Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge Q3 FY '23 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.

Yes. Good afternoon, ladies and gentlemen. This is Amit Kalyani, and welcome to the Bharat Forge Q3 analyst con call. Thank you for joining us. I have with me our teams from management, both from automotive and industrial and our investor relations and finance teams. As usual, I'll take you through a quick rundown of what happened during the quarter and then open up for Q&A. So we had -- in terms of BFL India, we had a fairly strong performance. We had a high revenue of INR 1,952 crores. Exports of INR 1,166 crores, which was our highest ever. EBITDA margin was fairly good at 25.2%, PBT was impacted in this quarter because of finance cost and exchange impact on MTM of about INR 35 crores, which is a onetime and notional. I would expect a normalized interest cost in the range of INR 50 crores to INR 55 crores per quarter. Passenger vehicle revenue has continued to grow and is now at about 20% of total revenue, which used to be in mid- to low single digits 3, 4 years ago. Our export industrial revenues grew by 14% sequentially, driven by both Oil & Gas and aerospace. We've had new order wins in Q4 of about INR 265 crores and for the 9 months of about almost close to INR 1,500 crores. Coming to our defense business. We've had a good run this year. We've had a total order booking of about INR 2,000 crores, including INR 600 crores just in Q3. These are all export orders, and this will all be completed in the next 2.5 or so years. These are both for artillery guns, mounted guns, and spares and consumables. And some part of this will be repeat business. And obviously, the capital items will have an O&M component to it as well. Coming to our overseas subsidiaries. We've had a miserable performance with an EBITDA level loss of INR 62 crores, primarily driven by 3 factors. One is low-capacity utilization due to ramp-up of the new facilities in Germany and North America. Overall, we have about a 7.5-million-piece capacity per year, and our products -- our current rate of production is at about 50%. The old plant is running at about 70% and the new plants are running somewhere between 25% and 30%. So overall, we have about a 50% capacity utilization. We have -- I do want to reiterate that while we are in the ramp-up phase, and we do have to have -- we have a path to profitability in work going on. The capacity is fully booked with orders. We are continuing ramp up, and we are working on getting all our cost compensation and price increases from our customers. And I expect that we will see a better performance in Jan to March. And we are very confident that in FY '24, all this will be significantly value accretive. In terms of the JSA business, I'm happy to report that we have had a top line growth of 20% and EBITDA growth of 52% in Q3. We have secured new business of about INR 153 crores this quarter. And our total order wins post acquisition stands at about INR 250 crores. We have signed a binding term sheet with Indo Shell Mold to acquire its SEZ unit in Sipcot. We expect this transaction to complete by March 2023. This plant is located about 3 kilometers away from JSA Sipcot plant and will therefore, have a lot of efficiency benefits of management and overhead and give us significant increased capacity. Our total melting liquid metal capacity will go up to about 120,000 tonnes, and casting capacity will be about close to 75 to 8 -- 75,000 tonnes or so. I expect that the JSA business will grow at a very healthy double-digit CAGR over the next 3 years. When we bought this company, it had a revenue of about INR 420 crores to INR 430 crores. And next year, we should be at somewhere in the region of 30% to 35% higher than that. And year after that, should be also possibly a similar amount, if not more, because we may also have the Indo Shell acquisition in place. We're very bullish about this sector. And overall, I think next year is going to be really turning point in Bharat Forge's history because a lot of the businesses and ventures that we have incubated over a long time and some of the new acquisitions and new ventures will all turn from either dormant to positive or negative to positive or mildly positive to highly positive. So we expect this growth to continue. We have a lot of new order wins on our traditional business, especially in the pass car sector, in the industrial sector, in the casting business, in defense, and we will turn around our aluminum forging business and our overseas operations. So overall, I expect that next year will be a good year and quarter 4 will be a step towards that direction. I think that's really all I wanted to say, and I will now be happy to take your questions.

[Operator Instructions] First question is from the line of Pramod Kumar from UBS.

Amit, my first question is on the U.S. and the European aluminum business. If you can just help us understand you did mention the opening comment that you expect them to be effective next year onwards. If you can just help us understand what is the big drag. What are you facing on the ramp-up? And how -- where are we in terms of the utilization rates for this capacity? And directionally, how do you see the margins in context to your existing businesses once they have the full performance cost measures are kind of behind us?

Yes. So right now, these -- both these plants are operating at, I would say, about 25% capacity utilization because we have a lot of product development going on, a lot of product ramp-ups going on and also training and development of manpower, especially in the U.S. How do we see this ramping up? We have a defined production that we have to produce in the year, and we are working towards that. At the same time, we also have to get compensation for all the cost increases that have happened inflatory wise in Europe and the U.S., which includes energy, which includes manpower, which includes freight, which includes overhead and so on and so forth. So it's a combination of growing your top line, increasing your margin through cost compensation and reducing cost through efficiency.

