Neutral Bharat Forge Ltd for the Target Rs. 1,286 by Motilal Oswal Financial Services Ltd
Margin resilience visible
Defense, aerospace and JSA to be key growth drivers
* BHFC’s standalone earnings at INR3.15b came in line with our estimate. Revenue came in below our estimate, whereas margins surprised positively. Despite weak demand, BHFC was able to hold on to its margins, which is commendable.
* Defense, aerospace and JSA Autocast are likely to be the key growth drivers from hereon. A pickup in the export business is contingent upon US tariffs for India relative to other countries. While 3Q is likely to be similar to 2Q, we expect the demand environment to start improving from 4Q onward. We factor in the acquisition of K-Drive Mobility into our financials and accordingly, we have raised our estimates for BHFC by 7% each for FY26/FY27E. However, despite factoring in all the positives, the stock trading at 54x/40x FY26E/FY27E consolidated EPS appears fairly valued. We reiterate our Neutral rating with a TP of INR1,286 (based on 32x Sep’27E consolidated EPS).
Margin resilience visible
* Standalone revenue declined 13.3% YoY to INR19.5b, 7% below our estimate of INR20.9b, due to subdued exports. Exports were affected by slow freight growth, weak sentiment and uncertainty on CV demand in North America due to US tariffs. Domestic business was hampered by lower CV production.
* Volumes declined 12% YoY to 56,000MT, while realizations were largely flat YoY.
* Domestic revenue declined 6.2% to INR10b due to a 7.5% decline in nonauto revenue. CV revenue grew 1.5% YoY. Export revenue declined ~20% YoY to INR9.4b due to a 45% decline in CV exports. The non-auto segment saw a modest decline of 4%.
* Standalone auto revenue came in at INR9b (-19% YoY), 15% below our estimate. Non-auto revenue stood at INR10.5b (-7.5% YoY), largely in line with our expectation.
* Standalone EBITDA margins expanded 50bp to 28.3% (330bp beat). EBITDA stood at INR5.5b (-12% YoY), 5% ahead of our estimate.
* Overall, adjusted PAT declined 10% YoY to INR3.2b (in line).
* Consolidated revenue grew 9.3% YoY to INR40.3b. Consolidated EBITDA stood at INR7.2b, up 12% YoY. ? Consolidated margins were down 100bp YoY at 17.7%.
* Overseas subsidiaries’ margins improved to 3.8% in 2Q from 1.4% YoY, led by improved utilization. While Europe subsidiaries’ margin declined 30bp YoY to 3.6%, US subsidiaries’ margin surged to 4.2% (from loss in 2QFY25).
* BFISL (led by JSA) also posted 180bp margin improvement to 13.7%.
Highlights from the management interaction
* 3Q performance is expected to be similar to 2Q, with an uptick expected in 4Q.
* The domestic CV business is likely to remain flat YoY in 2H.
* GST rate cuts augur well for the domestic PV segment, which is expected to see a continued pickup in demand in 2H.
* EU exports are weak currently, primarily due to destocking. However, a recovery is expected in the coming quarters.
* Management expects exports to the US to decline further in 2H. However, this is likely to be more than offset by a pickup in demand in segments like domestic non-auto, exports to non-US regions and ramp-up in defense and aerospace segments.
* The defense order book stands at INR94.7b. Apart from this, BHFC has recently won an order to supply carbines worth INR14b and another order from the Navy worth INR2.5b+ for the supply of Unmanned Marine Systems.
* Management expects aerospace revenue to cross INR3.5b in FY26, and BHFC expects this run rate to continue for the next 3-4 years.
Valuation and view
Despite weak demand, BHFC was able to hold on to its margins, which is commendable. Defense, aerospace and JSA are likely to be key growth drivers from hereon. A pickup in the export business, both auto and non-auto, is contingent upon the US tariffs for India relative to other countries. While 3Q is likely to be similar to 2Q, we expect the demand environment to start improving from 4Q onward. We also factor in the acquisition of K-Drive Mobility into our financials and accordingly, we have raised our estimates for BHFC by 7% each for FY26/FY27E. We factor in BHFC to post a CAGR of 12%/14%/29% in revenue/EBITDA/PAT over FY25-28E. However, despite factoring in all the positives, the stock trading at 54x/40x FY26E/FY27E consolidated EPS and appears fairly valued. We reiterate our Neutral rating with a TP of INR1,286 (based on 32x Sep’27E consolidated EPS).
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