considering several restructuring initiatives (footprint optimization and manpower rationalization) to get costs under control in this segment in the next 12 months.

Other key highlights:

*  Some of the plants in Mundwa are very old; hence, productivity is very low. BHFC wants to improve productivity of these plants through manpower rationalization and automation.

*  Consolidated capex stands at INR10b over FY25-26E.

*  BHFC has taken an impairment of its investments in Tork in 1Q. It invested about INR1.5b in this company. Tork management continues to work on alternate funding options. Further, in the power electronics business, BHFC currently supplies to a few CV OEMs.

*  The management has recently taken an enabling resolution to raise funds of up to INR20b. The management has clarified that the proceeds would be used for funding organic (greenfield) and inorganic opportunities in India and globally.

Valuation and view

*  We estimate a CAGR of 13%/26%/54% in consolidated revenue/EBITDA/PAT over FY24-26. However, at 45.5x/34x FY25E/FY26E PER, we believe the current valuation fully prices in the positive factors. We remain Neutral with a revised TP of INR1,540 (based on 30x Sep’26E consolidated EPS).

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