Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge Limited Q4 and FY '23 Results Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Kalyani, Deputy Managing Director, Bharat Forge Limited. Thank you, and over to you, Mr. Kalyani.

Good afternoon, ladies and gentlemen. Michelle, thank you very much for the introduction. Good afternoon, ladies and gentlemen, and thank you very much for attending our Q4 and FY '23 analyst and investor call. This is Amit Kalyani, and I have with me members of our finance and strategy, business and operations team. So I'll quickly take you through highlights across the board and then open up for Q&A. So if you look at our stand-alone business, we've had a record sales of almost INR 1,997 crores in Q4 '23 and INR 7,573 crores for FY '23. This has been a growth of roughly about 21% on sales. And this includes the pass-through of raw material and other price increases that we have received. In terms of tonnage, it was about 11% increase. Our exports were at $550-plus million. EBITDA margin -- that was for the year. EBITDA margin was 26.2%, which is a 100 basis points sequential improvement due to product mix. PBT is, of course, impacted by the finance cost and exchange loss. We see a normalized interest outgo of about INR 60 crores to INR 65 crores per quarter based on the current interest rates. Passenger vehicle revenues have grown about 53% to INR 1,307 crores for FY '23 on the back of a 71% growth in exports. Aerospace has now accounted for 11% of industrial exports and more than doubled from last year. And we expect that this will again grow at a healthy double-digit, 30%, 40% plus number this year as well, possibly even more. In terms of new order wins in the stand-alone business, we have new order wins of about INR 1,500 crores across the component business and industrial verticals. And we have successfully seen certain businesses now transition from incubation to harvest space such as defense, which I will talk about much more. And aerospace also is now on a significant growth path, and we are confident that the goal we had set of getting to INR 500 crores, INR 600 crores on an annualized basis is now within reach in a few years with very profitable business. In terms of ESG, we've made progress across the board on ESG. ESG metrics have substantially improved. Our ratings have improved. We are now a part of the First Movers Coalition, the SDG Global Compact, and we have also been recognized by our European customers for ESG leadership. In terms of our overseas subsidiaries, we had an EBITDA loss of INR 49 crores in the Q4 versus INR 63 crores of last quarter. Utilization levels are beginning to increase as production stabilizes. Our aluminum forging facilities, in fact, are booked -- are overbooked, and we can move towards profitability with price increase and with the ramp-up of our business. Based on the performance in the last 4, 5 weeks, we expect Q1 to be significantly better than Q4. In fact, I would say that European business should be in the black in Q4 -- sorry, Q1, and the U.S. business probably from Q3. But we will see sequential improvement in all the businesses, including the aluminum business every quarter. Coming to JSA, we achieved a revenue of INR 438 crores in the first year. We have won orders in excess of INR 400 crores, and we expect this business to ramp up very substantially over the next 2 years. We have got, across the board, interest from -- and orders from our existing customers of Bharat Forge and some new customers also because of our relationship and our backing of this business. And our acquisition of the new units in Coimbatore called ISML will close in the next 2 weeks. With this, plus the CapEx that we are doing in Coimbatore in JSA and in ISML, we will double our -- more than double our capacity from about 40,000-odd tonnes to more than 120,000 tonnes in the next 2 years. And our revenues will also more than double from what it was in the first year in the next 2 years also. This will be a very profitable business for us and a very good acquisition and pave the way for us to create a new solid vertical, which will allow us to grow and service our customers, both existing and get into new products and segments as well. Also in this business, we're focusing on green business model. So we are going to create a green foundry, by which we have the least carbon footprint, the lease emissions, most recycling and be a supplier of choice to all our customers. Coming to the defense business. I think this is the biggest inflection point for our company, a business that has been nurtured by our management and developed over the last 12 years. All the IP for this is homegrown and developed in-house, has now converted itself from an incubation to a delivery business. We have an order book of export orders of over INR 2,000 crores, and we have already received the AON for 300 guns of the ATAGS. So that means that in this year, the order for the ATAGS will also be placed. Besides this, we have significant orders on protective vehicles, [indiscernible] systems and components and consumables across the board, both in India and outside, and this business will also now, hopefully, cross $100 million in this year and move to significantly higher annual numbers going forward with a very solid profitability and return ratios. So a business that we all were looking forward to. I think the light is -- we reached the end of the tunnel, and there seems to be a lot of light and a lot of opportunity. In e-mobility, highlights are that on the Tork side, we've sold over 1,000 bikes, more than 2.5 million kilometers, and we have 0 recall, 0 safety incidents and no issues with any of the regulatory side or the incentive side. We are receiving incentives because every part of our vehicle is made in India, except for the batteries, which are imported and, meets all the local sourcing norms and requirements as per the government of India. We continue to look at expanding our business ramp-up. Our new plant was -- just announced start of production 6 weeks ago, and we will steadily ramp up production and cross -- get to the capacity utilization of about 1,500 to 1,800 bikes soon and then get to 2,000 and then beyond that. Our focus continues to be to build competency, deploy the product in the market, learn from it and build a scalable supply model for components, systems and aggregates in areas where we are not even present today. So this is a completely new area, the 2-wheeler and 3-wheeler area, where we want to supply components, subsystems and powertrains and be a solution provider. In terms of outlook, I think '24 is going to be a seminal year for the company as we pivot from just components to products or from tonnage to technology. As this transformation and momentum gains over the next 2, 3 years, the positive impact on providing both growth and stability to the top line will be evident. There will be many more legs for our business to stand on and more growth drivers for its overall opportunity and growth. As we look ahead to '24, we expect strong growth across revenues, profitabilities and return ratios driven by core forging business both in India and abroad and amply supported by other platform businesses such as defense, industrial and e-mobility. We believe that many of the troubles ailing the overseas aluminum business is behind us, and we expect them to contribute to improvement in ratios for the consolidated entity. For the stand-alone business, the FY '24 looks to be another good year driven by growth in the end markets globally, ramp-up of new orders won over the last 2, 3 years and increase in market share across the board. Thank you very much. I think we can take your Q&A now.

