Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q1 FY '22 Earnings Conference Call of Bharat Forge Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Kalyani from Bharat Forge Limited. Thank you, and over to you, sir.

Good afternoon, everyone. Thank you very much for joining us. Sorry for the slight delay. Thank you for joining us at our Q1 analyst call. I have with me members of our management from sales and marketing, finance, Investor Relations. And as usual, I'll make a few highlights upfront and then we'll get to Q&A. So overall, I think on a stand-alone basis, we've had a fairly decent performance despite the initial challenges with COVID and then the subsequent impact on the overall economic activity in India. I must congratulate all our team members, management and everyone in Bharat Forge and our suppliers for ensuring that we were able to meet our customer commitments despite all the significant operating challenges. Exports have been an area that have shone in this quarter. Sequential basis, exports grew by almost 25% to INR 915 crores, while the domestic revenues declined by 22% to INR 442 crores, leading to an overall growth only of about 5% in sales. The decline was due to the severe lockdown that was imposed in the month of May and, in certain states, even followed on right up to June and into July, especially in Southern states. We have managed our costs fairly well. We've put in place a very strong cost-reduction measure last year, which continues. And due to that, plus a good product mix and growth in overall business, we've seen a strong performance on margins where we've seen a 300 basis points growth. Our Oil & Gas revenue was approximately INR 150 crores for the quarter as against INR 45 crores in the last quarter. The fluctuation in interest cost is notional due to the reval of the rupee. Our PBT grew by about 12% to about INR 282 crores. We have an exceptional item of INR 62 crores, which is toward the VRS of our Chakan plant, where we have given a VRS for over 200 people. And all the unionized workforce there is completely now retired out. And all the expense towards this has been charged in this quarter. There's nothing that will continue. During the quarter, we also completed the acquisition of Sanghvi Forging at a cost of approximately INR 77 crores. This facility was operating at a very low capacity utilization and had not been, let's say, operated appropriately for the last 3, 4 years because of a cash crunch they had. We have put in place a new management team. We've put in place some measures to quickly bring this facility up to our standards in terms of operations. Of course, health, safety and environment are our first priority, and all those have been seen to. And we expect that from quarter 2, which is the current quarter, this company will get consolidated or we will report the earnings of this company, and they expect that it will break even this quarter and move to profitability from the next quarter itself. Bharat Forge continue -- and the reason for buying this company is that it has a capability to make products that are slightly bigger than our existing product portfolio, and it helps us expand our product offering, especially for the renewable energy and wind sector. We continue to maintain a strong balance sheet with ample liquidity, and we will look at opportunities in emerging areas and in and other areas for deploying capital which will give us incremental growth. If you look at our international operations, I think they have performed fairly satisfactorily. We have registered an EBITDA of 11.7%, which is supported by a focus on cost optimization, product mix improvement and total focus on delivering overall performance and cash flow. We expect that the Q2 CY '21 performance at EBITDA level will be slightly lower optically because of the RM inflation. But otherwise, things are running quite well there. So this quarter, we have also started disclosing the international operations revenue divided between aluminum and steel. This will be helpful for you to understand the growth that we will see in the aluminum side, and I will talk a little bit more about that going forward. Our consolidated balance sheet is also very strong with a debt/equity net of cash at 0.41. If you look at quarter 2, we expect the overall growth to continue, being supported by recovery in the domestic medium and heavy commercial vehicle market, sustained improvement in demand levels in the export market and the potential impact on end demand because of supply issues pertaining to semiconductor and sustained increase of input costs or factors to keep track of. In spite of that, we expect fairly strong growth in quarter 2 over quarter 1. In terms of new product development, despite COVID, a highly motivated team of researchers, engineers and manufacturing teams in Bharat Forge have indigenously developed in-house a medical-grade safety and critical product, which we developed in under 45 days, which meets all the stringent regulatory and quality requirements of the various testing and approving agencies. We have received tremendous support and encouragement from various departments of the government of India, and we are glad to report that we could manufacture, secure approvals and commence delivery of these systems within a record time from engineering to supply, including 45 days of testing of less than 100 days. So we converted an aluminum forging production line into producing these high-volume lightweight, portable aluminum oxygen cylinders. And this demonstrates the technology development capability within Bharat Forge and the ability to work as a team and create a fully new technology, master it, productionize it, stabilize it, validate the product and put it into the market. We see this becoming a new product line for Bharat Forge, which we will make from India and potentially supply the world, and this could be a new niche market that we occupy at a global level. On the e-mobility side, we are very excited with the progress we're making on e-mobility. We are very happy to report that our investee company, Tork Motors, have achieved Phase 2 homologation for multiple products, both in 2-wheeler and 3-wheeler segments, and we will talk about this a lot more in detail when we provide you a full road map for our e-mobility business. In terms of sustainability, currently, more than 25% of our energy requirements are sourced from renewable energy. In fact, as you know, renewable is a cyclical business. In the monsoon time, there are very high winds. And in fact, in the month of July, we have used upwards of -- we have consumed upwards of 35% of our energy consumption coming from renewables. So we will, as a goal, continue to increase our proportion of renewable energy and focus on reducing all the waste that we produce, reduce our CO2 and become much more environmentally conscious and reduce our water use towards neutral. I think that's really all I have to say, and I'm now happy to talk about -- take your questions and provide you answers.

