Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge Limited Q2 FY '22 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, ladies and gentlemen, and thank you for joining us at our half yearly analyst call. This is Amit Kalyani, and I have with me our finance, sales, investor relations and operational schemes. I'll take you through some quick highlights, and then I'll open up for Q&A. The highlight for quarter 2 was -- our revenue was a little over INR 1,600 crores or INR 16 billion, which is both higher -- almost double of last year same quarter and significantly higher by 17% by the previous quarter. In terms of EBITDA, our EBITDA margin at 28.3% and total EBITDA of INR 455 crores was significantly higher again by about 18% than the last quarter, and much, much higher than the last year. Profit after tax at INR 311 crores, also was about 86% higher than the previous quarter. In terms of our overseas subsidiaries, we had a half year revenue of INR 1,663 crores and an EBITDA of 11.3%, which is basically a result of the intense cost optimization and product mix improvement and operational improvement that we have made. If you look at our stand-alone business, the demand was robust in Q2 across sectors and geographies. Domestic revenues grew by 40%, while exports grew by 4.4%. Other operating income includes $110 million of RoDTEP benefit, which is accrued from Jan 1, '21 to June 30, '21. Despite the continuing input and logistic cost pressures, EBITDA margins came in at a healthy 28.3%, which was similar to previous quarter. We have seen some improvement in our return ratios due to the improvement in capacity utilization. Our ROCE today stands at about 17.8% and RONW at about 14.8%. In terms of cash flow, we have invested INR 234 crores in payment of CapEx in H1 of '22 and INR 270 crores in our subsidiaries, which include Sanghvi Forge acquisition, the North American aluminum plant and Kalyani Powertrain Limited. Happy to report that Sanghvi acquisition has been PBT positive in the first quarter after our acquisition. In terms of end markets, our domestic markets continue to do well across both PV and commercial vehicles. Export market and demand -- consumer demand is very robust, including the lead time and wait times for delivery of vehicles. Unfortunately, there is an issue with production and delivery due to the chip shortage and other logistic related issues, which is disturbing or impeding the ability of OEMs to build vehicles at the rate at which they need to. So we expect that as the chip shortage eases out, this pent-up demand to result in higher production. The Industrial segment continues to do well across all segments and geographies. One new product developed by Bharat Forge in a very short time was the aluminum for cylinders for medical-grade oxygen. Here we have had an order of about 100,000 cylinders, which will be completed between Q2 and Q3. And we are now looking at creating a long-term business opportunity for this. Our center for lightweighting and mobility, e-mobility is starting to gain traction with order wins from both automotive and industrial customers. We expect this to see increase -- I mean, see the results of this on FY '23 onwards. On the e-mobility front, we are continuing developing our product and technology strategy and localization and with some near launch events coming up on the horizon with customers for their new products and launches. In terms of outlook, we expect the stand-alone business to continue witnessing growth, on the domestic front and the export industrial front, while the export automotive business will be under some pressure because this will be the quarter where the chip shortage is going to have the most impact. The overseas subsidiaries, we expect the -- to end the entire year with a double-digit EBITDA margins in spite of the adverse impact of the chip shortage, which will be visible in the second half numbers, which will be slightly lower than first half, but still will be a double-digit EBITDA for the whole year, which in terms of overall, let's say, market-related scenarios is a pretty good performance and will continue to grow and become even stronger as our aluminum business further ramps up in U.S. and Europe. Europe our capacity is already set out and plant is running. It's only a matter of programs ramping up, which will start from December, January of this year. So I think that's really all I wanted to talk about. Most of the other information is in our update. So I thought that we can spend a little more time on Q&A. So I'd be happy to take your questions and try and answer your questions now.

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

Firstly, I wanted to check on this EV products that we are working on related to e-mobility and also the EV startup. If you could talk about what are the products where you think Bharat Forge would be building order book or competencies? And how do you see the EV startup investment evolving over the next 1 or 2 years?

