Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Bharat Forge Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Kalyani. Thank you, and over to you.

Good afternoon, ladies and gentlemen. This is Amit Kalyani. Thank you for joining us for our Q3 investor call. As is usual, I have our finance team and Investor Relations team with me. I'll take you through our numbers very quickly. I'm sure you have a lot of questions, which we will try to answer. On the whole, we've had a pretty poor performance for the quarter driven largely by the downturn both in the domestic industry as well as overseas in the Industrial space. On the commercial vehicle side, we've seen a 25% degrowth over last year for exports. On the passenger car side, we've seen a 15% growth over last year. On the Industrial side, on aggregate, we've seen about 50% degrowth over last year and exports are down by about 35% to about INR 635 crores. On the domestic market, our commercial vehicle sector is down almost 60% over last year, which is corresponding to the kind of downturn in the production in the last quarter. On the passenger vehicle side, we are flat compared to last year. On the Industrial space, we are down by about 28%, within which only in rail, we've seen growth. We had a large defense business last year, which, as you know, was a contract we had received, which was finishing and has finished. So that is no longer there. In spite of that, on overall basis, in Industrial, we did about almost INR 200 crores in domestic. Our total domestic revenue was about INR 365 crores, INR 635 crores of export and total revenue of just over INR 1,000 crores. And total income for the quarter was about INR 1,076 crores, which is about 36% lower than last year. Our EBITDA margins were about 22.2%. This was lower than Q2, but was also impacted by -- our PBT was impacted further by a onetime exchange loss of about INR 15 crores. Corresponding to which last year, we had a gain of about INR 8 crores. Looking on the sector-wise, as I mentioned, it was largely impacted by CVs and commodity sector, such as oil and gas. Passenger vehicles was a bright spot. We expect that going ahead, the passenger vehicle business will recover. In fact, this quarter, we had less passenger car business than we should have because of the GM strike, which reduced demand because many of their plants were closed for up to 45 days, but that is normalized now, so we should see a growth in the exports for pass car in Q4. Overall, we believe that the bottoming out has happened. And we are at the bottom of the trough right now. Probably Q3 and Q4 will be at similar levels. And from Q1, we should start seeing overall growth. We are right now not sure of what is the impact of the coronavirus on the global automotive industry. What we believe from our customers, having spoken to them all of last week, is that everybody in Europe and the U.S. has between 4 to 6 weeks of inventory. So as long as this problem gets over within 4 to 6 weeks and they start shipping and the plants start again and shipments start again, and there's no border issues then there should not be a major impact on the overall automotive and global industries. In terms of operating profits, we've had an operating profit margin of 44.1%, which is almost the same as last year. So it is -- we have worked very hard on cost reduction, and we will further effect significant cost reductions by Q4. And this, combined with some amount of tailwinds, we'll see margins recovering once again to fairly decent numbers. That is in the second half of next year. By quarter 4 of next year, we expect significant cost reductions to take place. In terms of subsidiaries, I'm very sorry with the kind of performance we have had, there was a very steep decline in the European markets and that continues. So we have started a significant restructuring in our German operations, where we are reducing manpower costs, reducing conversion, reducing all kinds of costs to a double-digit percentage of revenue. And hopefully, by the end of next year, again, this should have been fully completed. And also, our new aluminum business will start kicking in. I'm very happy to report that between the Aluminum Forging plant plus the fourth line that we have set up in Germany, plus one line that we have set up in our old German plant and the nominations that we have received for our U.S. operations, we have significant tie-up of business for a period of 5 to 7 years of close to $300 million a year. So this is something that will give a big flip to our European and overseas subsidiaries. It will change the entire complexion of the business. And as we convert more and more of our aluminum business to -- our steel business to aluminum and downsize our steel business, it will reduce the fixed cost in the steel business and allow us to take advantage of the higher margins in the aluminum business and grow our business substantially. Our Nellore plant is now online, and we are starting billing from February. We have received orders from many companies now, including both in India passenger car companies as well as global companies. And by next year, we should start seeing significant growth coming in this business. By next year, I mean, '21, '22. In terms of e-mobility, we continue to make progress in terms of localizing a variety of power electronic and control electronic products for both the commercial vehicle industry, buses and pass car and 3-wheelers, including 2-wheelers. We are, as a company, not undertaking any CapEx for expansion of any capacities. We have pretty much -- we're pretty much operating at 50% capacity utilization. So we have huge capacities available for any kind of growth that we can see. Also, please remember that we are investing in strategic areas such as defense, R&D and our e-mobility business where we don't have revenues yet, but these costs are all being charged off to our P&L. And as and when these business start generating revenue and contribution, you will see a substantial improvement in overall bottom line and EBITDA. Also, we've had a -- over the last 2 years, about INR 11,000 increase in steel prices, per ton. So that has also, over last 2 years, inflated our top line and suppressed our bottom line because of the inflatory impact of steel prices. So that's really all that I want to say. We've been trying to make sure that our inventories at the end customers and anywhere abroad are under control. We don't want inventories and working capital to get tied up, so we are very consciously managing our inventories and managing our cash flow. We continue to have strong cash flow. We have strong balance sheet. We have almost INR 1,900 crores of cash. And we have the ability to take advantage of any upturn or any strategic weakness in any of our competition by taking -- stepping in and supplying their products through our capacities. I think FY '20 is almost behind us. And I think it's one of the worst years that I can remember. I'm fairly confident that we see better times ahead. We have a stronger connection and contacts with our customers, especially as they move and transition their business towards the e-mobility future, there's a lot that we are looking to do for them. And also, the subsidiaries transitioning to a more aluminum chassis component and strategic chassis component technology business bodes well for the subsidiaries, and I'm fairly confident that this will once and for all in the next 1.5 years to 2 years completely change the face and nature of our overseas subsidiaries with healthy returns and ratios. So ladies and gentlemen, I will be happy to answer your calls now. I don't have anything more to say, so.