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

Congratulations, a great set of results. Firstly, I had a question on global CV business. We've seen one of the highest revenue run rates there. And so far, at least in the data, we don't see truck production really picking up in a big way. So could you talk us through in terms of -- and order inflows also have been a little bit soft perhaps because of the slot availability. So could you talk us through whether this revenue also includes some new order wins or -- like new products or new customers? And what is the outlook for this business? Along with that, some longer-term outlook also because there are some new technologies being explored as far as either electric trucks or hydrogen-based trucks. So how are you thinking about addressing that opportunity?

So first of all, I'll address your last point first that we have a comprehensive EV strategy that covers everything from -- on the technology side, it goes from light-weighting to power electronics, control electronics, motors, transmission and subsystems and systems. And on the product categories, it goes from 2-wheelers, 3-wheelers, light commercial vehicle -- ultralight commercial vehicle, light commercial vehicle, ICV and bus, okay? So we have the whole product suite available. And we have -- we'll probably host a analysts' meet maybe sometime in October, November, after the complete COVID situation is under control and show you what all we are doing in this area. And now I'll transfer the call over to my colleague, Subodh, who will talk about the other question that you asked.

Thank you, Amit. So before I come to your first question or the second question, yes, we are winning business on EV products for commercial vehicles as well. In fact, several products are under development as we speak, and we are very strongly engaged with all our customers in this regard. As far as the first question is concerned, you should not go by the order booking that happens on a monthly basis alone. You have to look at the 3 factors. The first factor is the backlog now is almost equivalent to 10 months of production. And most of the production slots for next year also have been sold if you look at that logic. So the commercial vehicle business is very strong. The orders are very robust. The challenge that most OEMs are having right now, which we -- they have to adjust lots is the semiconductor price problem. So to that extent, there is some amount of disruption from us like this discussion. But other than that, there is no weakness in the commercial vehicle system. In fact, with the positive news on the U.S. stimulus, it is actually probably going to be significantly stronger, I mean, in the next couple of months. So I think we are in good shape as far as commercial vehicles are concerned.

Actually, the stimulus has not yet started hitting the ground because of COVID. And once they start, I think you're going to see a tremendous upsurge in overall activity in the U.S.

Sir, for the trucks, could you talk about what are the areas in which we have won orders? What are the products there for e-mobility?

We have orders on -- for example, so we have driveline products.

Yes, we have confidentiality agreement, but we have products both on chassis, axle and driveline.

For electric trucks.

For electric trucks.

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

In your opening comments, you talked about Q2 being stronger than Q1. Could you talk a little bit about what would be the drivers now? Or is it predominantly going to be India? And linked to that, we've seen a nice uptick in the Oil & Gas business. What's the trajectory that you are talking about that going ahead? And similarly, if you could also comment about your aluminum forging. We are almost taking USD 24 million per quarter run rate on that. So what's the trajectory that we should look on that side?

So our growth in Q2 over Q1 is going to come from all sectors. It's going to come from commercial vehicle. It's going to come from pass car. It's going to come from pass car India and from commercial vehicle India and Industrial India. Industrial export will also increase. In addition to that, we see a little bit of increased demand coming from certain sectors where there is some pent-up demand because of long periods of no purchases in India and in certain other markets. So I would say that we will see across-the-board kind of uptake. Obviously, each sector will be slightly different. But generally speaking, we will have a across-the-board kind of uptake taking place. And your second question pertaining to our aluminum business. We have installed capacity in place for whatever growth we see over the next 2 to 3 years, and we will more than double our revenue per year from where we are over the next 2 years or 2.5 years. And we have capacity for more than that amount of business already in hand. In fact, we have more orders than capacity today, and we will very soon look at how to expand our facilities in -- outside of India in multiple geographies.