So let's talk about first components. In terms of components, we have 2 categories of components we are focusing on. One is lightweighting components, which are metallurgical products, either forged or cast, which we are supplying to a variety of OEMs across the world, and that business is ramping up quite aggressively. Just in terms of forging, we have enough capacity today to take our aluminum forging business from approximately -- currently $70 million to about $250 million, with the capacities on hand and order book on hand. Secondly, this does not include the casting side. That business will also ramp up over the next 2 to 3 years. And we expect that this will also grow at a double-digit pace. But more interestingly and exciting for us is our entire e-mobility components and systems business where we are supplying power electronics, control electronics, components, systems and subsystems for EVs, both all the way from 48 volt to 800 volt. So here, we have embedded systems-based products like DC/DC controllers, AC/DC controllers, inverters, butterfly controllers and all kinds of products. So here we expect revenues to start from next year and ramp up substantially by '23, '24 to triple-digit million-dollar kind of figures. Then we have other components which we are now exploring getting into. And I think once we have finalized everything, we will have a EV communication strategy with the shareholders and analysts. But suffice to say that EV is going to be 1 of the main growth drivers of our company in the '24 to '26 period and then beyond. And you asked me about startups. So I believe that there is a great opportunity for startups in the commercial vehicle space, that is the last mile delivery space, and the personal mobility space. The last mile delivery space opportunity is the largest in North America and Europe. And the personal mobility space opportunity is on the 2-wheeler and 3-wheeler, which is very big in India. And I believe the electrification of these 2 sectors in these 2 markets or 3 markets will happen very rapidly. And we are fairly well positioned both from a metallurgical products point of view and from electronics and electrical products point of view to cater to companies in this sector, and we have a road map and a game plan to do that.

Right. I also had a follow-up on the same. When we talk about power electronics, for which category of products have you seen traction? I mean, is it 2-wheelers, 4-wheelers, PVs there? Where are we already seeing traction in terms of order book wins? And also, we have also talked about this aluminum port cylinders. So what are the potential opportunities from these kinds of products which you would target?

So our current revenue from the e-mobility, power electronics, control electronics is approximately -- our company's revenues are about EUR 12 million to EUR 15 million. And this will grow over time, and we are here supplying largely high voltage to -- there is 650 volt to 800 volt applications, which are high-voltage applications for, let's say, applications, which are in the 250 to 350-kilowatt range, both on-highway and off-highway, but largely off-highway, which are industrial use. And on the automotive side, we have applications from 48 to 80 volts, which are for 2-wheeler and 3-wheeler, which we are already supplying. We now have about orders for about 1,000 vehicles to supply these. So this is in a ramp-up phase, but it will definitely grow. On the cylinder side, as I mentioned, we currently have 1 order, which we are in the process of executing, and that will get finished by Q3. But we see an opportunity for a continuing business in this market or in this sector in varied applications globally on a steady-state basis. So we're creating a marketing organization to take care of that.

The next question is from the line of Bhalchandra Shinde from Kotak Life.

Sir, on exports, if you can elaborate on how we see the...

Sorry, Mr. Shinde, I couldn't hear you. It's breaking.

Sir, we can hear you, but your voice is breaking. Come in a better refreshing area, please?

Am I audible now?

Yes, go ahead. Go ahead.

About exports would like to know that, as you mentioned on the media also that EV is -- might see [Technical Difficulty] overall Industrial prospects are also improving. So looking at all the tractions, how we see the export growth over the next 1, 2 years?

Next 1 to 2 years, are you saying in quarters or years? Your voice is breaking. I'm not able to hear you.

The next 1 year, next 1 to 2 years, not the quarter, in next 1 to 2 years, how we see.

Next 2 years, we see very strong export prospects and growth. We have long-term contracts in place. So I think we're in a good position.

Currently, our oil and gas is showing a strong access [Technical Difficulty].

Yes, oil and gas is strong and getting stronger. And I think winter is coming and overall, because of decarbonization, the use of gas is going to go up and shale fracking for gas is a very competitive option, especially for the U.S. So that is going to be a strong market going forward.

In the near term, because of the chip shortage, how we see the impact in near term? Will it affect our overall export sales or because it is -- I think only 10% of the total sales, right, PV-related sales? And -- most of the other sales is related to CV. Do we see impact in CVs also because of the chip shortage?

Both in CVs and PVs because of the chip shortage. In Q3, there will be a shortage in Q3 -- impact in Q3. Yes. Basically, the demand is getting deferred. If you go to the U.S. and you want to buy a new car, you have to wait 6 to 9 months today. Same thing for a truck.

Okay. So we create that kind of impact or next...

I mean it's not going to go to -- it's going to be a percentage impact. It's not drastic.

Okay. Okay. So will industrial able to compensate what decline we will see in CV because of the chip shortage or CV relatively a subdued leasing?

I think overall Q3 -- it remains to be seen because there are a lot of factors driving this. But overall, we will still have a good performance in Q3, but not as good as it would have been if there was no chip shortage. So there will be a dip over Q2 and Q3, but not very large.

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

Yes, sir. So you mentioned the 4 cylinders will still be there in third quarter. This quarter, we have done INR 69 crores, will it be around similar levels in next quarter as well?

A little bit higher.

