Stock of Bharat Forge fell 10% in the last two trading sessions. Margin pressures hurt its June-quarter (Q1FY27) performance, and a slight tweak to its full-year revenue guidance disappointed investors.
In standalone operations, sales volume rose 8% year-on-year to 66,787 tonnes in Q1FY27 while Ebitda/tonne declined 5.4% to ₹87,694 amid elevated energy and input costs. The management expects per-tonne-profit to recover even if profitability percentage remains low due to the denominator effect. Bharat Forge revised the FY27 revenue growth guidance for its Indian manufacturing business from 25% in Q4FY26 to 20-25%. While this suggests improving traction in H2FY27, some brokerages have cut earnings per share estimates for FY27.
Defence growth
Apart from standalone forging operations, the company also has other Indian manufacturing operations through subsidiaries KSSL (defence), K Drive (axles) and BFISL (castings). KSSL's defence revenue accounts for 13% of its domestic manufacturing revenue, and rose 71% year-on-year in the June quarter, albeit on a low base. Earnings before interest, taxes, depreciation, and amortisation (Ebitda) almost quadrupled year-on-year to ₹73 crore, but it is still a small part of total Indian Ebitda at about 10%. Other Indian subsidiaries are even smaller.
Kalyani Strategic Systems Ltd's (KSSL) order book of ₹11,196 crore as of June-end is around 7x its FY26 revenue. The company made a breakthrough in the naval segment by winning a large order for a marine gas turbine generator. KSSL’s order book is healthy, and it is targeting a steady-state margin of 22-23% for the defence business, but execution delays and lumpy revenue recognition warrant monitoring.
Based on the market capitalization-to-annual sales ratio of nearly 10x for FY26 for companies like Hindustan Aeronautics and Bharat Electronics, Bharat Forge's defence subsidiary could command a valuation of about ₹15,000 crore even if Q1FY27 revenue is annualized. Since Bharat Forge's current market capitalization is nearly one trillion rupees, the valuation of the residual business excluding defence comes to ₹85,000 crore. KSSL's current size is small and a sharp 40% rally in the Bharat Forge stock so far in 2026 suggests investors are betting on the defence business's prospects. Otherwise, the underlying numbers do not justify the high valuation of 57x consensus earnings for Bharat Forge for FY27, according to Bloomberg. The multiple is expensive for the traditional forgings business, which forms the bulk of the company's earnings, as its financials show.