Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '22 Earnings Conference Call of Bharat Forge. [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, and good afternoon, ladies, and gentlemen, and welcome to our quarter 3 analyst conference call. I'd like to welcome all of you and thank you for taking your time. As usual, I have with me our team from sales and business development, finance, Investor Relations. So give you a brief update and then open up for Q&A. So in quarter 3, the performance was as expected. In the last quarter, we had mentioned that we expect quarter 3 to be slower than quarter 2. And therefore, total sales were flat compared to previous quarter. Exports were about 10% lower, while domestic grew by about 16%. The drop in export revenue was primarily due to the production cuts because of semiconductor-related shortages in Class 8 trucks. Our EBITDA margin at 25.2% against 28.3% is basically due to certain one-offs in Q2 and Q3. There is a detail of this in Slide 10 of the update. Normalized EBITDA in Q3 would be about 26.4%. It's a decline of 120 basis points sequentially. We have an exceptional item, which includes a gain on the fair value of our investments in Tevva Motors and an exceptional expenditure of $99 million towards VRS. If you remember, at the beginning of the -- in 2020, we had taken a write-down in our valuation of our investment in Tevva because of the slowdown that has happened due to COVID and other issues. But Tevva has successfully managed to weather the storm and raise substantial funds over the last 8 to 12 months and has been valued quite well by the market, and they are now well on the path to taking their products to market. And therefore, these investments have been revalued as is required by the accounting standards. One highlight, however, is that the 9 months, I will say that I have never seen so much pressure and volatility in the markets. Huge demand on the pass car side, most of our global pass car customers are sold out at least for next year and some even for year after next for many of their popular models. At the same time, there is unprecedented cost increases on raw materials, on transportation and freight, on energy and constraints on raw material and labor shortages due to COVID in Western geographies. So you have to take all these cost increases, inefficiencies into effect and look at our margins and profitability against that lens. So if we compare these numbers with previous numbers, of, say, FY '19, 9-month FY '19, our EBITDA was 28.7% and for the 9 months as against 27.7% for 9 months of '22 despite volumes being 20% lower. And after the exceptional item of gain, the PAT for the quarter was $3,374 million for this quarter. We've had a number of order wins recently about -- or just over $100 million, which includes about $50 million for EV platforms across passenger and commercial vehicles. These are small, but I think this is the beginning of much bigger opportunities. Our overseas operations have also registered a fairly decent performance with a revenue of almost INR 23.5 billion and an EBITDA of about 10.6%. The CapEx for aluminum forging facility in North Carolina has been completed and the commercial production will start in the middle of the year. We expect this facility to ramp up over this year and next year start having meaningful revenues. And between the 2 new aluminum facilities in Germany and in the U.S., we expect that this revenue will more than double over the next 2 to 3 years. The balance sheet is in a very strong position as usual with a net debt equity of 0.07, this is post our investment of about INR 300 crores in the first 9 months in EV, in U.S. aluminum projects and in the acquisition of a company from NCLT in Baroda. Stand-alone business is doing fairly well operationally. We do have supply chain issues, which persist in the global automotive industry, which is affecting the ability for many of our customers to produce and ship out vehicles. Although the end demand from the market remains robust, we expect both the domestic and export markets to witness positive sales development in the second quarter of FY '22 across all major sectors, barring the agri equipment sector, Q4 of '22, barring the agri equipment sector. In the international business, also we see strong demand, but there are severe and unprecedented inflationary cost pressures across most variable cost elements, such as raw material, logistics and energy, which will take a toll on the profitability of the company in the initial quarters till we get the recovery of these cost increases for which we are actively engaged with our customers. And I would now like our Head of Sales and Business Development to talk about some of the key markets globally. Over to you.

