Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge Q2 FY '21 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, sir.

Hello. Good afternoon, ladies and gentlemen, and sorry to keep you waiting. Thank you very much for making the time to attend our con call post our Q2 results. I have with me members of our finance team, investor relations and our business development and marketing. I want to just say one thing upfront to everyone that we are living in unprecedented times where there is no certainty and any projections that we are getting from -- long-term projections from any customers, so I will be erring on the side of caution in anything that I tell you because I don't want to give a false impression or misrepresent in any way. Things are changing from day-to-day, and the fear of a second wave in Europe is quite real. And although there is no impact of that so far, we can't underestimate or discount what may happen if such a thing happen. So with that being said, I prefer to be completely open and honest to you all that we really don't have long-term projections for anyone, but I will still attempt to answer all your questions to the best of my ability. The stand-alone performance during the quarter was as expected. We are seeing, obviously, an improvement in domestic revenues, considering that it had gone down to the lowest possible levels in Q1. The Commercial Vehicle sector, which probably in Q1 was at a 20-year low, has now started growing. And where -- whether this is a Diwali-led, let's say, surge or it is a sustainable surge remains to be seen, but we are able to meet any requirements of our customers, and we have also ensured enough, let's say, fill of the supply chain, both outbound and inbound in order to be able to cater to any surges in demand from any of our customers. Just want to tell you that we will not disappoint any of our customers on volumes. We are consolidating the Q2 of our -- calendar Q2 of our global subsidiaries, which was the quarter which had the maximum COVID impact. And the figures there are for everyone to see. We are restructuring and focusing on cost improvement, optimization on all our businesses. This is something that is ongoing and will continue. Looking ahead for the demand in the coming quarter, the outlook is positive, and we just hope that things continue in the same direction. On the export front, we are seeing signs of improvement on demand, especially in the Commercial Vehicle segment in North America, a little bit less in Europe. I would like to highlight that the oil and gas sector is something that we don't see any significant business right now because of the overall price of oil where it is and the fact that our growth -- I mean, in the oil and gas business was largely in the fracking side, and we will see a significant reduction this year compared to last year. Aerospace is an area where we had planned to see significant growth, but due to the overall aerospace market softness, this growth will not be as anticipated and we continue to work on developing a lot of new products, but this will take a little more time, but I think we are still making positive progress on aerospace. The area where we see a lot of potential and positive momentum is in the renewable space, especially on wind energy. We see wind energy globally as a big business and starting to do quite well, especially manufacturing of certain aggregates for the wind energy industry, such as gearboxes, et cetera, in India, is picking up in a big way because they are exporting. And also because of Atmanirbhar Bharat imports of these from China into India has come to a stop. So this is a positive. Similarly, the U.S. class 8 is a positive. If you look at our automotive business compared to last year, we are, on the domestic side, I think only down by about 15%, but if you look at the export business, we are down by close to 40%. If you look at our industrial business, we have almost a flat business compared to last year. And that is in spite of the onetime small defense business that we had last year. On the industrial activity in the export market, we have a huge drop on oil and gas and areas that are related to oil and gas, such as high horsepower engines. And we are working very hard on trying to fill up this business using similar equipment and fungible equipment that we have, so that we don't have to make any new investments for making this -- by making products for the oil and -- for the renewable energy, marine and other sectors in -- both for global markets as well as for India. If you look at our balance sheet, we have a fairly strong balance sheet. We have long-term debt of about INR 2,300 crores, working capital and bill discounting of about INR 1,300 crores, cash of about INR 2,400 crores. So overall, quite a healthy balance sheet. Areas where we hope to grow our business is on the pass car sector, is on some of the Commercial Vehicle, agricultural and industrial sectors where there is growing demand in India and growing sourcing opportunities for us -- I mean supply opportunities for us from Europe and North America, but more from Europe. We are working with several new customers on programs, and some of our new programs are starting to ramp up this year, but it's going to take some -- about a year till it shows some significant benefit. We have almost no CapEx plans. We have, in the first half, about INR 200 crores of CapEx, and I don't think there's anything more that we will do in the second half, maybe INR 50 crores or so, nothing more than that. Last year, we did INR 550 crores, so I think between last year and this year, INR 800 crores CapEx is more than what we need. And in our existing products segments, we don't need to make any new CapEx. On the defense front, we have had several very successful trials on the artillery side as well as on the vehicle side. However, because of COVID, there has been, I would say, at least a 4- to 5-month delay in tests because people have not been able to meet and actually go and test products as frequently as is needed. So there is a slight lull on that side. But nonetheless, we are still in a good position for the opportunities we are pursuing, and we hope that very soon, this will all resume. So I think that's really all I had to say. The company is focused. We will manage our balance sheet. We will be stuck on capital allocation. We are focusing on cash -- free cash generation and on looking at growth opportunities. So that being said, I think I'll open up for Q&A. So please feel free.

