Happy Forgings margins and order book underpin industrial-led earnings growth

Investment View and Valuation

Motilal Oswal Financial Services retained its Buy rating on Happy Forgings in its August 5, 2026 results update, supported by resilient first-quarter margins, healthy order wins and multiple future margin levers. The broker raised its FY27E and FY28E EPS estimates by 3 per cent and 9 per cent, respectively, following better-than-expected margin performance and an improved outlook.

The target price is Rs 2,095, based on 33 times FY28E EPS.

First-Quarter Financial Performance

Happy Forgings reported standalone revenue of Rs 4,494 million in 1QFY27, up 27 per cent year on year and broadly in line with Motilal Oswal's estimate. Growth was entirely volume-led, with volume at 17,793 MT, while realisation improved sequentially to Rs 253 per kg.

EBITDA margin expanded 280 basis points year on year to 31.3 per cent, driven by a better product mix and operating leverage. This was the fourth consecutive quarter with EBITDA margin above 30 per cent. PAT rose 39.2 per cent year on year to Rs 915 million and was broadly in line with the broker's Rs 897 million estimate. Lower-than-expected other income limited PAT growth despite the strong operating margin.

The 1QFY27 revenue mix comprised commercial vehicles at 33 per cent, farm equipment at 32 per cent, off-highway at 11 per cent, industrials at 16 per cent and passenger vehicles at 8 per cent. Domestic sales accounted for 72 per cent of revenue, deemed exports for 12 per cent and direct exports for 16 per cent.

Order Book and Growth Opportunities

Management stated that the order book represents around Rs 9,500 million of peak incremental annual revenue potential over the next two to three years. The order book is diversified, with commercial vehicles contributing 25-30 per cent, industrials 35-40 per cent and passenger vehicles 25-30 per cent; the balance is in farm equipment and off-highway. Exports form 60 per cent of the order book.

Management reiterated confidence in delivering high-teen volume growth in FY27 and expects the industrial business to double over the next three to four years. New industrial programmes are expected to carry gross margins of 80-85 per cent for machined crankshafts and 60-65 per cent for forged crankshafts, with potentially 50 per cent of gross profit translating into EBITDA.

Industrials and Precision Components

Motilal Oswal views industrials as the long-term growth driver. Happy Forgings is investing Rs 6,500 million in a heavyweight precision-components facility capable of producing 250-3,000 kg forged and fully machined parts. The facility has already secured orders worth Rs 3,500 million. The broker forecasts industrial revenue CAGR of 50 per cent over FY26-28E.

Passenger Vehicles

Passenger vehicles contributed 6 per cent of FY26 revenue, compared with 1 per cent in FY24. Management aims to increase this contribution to 8-10 per cent within two years and 12-15 per cent over three to four years.

Earnings Outlook and Margin Levers

The broker expects standalone revenue CAGR of 30 per cent and earnings CAGR of 41 per cent over FY26-28E. It forecasts EBITDA margin expansion from 30.4 per cent in FY26 to 31.7 per cent in FY27E and 33.0 per cent in FY28E.

The expected improvement is supported by mix enhancement, operating leverage and the captive solar project. The solar project is scheduled to start in January 2027 and is expected to add 1.0-1.5 per cent to EBITDA margin when fully operational.

Key Risks and Offsetting Drivers

The report highlights the following risks:

• Near-term margin pressure from rising input costs.
• Commercial-vehicle volume weakness linked to the West Asia crisis.
• Demand in the US and Europe stabilising at lower levels.

Offsetting drivers include new domestic commercial-vehicle orders, an expected recovery at a key export client, an improved domestic tractor outlook and new tractor-export wins.