Thanks, Amit. So in continuation with the comments from Amit, we do see an overall robust market from a demand point of view. And to illustrate that from a commercial vehicle point of view, we see the U.S. market and the European market quite strong. As you know, most of production slots at the OEMs for 2022 have been filled out, at least till late November, mid to late November and possibly into early December as well. In India, also, we are seeing better growth as compared to the previous year. We are still away from the peak, but we are moving up in the right direction. Passenger cars in the world, the market is supposed to do better than what it did last year. Hopefully, there is a view that the semiconductor prices will start easing up in another 6 months or so. So the overall expectation is there should be a stronger market as compared to last year, both in North America, Europe as well as in India. In the construction and mining side, just given the government stimulus in most markets, there is a strong demand seen, and I'm talking about both Europe, U.S. and of course, with the pragmatic budget, we expect the sales in India as well. Oil and gas is doing better than what it was last year. We play in the fracking business of the oil and gas side, and we see a significantly improved activity on the fracking side. I must caution that currently, everybody is focused on using the assets they have but there is demand that's coming in for the sales for that asset. New builds in this area are still weak overall, but that will improve as the year passes is the impression. But overall, we expect the oil and gas market to remain stable, which is also supported by oil prices, which are expected to remain stable in the 80s, mid-80s in particular. In the renewable side of business, which we have also engaged with, overall, we see a stable demand given the focus on environment and allied factors. So we expect to see, I would say, strong growth pretty much in all geographies of the world in the renewable segment, particularly wind.

So I think we've given you a brief overview, and I think we can now take your questions.

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

Firstly, I wanted to check your outlook on both domestic and export business, particularly on the truck side because while demand is strong from a chip shortage perspective, are you seeing that easing significantly in the current quarter or later on. So what is the production outlook if you have any color there? Same thing for India? Then I'll come to the second question.

Okay. So Kapil, my colleague Subodh will answer this question.

So Kapil, current -- for the next quarter and a few months thereafter, we see reasonable level of demand from the customers in line with overall market projections for the year. And this applies to both in India as well. There is definitely some ups and downs relative to supply chain issues for other parts. But nevertheless, given the high demand, OEMs are doing everything possible to maintain the bill rate. That is the impression we have. So we see a stable demand in these months.

Okay. And what about India CV demand? Is it looking up? Any outlook you would like to share about.

At this point compared to what happened in Q3, Q4 is definitely looking better. If you look at the sales of -- the retail sales of all the big 4 truck players in January it seems like they are moving in the right direction for growth in Q4. So we have to -- unless something very crazy happens, we expect this -- we expect them to have growth over Q3 in the month and in Q4.

Okay. And we've seen pretty good traction in the non-auto segment, how much is oil and gas out of this?

So in this quarter, the oil and gas segment business was about INR 175 crores. But I just want to highlight one thing that last quarter and this quarter, we have had the impact of the aluminum cylinder supply, which is now complete.

Right. And sir, lastly, we have talked about this new order wins of $100 million.

Sorry, what is that?

We previously talked about the new order wins we have had in the 9 months of about $100 million, right? So what is -- along with this, what is the outstanding order book that has to go into production as of today? And when do these $100 million hit full production?

So our order book that has to go into production is, I would say, well in excess of -- on a consolidated basis, on an annual consolidated basis, I would say close to $400 million is yet to go into production on an annualized basis.

Oh, that's pretty large number.

Both entities are already in place.

Okay. And when -- by when could we expect to see that full production?

The full amount will ramp up by '24, but it will start from next year.

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

My question is on the order book. I mean this $50 million of EV platforms. So can you throw light on what kind of components are -- is this pure electric components or is also include...

These are more pure electric vehicles, and these are electric powertrain components. And we also have now started receiving orders on power electronics and control electronics for commercial vehicles.

Okay. And this would be true ratio or on our own as well?

No, on our own.

Okay. That's interesting.

I mean obviously, it was an operating company, but also on stuff that we have developed in-house.

Right, right, right. That's good to hear that. Second question is on the aluminum forging business. So this quarter would have been a very dramatic quarter because of the energy cost inflation. Would you throw light on how big was the impact of energy cost inflation in this quarter for BFAT?

