Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge Limited Q4 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.

Good afternoon, everyone, and thank you for joining our end-of-year results call. I hope everyone is doing well, and I'm sure this has been a difficult time for everyone. I'm confident we'll get through it. So coming to the business on hand, as usual, I have members of our Finance and Investor Relations team with me. So we've had a fairly decent end to the year, which was a very trying and difficult year for all of us. All segments of export, including oil and gas, started seeing very good growth. Q4 witnessed a 42% growth in exports driven by a 90% growth in the Industrials business. Passenger car exports hit an all-time high of INR 164 crores. Cost pressures are quite high on raw materials and especially on logistics. Logistics costs have increased by 3 to 4x over normal times. And despite these pressures, we've been able to expand EBITDA margins by about 300 basis points. We continue to have a strong balance sheet. We have sufficient liquidity. And our return ratios will also improve as the utilization picks up. Domestic auto sector revenue was also seeing a strong rebound. But unfortunately, as the second wave hit and the subsequent lockdown, the sale numbers show what has been the impact. And we believe that it will take at least all of quarter 1 and possibly a little bit of quarter 2 to get back to normalcy. The domestic industrial sector is also an area of deep focus and I think a great opportunity. So we have acquired Sanghvi Forging based in Vadodara under the IBC process, and we are in the process of implementing the plan. We believe that we're getting great assets at a reasonable price, and this will allow us to grow our domestic industrial business, especially in the areas of energy, including renewable, which is wind energy, hydro energy, and other allied sectors including mining, metals in the near future, and this will be a substantial addition. In fact, their press and capacity is very similar to the press that we set up our [ HMD2 ] press in 2008. In terms of exports, all our segments are doing fairly well and increasingly getting stronger and stronger. We are starting to see demand come back from oil and gas as well. We're constantly working on derisking our exporter industrial business. Our e-mobility business has now been spun off into a separate subsidiary, which is called Kalyani Powertrain Limited. And all our investments and holdings and business in this sphere come under this. So that it will allow us to have the right leadership, the right focus, and potentially also the right monetization strategy as we move ahead. Kalyani Strategic Systems has now become 100% subsidiary of Bharat Forge, pending the approval of the transaction from the Ministry of Home Affairs. I also want to apprise you that we have received a -- from the government of India, an order for the development and supply of certain components and products at short notice. And we expect that these will be completed by second/third quarter of 2021. We are seeing, on a secular basis, substantial growth opportunities in e-mobility and in defense. And we are now looking at building a new mega site or, let's say, 2 sites in close proximity to us and to each other for these businesses. Especially for defense, we have to go into an area which is separate from this plant because there are very stringent rules regarding locational security and security infrastructure. And for e-mobility, we need to have also a supplier part and allied services around it. So we are looking at acquiring a parcel of land of approximately 70 hectares in Khed, in the Khed industrial park, which is a joint venture between the Kalyani Group and MIDC. It's an MIDC-approved facility, it's a well -- high-quality infrastructure with many manufacturing and other companies. And as I mentioned, roughly up to 70 hectares, which is about 175 acres, in 2 or more parcels of land. And the total land acquisition cost, if we acquire all 175 hectares, will be roughly up to INR 240 crores. This addresses our need of a large parcel of land close to Pune and in the proximity of manpower of Chakan, Talegaon and such industrial areas, and this is going to happen over the next 2 to 3 years. It's not all going to happen at one shot. I think Kishore has some updates, or maybe I'll just finish the updates on the overseas operations. I'm very happy to report that our overseas operations are now finally operating at a very good level and increasing their numbers quarter-on-quarter. We had -- prior to the pandemic, we had initiated a major cost optimization and rationalization strategy for our operations. We are now seeing sustained quarter-over-quarter improvement in the operations from an average quarterly EBITDA of about 5% in '18, '19. Our operations have achieved an EBITDA of 10% in second half of CY '20. And we are seeing a continuation and improvement in this performance in CY '21 also. The CapEx cycle for aluminum forging also will be completed this year. And the aluminum forging facility in North Carolina will start in the end of '21. And it will focus on sustaining and improving this performance going ahead. If we look at our key financial parameters, as I mentioned, our balance sheet, we have almost INR 2,650 crores of cash on the balance sheet, our net debt equity position is 0.16 and long-term debt/equity on a net basis is negative. Balance sheet is strong. Our return on capital employed metrics, our goal is to get to 20%. And we are confident that by the end of this year, we will get quite close to that number and keep on improving. We see some opportunities in the immediate term for growth and we will pursue those. And we will keep you updated on what is our strategy for growing our automotive vertical, the industrial vertical, the defense vertical and our EV and lightweighting vertical as this year progresses and we overcome all the current COVID-related issues that we have. Our lightweighting vertical is the plant in Nellore and the 2 aluminum forging facilities that we have, one in Germany and one in the U.S. And these are going to become big growth drivers for us. We believe that in the medium term, these are going to be the biggest opportunities for growth, and we are, in fact, seeing more demand than what capacities we have. And we will first start product development for new customers and then look at adding capacities as and when needed. So I really have nothing else to say, and I'm happy to take your questions and look forward to interacting with you. Thank you very much.

