Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Bharat Forge Q3 FY '24 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 attending our Q3 analyst call. I'm going to hand over to our CFO, Kedar Dixit and I'll be here to answer your question and -- answer your questions.

Yes. Good afternoon, everyone. I'll just take you through the highlights for the quarter on the stand-alone as well as on the consolidated performance. So we had another quarter of strong performance registered in quarter 3, stand-alone revenues grew by 16% to INR 2,263 crores, and EBITDA grew by almost 31% to INR 645 crores. EBITDA margins are at 28.5%, which is an expansion of almost 330 basis points on a Y-o-Y basis, driven primarily on account of favorable product mix, cost of -- and cost optimization. PBT and PAT grew by 31% to INR 504 crores and INR 378 crores, respectively. The balance sheet continues to remain strong with surplus cash net of long-term loans now stands at almost INR 1,000 crores. At a consolidated level, also the revenue grew by almost 15% to INR 3,867 crores and EBITDA grew by 56% to INR 673 crores. For the 9 months ended on 31st December 2023, sales have grown by 19% to INR 6,640 crores, EBITDA grew by 29% to INR 1,815 crores and PBT grew by 30% to INR 1,385 crores, which is more or less equal to what we have achieved in the entire year of FY '23. During the quarter, the company has secured new business worth INR 550 crores on an annualized basis across various segments, including Automotive, Industrial, Defense, Aerospace and Casting, and out of which 90% are export driven. In terms of -- so the total exports out of Indian manufacturing operations now stands at $200 million for the quarter, which is 36% up from -- on a Y-o-Y basis. In terms of overseas subsidiaries, European operations have posted EBITDA of INR 22 crores, while the U.S. operations have achieved breakeven at EBITDA level in the last quarter. The Phase 2 CapEx of about $100 million in the U.S. is on track. The current capacity utilization on aluminum business is about 50% for U.S. and about 70% in Europe. As far as the aluminum operations are concerned, in Europe, the operations have been stabilized. And now we are working on getting price increases from the customers, which is underway. U.S. operations are yet to be fully stabilized, while there is a continuous improvement in operations quarter-over-quarter. Now I will hand over to Mr. Amit Kalyani for the comments on the outlook.

So I would say that the near-term outlook remains positive. It's -- there is a mixed bag. We have a stronger outlook in the passenger car sector and in our Industrial and Defense sector. On the truck side in Europe, we expect to see a small -- slowed tapering. And in the U.S., it should be flat. Medium term, I think we will continue to accelerate our growth going forward. We have many new growth drivers for our business, especially our Industrial business, our Casting business, also moving from components into systems and subsystems and new export opportunities that we are getting across our verticals such as Aerospace, et cetera, will provide adequate growth momentum for our company to sustain strong double-digit growth going forward. There will be years when the growth is slightly less, there years when growth will be slightly more. But I expect that on an overall basis, profitable growth and profitability will be maintained, and we should continue growing in a healthy manner going forward as well. We also should see in the next 18 months or so, our e-mobility and aluminum casting business should start growing and generate solid contributions to our bottom line and our top line. Additionally, once our European and U.S. operations -- especially our European operations, which is now on operational basis performing well, get their price increases under control, we will have a very good performance and a very good contribution to bottom line coming from there. Similarly, as we get fully stabilized and ramp up our U.S. operations, that too should provide a favorable contribution to our top and bottom line. So I think that's really all I have to say. I'm happy to take your questions now.

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

Congratulations on the strong performance. Sir, there were a couple of segments during this quarter which had a soft performance. One was...

We can't hear you, I am sorry. I think you are far away from the phone.

I'm sorry. Is it better?

Yes, yes, much better.

Okay. So I was saying that there are a couple of segments here, which had a decline. One was the non-auto exports. And the second was domestic PV business. So could you just share what was the reason for that? And what is the outlook for these segments and also domestic CV business.

Okay. So the nonautomotive export, which was down was Oil and Gas. On the PV side, we had a couple of programs that got over and we will have strong growth on the PV side overall because we have a lot of new programs that are starting and ramping up over the next 2 to 3 quarters. On the domestic PV, there has been a quarter-on-quarter slowdown or flattish nature of business. It's actually flat. Next quarter, which is typically the strongest quarter of the year, should see a better performance. And I think Indian CV on a secular basis should be positive because there is a good demand coming from the overall infrastructure build and the CapEx will taking place in India.

