Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge Q3 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.

Thank you very much. Good afternoon, ladies and gentlemen, and thank you for making the time to attend our call. I have with me our management team from Finance, Investor Relations and on the Sales and Marketing and Business Development side. I'll quickly take you through a few highlights, and then I will be happy to answer your questions. For the quarter ended December 31, we had a full shipment tonnage of about 51,000 tonnes; domestic sales of about INR 515 crores; exports of about INR 511 crores; total revenue of INR 1,035 crores; an EBITDA of INR 232 crores, which was 22.4%; and a PBT of INR 144 crores and a PBT after exchange gain or loss of INR 126 crores; and profit after tax of INR 926 million after an exceptional item of INR 55 million or INR 5.5 crores, which was towards VRS. The sales was -- the shipment tonnage was about 24% higher. Overall sales was about 18% higher. EBITDA was 40% higher than last quarter. PBT was 42% higher, and PAT was -- PBT after exchange gain or loss was also 37% higher. In terms of distribution of revenue, India was, as I mentioned, INR 520 crores -- INR 515-odd crores, America was INR 351 crores, Europe was INR 134 crores and the rest of the world was about INR 260 crores. We are starting to see strong recovery across sectors in both domestic and export markets. This has aided the strong double-digit growth that we have seen on a sequential basis. We have had a negative impact on this quarter due to the withdrawal of the MEIS scheme and almost 0 contribution from oil and gas. In spite of this, EBITDA margins have been expanded in Q3 on a Y-o-Y and sequential basis. All the segments in the domestic market have registered quarter-on-quarter and Y-o-Y growth, driven by a few factors. Passenger vehicle business was the highest ever in this quarter. The strong recovery in medium and heavy commercial vehicle volumes, robust demand in agri and farm sector, continued growth in PV and new products that we have developed for many of these sectors. In the export markets, barring oil and gas, which continues to be severely impacted, demand is on an upswing, and the momentum is strengthening. We continue to strengthen our balance sheet, and cash on the books today is over INR 2,600 crores. Cash position is positive net of long-term loans today. We are working on a strategy to supplement or substitute a large part of the oil and gas business with other sectors over the next 2 to 3 years. And we will start seeing some meaningful positive accretion on this from the middle of next year. We've already secured some business, and hopefully, once the product validation, et cetera, happens, this will start ramping up. I'm also happy to report that we've seen a sharp improvement in our overseas operations on a sequential and Y-o-Y basis. Basically, we are focusing on cost reduction, efficiency improvement and getting new facilities in Europe and U.S. online. As you are aware that we have made an announcement about a settlement of a cartel matter with the German government. And this fine will be paid over 5 years from the cash flow of our subsidiaries. Our U.S. aluminum facility is now fully constructed and will start trials in March. All our safety and other checks will be completed in the next 10 to 15 days, and our training will then start, and then we will start trial production. So we are well on time and on budget with that facility. I'm also happy to inform you that our customers have reacted very positively to the news of us setting up an aluminum forging facility in the North Carolina area because this is one of the bottleneck areas, and we expect to see tremendous traction. And our initial -- first-line capacity is already sold out. So we expect to see tremendous growth opportunities coming from there. We have also set up a center of excellence for light-weighting, which is an engineering and solutions center, in North America, and they are working with existing customers and some of the new EV players in delivering entire solutions using a combination of forging, casting and other metal-forming processes to deliver body-in-white components and entire body-in-white solutions to our customers. And we expect that this will help create a pipeline for the future of large new business and also give us engineering and prototyping business with these customers. Some of the new initiatives that we expect is that we expect to see positive traction on the defense, e-mobility and our aluminum casting venture this year. We have put in place a very solid strategy and are seeing a fairly good traction. The PLI and Atmanirbhar policies announced by the government are also giving us some tailwinds, although the COVID and the lack of, let's say, adequate financial support in the system is slowing down some of these initiatives because of incentives not being clearly enumerated. We have seen that there is a scrappage policy that is a mild positive for the industry. I think more than the policy itself, I think we will start seeing a shift towards the newer vehicles because of efficiency and overall cost effectiveness. That's really all I have to say, and I'd be happy to take your questions now. And between myself and our team, we'll be happy to answer all your questions. Thank you.