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

Congratulations on a great performance. I'll start with exports. We have seen pretty strong ramp-up both in CVs and PVs during the quarter. So could you talk us through whether current revenues, which you are seeing in CVs, for example, INR 400 crores of quarterly run rate. Is this the base revenue and on top of this, we should be building growth? Also, if you can just comment on the fact that production that we saw for the March quarter for U.S. plastics wasn't very different from the preceding quarter in December. So what's really happening here? And are there any supply constraints that the truck makers are facing currently because of which production is impacted? And similarly, for PVs, the INR 160 crores a quarter form a base for growth. That will be my first question.

So Kapil, thank you for your compliments. And honestly, your points -- your questions are very bang on. The CV production in the U.S. and Europe is hampered by the chip availability. What some other companies are doing is, for a limited number, they are building trucks up to the electronics portion and then they will separately put in the electronics portion where and when possible. But obviously, you can't build any number of trucks and keep them in storage like that. So let's say that truck production is slightly higher than sales, but definitely there is an impact. And we are now working with our customers and with certain financial agencies to understand what is going to be the impact of this huge $6 billion -- $6 trillion stimulus bill in the U.S., which is largely going to be focused on infrastructure, and its impact on transportation sector over the next 2 to 3 years, and to work out from that what is going to be the growth driver for us. All our customers feel that this is going to be one of the biggest opportunities, both for commercial vehicles and even pickup trucks and other construction and mining related equipment. So we see a pretty good positive outlook going forward.

Okay. Great. So we look forward to an update there, sir.

I think give us some time, once the chip shortage where I think it will get over in 2 months, by the time we have our next interaction in August, I think we should be having more clarity.

Yes. And sir, you talked about some new orders from the government of India. So can you just indicate what area is this and what is the order size here?

It's a nonautomotive business in a completely new area for us. We are converting one of our manufacturing facilities to manufacture this. And in -- like literally in 3 weeks, we are developing a product. And hopefully in less than a month, we will have it approved and start supplying. I don't want to talk more because there is a confidentiality agreement. But since it is a matter of substantial interest, we have to disclose it.

Okay. And one question on the profitability. We have seen a pretty strong improvement. But I just wanted to check, when I look at Bharat Forge's International plus Bharat Forge, it seems to me that EBITDA is around INR 290 crores. So am I calculating this right? And what is the reason that there is a difference between stand-alone EBITDA and BFL plus BFIL EBITDA of about INR 40 crores?

Yes, this is mainly because of the stock increase and the profit which gets eliminated when we consolidate because still the exports are rising from a quarterly run rate of about $40 million. We are now almost at $100 million. So the inventory portion is increasing. So that is the profit elimination on that.

Okay. So ideally, we should look at BFL plus BFIL as the overall profitability of the business, right?

No, that means -- on a constant stock basis, you should take it. But when you are ramping up, there is a stock increase. It's not going to happen every quarter.

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

Congrats on a great set of numbers. Amit, my question is firstly, can you highlight what was the Q4 utilization? And how do you look at utilization? Do you look at it from product segments? Or do you look at it from a domestic versus exports?

Our utilization would be about 65%. Certain -- on aggregate basis, certain areas are lower, certain areas are slightly higher. But I would say, I don't look at it from domestic versus exports or anything. But all I will say is that with our existing capacities, I think we can very closely get to about INR 2,000 crores a quarter in terms of run rate.

Right. Right. Great. So...

Also, please remember that in the worst quarter of the year, we had sales of just about INR 400-odd crores, and we had a positive EBITDA.

Positive EBITDA. Yes, yes. Okay, sir.

So if you see INR 400 crores going to INR 2,000 crores, it should give you the sense of kind of operating leverage we should be able to get.

Right, right. The second question is on KSSL. Now that we have -- I mean, you will be owning 100% directly from Bharat Forge. So first, could you just recap what are the operating arms? And what also, kind of orders do we have in KSSL? And...

KSSL has several joint ventures and certain subsidiaries. Subsidiary is Analogic. Then we have an embedded system subsidiary in Bangalore. And we have joint ventures such as Kalyani Rafael, which makes missiles. And then we have other joint working programs that we work on.

Right. So the Kalyani Rafael is the one where we have a substantial order. How close is that to procurement, production, or procurement?

See, what has happened is all defense orders, which were supposed to happen in this period of time has -- nothing has happened purely because of the whole COVID-related matters and money being spent on COVID-related matters. And even resources, I mean, you must have seen that DRDO has been involved in developing all kinds of things, right, from oxygen plants to vaccines and hospitals and things like that. So I think the whole country is basically struggling to get all the resources that it has to work on COVID-related matters. So unfortunately, orders and any of that stuff, only emergency orders and emergency procurement has taken place. No large, long-term orders have taken place.

Sure. Okay. And the other question I had was a follow-up on the North America CV production. Like you highlighted, maybe the production numbers are lower than what kind of inventory they are building up. So could you highlight what's the kind of run rate we have seen in Q4? And...

