Bharat Forge margins lag as defence order book and exports strengthen

Investment View and Valuation

Motilal Oswal Financial Services Ltd. (MOFSL), in its August 10, 2026 results update on Bharat Forge, retained its Neutral rating with a target price of Rs 1,931 per share. MOFSL considers the GST rate cut supportive for a revival in domestic automotive demand and sees a clear recovery emerging in the US Class 8 truck cycle. Defence, aerospace and JSA are expected to be Bharat Forge's principal long-term growth drivers.

However, following the stock's recent rally, MOFSL believes most positives are already reflected in valuation. At the report CMP of Rs 2,093, Bharat Forge traded at 64 times FY27E EPS and 44 times FY28E EPS. The target price of Rs 1,931 is based on 40 times FY28E EPS.

Q1 FY27 Financial Performance

Standalone Results

Bharat Forge's standalone Q1 FY27 adjusted PAT was Rs 340 crore, flat year on year and 12 per cent below MOFSL's Rs 390 crore estimate, principally because of weaker-than-expected margins. Standalone revenue increased 11.5 per cent year on year to Rs 2,347 crore, broadly in line with estimates.

Standalone exports grew about 12 per cent year on year to Rs 1,200 crore, supported by double-digit growth in non-automotive products and passenger vehicles. MOFSL attributed the export performance to inventory restocking and a rebound in North American truck production. Domestic commercial-vehicle revenue was stable both year on year and sequentially, while total domestic revenue grew 11 per cent year on year to Rs 1,140 crore.

Standalone EBITDA was broadly flat year on year at Rs 586 crore, versus MOFSL's Rs 635 crore estimate, as EBITDA margin contracted 220 basis points year on year to 25 per cent against the 27.1 per cent estimate. Higher energy and input costs drove the margin shortfall. Bharat Forge also incurred an exceptional expense of Rs 24.5 crore relating to incidental expenses from the restructuring of Bharat Forge CDP, its German subsidiary.

Consolidated Results and Estimate Changes

At the consolidated level, Q1 FY27 revenue rose 19 per cent year on year to Rs 4,630 crore, while EBITDA margin fell about 200 basis points year on year to 15.3 per cent. Bharat Forge reported a consolidated net loss of Rs 89.9 crore due to an extraordinary provision of about Rs 360 crore related to CDP restructuring.

Overseas subsidiaries' margin declined to 1.7 per cent from 3.9 per cent a year earlier, reflecting losses in the US business. European subsidiaries' margin was broadly stable at 2.8 per cent, whereas US subsidiaries' margin fell to negative 0.8 per cent from 6.1 per cent in Q1 FY26. These margin pressures and US losses led MOFSL to reduce FY27E net profit and EPS estimates by 7.3 per cent; FY28E net profit and EPS estimates were unchanged.

Demand Outlook and Growth Drivers

Management said the demand environment remains favourable despite cost escalation, with firm demand in India and the US, strong European CV demand and stable European passenger-vehicle demand. Management maintained guidance for 20-25 per cent FY27 growth in Indian manufacturing, with stronger growth expected in H2 FY27 and continued momentum in FY28.

Automotive growth over the next five years is expected to be led by new JSA and K-Drive products. Non-automotive growth should come from defence, aerospace, power generation, semiconductors, data centres and industrial businesses.

Defence Order Book and Export Opportunities

During Q1 FY27, the forging business secured Rs 520 crore of orders, defence won Rs 680 crore and ferrous castings secured about Rs 150 crore. Bharat Forge's defence order book stood at Rs 11,200 crore as of June 30, 2026, executable over four to five years.

The defence backlog includes a domestic ATAG order of about Rs 4,500 crore, expected to start in H2 FY27, a Rs 1,400 crore carbine order and a Rs 250 crore Indian Navy unmanned marine systems order. MOFSL expects the robust defence backlog to be a major growth driver.

MOFSL also forecasts 20 per cent export revenue CAGR over FY26-FY28E as US Class 8 demand improves, demand for higher-horsepower engines remains strong, aerospace order intake rises and passenger-vehicle exports revive. Bharat Forge plans to raise up to Rs 2,500 crore through debt or equity for organic growth and M&A opportunities.

MOFSL Estimates

MOFSL forecasts Bharat Forge to deliver FY26-FY28E CAGR of 17 per cent in revenue, 24 per cent in EBITDA and 39 per cent in PAT.

Key Risks and Factors Tempering the View

• Near-term input and energy-cost pressure may continue to weigh on margins.
• Losses in US operations remain a drag on consolidated profitability.
• CDP restructuring charges have affected reported earnings.
• MOFSL considers the valuation to already capture much of the prospective growth following the stock's recent rally.