[Operator Instructions] We have the first question from the line of Amyn Pirani from JPMorgan.

Thank you for the opening remarks on the newer areas and new revenue streams. I just had a question on the legacy business, especially on the stand-alone. The domestic truck business quarter-on-quarter growth seems to be a bit behind what we saw in terms of the sales. And it looks like there has been a lot of prebuy. So what is the outlook for that in the next few quarters? Are we at the end of the cycle? Or do you think there is more left in this up cycle?

I think Subodh will answer that.

So we -- can you hear me?

Yes, yes.

Okay. So you're right. We saw some prebuy in the last quarter, and we were able to cross the 400,000 as far as [ TIV ] is concerned. But at this point, at least as we see in Q1 and the projections for the next one or two quarters, we see a reasonably strong demand continuing. And based on what we see and what we hear and what we experience, there could be a couple of factors. One is, there are no inventories in the system. I think the retail sales have also been strong because of the prebuy. So there is an expectation that there will be some rebuild of inventories in the system. The demand seems to be reasonable as well given all the infra push and all of that. For the next 3, 4 months, there is a strong projection from everybody. In fact, we are seeing demand higher than Q4 as well at this point. Of course, we are monitoring this carefully. But for now, this is what we see. So we are not seeing any letdown from a demand point of view as we speak right now.

That's good to know, sir. And similarly, if you can give a comment on the trends in the global truck business. So you've hit a INR 500 crore-plus revenue in this quarter. How are the production trends going forward and your business in the next few quarters?

As far as global business is concerned, if I look at the U.S. in particular, then the demand is still holding on. The production levels have not changed. They've been pretty constant over the last 18 to 20 months, and that continues right now. I think in previous calls, we have also explained that the backlogs are still reasonably healthy. And as a result, truck builds continue. There are some challenges that the market is facing relative to supply chain. It's not just semiconductors, it's a couple of other things as well. So there is a certain up and down from that point of view. But somehow, we are seeing production steady and, as a result, we are also seeing our demand steady. We are also seeing some growth, in fact, like in India as well because we are seeing improvement in market share across the board. And that is also a factor as far as Bharat Forge is concerned. We see a similar condition in Europe, where the demand is holding reasonably strong. Of course, in Europe, also there are some supply chain factors that are affecting build. But by and large, the OEMs are still managing to build one way or the other. The expectation is the rest of this year also will be reasonably strong, like in the U.S., and there is a strong optimism for next year as well to remain at similar levels, although now we have to monitor this literally month by month. As far as -- we also play in South America. We are seeing some small declines in South America, but then in our case, we are going from a relatively small base to a higher base. So for us, we see this as an increment in our business really. So overall, this is the view that we see of the world. This is as far as the commercial vehicle is concerned.

Yes. So it seems that we are still in a supply-tight situation and demand really is not so much of a concern at this moment.

Yes, I would say, demand is stable, and we are -- we are catering to a stable demand, but we are also seeing growth because of market share factors.

The next question is from the line of Gunjan Prithyani from Bank of America.

My first question is on this overseas subs losses. Now if I recall, last quarter, you had laid out that the utilization in the new plants in U.S. is about 20%, 25%. Can you give us a little bit more color on where we are in terms of utilization rate? And what's really ailing the business? Is it the operating leverage being low? Or is it just the costs have elevated so much that it needs renegotiations with the customer base? A little bit of color as to how we should see that...

It's very simple. There are 2 issues. One is we have to ramp up production, and we have to increase prices. The prices have, on average, gone up by anywhere between 25% to 30%, in some cases, even 40%. So we need to get that price pass-through. And the second is we need to grow our top line. Those are the 2 issues.

And where are we on the utilization versus where we can get...

We are at close to 50% now.

So that's not really a bad level. So...

