Bharat Forge shares: Defence orders strong; should you buy, hold or sell stock?

Bharat Forge’s March quarter standalone revenue and Ebitda came in line with analyst estimates but a higher defence revenue and margin forecast led a couple of analysts increase their FY25 and FY26 earnings per share forecast by up to 20 per cent. But they differ of stock valuations after a 14 per cent rally on Wednesday and 82 per cent rise on the counter in the last one year.

On account of a better-than-expected scale up of defense orders, Motilal Oswal raised its earnings estimates by 1-3 per cent for FY25-26. But after the recent sharp run up, the stock at 36 times FY25 consolidated EPS and 29 times FY26 EPS appears fairly valued, the brokerage said while downgrading the Bharat Forge stock to 'Neutral' with a target price of Rs 1,370.

Nuvama said while defence growth is likely to stay robust, core segments such as CVs, construction equipment, tractors and oil & gas are expected to register weak performance, limiting revenue/EPS CAGR to 8 per cent/10 per cent over FY24–26E.

Subsidiaries are expected to see robust growth and positive earnings in FY26. This brokerage suggested a target of Rs 1,160 on Bhat Forge against Rs 1,080 earlier. "In light of the expensive valuation, we retain ‘Reduce’ rating," it said.

Analysts said auto exports are likely to be subdued. Domestic CV/PV demand may moderate after a robust 22 per cent CAGR in domestic auto in FY21–24 due to pent-up demand having eased off and expectations of moderation in infra spending by the government, they said.  

"After a strong 43 per cent CAGR over FY21–24, we expect industrials CAGR to be 14 per cent over FY24– 26E. The Defence (27 per cent CAGR) segment shall support the growth despite subdued prospects in global construction equipment, tractor and oil & gas segments. Ex-defence, revenue CAGR in industrials is 8 per cent versus a 30 per cent CAGR over FY21–24," Nuvama said.

Emkay Global said Bharat Forge has continued to post robust order wins in defence, even as base business outlook has also improved against earlier expectations (sees flattish performance in CVs; witnessing strong market share gains in other businesses). 

"We build 13 per cent/28 per cent revenue/EPS CAGR over FY24-26E (upgrade EPS by 20 per cent/12 per cent in FY2025/26E backed by higher revenues and improvement in margins including at overseas subsidiaries). We upgrade to Buy from Reduce with revised target price Rs 1,650 (Rs1,100 earlier); we assign 21 times FY26E EV/Ebitda on consolidated basis (25x EV/Ebitda to defense and 20x EV/Ebitda to other businesses)," it said.