Medium-term growth outlook remains healthy for Bharat Forge stock

Brokerages expect growth to strengthen in the second half of FY27, supported by defence order execution, recovery in Class-8 truck demand and domestic CV momentum

Auto component major Bharat Forge reported a mixed performance in the June (Q1FY27) quarter.

 

While revenues were broadly in line with estimates, there was a miss on the operating performance front.

 

Though margins in Q1 were under pressure, brokerages are positive on the outlook given sustained growth in commercial vehicles (CVs) as well as margin recovery from the September quarter.

 

Given the Q1 show, and a 26 per cent rally in the stock over the last six months, there could be near-term downside pressure.

 

The stock closed 2.7 per cent lower at ₹2,052 on Tuesday.

 

Revenue growth for Bharat Forge’s consolidated operations was at 19 per cent while on a standalone basis the growth was at 12 per cent. The growth rates for domestic as well as overseas operations were 11-12 per cent. However, the industrial segment outperformed the auto segment during the quarter. Domestic auto segment saw a growth of 3 per cent while overseas auto grew by 10 per cent. The industrial business in the domestic and the overseas markets saw a healthy growth of 16 per cent each.

 

Though revenue growth was muted in the quarter, the demand outlook for Bharat Forge remains robust with gains expected to reflect in the second half of FY27. This will be driven by a recovery in Class-8 truck demand (North America) and healthy momentum in the domestic CV segment. 

 

What should add to the overall growth is the ramp up of defence business led by execution of the current order book.

 

These include the advanced towed artillery gun system (ATAGS) and the close quarter battle carbines.

 

The company won new orders worth ₹1,352 crore in Q1, including ₹681 crore from the defence sector. Defence order book now stands at ₹11,200 crore. Bharat Forge signed its largest-ever naval order for 12 marine gas turbine generator sets for Kolkata-class ships.

 

In addition to the defence business, the company’s 20-25 per cent growth in the Indian manufacturing business (especially in the second half) is riding on recovery from overseas operation disruption and new facility ramp-up.

 

ICICI Securities says the medium to long-term prospects for Bharat Forge remain compelling, aided by a growing order book in newer verticals like defence and aerospace.

 

Key monitorables, according to analysts led by Ronak Mehta of the brokerage, include profitability of overseas subsidiaries and delay in execution of defence orders.

 

ICICI Securities has upgraded the stock to a ‘buy’ rating from a ‘hold’ earlier and revised the target price to ₹2,400.

 

The consolidated operating profit margin performance was below expectation as the metric fell 190 basis points (bps) quarter-on-quarter (Q-o-Q) to 15.3 per cent. This was on account of a 240 bps Q-o-Q decline in standalone operations. It was due to a 160 bps hit from commodity, energy and logistics costs.

 

The other factor that weighed on margins was a 170 bps decline in subsidiary operations which resulted in operating loss in the US due to a breakdown. A major breakdown at its US steel forging plant halted manufacturing activities for nearly three months. 

 

While results missed estimates, Nomura Research believes that the fundamental growth drivers are intact and the stock correction was on account of high expectations.

 

While high energy costs are expected to be passed on, Kapil Singh and Siddhartha Bera of the brokerage expect strong ramp-up in revenues, led by Class 8 truck upcycle, defence and aerospace segments.

 

Restructuring of European Union operations can drive strong export growth in FY29, they add. The brokerage has a ‘neutral’ rating and raised its target price to ₹2,260.