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

Sir, thanks for your comments. I think they clarify most of the sector outlook. I just wanted your views on when you look at growth for next 2, 3 years, not short term, when you talked about oil and gas, is it more of a short-term view or you think this is more of a medium-term view that some other segments will need to fill this? And we see pretty good performance in passenger vehicles, so what is the outlook for this for next 2 to 3 years?

So Kapil, I'll take your second question first. The passenger car sector, we anticipate continuing to grow. This year, whatever new programs and new products we have to develop will be a little slow because people are not able to meet, and there's no new testing validation and stuff that is all getting slowed down. But we are definitely going to substantially increase our passenger car business for exports and for domestic. For domestic, we've won business with most of the new players and new platforms that are coming in, and we have a lot of new business from outside as well. But that is going to be over a period of '22, '23 ramp-up. On the oil and gas side, honestly, I don't know what to tell you. Right now, it is driven by cost where the fracking is at a very subdued level. I think, from -- what was the peak, 1,800 rigs, Subodh?

900.

900 rigs, sorry, 900 rigs from the peak, now it's at below 200 rigs.

Below 150.

Below 150 now. So this is a business that turned on and off in a matter of a week. So the positive about it is that it also is a very low capital to start. To start a rig is matter of 20 million, 25 million. It's not like offshore rate where you have to invest $2 billion before and wait 5 years before anything can happen. This is a matter of weeks. So it really depends on government policy, on oil independence and energy dependence what they decide to do. But right now, the outlook for oil and gas is quite very subdued for our products, very, very subdued.

Okay. So sir, when you look at the business over next 3, 4 years, the thing is that some of these businesses have, for example, the U.S. truck business, you see that it peaks out around 300,000, 330,000 domestic also, we see similar things. So I think what I'm trying to understand is that the PV business, for example, is one major growth driver that you have talked about. Is there anything else that the company is also looking at? Are you also open to acquisitions because Bharat Forge hasn't done any large acquisitions. Would you be looking at areas beyond metal forging also when you look at next 3, 4 years?

You know the real answer is, we are looking at opportunities beyond metal forging, obviously, but in areas where we have either customer complementarity or some amount of technology knowledge that we can leverage. So you will hear more about this in the next 6 months. Right now, we are looking at all opportunities. And first, we are looking at what we can do using our existing capacity, and use that better and by getting into new areas, like I mentioned, marine and the renewable energy sector, we're putting a lot more focus on that. So these are the kind of opportunities that we are looking at.

Okay. And sir, just lastly on CapEx. I see that consol CapEx in first half has been about INR 340 crore, so full year consol CapEx would be what, close to INR 700 crores, that should...

No, no, no. Full year consol CapEx will be in the region of about INR 450 crores, this year.

So first half has been pretty high. What is the reason for that?

That is because our new aluminum forging plant is completed in Europe. So this was the CapEx, which was required for that. In Germany.

The next question is from the line of Amyn Pirani from CLSA.

Just on the export nonauto business, you mentioned you wind energy and marine engines as possible offsets. So a, in the near term, are we seeing any substantial revenue from these? And b, from an opportunity point of view, opportunity size point of view, can they be as large as the oil and gas maybe, say, over a 2- to 3-year period.

So the second answer is, yes, in a 3- to 4-year period, it could be as big, if not bigger. And we already have started supplying products into both these sectors in a small way. I think today, the business is probably in the region of INR 50 crores or so. But we have line of sight to grow it to at least, what Subodh, 3x, immediately in the near future, and then we will look at getting new business that can fill up the rest.

Okay. Okay. And if I look at the export industrial revenue base right now, which is like INR 180 crores, would it be fair to say that oil and gas is like close to 0 or that it still have some substantial amount of oil and gas revenues in this revenue?

This quarter was about 3 million, 4 million.

