Can this battered defence stock forge a new path? Only if it cleans house first.

Bharat Forge, one of the first private companies to enter the defence sector, unveiled its first fully indigenous unmanned aerial vehicle (UAV) engine at Aero India. Once primarily an auto ancillary company, Bharat Forge is now known for its expertise in forging and precision engineering, and is looking to fill one of the most significant gaps in India’s defence ecosystem: jet engine technology.

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India has long relied on imported gas turbines for UAVs, aka drones. Several startups have entered drone manufacturing in recent years, but most depend on propulsion units imported from China or Europe. To bridge the gap in jet engine technology, Bharat Forge is producing landing gears in Pune. The company already produces 100% of Airbus’s commercial aircraft parts.

Bharat Forge is also investing in the latest technologies used in warfare. It is collaborating with foreign partners to produce everything from AI-powered drones to hypersonics and directed energy weapons.

Auto ancillaries boom

Bharat Forge is unique in the auto ancillary space. Most of its peers are currently busy manoeuvring their product profiles from internal combustion engine (ICE) supply chains to electric vehicle (EV) supply chains. Some are getting into hardware for electric vehicles, others into digital products.

With road accidents on the rise, the government has mandated safety features such as anti-lock braking systems (ABS) for commercial vehicles, driver and passenger airbags, seat belt reminders and more, with the aim of reducing accidents by 50% by 2030.

This has given ancillary companies an opportunity to increase their digital content per vehicle. Premiumisation of passenger vehicles has allowed most auto ancillary companies to offer add-on features and technologies in cars.Makers of car sensors, sunroofs, alloy wheels, advanced driver assistance systems, instrument clusters and other such parts and systems are seeing demand surge because of this.

Companies such asMotherson Sumi Wiring and Tata Elxsi, which compete with Bharat Forge, have been catering to the changing trends in automobiles while keeping their margins intact.

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Motherson Sumi Wiring has designed and developed high voltage wiring harnesses, connectors, and components for EV powertrains and battery management systems (BMS) to prepare for the deeper penetration of features based on regulatory changes.

Tata Elxsi meanwhile has been at the forefront of developing software-defined vehicles (SDVs), which promise to transform the mobility landscape.

So while Motherson Sumi Wiring is leveraging the demand for premium hardware for vehicles, Tata Elxsi is leveraging the demand for connected and tech-enabled vehicles. Neither has compromised on margins while doing so. Both also havenegligible debt and healthy return ratios.

Marching to its own beat

Bharat Forge, meanwhile, was one of the earliest private-sector, non-defence companies to venture into the space dominated by public sector units (PSUs).

For almost a decade until 2022, it focused on platform development, metallurgy and material science as well as embedded electronics for defence equipment. With these efforts, the company positioned itself as a product supplier and not just a component supplier in the defence vertical. Its offerings included artillery (towered and mounted guns), protected vehicles, and armoured vehicles for the defence segment.

It eventually won orders to make propellants for the Akash missile (a medium-range surface-to-air missile), the Pinaka (multiple rocket launcher), and for pyrotechnics, which helps initiate the explosion, and igniter, which provide the spark for the ammunition.

The fact that Bharat Forge is already focussing on making parts of the jet engine and catering to maintenance, repair, and operations (MRO) demands of the Airbus’s commercial aircraft highlights management’s foresight.

What spooks investors

However, what has ailed Bharat Forge through all of this is a lack of focus on margins and return ratios. Also, it tends to keep the debt-to-equity ratio uncomfortably high. Such issues in fundamental quality have dampened its stock price.

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While the stocks of Bharat Electronics, Hindustan Aeronautics, Bharat Dynamics rose three- to five-fold between April 2024 and February 2025, the recent market correction has erased some of these gains. In the case of Bharat Forge, the erosion of the valuation multiple has been much sharper. So, despite having reasonable exposure to the defence sector, the stock has been a laggard among Indian defence stocks.

Although its prospects in aviation defence and aviation MRO are extremely promising, Bharat Forge may not be able to sustain its valuations without focusing on margins.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com