[Operator Instructions] The first question is from the line of Kapil Singh from Nomura Securities.

Firstly, I wanted to check, you mentioned that Q4 may be similar to Q3. Did I get that right?

Yes.

And normally, there is seasonality, right? So...

Sorry?

I'm saying, normally, there is seasonality that Q4 has much higher truck production, so we are not expecting that...

Yes. Because of the queue, because of the BS-IV to BS-VI transition, nobody wants to bear BS-IV vehicles and get stuck with them not being sold. So that is the problem.

Okay. Okay. And in the overseas business as well...

That's what the Customers are telling us. And there's still inventory in the market of about 18,000 and 19,000 trucks. So they have to first liquidate inventory and then build and sell new vehicles.

Okay. And sir, in the overseas business, also, we expect it to be at the same level in -- on the both trucks as well as oil and gas?

Yes. Overseas also, we expect, overall, the business to be very similar to Q3. On top of everything else, we have this whole coronavirus business, which is -- it's difficult sitting in India to understand what is the impact of that, but 30% of the global supply chain for manufactured goods comes out of China and about 20% of manufacturers goods are purchased by China. So if you put a stop on it for 30 to 45 days, it's quite a big impact.

Right, right. Sir, secondly, I wanted to check on something more structural that you have talked about in terms of electric vehicles, e-mobility and also power electronics. Just if you could talk about what are the competitive strengths in this business? And how is this business different in terms of return ratios, et cetera? I mean, some of the things that we would like to understand is, for example, in forging business, we need to set up a big capacity upfront. And that turns out to be a competitive advantage as well. So here, do you need to do a lot of CapEx for R&D? Or how you are thinking about it?

So look, what we are doing is we have created a capability of power and control electronics, which is basically a DC/DC converter -- AC/DC converter, inverter, onboard charger, battery packs, through the various investments we have made. Now the first company is a company called Refu, which we acquired 50% of. Now this company makes power and control electronics for nonautomotive, but not -- let's say, not on-highway vehicles. So they supply to these big cranes and to all kinds of specialty vehicles and equipment, high-end power electronics and control electronics, including vehicles that are used for doing aircraft in airports, et cetera. So a very demanding application. And now what we're doing is we're taking their capability and using India engineering and cost base, expanding the -- let's say, the offering, moving it down into the automotive space, whether it's the commercial vehicle or pass space. Similarly, with our investment in Tevva, we are taking their battery technology and their BMS technology and adapting that to various opportunities that we have in India because basically for buses and [ ILTs ]. We see one of the problems on the electric side was that till today, the electric FAME 2 incentives are only applicable to 2-wheeler, 3-wheeler and passenger car. The passenger car electric is going to be a global solution. Nobody is going to look at local solution. But if you look at 3-wheeler and 2-wheeler, 3-wheeler have already started with local solutions. There are a lot of electric 3-wheelers on the road in UP, Bihar, Haryana, Madhya Pradesh, which are low-cost 2-wheeler -- 3-wheeler. These are -- so basically like a -- almost like a [Foreign Language]. So we expect that as regulations come into these markets, these will have to move to standardized solutions that need safety norms, which are at least local, if not global in standards. So this is where we see an opportunity. Similarly, with buses and light trucks getting covered by Fame 2, which will happen very shortly, we expect that a lot of the municipal buses will become electric. Because as a part of this whole CO2 mitigation and pollution mitigation, the government has taken a policy decision to move towards electric buses in the city. So these are 2 big growth drivers. And today, electric buses are largely Goldstone, which is dividing its imports the whole case, assembles it into a bus in Hyderabad and sells it under 3 different names. So both Ashok Leyland, Tata and others want to address this, and we are engaged with them in a conversation about providing them solutions for where our solutions fit their needs. So that's how we see this capability. We are -- the capability we are offering is both at a component level and at an integration level. Tevva has extremely strong integration capability, and that's what we bring to the table.

Okay. Is it possible to quantify what is the content that we can supply in a bus or...

The content for vehicle will be significantly higher than the content per vehicle that we see today, but let it first start. We are still a little away from that.

The next question is from the line of Puneet Gulati from HSBC.

Can you help me understand why was the trading subsidiary reporting a negative EBITDA this quarter as well? How should we think about this?