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

Sir, as you talked -- as you alluded to some of the new initiatives that you are taking in terms of e-mobility and defense also. So just to set the context, one of the things we understand is, obviously, there'll be a strong cyclical recovery, which we can see. But to drive growth beyond that, what are the things which are being done? Where is Bharat Forge in terms of success in these areas? That would be really helpful to understand.

Yes. So thank you for your question. It's a really good question. So as you rightly mentioned, we will see a cyclical recovery in most of our traditional businesses. However, we are now building 3 new growth drivers, which will, over the next 5 years, become very meaningful new businesses. One is in the area of EVs, where we are producing components; subsystems in the areas of power electronics, control electronics; and the entire BMS for both low-voltage extremely small LCVs and intermediate -- high-voltage intermediate LCVs. And we are now, let's say, in the phase of integrating a couple of solutions for customers for testing and validation. So we believe that this component business will become a large EV business for us. So second is our light-weighting business, which is made up of currently forging and casting. This currently is at about $50 million. And we believe that in the next 3 to 4 years, this can easily get to somewhere in the range of $200 million to $250 million. And the third business is this whole solutioning business of light-weighting, where you're not just making components, but you are delivering a lightweight solution to an industry, which means we are using a combination of technologies or processes to give a solution. And of course, we are starting to see a lot of traction and momentum on the defense side. We've been shortlisted for a number of new programs -- a number of programs, which will result in orders in the very near future. We are very -- actually, we were hopeful that we would have some announcement to make by now, but unfortunately, because of the budget and all, things have not yet happened. But in the very near future, we expect to get some orders. And we expect that even in the defense business, we will have a recurring kind of business and the project type of business going forward.

Great. That's quite helpful. Sir, are we also working on global EV projects in this company?

Yes. We are working on global EV projects, but that is more at a component level, where we are looking at the DC/DC controllers, inverters and the BMS solutions, not an entire vehicle solution.

Okay. Okay. And sir, could you talk about oil and gas, like what is the reasonable run rate you expect?

Sorry, and -- sorry, additionally, for EVs, we're also supplying components, forged and machined components, for EVs to our traditional European customers.

Okay. Okay. Yes. Sir, on the oil and gas, can you also talk about what is the reasonable business size that you are looking at?

So look, I'll tell you, honestly, the oil and gas business will have a massive correction, and from there, it will grow. Simply because oil and gas revenue, when the oil prices had gone down, had dropped to almost nothing. Subodh, what would we say? Now we're running at about $4 million, $5 million a quarter. From $30 million a quarter, it's come down to that kind of number. But this quarter, it was $3 million, and we expect this to go up slightly, but it's not going to go back to the numbers that there were. Therefore, we are now replacing this business with business in other sectors, including metals and mining and renewables. And our customer engagements remain very strong. In fact, we are in constant dialogue with our customers, and we are also working with our customers in looking at how we can make products more innovative and make them more cost effective and make the overall solution better for the end consumer as well.

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

Just on the oil and gas business, I just had a question. We understand that it's unlikely to go to that $25 million, $30 million run rate anytime soon. But given the way oil prices have moved, is there any visibility of this $3 million becoming more like $10 million, $15 million in the near future? Or still very uncertain?

I would say that give us another quarter before we can answer that. But maybe Subodh can add something.

Yes. In addition to what Amit just said, from our point of view, we think the -- there will be some positive movement just based on the oil prices stabilizing between $50 and $60. And based on that positive movement, we will start seeing some traction, whether that is $5 million or $10 million a quarter or a little more, we will know for -- in maybe 1 or 2 quarters. But right now, we are ready to take anything that comes.

Okay. And apart from oil and gas, maybe other things like construction and other mining equipment and all those kind of things, how are we seeing the traction there? Because I think there -- I think in the U.S., things seem to have picked up, if I'm not wrong?

Yes. U.S. has picked up, and we also see particularly in the construction area, strong amount of traction coming from India as well, just given the fallout of the budget and the push for infra. So we are obviously working on that aspect, not just on our current offering, but also to grow our offering in the segment. And there are various projects that are in the pipeline. So this is an important sector for us.

