The euphoria in Bharat Forge Ltd has subsided. After hitting an all-time high of ₹1,804 on 21 June, which was in tandem with the excitement in all defence sector stocks, the stock has corrected to ₹1,316. With that, some froth in its valuation has cleared as it trades at a price-to-earnings of 30x from 40x at peak based on Bloomberg consensus consolidated estimates for FY26. Even so, valuation is not as appealing. Its September quarter (Q2FY24) earnings reveal that Bharat Forge’s performance on a key metric has not been up to the mark.
True, standalone Ebitda per tonne substantially rose from ₹86,000 to ₹98,000 year-on-year (y-o-y) in Q2FY25. Ebitda is earnings before interest, tax, depreciation and amortization. EV is enterprise value. But here, absolute Ebitda growth matters more than the per tonne Ebitda. Valuing a company’s performance based on EV/Ebitda gives a better picture of valuations unless one looks at replacement cost-based valuation based on EV per tonne. As sales volume fell by 9% y-o-y to 64,000 tonnes, Ebitda grew by a mere 3% y-o-y to ₹625 crore. Standalone revenue at ₹2,247 crore was flat y-o-y.
Domestic revenue growth was offset by a decline in export revenues primarily led by weakness in European commercial vehicles. Even the Indian commercial vehicle business was soft, but it was more than compensated by the strong show of passenger vehicles and the industrial segment. Kalyani Strategic Systems Ltd (KSSL), a wholly-owned subsidiary in India, engaged in defence business is analyzed and valued separately as defence sector stocks are trading at elevated valuations with high-growth expectations. Other Indian subsidiaries and foreign subsidiaries are not material as of now.
KSSL’s performance was robust, with a 58% y-o-y jump in revenue to ₹468 crore. Ebitda almost doubled y-o-y to ₹33 crore. The management stated that the 7% sequential drop in revenue was owing to the subdued execution of export orders. It also suggested that the performance of the defence business should be evaluated on an annual basis as new orders that are lumpy in nature take time to reflect in financials. For FY25, the management expects 40-50% growth in revenue with a better outlook for FY26. The order book at the end of Q2FY25 stood at nearly ₹6,000 crore, which should help achieve the stated growth targets for the current year and next year.
Going forward, domestic defence revenue is expected to grow faster than exports due to the base effect. Even the domestic defence order book is likely to swell as there are potential orders for the ATAGS (Automated Towered Artillery Guns System). The total ATAGS order size is around ₹7,000 crore, and the company’s share could be about 60% of the total. If the company wins the order, it could leapfrog the defence order book to ₹10,000 crore.
On the flipside, Bharat Forge’s global subsidiaries continue to suffer due to weak demand. The company plans to slash costs to improve its margin. While European operations made a small Ebitda of ₹38 crore, the same from US operations was negative at ₹21 crore. If both are netted off, there is hardly any impact on consolidated Ebitda for the quarter at ₹689 crore. But as things stand, brokerages Nomura Global Markets Research and Jefferies India have slashed their targets for Bharat Forge stock to ₹1,515 and ₹1,100 from ₹1,789 and ₹1,200 earlier, citing a weaker demand outlook.