Okay. And in the domestic industrial, how are you seeing the trend and where you see good growth over the next, say, 1 or 2 years?

Yes. So we've created a strategy to grow our domestic industrial business quite aggressively. There are a number of sectors where we see opportunity. And we believe that we can easily double, if not more than double, grow our domestic industrial business over the next 3 years or so.

And when you're talking about doubling, is it like, say, on the base of this year or -- hello?

Yes.

So talking about [ risks ] -- what would be based off of this doubling of revenue? Like this year revenue you're talking about on that base you can double.

Yes. More than, more than.

Okay. And -- but these sectors, but I believe that you are probably more bullish upon or are you seeing that...

I don't want to talk about that in too much detail because a lot of our -- a lot of other people get ideas from that. So let's just leave it at that and we haven't -- we made an acquisition of a company, as you know, Sanghvi Forging, which has a facility very similar to ours. Each of those facilities can do easily, some in the region of 50,000 to 60,000 tonnes of forgings. And that itself is about $100 million of business, so 100 million, 110 million, 120 million. So that kind of opportunity. That facility is today operating at less than INR 100 crores in sales. So we have huge growth opportunities.

Okay. And in the export Industrial, what was the revenue from the oil and gas segment in this quarter?

About INR 200.

INR 200 crores?

Yes.

Okay. So the media ramp-up has come from there only in this quarter?

Yes. I mean little bit. Last quarter was about INR 170 crores.

Okay. Okay. And lastly, on the passenger vehicle side in domestic market, I think revenue has gone up decently quarter-on-quarter. So is it like new orders or what is driving in...

A lot of business from some of the new entrants and from some of the new products launched by some of the international car companies in India. And those products, which we have got orders for are very successful. And therefore, we're getting substantial traction there.

[Operator Instructions] The next question is from the line of Mumuksh from Emkay Global.

So I want to understand how do you see the impact of the U.S. infra bill on the demand for Class 8 and construction equipment segments?

Look, the point is the U.S. has decided to spend $500-plus billion on infrastructure. And this is going to go in areas like roads, bridges, water, rail, electricity, and basic infrastructure. So when you have basic infrastructure, this kind of infrastructure spending has a tremendous cascading impact throughout the whole ecosystem. So this will boost truck production. This will boost demand for trucks, demand for construction equipment, demand for higher horsepower engines for diesel gensets for compressors, all kinds of equipment. Even airports are being now looked at from upgradation, because a lot of U.S. infrastructure, which was built in the '40s and '50s was last upgraded in the '70s and '80s. You know 40 years is a long time. And you can see the impact of the degradation in the U.S. infrastructure, every winter when you have storms and power outages. So I think this is a very good step. It will definitely improve the quality of infrastructure and quality of life in the U.S. but also provide a massive boost to the U.S. economy and global supply chains.

So how was the price increase impact this quarter on the revenue?

Steel impact.

Yes.

About INR 50 crores.

And what was the logistic cost increase maybe sequential year-on-year?

I'm not going to share that.

And the USD-INR realization this quarter?

[ 74 million ].

And just last question. Sir, any update on the [ APAC ]?

Yes. Our final trials are done. Now some user introduction trials are going on. I think -- very soon we should hear something.

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

First, couple of clarification. One is the RoDTEP benefit you indicated was INR 11 crores, INR 110 million. Is that right?

Yes, rupees. Yes.

And this was from 1 January till now?

January to June.

January to June. Okay. And what it would be for the current quarter?

INR 7 crores.

Okay. Okay. And secondly, with respect to CapEx, so how should we look at the CapEx considering that at consume level, we have already invested about INR 506 crores on CapEx. So what should be the full year expectation, both on stand-alone and consol basis?

See, as we have told you, we will be spending about $75 million on our plant in the U.S. that is funded by equity and some amount of debt. We have no CapEx in India right now. Our CapEx in India will be under INR 100 crores. And the only CapEx that will remain is whatever CapEx we need to do for in the U.S. Today, in the U.S., we are seeing a lot of demand for our U.S. older forging plant also. So we're doing some CapEx there basically to put robotics and automation and some maintenance to clean up some cycle time issues, et cetera, to make it more productive. That will be on the order of maybe between $7 million to $8 million over the next year, 1 year, 1.5 years, that's about it.

Okay. But the first half stand-alone CapEx itself was close to INR 250 crores. So we're seeing incremental INR 100 crores doing above that?

That's what payments for previously sanctioned and implemented CapEx, including the movement of our ammo from Pune to Baramati and so on and so forth.

Right. And over and above the INR 100 crores for the remaining period?

Yes, I think that should be all for the next half.

