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Defense business remains key growth driver

Performance improvement at overseas subs key monitorable

* Bharat Forge’s (BHFC) 1QFY25 standalone performance was in line with our estimates. Revenue growth was largely driven by defense business even as most of its other segments saw weak demand. Overseas subsidiaries are showing signs of gradual improvements.

* We have reduced our FY25E EPS estimate by 10% to factor in demand weakness in domestic/export CVs and overseas subsidiaries. We believe most of the positives are factored in the current valuation of 46x/34x FY25E/FY26E EPS. We maintain Neutral with a TP of INR1,470 (based on 28x Jun’26E consolidated EPS).

Losses in overseas subsidiaries slightly reduce

* Standalone revenue/EBITDA/adj. PAT grew 10%/18%/20% YoY to INR23.4b/INR6.5b/INR3.8b (est. INR23.7b/INR6.5b/INR3.9b).

* Overall revenue growth of 10% YoY was driven by non-autos, which grew 19% YoY. Non-auto growth was largely driven by ramp-up of defense orders. Auto segment grew 2% YoY.

* Gross margins improved 250bp YoY (-40bp QoQ) to 58.2% (est. 58.3%).

* EBITDA margins improved 190bp YoY to 27.9% (est. 27.6%).

* Adj. PAT came in at INR3.8b (in line), up 20% YoY after adjusting for the impairment related to Tork Motors.

* Losses at overseas subsidiaries reduced marginally to INR1.2b from INR1.3b PBT loss in 4QFY24 and loss of INR930m in 1QFY24.

Highlights from the management interaction

* CVs: The management does not expect any major pick-up in 2Q but expects a good revival in 2H for domestic CVs, based on discussion with OEMs. For FY25, the management expects CV exports to remain stable with a moderately negative bias.

* Defense business outlook: The management indicated that India needs 4k guns of different platforms. Given the war going on in different regions globally, there is huge demand for replacement of various guns over a period of time. Since BHFC has nine artillery gun platforms, it is likely to be among the beneficiaries of new incremental gun orders, either from Indian Army or overseas.

* Non-auto exports: While aerospace has remained muted in 1Q, the management expects this business to post 15-20% growth in FY25 and then strong double-digit growth from FY26E onward as the company starts executing orders (segment revenue stood at INR2.5b in FY24).

Valuation and view

* With order wins of INR7.75b in 1Q, the executable order book as of Jun’24 stood at INR54b, with a mix of artillery guns, vehicles and consumables. BHFC’s defense business is expected to be its key growth driver over FY24-26E. Further, strong traction in outsourcing opportunities from China and Europe to India, especially in the Industrials segment, should also drive growth for BHFC going forward. The company expects its aerospace business to double in the next 3-4 years. With the capacity ramp-up of overseas subsidiaries and new order wins with better pricing, its performance is likely to improve over FY24-26.

* We estimate a CAGR of 13%/26%/54% in consolidated revenue/EBITDA/PAT over FY24-26. However, after the recent run-up in the stock, we believe positives are fully priced in the current valuation of 46x/34x FY25E/FY26E consolidated EPS. We remain Neutral with a TP of INR1,470 (based on 28x Jun’26E consolidated EPS).

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