No, it's not negative. Where do you see negative?

Sir, if I strip out the -- this BFIL plus trading...

No, no, we have other domestic subsidies also.

So you have this...

One second, let Kedar explain.

Yes. So this also includes intercompany elimination and there is a dividend, which was declared by U.K. entity to India. So that gets eliminated in consolidation. So -- and then that's no more income for the group. So I think you have not taken that cognizance and that is the reason you are seeing a loss at trading entity.

No, no, I'm looking at the table 10 in your report, which talks about EBITDA of INR 2,128 million for Q3 and then there is a stand-alone EBITDA of INR 2,094 million. So just trying to understand why was a gap there?

INR 2,128 million and INR 2,158 million.

INR 2,158 million and then EBITDA is INR 2,394 million at just stand-alone level.

No, no, that INR 2,158 million you're looking at is -- you're looking at Q2, INR 2,158 million, Q2 of last year.

No, no. Table 10, INR 2,128 million.

Yes [indiscernible].

Yes. So as I mentioned, that also includes intercompany profit elimination. So whatever inventory which is unsold inventory, so we need to eliminate profit on that. So that is the impact of that.

Okay. It was a negative number last quarter also. So I was wondering, 2 consecutive quarters of unsold inventory there?

See basically, when your volumes go down substantially, suddenly, there is a time for liquidation of inventory.

Okay, okay, okay. Got it. Yes. Then in this quarter, you reported 3 additional subsidiaries. If you can give some more color there? One is this Eternus Performance Materials, there is Kalyani Center for precision technology and Kalyani Precision Machining. What are these 3 into?

The Kalyani Precision Machining is a new plant we have set-up in Maharashtra, where we are -- we have got some machining business for a short period of time for the next 2, 3 -- 3, 4 years, where we have hired a facility, and we have set up a plant, independent plant to take care of that new business. That Kalyani, that performance -- Eternus Performance is a defense-related investment -- defense-related startup in the -- what you call it UAV frames where we make carbon fiber product and carbon and composite products, which we have invested a small stake in. And the third subsidiary, the Precision Machining is the subsidiary we have incorporated for machining operations of the forgings that we make in U.S. But there's no investment in that. It's just a company that we have incorporated because we anticipate getting business that time to put it in that.

Okay. Okay. And last thing, you also mentioned that the new Nellore plant will now be housed under a separate subsidiary to get...

No, no, we couldn't do that and it is part of our costs specs.

Okay. Okay. Okay. And any guidance on FY '21 CapEx? What number should we...

FY '21 organic CapEx is almost nothing. Only whatever CapEx is done last year, there are some payments for that, which will be done.

Some number there?

The payment for last year will be about INR 250 crores.

INR 200 crores. And then there will be some maintenance CapEx?

Maintenance CapEx will be about INR 100 crores.

The next question is from the line of Ronak Sarda from Systematix.

Amit, [indiscernible]

Sorry, I can't hear you.

Mr. Sarda, can you speak closer to the handset, please. Your voice is breaking.

Can't hear you.

Is it audible now?

Yes, yes, much better.

Sir, you mentioned you see -- we should see some growth coming back from FY '21. Based on the current scenario, would you be able to highlight which segments...

Sure. We will see growth on pass car. We expect commercial vehicle also to grow, and we expect our Industrial business to grow because the destocking should be over. So we expect some growth to come there as well.

Okay. This is mainly the non-auto exports industrial, you mean, not e [ NFS ]?

Yes, yes, yes.

Sir, the second question was on the non-auto exports only. I mean, we have seen some sequential decline again this quarter as well. Anything specific to highlight here? Or this is more of a...

No, no, just further destocking. And look at the crude oil prices, they have softened like hell right now. They are at somewhere in the region of $52 to $54.

So that's the impact mainly, the further softening?

Yes.

Okay. And if I look at the class 8 production for the last 10 or few months, our decline has obviously been much more than what the production decline has been. So is it safe to assume that...

No, our decline has not been more than the production decline. Our decline is in line with the production decline.

Okay. So is the destocking over, I mean, in the export CVs? Or should we see some further destocking in next quarter as well?

No, actually on the export side, there is expectation, in the second half, it should improve a little bit. Right now, markets are quite slow. But they are at the same level as what we saw in Q3.

Right. Right. And sir, finally, on defense, there are some news that Saudi Arabia is also looking to test our...

See, I don't want to comment on any individual country or customer. All I will say is that we had a fantastic response to our products at the Defexpo. And we are very hopeful that we should definitely see export business coming in the next 12 to 18 months.

Okay. Sir, any regular defense business other than the guns, obviously, which we normally...

For the product that we have showcased this time besides guns are vehicles, armored protected vehicles. We have unmanned vehicles. We have bulletproof vehicles, glass proof vehicles. We have a variety of different products that we have showcased this time in the auto -- in the defense expo, including some very interesting drones for carrying goods and cargo. So we have a drone, which can carry 65 kilos of cargo up to 6,000 meters in altitude. So you want to send some emergency supplies or medical supplies or food or radio, whatever, to someone behind the line, this can be done remotely.