Right, right. And secondly, in the passenger vehicle exports, we had seen a Q-o-Q decline. So was that primarily because of chip shortage impact or there's something else to it?

Basically, the chip shortage. See, what has happened with chip shortage is that, as the OEMs are fewer chips, they have to decide on which vehicle they put them. And typically, they're putting them on the highest margin vehicles. So they are putting them on the Cadillac escalates and the navigators of the world, which produce the highest margin per vehicle for the manufacturer. So although the number of vehicles manufactured are going down, the profits of some of the OEMs are remaining fairly robust.

The next question is from the line of Amyn Pirani from JPMorgan Chase.

My first question was on the e-mobility components that you talked about. So you said that you also started to supply in the 48 volts to 80 volts, which is for 2-wheeler and 3-wheeler. This is entirely India, right? Or is there?

That is currently entirely India.

Okay. Okay. Okay. And the 48 volts and in that range, these components would also be used for hybrid cars, right, if I'm not wrong? And is that an opportunity that we have?

Our product is not designed for hybrid cars, because we see hybrid as a steppingstone to full electric.

Okay.

So we are focusing on the full-length consolation. Our aluminum foil and cars components are going into hybrid and EV, but eventually it would all switch into EV.

Okay. And you also talked about in domestic passenger vehicle segment, you won some new orders. So what kind of components are these? Are these engine components? Or are these some other kind of components that you're doing now?

This is a combination of engine, transmission and chassis components in lightweighting.

[Operator Instructions] The next question is from the line of Sonal Gupta from L&T Mutual Funds.

Just on the India Industrial bit, I mean you had won some orders on Kalyani M4, et cetera. So have those started kicking in?

No, the deliveries for that will start in Q3. And actually, realistically the delivery will happen in Q4.

So that order will be executed over what period?

Between Q4 and Q1 of next year. Because of the COVID situation in April and May, we had a delay in about 2 months.

Okay. Okay. So I mean, like -- so even if the cylinder orders had completed in Q3, then we should not see a negative or a decline in Q4 on the industrial side, right?

No. I mean, that defense -- that the defense business will start kicking in Q4.

Got it. And just on -- I mean, like how do you see -- I mean, like the inventory situation with your customers now, are they given the supply chain disruptions? Are they running with a higher inventory? Or I mean, will that also lead to some sort of a destocking risk?

No, because I don't think there's a significant increase in inventory, I would say, maybe the increase in inventories to the tune of maybe 10 to 15 days. Yes, in that range. I don't think it's more than that. And really, the demand is very, very strong. At least that is what our customers tell us and what we hear from the company that publish this information. So once the chip -- and today, the issue is that logistics -- logistics change where in the old days we could forecast that between 31 and 33 days, the material from our plant would reach the U.S., today, that could vary anywhere between 50 and 70 days. So we have to also provide some amount of cushion for that. But I think, overall, we are okay. Our primary focus is to make sure that we don't create any customer stoppages.

Sure. No, absolutely, right. So -- but -- okay. And just on -- I mean, like by when do we see the -- I mean, like -- this will we start seeing improvement on the Sanghvi Forge thing from next year onwards?

Already it became profitable. Even at a -- first quarter itself on a PBT level we have become flat. And we will see -- quarter-by-quarter we'll see growth.

Right. So any plan -- I mean do you have longer term to -- I mean like, will that -- that will be a subsidiary or that's -- sorry, that's already included?

That's already 100% subsidiary now.

Right. No, I'm just asking you because in terms of the stand-alone numbers, will it get included in this standalone numbers trying to understand.

It comes in our subsidiaries and solely owned subsidiaries. But it's a small number right now. In the first call there was to fix the place. Fix the technical issues, fix the maintenance issues, quality issues, cash flow issues, people issues, and then take and execute new business.

Yes. And sorry, just last question. I mean, again, a clarification on the CapEx. Could you on a cash flow basis, tell us what is the CapEx for this year, both standalone and international?

What we have today spent roughly is about INR 500 crores for the first half, between stand-alone and overseas. Stand-alone, we will probably spend about INR 100-more crores this year. And overseas, probably about close to INR 75 crores, INR 80 crores, maybe INR 100 crores at a round number. So here talking about INR 700 crores.

And where should this number be next year? How do you see that?

See, next year, we don't need to make any forging capacity investments over here, for sure. And I would say overall CapEx should not be more than about INR 250 crores to INR 300 crores.

The next question is from the line of Jinesh Gandhi from Motilal Oswal.

Just a couple of clarifications. Firstly, you mentioned $12 million to $15 million of power electronics revenue. So is this entirely from our Refu JV or beyond that as well?