All I can tell you is that our team represents the order EDIs that we get from our customers, okay? So I don't have more information than that right now. But all I will tell you is that we all expect continued and sustained demand and business, and I think order intakes are spiking as we speak.

Sure. And the final question is on the second list of engineered production by the Ministry of Defense.

Yes, I know my father has already commented on that. I think -- I don't think there's any need for each member of our family to comment on it. I think it's a good step. I think it basically reaffirms the government's views that they want to energize manufacturing of defense, and we welcome it and we have a lot of play in this.

The next question is from the line of Basudeb Banerjee from AMBIT Capital Private Limited.

Good set of numbers. I just had 2 queries. One is if I look at inventory number days have moved up so much compared to last year closing. So is it just a year-end adjustment or something structural as seen there?

No, this is basically increase in activity levels and plus the impact of inflation. The raw material prices have gone up, so there is an inflation impact on the cost.

Second thing, so Amit, sir, as discussed last quarter also, that we saw a remarkable performance for the European entities, margin moved up to 9%. This quarter, reported number is double digit. So how should one look at from a 2- to 3-year perspective, what is the leg room for that to move up?

So we expect the full year to be a double-digit performance. And we expect every year this to improve slightly, at least, until we get to about 12%.

Okay. And last question, sir, after many months of remarkable numbers from U.S. plastic order book additions, suddenly there was a blip this month and as you discussed, sir, in the previous question regarding production and order book mismatch. So how should one look at the sudden decline in the order book this month? Is it purely because of near-term supply issues that...

It is all on supply results, supply issues. And basically, please understand the spending on the fiscal stimulus that's going to take place in the next 5 years in the U.S. is going to create tremendous demand. And this is what all our customers are telling us.

The next question is from the line of Aditya Makharia from HDFC Securities.

Congrats on announcing that you're putting up a site separately for defense. Can you -- I mean, I think after 5 or 7 years, this is the first time you're actually speaking of capacity specifically for this segment. So just wanted to know what is your thought process here? Any numbers you could give us as to how you're seeing the big picture play out?

Okay. So let me tell you, we are going to set up facilities for 3 products here. One is going to be specialty vehicles, second is going to be certain systems and aggregates that go into a variety of our products, and the third will be our assembly plant and testing facility for both vehicles and other systems and aggregates that go into vehicle's drivelines, including our artillery guns, et cetera. Basically, we are developing a whole new family of vehicles and platform, and this we see opportunity at a global level.

Okay. Anything on the India side? I mean, because we've seen...

We already received an order for one of the platforms for India. We're working on 2 other platforms for India. So we see tremendous opportunities going forward.

Right. Okay. Got it. Second thing is on the U.S. class 8 truck sales, do you think the sales number could be 3 lakh units in the next maybe 1 to 2 years in the U.S.? I think currently, we are at about [ 185 ], [ 190 ] is what we ended last year.

Honestly, I don't see any reason why it shouldn't get to those kind of numbers. I don't want to give an exact figure because this regards to issues of supply chain and all that, we don't know what the current situation is. But honestly speaking, I think what is the projection that we get from our customers right now is, currently, the outlook for the U.S. is -- yes, I will say, 2020 is [ 210 ], 2021 will be very close to [ 300 ] and probably the year after that could even be higher.

Great. Just one last bookkeeping question. What are oil and gas revenues for this year, FY '21? I think the [indiscernible] INR 1,000 crores, right, earlier?

Yes, yes. So FY '21 was nowhere near that. FY '21 was something like INR 136 crores, it was peanuts.

The next question is from the line of Raghunandhan N. L. from Emkay Global.

Congratulations on great set of numbers. A couple of questions from my end. Firstly, realization has gone up 15% Q-o-Q and 8% Y-o-Y to INR 232 per kg. What has supported this rise? And do you expect it to sustain?

What you should do is please understand that there is a steel price increase, which is seen in both top line and in raw material. So if you net that off, that is the number you should use for finding out the actual realization.

Got it, sir. So...

And there is, of course, more machine products also going out now. And we are seeing some amount of high-value products also starting. Our aerospace business is also picking up.

Got it. Sir, my second question was on the ATAGS guns. Media reports indicate that DRDO testing is in June. Given the progress, do you expect a...

We're not testing it. It is our army, its user, who's testing it.

So do you expect progress on these projects? And how do you see the -- when is the results in orders?

As I said earlier, everything is -- we are almost at the point where we can now -- we're ready -- our product is ready. I'd also like to say that our facilities to manufacture are lined up. We can manufacture 4 guns a month right now. In 2 months, we can go to 6. And by the end of the year, we can go to 12 guns a month. I don't think anybody else in the world can say that they can make 150 guns a year. And now that we have the Sanghvi Forging facility, even the forgings will not be a bottleneck because we can move our other forging there and focus only on guns here or do it in both places. So that's not an issue. So we have almost unlimited capacity of making guns now.

Wishing you all the best there. On CapEx and investments, how much -- what is expected for FY '22? And also, the FY '22 investments, can you share the breakup?

So FY '22, our total spend will be roughly in the region of INR 300 crores, okay? And next year, we're looking at roughly about INR 250 crores.

Got it. And...

And there's no organic CapEx, okay?

Yes.