Okay. And just lastly, you mentioned that on the defense side, there has been a lot of traction. And hopefully, you will have certain announcements to make in the near future. If I can just ask, is this related to the ATAGS project or these are new things that you are referring to?

No. ATAGS is a different story. There, we have a well laid out process that is going on. But there are some other products, which we have builded over the last 6 to 12 months, which have gotten under accelerated, let's say, procurement -- trial and procurement process.

Okay. Okay. And is there any clarity from the government on the ATAGS team, I mean, they have taken a lot of time already?

Absolutely, there is clarity. There is a clearly defined steps -- next steps, after which, we will have complete clarity. So there is the final testing that is going on, after which we have that step -- that's the last step that needs to be done.

The next question is from the line of Nishit Jalan from Axis Capital.

Sir, my question is a follow-up on non-auto exports. We have seen a sequential decline of about 60% as well. So is there -- because I assume that oil and gas revenues were already very low last quarter as well, is there any shipment which has got delayed? Or there is some negative impact, which has come from any segment? And your analyst update says that our construction and mining equipment sales in the international markets is under pressure. So just wanted some color on that.

So it is largely oil and gas. I mean 95% of that reduction is oil and gas. And there are certain industries, which also get impacted by oil and gas, such as construction equipment also.

Okay. So in last quarter, oil and gas revenues were around USD 4 million, USD 5 million only, right? It was not higher than that?

Which quarter are you talking about?

So sequentially, if I look at your non-auto exports...

Previous year?

No, no. I'm talking about Q2 FY '21 and Q3 FY '21. So from INR 178 crores top line in Q2 FY '21, it has come down to about INR 90 crores in Q3.

Yes. That drop is almost entirely oil and gas.

So last quarter, oil and gas revenues were closer to INR 70 crores, INR 80 crores, is it?

Yes, absolutely. It was more than $10 million, about $10 million.

Okay. Okay, sir. And sir, if you can share debt numbers or net debt numbers for consolidated entities? That would be very helpful.

Consolidated net debt, long-term debt is 0.

We'll share these numbers.

Okay, I'll tell you, our debt in the stand-alone company, the long-term debt is about $220 million, and we have about close to $70 million, $80 million in the overseas subsidiary. So $300 million?

On a long-term basis, right?

So on a long-term basis, we have net cash.

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

Sir, first question on the commercial vehicle revenues, both India and exports. We've done very well, sharp outperformance in India and registering a positive growth Y-o-Y for exports. Can you help us understand how are these segments seen over the next few quarters?

Yes. My colleague will answer. He's the one who is responsible for delivering this growth. You've done a great job, so you should take the credit. Go ahead, Subodh.

Okay. So your question is global and India, right?

Both. Yes.

So in the global side, based on the present projections, we see reasonably strong traction both in Europe and the U.S. This is, of course, considering the fact that there will be no negative impacts of the COVID situation going forward. And as far as India is concerned, we are a little concerned, just given the traction. As you know, the sales in -- of commercial vehicles are fluctuating quite a lot. Overall, there is optimism, given the rise in construction and -- construction activity and so on. So overall, it should all go well. But right now, we have to be very cautious about India, and we are taking it month by month.

Right. So this fluctuation you mean from the demand side or the supply chain constraint?

No. Actually, what -- I think what Subodh is trying to say is that the retail sales are not -- at least for January were not in line with wholesale sales, and this has been across many sectors.

Right. Right. Okay. Sure. And on export CVs, I mean, can you help us understand how is the lead lag behaving? I mean are we now matching the overall production run rate for North America business? Or do you think there is some opportunity for inventory stocking, which might happen given the strong order booking?

Currently, if you are comparing the incoming orders that are typically announced every month, then obviously, those orders are at a very high level. They are at 40,000-plus. Obviously, the production is not at those levels in the market. So we have adjusted our levels of shipments to the production levels, and we are obviously ready for more. So it is a dynamic factor.

But I would also say that the demand upper has been so rapid, that we are probably shipping a little less than what we could have.

Right. Right. Sure. Sure. And finally, on the domestic industrial revenues. So if I, say, even knock off the overall growth seen in tractors, are we seeing some traction in the -- your industrial or capital equipment industry? Or do you think there's still some time away? Because that segment has been...