It's entirely from Refu right now, plus what we are shipping from India to Refu.

Okay. Okay. And secondly...

We were to assume that value-wise is being shipped from here.

Sorry, you said 40%.

30% of that is being shipped from here currently.

Okay. Okay. And secondly, with respect to overseas subsidiaries -- overseas operations, you indicated double-digit margins for full year. So while first half was already close to 11%, do you expect that to improve from there on or 11% to 12% should stabilize.

I think level will moderate a little bit because of the chip shortage creating overall reduction in demand. But I think for the full year we will have a double-digit number. And then next year, as our aluminum plant ramps up, we will see a substantial increase.

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

Congratulations, Amit. I have 2 questions [Technical Difficulty].

Mr. Jalan, we can't hear you. You need to be called from another line. It's very -- very broken your voice.

Hello? Is it better now, sir?

Yes, a little better.

Sir, the first question was on the e-mobility business [Technical Difficulty].

Mr. Jalan, we can't hear you at all.

[Operator Instructions] The next question is from the line from Pramod Kumar from UBS Securities.

Amit, just a follow-up on the defense side. In addition to the artillery guns, is there anything else which you're seeing -- which is kind of seeing some progress in terms of the various changes of the tendering or the testing. I'm just trying to understand by when this year or it can be which quarter do you expect some meaningful defense revenue cadence to come in?

See, today, we have 3 areas where we have, let's say, made significant progress. One is on the artillery guns, one is on the vehicles, and the third is on these mounted guns that we have made. So we have made a light strike vehicle called the Garuda, and we have MGS, which is a 155/39 mounted on a 4x4. So these are the 3 areas. Today, we have orders for the vehicle side for the lighter vehicle and for the heavy vehicle. On the guns side, we have 1 gun in testing, which has reached a final stage. And on the mounted gun side, we are now going for testing.

So by when do you expect this to become a meaningful part of your business in terms of...

What do you define as meaningful, 5%, 10%, 15%?

5% to 10% to begin with.

So let's say, if we are saying 10%, I would say it would take about 2 years or so.

Two years or so. And second question on the CV demand recovery. You've been a little of cycle, the company has seen so many cycles. But how do you see the cycle playing out because there is a massive increase in fuel prices on 1 hand, there is a surplus tonnage capacity, which got created a few years back. And also, there's some rough incremental competition or more organized railways in form of dedicated set corridor and all that. So given your experience, have you seen the production schedules, which have come from the OEMs so far in line with what you expected or they're kind of lagging?

Right now, we are seeing Q3 higher than Q2, and Q4 higher than Q3. But over a more longer term, I expect that you will see a shift on the truck manufacturing side where you will have off-highway trucks, which are for construction, mining growing, and then the ICV sector and the SCV sector growing, because as you rightly said, the heavy commercial vehicle, not only is it the railways which is affecting or taking away market, but it's the highways and the GST, which has improved the kilometers per day or 10 kilometers per day that is carried, and therefore, the efficiency of transportation has increased. But at the same time, because of e-commerce and other things, the demand of last mile delivery has substantially gone up. And that will see a big growth in the ICV for the hub to spoke and then the small commercial vehicle for the last mile delivery.

And if I can squeeze 1 question on electrification. Any updates on stock, Amit, in terms of a product launch or because the space is clearly excited, the demand what we're seeing in terms of bookings or interest and order backlog is quite huge, even on 2-wheelers. So if you can just help us understand how do you see stock kind of pops up...

We have invested in top, because we think that they have a good product and that we can get into their supply chain and learn the product technology and the supply side. But in terms of the day-to-day operations of [ stock ], I'm not directly involved. But I'm certain that they are in a position where in a few months they will make some announcements about their product launch, et cetera.

And can you talk more about your existing supplies to any electric vehicle start-up for traditional OEM? Is that you want to share at this point of time as we're not...

I don't want to tell names, but as I mentioned that, we are already supplying -- even in India our revenue to electric vehicles will be in excess of, I would say, INR 10 crores to INR 15 crores this year and probably a healthy double-digit, I mean, almost heading to significant double-digit number next year heading to triple digit year after next.

If I can push more on that. Is it more on motor-related beds on the electronic side as in...

It's on the petrol and power electronics.

[Operator Instructions]

Ladies and gentlemen, thank you for your time and interest. And as usual, if anybody has any other questions, please feel free to reach out to our team. We'd be happy to take your questions. And thank you for your interest and support to our company and have a pleasant healthy and safe weekend. Thank you very much.

Thank you very much. On behalf of Bharat Forge Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.