Prabhudas Lilladher Upgrades Bharat Forge to ‘Accumulate’ with ₹1,701 Target as Defense Orders Surge

Prabhudas Lilladher has upgraded its rating for Bharat Forge from “Hold” to “Accumulate,” with a new target price of ₹1,701. This decision is based on the strong growth expected in Bharat Forge’s Defense business, which is anticipated to deliver over 50% growth in FY25.

Key Highlights:

• Defense Business Boom: The Defense sector is expected to grow by more than 50% in FY25. Bharat Forge recently secured new defense orders worth ₹7.8 billion, and the current order book stands at ₹54 billion, including artillery guns and other military equipment.
  
• Revenue Growth: Bharat Forge’s consolidated revenue for Q1FY25 increased by 5.9% year-on-year (YoY). However, this was 4% lower than expected due to a decline in the Forging business. Gross profit saw a significant rise of 13.5% YoY, with gross margins improving by 370 basis points to 55.3%. The growth was driven by the execution of Defense orders and a recovery in the Oil & Gas business.
  
• EBITDA and Margins: EBITDA (earnings before interest, taxes, depreciation, and amortization) grew by 20% YoY, with margins expanding by 212 basis points to 18%. However, profit after tax (PAT) was lower than expected due to an impairment in its Indian subsidiary.
  
• Positive Outlook: Bharat Forge is expected to continue its positive momentum in the coming quarters, with the management forecasting gradual recovery in the Commercial Vehicles (CV) and Passenger Vehicles (PV) segments. They estimate a 15% compound annual growth rate (CAGR) in revenue and 28% CAGR in EBITDA from FY24 to FY26.
  
• Fundraising and Expansion: The company has approved a ₹20 billion fund raise to expand its manufacturing presence in India. This expansion will help Bharat Forge explore more opportunities both in India and globally.
  
• Conference Call Insights: During the recent conference call, the company highlighted the smooth ramp-up in executing Defense orders and discussed the potential large-scale opportunities for Advanced Towed Artillery Gun Systems (ATAGs) in India. Bharat Forge is also focusing on reducing losses in its international subsidiaries, expecting improvements in FY25.

Overall, Bharat Forge’s strong performance in the Defense and Industrial sectors, along with its strategic expansion plans, have led Prabhudas Lilladher to revise their outlook and upgrade their rating to “Accumulate” with a target price of ₹1,701.