Actually, even without agricultural, we've had growth. We've had small growth, but we've had growth. And we are gaining market share also. So our initiative has been how do we get closer to our customers? How do we gain market share, defend our business? So we are playing both defense and offense. Defend our large positions and attack new areas that we're not present in. And this mechanization of agricultural equipment is increasing at quite a fast pace. There are a lot of new components and opportunities in that, which we are addressing.

Right. Right. Sure. And this was effectively not present over the last few years? Or we are seeing a rapid growth, you mean?

We're seeing a rapid growth in that.

The next question is from the line of Jeetu Panjabi from EM Capital.

And lovely to see great numbers. I have a question. When you're looking at what the customer schedules are looking like, and you're seeing that they're coming back and saying, look, we need it sooner, we need it quicker. What's percent on that? Has that -- is that continuing? Or is that paused? And just a linked question is, are you kind of producing to inventory? Or are you producing to the orders? Are you going ahead with what the order book looks like? And...

No. We produce only against orders, Jeetu. But what -- this urgency is also because a lot of customers, and in turn, some of their supplier plants have not yet ramped up to full capacities or have not ramped up even to 50%, 60%. So when spot orders happen, they are unable to have their entire supply chain respond as fast as we can. We can go from receiving an order to getting steel, forging it and machining it and out the door in probably 3 weeks. It is very uncommon for most -- many people. So wherever there are spot orders, we are getting a big benefit of that and...

Sorry to interrupt. Mr. Panjabi...

NPD, value addition, VAB, all that is leading to better customer traction and market share gains.

And Amit, one more question. In terms of the new -- 3 new areas you talked about, what do you think in 2 or 3 years, in terms of revenue, what kind of scale do you think you can get there?

See, Jeetu, these are large new businesses. This is like -- I would say that this is similar to creating a non-auto business that we did. It went from 5%, 10% to a meaningful proportion of our business. Now all 3 of these put together, in the next 2, 3 years or 4 years, should get to a meaningful percentage of our overall business. That's the desire, and that's the intention.

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

Is it fair to assume that tractors will be around 20% or so of India non-auto?

Yes. India non-auto, yes, approximately, yes. Actually, pretty much, yes.

Yes. And secondly, how to think about gross margins going ahead? Because if I remember correctly, the commodity is a pass-through for Bharat Forge, right? But mix shift will have some impact on margins. Like...

I would expect gross margins to remain strong, and in fact, as the capacity utilization goes up, I would expect gross margins to turn slightly positive from here.

Okay. Okay. And will there be any impacts of mix shift, like if India grows faster than exports?

That's a good point. I would say that, again, if it's significantly improving capacity utilization, it should more than compensate.

Okay. And lastly, could you tell us a little bit about the currency rate that you realized for this quarter? And how are you hedged?

This quarter was INR 72.50.

Okay. And are you hedged for the coming few quarters?

Our next quarter is more or less at the same level.

The next question is from the line of Pramod Amthe from InCred Capital.

Amit, I wanted to check, what is the status of this aluminum casting facility, which you've set up in India? What is the run rate? What is the ramp-up status?

So our facility is fully ready and just making trial production. We lost about 10 months because of COVID. So basically, I would say we lost 1 year. And we are now -- we have -- the sales plan is about INR 25 crores, and next year will be about closer to INR 70 crores, INR 80 crores. That is on an organic basis.

But you had orders in hand and all, right, for this? And how are the customers...

Yes. We have orders of about INR 35 crores, that is all ramping up because even those customers, all -- this is all for new platforms.

Okay. And this is only to do with the COVID, nothing to do with the operational challenges per se for this -- because this is all a new line of business to set up in India, right?

Yes. Absolutely. No. There was no challenge on the technology side as such.

Okay. And second is, you talked about PLI. I wanted to get your thoughts, would you be a derived beneficiary of new capacities coming on stream? Or do you plan to take benefit by setting up yourself some projects under this scheme? How do you look at that?

As I mentioned, we are going to follow our asset-light strategy. And we are going to sweat our assets in any areas where we have capacities, okay? And if that means that we collaborate with a customer and do manufacturing of components and systems and supply them, and then they integrate it without setting up large facilities, that's a collaborative model that we will follow.