And margin related to the rest of the business, do you expect the gap to...

I would expect our margins when we are running at, let's say, 75%, 80% capacity to be in the high teens.

With high teens Okay.

Probably 16%, 17%, 18% in that ballpark.

And of course, there will be upside if you can ramp it up higher beyond like 85%, 90% as well for the operating...

Yes. of course.

Yes. So great. And the second question is on the CV industry, Amit.

You said, CV or PV?

CV, sorry, India Commercial Vehicle, to be precise. You did talk about 4Q momentum being strong. Just want to understand is RD not causing any production disruption when you look at the production schedules what you have from the OEMs? And do you expect this is a normal...

What is causing production disruption?

RD, the real driving emission regime, the transition to the real driving emission regime.

No, not that we see because I had a -- we had a review just last week and our projections for Q4, MHCV is close to 100,000, this is what our customers have told us.

And extending it to the international side, because of the increasing concerns on U.S. interest rates and the economy, are you -- is the commentary from the map of the OEM stages? Because as we understand, they're booked out for '23, most of the capacity that are sold out, but are you on the margins being somewhat of a cancellation and somewhat of a reduction optimism on '23 from the U.S. OEMs of the product price.

No, nothing in that -- of that kind at all, actually, I will let Subodh comment about this.

No. Amit, I agree. We're not seeing any...

So we are not seeing any slowdown or any downturn in the U.S. demand as of now. In fact, it remains strong, and we expect that this year -- next year will be as strong as this year.

Great. And final question on defense, Amit, as you understand, ATAGS, your gun is like the last one in the play, but we -- and they did get used in the independence debt celebration last year, but it's been quite some time, but we still haven't seen the order coming in, we have started exports already for a separate gun. So by when do you expect some development on that count stuff because you have -- I think you're ramping up capacity, you're getting the entire infrastructure, but we haven't seen the orders coming through.

Well, I think we were at the -- we are on the edge, I think very soon, you should hear something, hopefully, in the next couple of months. Yes. The PM has also talked about this. So hopefully, all of it should fructify something.

Next question is from Jinesh Gandhi from Motilal Oswal Financial Sources.

Amit, so continuing on defense question, so the INR 600 crore order is largely for spares and ammunition, or we have also won any gun or the vehicle order.

So it's 50-50, 50% is for capital items and 50% is for spares and consumables.

Okay. And you indicated this is largely for exports?

All of it is for exports.

Okay. So the export side is ramping up pretty well in defense, so that's good to see. Got it. And second question...

The order book right now is for defense -- for exports.

Exports, okay. Got it. Got it. And coming to JS Auto costs, so we have seen a good amount of pressure on margins vis-a-vis what they used to make earlier from 16% to close to about 11%, is this largely because of metal prices or there is something else to that?

So there are 2 factors. One is inflation and the second is that they had 1 customer who had a very high margin business which has now come down to almost 0 because that customer had its end demand coming from Russia. So because of that, there is a postponement in that business.

Right. So sustainable margin for JS Auto would be what, about 13%, 14%?

No. I think our goal is to take it to about 15%, 16% in the medium term. I would say, in a year or two.

Got it. Got it. And lastly, with respect to the impact of commodity prices. So have you started to see benefit of lower steel prices and aluminum prices?

Not yet. It's flat right now.

Okay. So that will be additional driver of margins from here on?

Yes. When they start coming down, yes.

Right. And lastly, can you indicate USD INR for the quarter? USD realization.

$81.5.

Next question is from the line of Mumuksh Mandlesha from Emkay Global. Mumuksh, your line is...

Can't hear you. Sorry.

Please speak up a bit.

Can you hear me, sir?

Yes, this is better.

So what was the revenue for this M4 this quarter? And how much is spent -- more pending in coming quarters? And any update on the reversal of penalty that occurred in Q2, sir?

No. So that matter is still being, let's say, discussed and debated with the ministry. I don't have a figure for you right now. I would say, roughly INR 80 crores for the KM4 for this quarter.

Right. Sir, can you share some light on the Bharat Forge attendance at the AeroExpo, what kind of traction and what are new products company is listing.