Actually, the real increase will happen in the Jan to March quarter because energy prices went up in December, we have seen this quarter. Another thing that I'd like to mention -- so another thing is that, please bear in mind that a lot of geopolitical and other issues are creating energy cost increases in Europe right now.

Right, right. No, that's fair point.

They are completely out of anyone's control, unfortunately.

Sure, sure. And the 30,000 tonnes capacity in Europe for aluminium forging is now fully operational, right, the 10,000...

Fully operational, it's not fully utilized.

What would be utilization in 9 months?

I would say the current rate of utilization would be about 10,000 to 12,000 tonnes [indiscernible] 50%.

Okay. Okay. And so this will also fully ramp up next year?

Next year and year after next.

Okay. Okay. And any word on...

This ramp-up has got slowed down because of the chip shortage and other supply chain issues. Overall vehicle production has come down.

Fair point. And any word on the second phase expansion in the U.S. given that capacity is also fully sold out?

So I will be in the U.S. very soon, and we will buy March and take a call on the second phase.

Okay. Yes. Got it. And lastly, what would be the impact of steel and other commodity pass-through in this quarter, benefits on the revenue side?

Total impact this quarter would be -- one second. You are talking about compared to last year, right?

Compared to last year or the second quarter?

So compared to second quarter, it's about -- between INR 30 crores and INR 35 crores.

Okay. This is helpful.

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

Amit, in this unprecedented inflationary times, both at the commodity and the processing cost, how does your cost escalation term work, and do they break down? Or what's the thought how to recover it?

Yes. Again, I will let Subodh answer this. But we have different, let's say, clauses and agreements with different customers. Some are on a monthly basis, some are on a quarterly basis, but Subodh will explain.

So Pramod, the steel, let's say, for us, the major part of the inflation has been steel. And as we have talked before, all of it has always been recovered through a mechanism. So let me say that, that mechanism continues as far as steel is concerned. There is a little more complication this time because of higher steel inflation. But in principle, we have a mechanism to address that. There is -- because of the unprecedented changes in energy and logistics, we are also working with our customers to set up mechanisms for these factors. We are interesting on a full pass-through of the inflation. And accordingly, those mechanisms are being addressed so that they can be reviewed on a quarterly basis.

Sure. And second is with regard to the sales traction. You guys alluded that your sales is still 20% below the FY '19 levels. If I understand rightly, the large part of the shortfall seems to be on the industrial side, if I'm not wrong.

It's actually on both. It's both on industrial and commercial. Oil and gas activities not at the previous levels. Neither is the construction and mining and stuff, yes. And obviously, the automotive is all down because of the chip related activity. So everything is down.

But in terms of direction, it looks like the...

If we look at [indiscernible] FY '19, it was 475,000. This year, it is going to be 275,000.

Yes. But at least we get some grip in terms of numbers, volume where they are and how that can pan out in the future. But if I had to look at the industrial side, are you getting any bigger confidence now in the sense that at least in 1.5 years, 2 years, even cross that historical peak?

I'll tell you why, I do have the confidence that we will do it because we have now entered a lot of new sectors especially the renewable energy sector in this area that will allow us to grow our business and derisk that business much more.

Okay. This is through the acquisition, which you made?

No, not only to acquisition, also organically.

Then I said the production capacity which you acquired from that entity. So that is giving that comfort or?

Yes, but that actually will be further growth even beyond that. Whatever we are talking about will really take up 20% of their capacity. If you look at their sales, they are running at INR 20-odd crores in the quarter. And they have the same facility as we do. So they are doing 10% of what we do. So obviously, they have huge capacity still available.

Okay. The last question is with regard to your investments into the EV space. You have done into the 2-wheeler space and also into the Tevva. One, you, yourself have gone through the cycle of writing it down and participating at the higher valuation. How are you looking at this space, especially where the valuations are going through the roof, you guys will continue...

