Neutral Bharat Forge Ltd for the Target Rs.1,597 by Motilal Oswal Financial Services Ltd
US Class8 appears to have bottomed out
GST rate cut helps drive domestic auto revival
* Bharat Forge’s (BHFC) standalone adjusted earnings at INR3.2b came 14.7% below our estimate due to lower-than-expected margins. Margins were impacted by weak exports, adverse mix and increase in tariff costs in Q3.
* The GST rate cut has helped revive the domestic auto business, which augurs well for BHFC. Further, the US Class8 cycle appears to have bottomed out, with early signs of revival. Defense, aerospace, and JSA are likely to remain key growth drivers for BHFC over the coming years. Given its improved outlook, we have raised our FY26-27E EPS by 10%/8%. We now expect BHFC to post a 15%/17%/31% CAGR in revenue/EBITDA/PAT over FY25-28E. However, following the recent rally in the stock, most positives seem to be factored in (valuation now at 44.7x FY27E and 36.2x FY28E). Reiterate Neutral with a TP of INR1,597 per share (valued at 35x Dec-27 EPS).
Earnings below estimates due to weak demand and adverse mix
* Standalone revenue was flat YoY at INR20.8b (largely in line with estimates). Volumes in 3Q declined 6% YoY to 57,859MT, while realizations grew 7% YoY to INR360/kg, driven by a higher non-auto mix.
* Auto revenue declined 18.5% YoY to INR8.7b (8.5% below est), and contribution fell to 41.7% vs 51% in 3QFY25 and 46% in 2QFY26. Meanwhile, non-auto revenue grew 18% YoY to INR12.1b (in line) and contribution touched 58.3%.
* Export revenues declined 20.8% YoY to INR9.1b on account of lower production and inventory de-stocking in the CV segment in North America, as North America CV revenue declined 51% YoY.
* On the other hand, domestic CV revenues were strong, driven by higher production volumes across OEMs in 3Q, as the benefits of GST rate cuts percolated into lower TCO for end-users. Overall, domestic revenues grew 24% YoY to INR11.7b
* Standalone EBITDA margin contracted 190bp YoY to 27.2% vs est of 29.6%, due to weak demand, adverse mix, and increase in tariff costs. As a result, EBITDA declined 7% YoY to INR5.7b (vs est of INR6.3b).
* Overall, adjusted PAT (adjusted for INR487m on account of labor code changes) declined 7% YoY to INR3.2b (15% below estimates).
* Consolidated revenue grew 25% YoY to INR43.4b, led by the integration of K-mobility. Consolidated EBITDA stood at INR7.5b, up 20% YoY.
* Consolidated margins contracted 70bp YoY at 17.3%.
* Overseas subsidiaries’ margins expanded to 3.8% in 3Q from 0.3% YoY, led by improved utilization. Europe subsidiaries’ margin expanded 320bp YoY to 4.3%, and US subsidiaries’ margin surged to 2.7% (from a loss in 3QFY25)
Highlights from the management interaction
* BHFC secured orders worth INR23.9b in 3Q, with INR18.7b coming from defense, INR3.8b coming from components, INR780m from castings, and INR550m from K mobility. The defense order book as of Dec’25 stood at INR111b.
* According to management, the worst seems to be behind in both the domestic and export markets across segments.
* The implementation of GST has boosted domestic auto demand, leading to a healthy uptick across segments.
* The US CV market seems to be bottoming out with early signs of recovery visible, given higher order intake in the last couple of months.
* Regarding the India-US deal, while the fine print is awaited, it removes uncertainty between the two trading partners, thereby facilitating the long-term resumption of trade.
* Standalone Net D/E at the end of 3QFY26 stood at 0.15x, and management aims to close the year with long-term debt of INR6b.
Valuation and view The GST rate cut has helped revive the domestic auto business, which augurs well for BHFC. Further, the US Class8 cycle appears to have bottomed out, with early signs of revival. Defense, aerospace, and JSA are likely to remain the key growth drivers for BHFC in the coming years. Given its improved outlook, we have raised our FY26-27E EPS by 10%/8%. We now expect BHFC to post a 15%/17%/31% CAGR in revenue/EBITDA/PAT over FY25-28E. However, following the recent rally in the stock, most positives seem to be factored in (valuation now at 44.7x FY27E and 36.2x FY28E). Reiterate Neutral with a TP of INR1,597 per share (valued at 35x Dec27 EPS).
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