Traditional Forged Auto Components Will Decline Amid Rising Costs

Key Takeaways

• Ongoing shifts to electric vehicles and eco-friendly materials pose risks to Bharat Forge's core business and threaten long-term revenue stability.
  
• Heavy exposure to cyclical sectors, volatile costs, and slow diversification undermine earnings resilience and increase vulnerability to market disruptions.
  
• Diversification into high-growth sectors, strategic acquisitions, and new product lines are enhancing revenue stability, operational leverage, and reducing earnings cyclicality for Bharat Forge.

Catalysts

Engages in the manufacture and sale of forged and machined components in India and internationally.

• The global acceleration towards electric vehicles threatens the long-term demand for conventional forged automotive components, which continues to be a considerable portion of Bharat Forge's core business, placing future revenue growth at sustained risk as OEMs shift sourcing priorities away from the company's legacy product base.
  
• Increasing regulatory focus on circular economy principles and lightweight, recycled materials adoption is pushing customers to phase out traditional forged metal parts; this trend risks shrinking Bharat Forge's volumes, leading to declining topline and potentially underutilized capacity that will weigh on operating margins.
  
• Bharat Forge is exposed to input cost volatility and intensified price competition as higher steel and energy costs continue to compress margins, while the company's ability to pass these on is constrained in a consolidating and highly price-sensitive global OEM supply chain, posing ongoing threats to net profit.
  
• Heavy reliance on cyclical sectors such as commercial vehicles, industrials, and exports keeps Bharat Forge's earnings especially vulnerable to macroeconomic downturns and sudden changes in tariffs or trade policy, as shown by recent disruptions; this undermines earnings stability and risks steep drops in both revenue and profitability during downturns.
  
• Initiatives to diversify into new business areas such as defense, aerospace, electronics and e-mobility remain subject to long and uncertain gestation periods before achieving scale or profitability, making delays or underperformance in these segments a structural risk to both future sales and long-term earnings momentum.

Bharat Forge Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bharat Forge compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bharat Forge's revenue will grow by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.8% today to 8.9% in 3 years time.
• The bearish analysts expect earnings to reach ₹15.7 billion (and earnings per share of ₹32.83) by about August 2028, up from ₹10.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 43.3x on those 2028 earnings, down from 53.1x today. This future PE is greater than the current PE for the IN Auto Components industry at 29.7x.
• Analysts expect the number of shares outstanding to grow by 2.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.56%, as per the Simply Wall St company report.

Bharat Forge Future Earnings Per Share Growth

Risks

• Bharat Forge is experiencing strong growth in non-automotive verticals such as defense and aerospace-with a robust order pipeline in defense (around ₹9,000 crores plus a likely additional ₹1,400 crores soon) and a projected annual growth rate in aerospace of over 20 percent year-on-year, which can support long-term revenue visibility and diversification.
  
• The company continues to expand its India manufacturing base and has made strategic acquisitions, such as the American Axle India CV assets, granting access to the high-growth light commercial vehicle and SUV markets, which could meaningfully lift overall revenues and market share in coming years.
  
• Overseas aluminum operations in both Europe and the US have turned profitable with improved utilization and stable EBITDA margins, while an additional line is under installation, signaling operational leverage and potential future earnings upside as capacity is further absorbed.
  
• Bharat Forge is broadening its offerings through entry into electronic components, server manufacturing, and e-mobility (e.g., SMT lines, KPTL e-mobility, server partnerships with Compal Electronics), which, supported by government incentives and increasing domestic content, can drive margin accretive growth and reduce cyclicality in earnings.
  
• The management is confident that tariff pressures are being managed collaboratively with customers and that global competitiveness is preserved due to similar or higher tariffs applied to competitors from other geographies, limiting downside to export volumes and helping protect consolidated net margins over the medium term.

Valuation

• The assumed bearish price target for Bharat Forge is ₹870.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bharat Forge's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1800.0, and the most bearish reporting a price target of just ₹870.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹175.5 billion, earnings will come to ₹15.7 billion, and it would be trading on a PE ratio of 43.3x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹1135.5, the bearish analyst price target of ₹870.0 is 30.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.