We're not participating in the higher valuation. What has happened is Tevva has raised money at a significantly higher valuation. Therefore our investment in that has got revalued to the value at which they have raised fresh capital.

So you are maintaining the stake there or you are diluting?

We have not put in any fresh money, okay? [indiscernible] has come down in percentage terms, but in value terms that have significantly gone up.

And is that because of some discomfort on valuation or incremental capital allocation, you don't...

I don't want to put an unlimited amounts of money in these businesses. The purpose of putting money in these businesses is to learn technology and bring those products into Indian market when they are applicable to our market. And that is what we are doing.

Okay. And the other venture is 2 wheelers, which also seems to be at an inflection point now the way the product has...

We now already launched their first product, and they have received only from Pune where they have lost a very good response. And they will be producing and launching their vehicle, by April they will start supplying their vehicles.

And there, you have a decent chunk of stake, right?

I think we won more than 50%.

So in case for execution, they need a funding, you guys in participating there or how...

Yes, yes. We are fully working with them and making sure that they have everything they need to go to market. In fact, the plant is already almost constructed, and all that equipment is mostly in and going in for trial production.

Okay. And in that sense, any commitment in terms of the next 1 and 2 years, how much investments you may have to put into this. Tevva, you said you will not be going in, but at least for [indiscernible] order...

We are going to not make significant investments in company as such, but we will make significant investments in making components, systems and [indiscernible] systems.

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

Yes, sir. So we talked about that the overseas CV will pick up, but can it go back to, say, 2Q or 1Q levels in Q4? How do you see trajectory over there?

You think can Q4 overseas CV go back to second quarter numbers, higher than this. We expect them to be higher than Q3, for sure.

Okay. But the visibility of going towards 1Q or 2Q still is not there?

One second. I think it will pretty close to Q2 growth. I think it should be pretty close to Q2.

Okay. So we see strong traction out there. Okay. And secondly, like India industrials, if I look at ex of that cylinder, oxygen cylinder, it was around INR 226 crores. So how do you see that ramping up in the subsequent quarters, 4Q and 1Q. And we had talked about some Kalyani [ Forge ] order earlier defense order, which we are supposed to start from -- it will start from fourth quarter. So how do you see the ramp-up in that going ahead?

So the vehicle orders will start getting delivered on from -- in small amount in quarter 3, then it will roll in -- I mean, a small amount in quarter 4 and then in the first half of next year. But we are adding more and more orders. So I think this will be a continuing business.

Okay. So -- but overall industrial India, we'll see, I mean, a strong growth going ahead beyond this INR 226 crores.

Yes, yes, absolutely. I think there's a fair chance to say that we can grow this to INR 300 crore, INR 400 crore business in the next 2 years per quarter, India industrial.

The next question comes from the line of Hitesh Goel with CLSA.

Can you sort of break down the industrial business in terms of -- you've talked about the oil and gas business and exports but how much is coming from the construction equipment, renewable energy so that we get some sense?

Renewable energy right now is very, very small, okay? I would say oil and gas is about 50% and about 10% is aerospace and defense and then 40% is other industries, which is construction, mining, et cetera.

This is in exports, right? And in the domestic?

In domestic, I would say, out of the INR 220-odd crores, more than 1/3 is construction and mining. Agriculture is about 15%. Aerospace is about 10%. And then you have assorted other sectors, which are about [ 30% ].

The next question comes from the line of Jeetu Panjabi with EM Capital Advisors.

So a couple of questions. One, can you take us through your outlook over the next 18 months on key demand segments, for example, U.S. trucking, European trucking, and industrials or whatever. So what -- just give us how you're thinking?

Jeetu, you're a bigger expert on the U.S. EV market than I am. So all I can tell you is that there is extremely strong demand for transportation is being driven by this whole logistical boom in the delivery services. Secondly, the infrastructure spending that is starting to take place in the U.S. or should be starting to take place in the U.S., whether it is replacing bridges, roads, airports, whatever, whatever, whatever. So in that background, I would say that the U.S. is definitely going to see a fairly sustained and strong growth in transportation demand, at least for the next 4 to 5 years.