And not as much capital.

And with not the same amount of CapEx as we've done now.

So this is including North Carolina and the Germany facility, right?

This is including both and we see tremendous demand in both areas. And we are already now commissioned the line in the U.S. We have now made more than half a dozen platform prototypes and sent them for approval. And by the end of this year, we will get the approval and early next year, we will start on those volumes. And all the current major OEMs are covered, including EV OEM, pure EV OEM, traditional OEMs, which are the big European OEMs, also big U.S. OEMs and Japanese OEMs.

Right. That is encouraging to know. Lastly, could you comment about the future trajectory of Oil & Gas revenues?

See, Oil & Gas, you must understand, is now moving towards a very dynamic business where it depends on the oil prices and which location in the U.S. [indiscernible] cost of production of shale. The production costs vary anywhere from $25 a barrel to $55 a barrel. So obviously, the ones which are at $55 will only start if the oil prices are high. The ones which are $25, $30 will keep running throughout no matter what oil prices are.

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

Congrats on a very strong set of numbers. The first question was on the e-mobility side. I mean my understanding the last full year magnitude products, but any sign of order booking now given the inflation we are seeing in the 2-wheeler and 3-wheeler segment in India? This fall from the domestic...

We have received orders and are executing orders right now across some very interesting sectors. We're not in any really commodity products. Give us until next quarter when we'll probably be able to show you more and tell you more than what we are able to right now. But very clear that e-mobility is going to become a very large part of our business, both in India and then gradually outside as well.

Fine. Sure. And the other question I had was on -- more on the profitability side as -- assuming in Q2 and the second half, the export mix comes down and domestic inches us again back to either 60-40 or 55-45 kind of a ratio. However, the operating leverage also kicks in kind of given we would be at...

Please remember where -- we have 1 month done in the quarter, maybe 1/4 -- 6 weeks into the year -- into the quarter. Let's wait until the quarter is done, but I don't think we have any concern or apprehension about our performance for next quarter.

No, what I meant was how does the product mix and operating leverage play out? Do you see margins stabilizing at current levels given the cost measures we have taken?

I think our market will remain stable at this level currently.

Right. Even as the product mix normalizes?

Exactly.

Sure, sure. And the final question on the export PV, right? I mean given how strong the performance has been, is there a play of inventory here? I mean -- or do we -- I mean, do we feel as the production ramps up, we will see similar growth in our top line or our exports as well? How should we look at any inventory adjustment happening in the export, PVs especially?

I don't think there will be any adjustment for inventory. I think it is fairly real.

The next question is from the line of Ashutosh Tiwari from Equirus.

So firstly, on the European space, I think we already have reached the peak that we have done in FY '19 quarters. So what is driving this growth? And how do you see the outlook going there over there?

I think drivers. Do you have a say?

So our European subsidiaries, the growth...

Members of the management, we cannot hear you at the moment.

Sorry. So on the European subsidiaries, the overall performance has been peak compared to previous because the nonaluminum business is operating at a fairly high level driven by the underlying demand of passenger cars and commercial vehicles, and aluminum has grown to a higher level than previous. And we have received businesses for hybrid, which we have also -- hybrid and electric, which we have started executing. This have also tripled over the last 2 years in Germany, from our German plant, speed up automating to this plant.

So this is a large part of this, passenger vehicle, which is driving this growth -- I mean what is driving this growth here in the business?

Yes. Basically, the growth is being driven by pass car.

Okay. Okay. And on India...

In India, rural pass car.

Okay. And on India side, despite this lockdown and impact, I think, if I look at the India Industrial revenue is only around 10% quarter-on-quarter. So and -- so in what sectors you are seeing more pickup now versus earlier versus last 3, 4 years? And what is the outlook for the year, going ahead for next 2, 3 years?

See, as far as India Industrials are concerned, it is largely driven by the growth in the construction segment in India. And with all the efforts of the government to continue boosting infrastructure, we expect this to remain on a strong trajectory.

So largely, the construction revenue in India, you guys are saying?

These are -- so these are construction equipment as such. These are engines that are used as prime movers, which have also highway applications. These are tractors and so on. So there is a wide range of products involved here. And we have also entered into some new areas of industrial products, which are the new segments for us. So as a combination, we see a strong trajectory in our Industrials business.

And lastly, on the Oil & Gas side, is it exposed? You mentioned that you did INR 150 crore revenue. Now when you talk to different companies across sectors, I think all of them are seeing very good traction Oil & Gas and talking about the new orders going there. So again, this $20 million in revenue that we did in last quarter, will it further increase going ahead from here for the coming quarters?

