Margins Alone won't Save Bharat Forge, Defence Orders Drag Q3

Bharat Forge Q3: For India's largest exporter of auto components, things stay complicated, thanks to global uncertainty playing out in the background. Last year, the shares of the auto and ancillary company delivered a mere return of around 5% amidst a turbulent demand outlook.

And, as for now, the market sentiment seems to have turned dimmer as the company delivered a negative return of over 17% on just year-to-date basis. The recent Q3 performance provided little hope to investors.

Bharat Forge is one of the top manufacturers of forged and machined components. The Kalyani Group-owned firm supplies critical components to several sectors, including automotive, oil and gas, aerospace, mining and defence.

The company reported a net profit of Rs 212 crore, marking a 16% drop from Rs 254 crore in the corresponding quarter of the previous fiscal. Revenue from operations also witnessed a double-digit decline to Rs 3,475.5 crore as against Rs 3,866 crore reported in the same period last year.

Ebitda margins, on the other hand, came in better than expected at 28.1%. While they dipped from the previous quarter, the decline was not as steep as analysts had anticipated. Despite potential headwinds, margins held steady but not for international business, where they remained mixed.

Overseas Business Under Strain

Bharat Forge mainly focuses on the automotive sector when it comes to international business wherein the US and EU are key markets for the company. In Q3FY25, two factors weighed heavily on the firm's bottom line: a weaker demand outlook in the domestic market and global policy uncertainty driven by tariffs. During the quarter under review, exports made up around 54.9% of the revenue mix.

The management pointed out that overseas business is feeling the heat of demand slowdown, especially in the Eurozone. Fluctuating demand is adding uncertainty to both commercial and passenger vehicle exports, which is in-turn adding pressure on Bharat Forge's top line.

This has pushed the management to review its European manufacturing footprint, with decisions on the same expected in the upcoming 6 months. Till then, losses in the region are likely to stay high for the next 2-3 quarters before the restructuring begins to show results.

Plus, a slower-than-expected defense order progress and weaker profitability in its European subsidiaries acted as a major drag on the company's Q3 performance.

Defence Order Book

As for the domestic outlook, CV revenue has already dropped by 12% YoY (year-on-year) with the PV segment improving by 28%. The company's defense business revenue declined 22.5% YoY and 34% QoQ to Rs 3.4 billion. The overall order book stood at Rs 57.1 billion, slightly down from Rs 59 billion in Q2, as new order additions remained weak at Rs 970 million. Bharat Forge is also expecting a delay in ATAGS gun orders to FY27.

But the major peril for the company, as per analysts, remains the overall fluctuations in the market cycle.

"Cyclical risks expected by us have started to play out. Progress on Defense orders is slower than our expectation. We continue to see downside risks from cyclical factors in the EU, US and overseas subsidiaries’ profitability. We factor in the delay in ATAGs gun orders to now kick in from FY27F and lower profitability of EU subsidiaries," global brokerage firm Nomura said.

What should investors do?

While challenges persist, long-term hope remains high due to the company's increased focus on high-entry-barrier segments wherein competition is limited.

"The management has hinted towards improved profitability in overseas subs over FY26E led by pricing support, cost efficiencies and improved utilisation. Focus on high entry barrier segment continues as the company sets up a machining line for landing gears (first in India by any company) and ring mill for high precision forging for global orders," Yes Securities said in its report.

Meanwhile, its subsidiary firm, JS Auto continued its robust performance, clocking in a 20% YoY surge in revenue at Rs 1.66 billion during the quarter ending December.

However, most brokerage firms have reduced the target price on the stock as current headwinds outweigh any potential positives. The stock has already declined by over 40.2% from its 52-time-high. Nomura has reduced its target price to Rs 1,193 from the earlier Rs 1,515 and has maintained a Neutral outlook, factoring in weak demand play and 'unpredictability of the US tariff impact.'

Some analysts also believe that the recent drop in stock price has already accounted for the near-term challenges, leaving headroom for a decent upside potential. "The recent correction in the stock largely factors in near-term challenges and do offer decent upside on the stock as our SOTP-based target price at Rs 1,394 based on 40x to defence business at Rs 569 per share and 25x to other base business at Rs 825 per share on Mar’27 EPS," Yes Securities said in its report.

The stock is currently trading at 27.9x/22.9x its expected FY26/27 earnings, which is lower than its 10-year average of 38x, as per the brokerage house.