Yes. Okay. So basically, I mean, these numbers are already factoring the decline. And if it's on like you said, then that will be after that. You don't...

When you're at 3 million, 4 million compared to 25 million, you're obviously at the bottom. It can't go negative.

Yes. Yes. Okay. And just one small clarification in the results. I don't know it's a very small thing, but you have a note, note #7, you put something about India's code for social. I was not sure if -- why...

That is the auditors have asked us to put it. It's for all companies now. There is some new social code, which is going to come out, which is not yet notified by the Ministry. The rules are yet to be notified. So some companies have chosen to put it as a note, some companies have said they will do it after it is notified. So our auditors being E&Y have chosen to err in the side of caution.

Okay. I mean is that like a material fee for you? Because you -- I understand it's mostly for good workers...

It is not workers impact so we don't know what it is.

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

My first question is on the India PV revenues for the quarter. We have done pretty well, I think almost INR 90 crores run rate despite a sharp dip in production, I mean it is still much below the levels. So could you explain us what has driven this kind of an outperformance, this...

Our sales were about INR 90 crores, you're correct. Subodh, maybe you can answer?

It's actually, flat Y-o-Y.

Yes. So in spite of the lower production of commercial vehicles, how come our sales are still flat compared to last year?

Basically, we have been focusing on, one is, of course, BS-VI products; number 2 is higher share; and number 3 is, I would say, faster response to situation given where the market has been. So we have been -- as a factor of all of these 3 things, we have been able to, in fact, increase our market share, and that is sustaining as we see it.

Okay. Okay. Sure. So I mean a similar guideline -- assuming growth in production volumes in the second half, we should see a similar growth in our numbers as well. Is that a fair assumption?

That is an expectation, yes.

Okay. Sure. And the other question was on the North America PV, Subodh, again for you. I mean given -- when are we seeing production ramping up for the class 8 trucks? I mean given the sharp increase in the order book now, is it more like Q3, Q4 numbers will see a jump happening as well?

See right now, whatever numbers you are seeing, and I think you know this very well, the numbers really reflect order bookings. They don't necessarily reflect product accounts and the -- there is a -- if you look at how the U.S. market grows and also on a backlog process. And ideally, in a good market, the backlog should be at least worth a years' worth of demand, and right now, it is not that. So everybody is still not very optimistic in terms of increasing production like this. Yes, it's definitely good news. But these kind of order levels have to sustain for a few months before some traction happens in the market, that is our view.

Also remember that one big uncertainty in the U.S. about the politics is now over. So everybody will now, let's say, figure out what the new normal is.

Sure, sure, sure. And the other question was on the domestic industrial. I mean we have seen a very sharp recovery here as well, is there any lumpy defense business or this is driven by more of tractors?

There's no defense business in this. I will allow Subodh to please answer.

Yes. In our Industrial business, we are seeing some positive pressure, but this is largely based on, I would say, finding new products in the industry. And in the existing product segment, yes, we all know ag is strong on this one. But other than that, it really depends on new products and new industries.

The next question is from the line of Binay Singh from Morgan Stanley.

A few questions. Could you share what is the tractor revenue in the domestic nonauto sales? Would it be around INR 600 crores or so?

No, no. Tractor sales was about 30% higher than last year.

Okay. Will it be when I look...

INR 40 crores. I would say about INR 40 crores for the quarter.

Okay. Okay. Okay. And secondly, like, in general, what is the lead effect on Bharat Forge sale has seen the actual production, both for India and U.S., like in a 1-month lead or a 2-month lead?

India, I would say about, roughly about anywhere ranging from 10 days to 3 weeks. And abroad, I would say, 2 months. Right, Subodh? 3 months. It depends on geography, but between 2 to 3 months.

Okay. And lastly, just on the other expenses. In the last call, you had commented that the company -- like 70% of the cost-cutting prices over 30% is remaining. How would you put that today when you look at your other expense and staff fundings?

Yes. So last quarter was abnormal because for almost a couple of months, there was no activity. But as compared to last year, there has been work which is being done. So as compared to last year, the level of other expenses are coming down.

Correct. Correct. So are you planning to sort of bring them down further from these levels? Or how should we see it for a similar revenue...

So it's a continuous activity. And being fixed in nature, there are certain limitations, but we are working on to realistic further.

So will we see more VRS offerings like I...