So currently, we are not seeing new activities in the fracking area in the U.S. A lot of activity is largely linked to the revitalizing of current assets. So we expect this to remain stable for the next couple of quarters. Growth, we are not exactly sure as yet. But...

We will only grow from new products that we launch into these sectors, which we are working on, from a product development point of view. But please understand, we don't make commodity products like Sanghvi, okay? And there is a huge requirement for those kind of products, but they are at very low margin, and they're extremely commoditized products. So we are only focusing on high-value, highly differentiated products in this sector.

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

This is with regard to the Sanghvi Engineering. Looking at the capacity, it looks pretty small compared to the size which you have. So can you explain what type of capability it brings in? Or is there a more scope to expand capacity or shift your products there?

So basically, they are the same capacity in terms of tonnage that we have in Bharat Forge, in our open-die forging facilities. The issue is that there are a lot of bottlenecks in their plant and in their facilities. There are set up a very good press line but not everything that goes before it and after it. So the debottlenecking will end up costing us somewhere in the region of, I would say, INR 20 crores to INR 25 crores. But with that, we can, I would say, almost triple the capacity there. And honestly, with a press like this, and if we are able to do high-value or even, let's say, medium-value product, we can make this into a INR 500 crore, INR 600 crore business, if not more.

And is there a further scope to expand here in terms of brownfield or greenfield?

They have 15 acres of land out of which, I think they've only used about 5 acres or so. So there is scope to expand in terms of machinery equipment, et cetera.

And second one is, you were talking about new order wins in the CV electric space. When do you expect these to kick off in terms of sales? Any time lines you are looking from the customer?

2024. '23.

We see these orders will start in '23 and '24.

The next question is from the line of Amit Mahawar from Edelweiss.

Amit, congratulations on great set of numbers. My first question is on the new plants, especially the India locations and North Carolina. What is the contribution of revenue we are targeting by the end of FY '22?

FY '22 revenue from North Carolina will be very small. It will be somewhere in the region of $8 million to $10 million because that will be our first year, and that is where we have to get all our approvals and even the customers have to start doing their own preproduction lots, et cetera. '23 onwards, we will see a very steep ramp-up. And by '24, we should be at full capacity.

And from the capacities in India, especially in Mundhwa?

Mundhwa, also by '23, we should be at almost full capacity.

Fair point. Second question is on Sanghvi again. I'm sorry to harp on Sanghvi again. But this is a plant which also had some qualifications from some of the global OEMs like Rolls-Royce. You spoke about renewables, Amit, but that plant is -- please correct me if I'm wrong, it's far beyond renewables or -- so more about quality of business that you can tack from there. You spoke about INR 500 crore revenue, but the quality of business from this plant can be far different, right? So -- and I know Bharat Forge has a solid qualification list from the western OEMs. But anything specific that you would want to add on this plant?

Well, I'll tell you one thing. I honestly don't know what they have communicated to the outside world in terms of qualification. But fact is that they were in the dark state that they are in because of the overall management that they have. But I know that, that is a good plant. It has been well set up, and we can maximize its potential, if anyone can. And we will leverage our relationships and our capability and our integrated approach to definitely maximize the output value and value addition from that facility.

[Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Congrats to the team for excellent results. Sir, first question pertains to the margin sustainability. I mean given that in a quarter where we are almost 30% lower volumes than peak volumes, our margins are comparable to those of performance. So from here on, should we expect on steady-state, maybe say in FY '23, will we utilize more capacity margins to go back to previous mix of 30%, 32%? Or there are changes in the underlying business as well?

The company is very different than what it is in the past. I think we are spending a lot more on R&D right now. And honestly, between 28%, 29%, I think, is a very good number for margins. More than margins, we will focus on capacity utilization. We will focus on capital output and overall sales and cash flow and growth, of course.

Okay. Okay. Understood. Secondly, can you share if these are -- what was the [indiscernible] you said additional this quarter? Then what was the steel price pass-through benefit?

It was INR 75 this quarter.

Okay. And steel price pass-throughs?

Steel price pass-through was about INR 30 crores.

Okay. Got it. Got it. And lastly, with respect to, on the CV portfolio, I mean you are doing so many different products across different categories. But if you take a worldwide view and based on the order which we'll be having, would you be able to share magnitude of revenues or orders coming from new components space in electrification side?

Yes. I think as I mentioned earlier, we will hold -- we'll do this in more detail next quarter because I think we'll have a lot more to share with you.

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