Okay. And what about how do you look at India? Is India going to...

I think India is going to be on a 10-year growth trajectory because the kind of infrastructure spending that is being talked about and unlocked now is going to create a secular growth trend for at least the next 8 to 10 years.

Okay, the converse question is what -- are you less excited about in the backdrop of what you just spoke?

Look, I think the one thing which worries me is cost and inflation, because in a backdrop where demand isn't or let's say production isn't at the highest level, costs are escalating for all kinds of, let's say, extraneous reasons. Then I'm a little worried about Europe because Europe is very sensitive and dependent on a lot of geopolitical issues, whether they affect raw material supplies, energy supply, supply chain issues, et cetera. And I also expect that a lot of suppliers will go bankrupt in Europe in the next 6 to 12 months. And -- that is not a problem for us. But then what happens is that disrupts the overall and supply chain.

Right, right. And actually, one final one. So how do you think of capital allocation in this context? Are you happy to do...

We're going to only allocate capital on growth and not on any of our existing business and product unless we have long-term take-or-pay or business assurance. So we have created a strategy where we want to be the last man standing in our business for however long, these core products are made. And there, we are working on extreme focus on reduction of cost and efficiency and a better technology in order to get a larger share of that market as it progresses.

Okay. Fantastic, good vision as always.

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

Just wanted to check on the torque side. So what is the capacity? Are they starting with? And any sense on the orders which they've got on their hand?

So I think the first initial capacity that setting up is going to be about 50,000 pieces, 50,000 numbers of 2-wheelers and an equal number of 3-wheeler powertrains. And I think just from Pune, they have received over 1,000 orders, and they stopped after that. They didn't take any more orders.

Okay. Okay. And are you helping them with respect to ramp-up and having by that launch on pan India basis?

So we are not working actively, but we are helping them on the industrialization strategy. Marketing and some -- we are not in the B2C business. So I wouldn't call us experts in that, but we are connecting them with people wherever it is needed and whatever help they need is being provided.

Sure, sure. And secondly, on the Tevva side, so you indicated there was a recent fund raise. So at what valuation in the fund raise happen and what is our effective stake after participating in that?

So they have done 2 rounds of fund raise. The fund raise that we talked about was the previous one, after which we have done reval. Recently, they have done another fund raise that double the value of that. And post both these fund raises, our stake is just under 10%, about 9.8%, 9.9%, something like that.

Okay. Okay. But you would not be aware of the last fund raise valuation?

It's double of what it was in the previous.

And what was the previous one, sorry?

Like -- okay. So recently, the company is valued in excess of $400 million.

[Operator Instructions] The next question comes from the line of Ashutosh Tiwari with Equirus Securities.

So we talked about this power cost impact -- possible impact on margins in overseas business, because this huge increase in power cost in the European countries. Do we see that probably forging income in new vehicles will benefit in terms of increased outsourcing towards India?

In the longer term, yes, not immediately.

Okay, okay. So that -- and will it be a substantial impact for us in the fourth quarter?

There will be a substantial impact, but obviously, over a period of time, that will get reimbursed. We don't produce energies. We have to buy energy from the grid. So there is a price for it. Everybody has to pay it, and that is well understood that there is a pass-through on these variables.

The next question comes from the line of Kapil Singh with Nomura.

Just a follow-up. If you could talk about whether Bharat Forge bid for the PLI scheme under the component champion. And which are the areas that you are targeting over there if so?

Sorry, you're asking me about PLI. So we have applied for the PLI scheme under 2 categories under the component champion and OEM.

Okay. And as an OEM, what are we targeting to make?

So we have interest from several 2-wheeler companies for us to manufacture for them and from certain global start-ups in commercial vehicles, where they want us to manufacture on an EDDM basis, engineering, design, development, and manufacture basis. So we will manufacture the component and make the product and supply it on either rolling case or finished product basis to them for commercial purposes.