Yes. So we have announced second -- we are working on it. We are still working on it.

And is it fair to say that the VRS offerings also reflect that you sort of anticipate a slow volume recovery, so which is why you are leaning down on the cost structure?

There are 2 things. One is that and the second thing is that we are also using digital and other things to restructure our entire organization to make it more variable cost led and more lean rather than fixed cost oriented. Yes, exactly. That's what we are doing. We are creating a new organization structure.

No, no. I think because -- congratulations for the future.

Thank you very much.

The next question is from the line of Sonal Gupta from UBS.

I mean just continuing with the other expense question. I mean, earlier, we were looking at all these digital initiatives and whatever cost-cutting programs to sort of start yielding results from Q2 of this quarter -- or Q2 this year. And would you say some of those have got postponed a bit? Or I mean just trying to understand, I mean...

The problem is that there are -- as I mentioned, some of these expenses are fixed, okay? And only the variable part of that is what you can bring down on a variable basis. So if my production is today running at 50%, the fixed portion I can't do anything about that, so I have to do something structurally about it. The variable part of it is what is coming up. There are so many kind of licenses and fees that one has to pay for all the different technologies that we use, whether it is SAP, whether it is your technology license and et cetera, these are all your fixed costs. Just because my business goes down, doesn't mean they're going to reduce or give me a waiver for 1 quarter or 2 quarters. It doesn't work like that. So those are the elements that are fixed. And the only way we can, let's say, structurally reduce those and if we actually reduce number of people using these technologies. And that...

That takes time.

And that takes time because that is not so simple.

Okay. Now because if I look at your Q4 revenues, was similar to what you're seeing doing in this quarter and your other expenses are also similar to what you did in Q4, so there's not much of a change in that sense, I mean, like just trying to understand when do we see the -- I mean, like under [indiscernible] Q4 also had some benefits.

Yes. And also, there is an exchange loss which is sitting -- of about INR 10 crores, which is sitting in other expenses. So if you exclude that, then you will see actually a reduction in -- as compared to Q4. And in Q4, the lockdown happened in last 8 days. So we were not having any time to counter that or to take actions, whereas this quarter of, let's say, from April onwards, we have taken cautious approach of reducing the cost. So that impact you will see. So if you reduce the exchange impact, then you will see a reduction as compared to Q4 also and as compared to last year's same quarter.

No, no. Q4 -- I'm reducing the exchange loss. But anyways, on the other things -- just on the -- I mean, one was in class 8 production, I mean, like because you're saying that you have a 2 to 3 months lead over production. And if I look at the production data, like the Q2 quarter, U.S. class 8 production is back to what we -- with the March quarter levels. So are you saying that -- I mean you're not really seeing much improvement from the Q2 -- I mean what you've done in the Q -- what the industry has done in Q2 in Q3, I mean like in the December quarter in terms of production?

There are 2 factors here. Number one is in our -- in our [ any 2 ] business, particularly the kind of market share that we have, you also have to have some amount of safety stock in the system. So the volatility in the schedules typically gets absorbed by the safety stock. And then you have to replenish those safety stocks, which then falls within our overall lean time. And it takes a lot of perfection to get to that level, and we have an experience of the last 15, 20 years trying to do that. And based on that, we are able to manage the whole combination. And now -- right now, the demand pattern is very volatile. The demand pattern is -- it comes in a matter of weeks and -- in many cases, we are, of course, single source and then typically we are multiple source, then it also is an opportunity because at the end of the day, the velocity is the factor of winning the business as well. So that is where we are concentrating on as well.

Sure, sure. Okay. And just on the India CV bit, I mean, like you said BS-VI has been also a factor in terms of improvement. So just wanted to differentiate between -- and potentially the same thing that inventory adjustment and things happening, which would have maybe pulled forward demand for you versus maybe the OEM production levels. But I mean could you sort of indicate what sort of ASP improvement are we seeing in the -- because of BS-VI in India?

What improvements, sorry...

Average selling price.

Currently, the OEMs are not passing on much to the market. In fact, it's been a double whammy for them. So what has happened is in that process, the pressure, obviously, comes down to the whole supply chain. And so there is a challenge in that process. I would say that in our case, we've been able to get some benefits out of the exchange, at least from a cost recovery point of view. And it depends on the individual components. But overall, at the overall level, it is a stress situation as far as that aspect is concerned.