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Auto growth benefits offset by defense delays Defense order execution remains the key monitorable

* Bharat Forge (BHFC)’s 2QFY27 standalone adjusted PAT at INR3.8b came in line. Higher commodity and energy costs weighed on standalone margins. Consolidated PAT declined 7% YoY due to losses in the US subsidiaries and lower standalone margins.

* Due to the margin pressure witnessed in 2Q, continued losses in the US operations, and delays in ATAGS revenue recognition (higher margin business), we cut our FY27/FY28 earnings estimate by 6%/5% respectively. The GST rate cut has helped revive the domestic auto business, which augurs well for BHFC. Conversely, the US Class8 cycle momentum seems to have peaked, with weak Oct net orders. Defense, aerospace, and JSA are likely to remain the key growth drivers for BHFC in the coming years, while delays in revenue recognition from defense orders will hurt near-term earnings.

* We now expect BHFC to post a CAGR of 16%/22%/36% in revenue/ EBITDA/PAT over FY26-28E. However, at current valuations of 58x FY27E and 39x FY28E earnings, most positives seem to be factored in. Reiterate Neutral with a TP of INR1,800 per share (valued at 40x FY28E EPS).

Highlights from the management interaction

* India manufacturing revenue is expected to increase from the current ~INR30– 34b per quarter to ~INR50b by the end of FY28, while EBITDA margin could expand by at least 200–250bp as aerospace, defense, semiconductor and other non-auto businesses scale up

* Unexecuted defense order book stood at ~INR 109.5b; 2HFY27 revenue should improve as recent programs enter execution, while ATAGS deliveries are expected to begin in 1QFY28 with an expected EBITDA margin of ~20–22%.

* Management expects H2FY27 to be stronger than H1FY27, driven by price recoveries and program ramp-ups across aerospace, industrial exports, semiconductors, CVs, passenger vehicles, marine and domestic subsidiaries.

* Bharat Forge is investing ~INR 13b in Baramati to add ~100,000 tonnes of forging capacity, supporting growth in aerospace, semiconductor and industrial businesses over the next 2–3 years.

Valuation and view

Due to the margin pressure witnessed in 2Q, continued losses in US operations, and delays in ATAGS revenue (a higher-margin business), we cut our FY27/FY28 earnings estimate by 6%/5% respectively. The GST rate cut has helped revive the domestic auto business, which augurs well for BHFC. On the other hand, the US Class 8 cycle momentum seems to have peaked, with weak Oct net orders. Defense, aerospace, and JSA are likely to remain the key growth drivers for BHFC in the coming years, while delays in revenue recognition in defense orders will impact near-term earnings. We now expect BHFC to post a CAGR of 16%/22%/36% in revenue/ EBITDA/PAT over FY26-28E. However, at current valuations of 58x FY27E and 39x FY28E earnings, most positives seem to be factored in. Reiterate Neutral with a TP of INR1,800 per share (valued at 40x FY28E EPS).

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