So look, we currently have strong business in 3 areas of aerospace. By the way, we are at the Aeroshow if any of you are visiting, kindly visit us shally #35, and I will be there tomorrow as well. In fact, right after this, I will head to Bangalore. So currently, our exposure to aerospace is in 3 areas. We make aerostructure components, which are forgings, complex forgings. We make landing gears, and we make engine components. And I'm very happy to tell you that we are the only company in India, which is certified for article forging by Nadcap, So we're the only company which is certified for all materials, including materials that we make in India in Saarloha and using them and from converting them to forgings. So nickel alloys, maraging alloys and titanium, these are the 3 materials that we forge, of course, aluminum also. There are certain aluminum parts also we forge for aerospace. We are seeing very strong growth in our aerospace business. And currently, what is happening is that we are seeing a lot of U.S. involvement in Atmanirbhar Bharat by setting up manufacturing facilities to manufacture certain large systems in India. And that is where we are becoming part of their supply chain. And by getting into the supply chain and value chain of these companies in India, we also will get into eventually their supply chain outside India because there has now been an agreement between India and the U.S., where in areas of high technology, cyber and those kind of areas of working too closely together and creating mutual supply chain. This is what happened in the beginning of the month in Washington, D.C. So we expect to see some positive fallout from this going forward. In fact, there is a very strong presence of U.S. companies on the buying side at the Aeroshow.

Right. Sir, can you possibly indicate what kind of revenues for FY '24 we see for different segment, sir?

Yes. I don't want to give you a forward-looking statement, but it's going to be substantially higher than what it is this year. It will be, I would say, order of magnitude higher than this year.

Next question is from the line of Pramod Amthe from Incred Capital.

Amit, this is with regard to the international operations. I understand your aluminum forging is taking time. But even if I have to look at your steel forging on a September quarter to December, there seems to be a slippage into losses again. Is it more seasonal or you feel these...

No, there is no loss on the steel business. It's all from the aluminum business. And the steel business is operating positively but at a slightly lower EBITDA than what we'd like. See all of the businesses have had to deal with a very strong, let's say, inflatory atmosphere. And Germany has been especially badly hit because not only has it been an inflatory atmosphere, it also had very big problems in terms of manpower availability during COVID. So a combination of all this has led to a decline in profits, but it is still EPS accretive and positive.

And coming to the aluminum business, have you already seen the turnaround in the international operations or you are hopeful of turning around in the March quarter.

No, we are seeing improvement in Q4 over Q3. And in Q1, we will be even better off than Q4. And as I mentioned, we will get to the numbers that we have indicated by the middle of the year, but we will be EPS accretive for the full year FY '24.

And just to understand better, are these programs going slower and hence, it's taking time to ramp up? Or it is more about...

It's a combination of multiple things. Europe has lost over 1.2 million car production because of supply chain issues last year. Between the Europe and U.S., we have -- they have lost 3 million car production because of the supply chain issue. So it is a combination of external and internal factors.

Sure. And last one is...

And please remember that the price escalation and price compensation is something that we need to get in order to be able to operate at the level of profitability that we had planned.

Sure. With regard to EV parts, you are planning to open up some plants in India. Any update in the sense you started them or are they on cores?

So plants will start from next month. One plant will open next month, one in March and one in May.

Next question is from the line of Gunjan Prithyani from Bank of America.

Just 2 follow-ups, sir. Going back to the U.S. truck cycle, I mean, there is a 6-, 7-month sort of backlog at the OEMs, but the order intakes have flowing for the last couple of months. So any color on how we should be thinking about the outlook for the industry beyond 6, 7 months of backlog?

At this point, most of the production slots for 2023 are covered at least in November, it is not 6, 7 months. And then basically, the last 2 months or so have been around 18,000, which is slightly lower than the average, but the expectation right now is 2023 and 2024 will be reasonably okay.

Okay. Got it. And the second follow-up I had was, I mean, I understand the defense ramp-up you mentioned next year, but is it possible to get the revenues for both defense and aerospace for this year, maybe 9 months or this quarter?

I think we'll share that at the end of the year.

Okay. Okay. Got it. And this -- just the last thing on the order backlog. Now INR 2,000 crores, which you mentioned. I mean, how should we be thinking about the translation of this into revenues? I mean, in terms of timelines, does large part of this start contributing from F '24 onwards, and the incremental win that we are talking about from Indian Army, that also starts kicking in, in F '24. So it will be INR 2,000-plus-plus crores is it?

Yes, it will be INR 2,000-plus-plus crores because this does not include any of the Indian orders. You should start expecting to see revenues from this start growing from the second quarter of '24, which is the June quarter. June -- I mean, June -- July, August, September, okay?

Okay.

And the entire INR 2,000 crores will be done in 30 months, largely in 2 years with some spillover into half year more.

Okay. And that should be same for the domestic orders also, right? Once they come through like the execution timeline is pretty much...