Diversified portfolio positive but factored into Bharat Forge valuations

Aerospace exports were strong, high-horsepower engines were stable, and the oil and gas segment was weak

Bharat Forge offered strong guidance despite an uncertain macro environment and modest fourth quarter (Q4FY26) results. The defence segment could see a big ramp up from the second half of 2026-27 (H2FY27) as orders for Advanced Towed Artillery Gun System (ATAGS) and close quarter battle (CQB) carbines arrive. The company is also witnessing growth in aerospace and the data centre business.

 

The Q4FY26 standalone adjusted earnings were at ₹370 crore. Defence, aerospace, and the JSA Autocast subsidiary remain key growth drivers. Exports lagged due to global softness and tensions. The standalone revenue rose 4.5 per cent year-on-year (Y-o-Y) to ₹2,260 crore. Volumes declined 8 per cent Y-o-Y to 62,201 metric tonnes (Mt), while realisations grew 13.1 per cent Y-o-Y to ₹363 per kg.

 

The auto segment revenue declined 7.1 per cent Y-o-Y to ₹1,060 crore and non-auto revenue grew 17.5 per cent Y-o-Y to ₹1,210 crore. Export revenue fell 12 per cent Y-o-Y to ₹1,080 crore. However, it was up 19 per cent Q-o-Q due to inventory restocking and a rebound in US truck production. Passenger vehicle exports were also strong, driven by demand across North and Central America.

 

Aerospace exports were strong, high horsepower engines were stable and the oil & gas segment was weak. The export revenue for FY26 stood at ₹4,010 crore, down 15.2 per cent Y-o-Y, impacted by prolonged destocking in US truck markets. The domestic commercial vehicle (CV) revenue was good and overall domestic auto revenue grew 32 per cent Y-o-Y.

 

The standalone operating profit margins declined 120 basis points Y-o-Y to 27.3 per cent and operating profit was flat Y-o-Y at ₹620 crore. An exceptional provision of ₹490 crore was made for an impairment of investment in Kalyani Powertrain (KPTL), which handles all electric mobility products. Adjusted for provisions, net profit fell 28.7 per cent Y-o-Y to ₹260 crore.

 

The operating profit margin was stable Q-o-Q at 27.3 per cent, and balance sheet strength was impressive, with net debt-to-equity at just 0.18. Bharat Forge has acquired a 30 per cent stake in Fortuna Engineering for ₹130 crore. Fortuna had FY25 revenue of ₹322 crore, and operates at mid-teen margins.

 

The consolidated revenue rose 17.5 per cent Y-o-Y to ₹4,530 crore. However, net profit fell 17 per cent to ₹233 crore. Margins also contracted 50 basis points Y-o-Y to 17.2 per cent. Margins of overseas subsidiaries improved to 3.7 per cent in Q4 from 1.2 per cent a year ago. Margins of European subsidiaries improved 350 basis points Y-o-Y to 4.7 per cent, and US subsidiary margin fell Y-o-Y by 20 basis points to 1.1 per cent. There was a restructuring expense of ₹99 crore in Germany. For FY26, revenue was up 11 per cent to ₹16,811 crore, while operating profit was up 9 per cent and net profit grew 18 per cent Y-o-Y to ₹1,090 crore. The free cash flow for FY26 improved to ₹370 crore post capex of ₹1,100 crore.  

 

For FY27, barring major geopolitical disruptions, the management is optimistic of 25 per cent revenue growth in Indian manufacturing, with improvement in operating profit due to strong execution, export market recovery and healthy demand in India and the US. Growth is expected to be led by aerospace, followed by defence and auto components.

 

The full-year defence revenue was ₹1,560 crore in FY26. The defence order book stood at ₹11,000 crore at FY26-end, with multi-year revenue visibility. ATAG production ramp-up and CQB carbine commercialisation are expected to contribute to revenue from H2FY27 onwards. Bharat Forge is addressing emerging opportunities in Europe, with recent order wins.

 

Aerospace revenue was ₹400 crore in FY26 and contributed 26 per cent of industrial export revenue in Q4FY26. Management expects strong double-digit growth in the segment, driven by global outsourcing, new wins and increasing relationships with aerospace original equipment manufacturers (OEMs). CV exports were under pressure due to channel destocking in North America. But early signs of recovery are visible.

 

The recently acquired K-Drive may double the axle business over the next 3-4 years, while targeting mid-teen operating margins. The portfolio is moving beyond medium and heavy commercial vehicles (MHCVs) to electric vehicle (EV) platforms. Subsidiary JS Autocast reported a revenue of ₹760 crore and operating profit of ₹100 crore in FY26. Operating profit margin for the period was at 14.3 per cent. A slowdown in wind related business led to near-term softness.

 

Bharat Forge could conservatively post consolidated annual revenue growth in mid-teens, with higher margins and higher operating profit growth till FY28. Moving into multiple segments will help to reduce cyclicality. But geopolitical tensions are a serious concern. The recent rally in stock price implies that the positives are factored in with valuations running at price to earnings of 56 times the expected FY27 earnings.