No, the issue is the price. Please understand, when your production increases and your cost is not recovered, you have a bigger problem. But we have now got cost recovery from several customers. Few are pending, and that will all get closed out by about another 1.5 months or so.

Okay. So by the second half of this fiscal, we should see this business...

Europe, we should see black numbers in this next quarter. U.S., I'm very hopeful, the quarter after that.

And how about the medium-term target that is the low-teen EBITDA margin? I mean is there a road map...

That still remains. That still remains. Mid-teen EBITDA margin still remains.

So that's something that we should be looking at for next year once the full market...

Next year, yes. Maybe towards the second half of next year, yes.

Okay. Got it. My second question is on defense. Now clearly, this is one business which is surprising positively in terms of the way the order book is building out. Now can you just share as to how we think about the revenue scale-up, where we are right now in F '23? And do you see this going to INR 1,000 crores, INR 2,000 crores? Some guidance around the revenue...

I think we should be above $100 million this year. That is our goal. And obviously, next year, we want to grow that quite substantially because this year, till December, we will have production happening in our existing facilities. And our new mega plant will be ready by January, February of next year -- I mean, January, February of '24. So by March, April of '24, that facility will be ready for production. And that will be a quantum jump in our capacity. We will have almost 3x as much capacity as we have today.

And in terms of profitability, it's fair to assume that it won't be dilutive at the consol level when the revenue starts scaling up?

No, no, I think it will be positively surprising for everyone. See, the difference is these are our products. These are not something that we are contract manufacturing or someone else's IP that we're doing. So we control the IP. We control the entire value chain. So I think we will have a good control over the numbers as well.

Okay. Got it . Just last one from me. This whole inorganic and acquisition is something which is totally -- we've made small acquisitions, but it seems like there's also a talk of making large acquisitions on the defense side. Any thought process around how will we approach inorganic opportunities, which streams it would be -- it will help us think through because, I mean, that's something that clearly came as a surprise to us.

I don't know what you're talking about, but we are not looking at any large opportunities. We will only look at opportunities which are platform opportunities like JSA, which provided us a complementary business area where we could, A, enter some new segments and also provide products and services to our existing customers. So one of the things that we will do is look at bolt-ons to JSA like we have with ISML and many others so that we are able to grow our capacities there, leverage the strong management and technology that we have in increasing our revenue and profitability fast. There is no plan at all of buying anything else complicated or anything else for sure. I'm definitely not going to buy anything outside of India. I think India is the best place for manufacturing, and the whole world is coming to India. So this is where we will look at acquisitions and growth going forward.

The next question is from the line of Kapil Singh from Nomura Group.

Just a follow-up on defense. This $100 million that we are talking about, this includes artillery guns as well, right?

So this is -- our total revenue, in rupee terms, will be over 100 million. This will include everything that we do in defense, including artillery guns, yes.

Okay. And can you also let us know how the defense orders -- the guns orders will roll in going ahead? Is there -- every year, there is AON issues or how does it work?

So right now, Kapil, there is an AON for 307 ATAGS guns that is out. The RFQ will come out very soon, and then the whole order process will go through. But the guns are approved. They finished all their trials, and they are ready for induction based on the process being completed.

And sir, this 307 guns will be over what period?

That is over a 4-year period from the first year of supply.

Okay. And then rolling basis, then every 3 or 4 years, update would come on this, right?

See, the total requirement is huge, okay? This is only an initial order.

Understood. Second, can you share an update on the industrial business, both in India and overseas? Also the oil and gas business, what is the outlook there?

Oil and gas business outlook is steady. It is better than last year. Industrial business is growing, thanks to a lot of boost of the renewable energy sector and the Make in India and China plus one. A lot of those companies are moving into India. Plus the fact that India is the only country where infrastructure development is taking place at such a pace, I think India is the place to be for industrial sector, and this is where a lot of growth is going to happen. We expect to continue a double-digit growth in the industrial sector as overall, including both forging and casting.

The next question is from the line of Mumuksh Mandlesha from Anand Rathi.

Sir, can you just share some outlook for the construction equipment for the overseas market, sir?

I don't have the construction equipment outlook. I know that we are a supplier to that sector across various different components and fields, and our business is growing quite dramatically. I don't have details of which company is growing in which geography. Maybe Subodh has that. Maybe he can add something to that.

Yes, Amit, you are right. There is no such specific benchmark, but we deal with pretty much everybody in that segment, in the construction and mining segments globally. And currently, we are seeing very strong demand, which again is a factor of the strength of the market to a certain extent and also for us, growth in, let's say, either a market share or acquisition of new business. So it's a combination factor, but that segment for us is growing quite well.

And one more thing that will start happening in the near future is you will start seeing capacities being created in India to service India and to export from India.

Right, sir. And sir, this quarter, PV revenue was lower sequentially in both domestic and exports market. Any reason for that, sir?

Sorry, sorry, can you say that again?