And in the component scheme, what products are we looking to make?

So on components, we are going to make pretty much every component that goes into an electric vehicle, the high-value components. I mean, not chassis and stuff, but right from motors, power electronics, control electronics, battery, BMS, all that stuff.

[Operator Instructions] The next question comes from the line of Ronak Sarda with Systematix.

A question on the international CVs, especially on the North America side. So do we have -- what are the production targets for CY '22, you highlighted the CY '21 numbers are much lower than what they were initially are than I expected.

For CV?

For CVs, yes.

What are the production targets for Europe and U.S. for CV for '22 compared to '21?

So in the U.S., they are expecting, let's say, the Class 8 segment that we primarily partaken to be somewhere in the region of 300,000 units. And in Europe, we are expecting a similar number.

Okay. Okay. And could this go up if the supply chain eases and there is more ability on the supply side? I mean I'm assuming these are post taking into account the supply chain constraints.

See, at this point, if you -- most OEMs are not increasing their production slots as such in a month. I mean they are maintaining a certain equal where the indication of demand is there. But the broader interaction is this may not go up from a production standpoint. We will continue to accumulate backlog.

Got it. So it was expecting to see by '23 then to have a smoother production, sure. Second question, Amit, for you. I mean, on the torque production side, how much of the components are we supplying in terms of maybe the number of components, name of components or the value go to be powertrain?

We are going to supply the housing for the battery, for the motor. And also, we are going to manufacture certain -- the motor and the power electronics and control electronics for them.

Sure. Sure. So -- okay. And on the motor side, have you developed the motor with someone with some collaboration or...

It is both proprietary motor.

Right. And what would be the power range for this motor?

The motor power range is peak power from 6 to 9 kilowatts currently. And the second model will be from 9 to 20 kilowatts or from 10 to 20 kilowatts.

Right. And we can manufacture both of them?

Yes, yes. We are setting up a line which can do flexible manufacturing.

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

So as you mentioned, in Europe, there is a cost pressure. Would like to know, on control basis how we see the profitability means like do other reasons also, we see the margin pressure and relatively our control-label margins will be under pressure. And for how many quarters we see this scenario?

Look, I don't have a magic ball -- crystal ball. So I can't tell you how many quarters, but we are right now in the deep of winter, it's one of the most severe winters in the last 10 to 15 years, both in Europe and the U.S. So even in China and places in Saudi Arabia and some place it has snowed. So places which normally don't get the severe winters have had a very severe winter. So oil and gas usage for heating has gone up. And at the same time, we have geopolitical issues, which are causing cost pressures. So honestly, I can't give you a forward-looking view like that. All I will say is that it takes when there is such a tremendous increase that happened so suddenly, it takes 3 to 6 months to resolve this to a dialogue with your customers.

Sure, sure. And on current basis, how much relatively EBITDA contribution is from these regions right now for us?

Our EBITDA from -- for the 9 months on Europe was about -- not from our overseas subsidiaries -- what is your question, just repeat your last question again?

The reasons where we are seeing the cost pressure, how much EBITDA contribution over last 9 months was there?

It will be roughly about INR 230 crores, INR 235 crores on those operations outside India.

As there are no further questions from the participants, I now hand the conference over to Mr. Amit Kalyani for closing remarks.

So ladies and gentlemen, thank you for your time and interest in upping all these questions and getting to know more about what's happening in our company. It's been a challenging quarter, but I think we are heading for exciting times. We have a lot of irons in the fire, and we expect that as these come to maturity, we will start seeing tremendous growth in top line, bottom line, and the kind of business that this company will do in going ahead in the future. The new Bharat Forge is going to be quite different from the old one and we look forward to you being a part of this journey as we go ahead. Thank you very much. And if anybody has any direct questions, please contact our team. Best wishes to you all and for a safe and healthy time and have a nice weekend. Thank you. Bye.

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