Okay. And sir, what is the traction you're seeing on the Defense business? We have -- are there more programs, both in the domestic and export where we can win models? How is the progress there? If you could just talk about that?

We have a lot of new programs that we're working on, on Defense. As you know, there are programs which are both on the artillery side, programs on the vehicle side and programs both in Naval, Air Force as well as the components and MRO, which we're working on, all of which are starting to yield results. We have a good, healthy export order book, and we will continue to build this and continue to execute against orders that we already have. We are participating in new development programs, which have very, very large business potential both within India and globally. And as these reach some amount of finality, we will talk about them more publicly.

Sir, any update on the ATAGS gun order? Are you expecting it in the current financial...

No, it's expected to be coming out anytime soon. So let's see.

Okay. And sir, just one question on the margins, please. We had a very good improvement in gross margins. So if you could just talk about what exactly in the mix was there that drove it? Or were there any other factors?

So if you see our product mix, we now have a higher share of contribution coming from both subsystems and systems, both in Industrial and in Defense. And this is really what's helping our margins. Additionally, cost control and efficiency improvement is also working well.

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

My first question is on the -- a follow-up on the Defense business itself. Can you talk about the order book? Because I think last quarter, you all had mentioned somewhere around INR 3,000 crores. And what I picked up in the media was INR 2,000 crores. So just trying to understand what is the difference between the 2 numbers? And also broadly, if you can talk given the visibility that you're seeing from the new programs you're engaging in, how should that -- how should we think about this business scaling up in terms of revenues over the next 2, 3 years?

So we expect our Defense business to grow to a very meaningful size of our overall business in the next 2 to 3 years. In fact, already, we expect this business to be over INR 1,000 crores this year. When we had talked about the INR 3,000 crores order book, we are already executing INR 1,000 crores out of that. So what is remaining will be about INR 2,000 crores. So the number of INR 3,000 crores was correct. We are in the bid for some very large new business and as this comes through, that will add significantly to our overall order book as well as our revenue per year annually. I think to look at us getting to a INR 2,000 crores, INR 2,500 crores annual business in Defense as the first milestone and then growth from there is a realistic target in the next, I would say, 2, 2.5 years.

Okay. Got it. And I'm just trying to understand the margin that you typically say around 20% plus on the Defense. How do I read it because the subsidiary business does have like a mid-high single-digit margin. So a part of that margin of entire Defense vertical is captured in stand-alone? Is that the way to think about Defense revenues?

Yes. I mean you have to think of Defense revenue and margins on an aggregate basis.

Okay. Got it, which I assume even now would be close to -- would be in the double-digit...

Yes, absolutely. Strong double digit, yes.

Okay. Got it. My second question is on the Class 8 truck outlook. Now what you mentioned in the initial comments where you're looking at U.S. Class 8 being still flat. And some of the third-party industry estimates talk about a meaningful decline this year, given the order book is running down or general weakness in macro. Is that something to really -- is that something that you're picking up in your engagement with the customers? Is it going to be a decline year at all the way you're engaging with the customer?

So I think the U.S. order book will be strong. I think, U.S. will continue to remain strong. I think, Europe is where there's a bit of a question mark.

Okay. Europe -- so U.S., you're still looking at flattish for the year given that there is some backlog still to execute. And there was this mention of emission that you spoke about. Can you...

The emission norm changes happen next year.

'27.

In '27. So there will be a prebuy in '25 and '26. I don't think the next 2 years, we will see a slowdown in the U.S.

Okay. Got it. And my last question is anything to call out on the EU sub -- European subsidiary's margin trajectory? You mentioned 12 to 18 months. How should we see it progressing from current low single digit? Do we see them getting significantly better in F '25 or it's going to be a few more quarters of...

I think subsidiary margins will get significantly better in '25, but U.S. will probably take a little more time. That is where I talked about the 12 to 18 months. But I think in 12 months, you will see also a significant improvement there, but I think we'll see a higher improvement in Europe.

So overseas subs would still be in the range of mid- to high single digits in F '25. Is that a fair way to look at it overall, not just Europe, just your entire overseas subsidiaries.

I would say, yes. Maybe higher inventories.

Next question is from the line of Jinesh Gandhi from Ambit Capital.

Sir, can you talk about what was the Defense revenue in this quarter? And how much of that would be from the gun's order on the export side?

We're not giving you any breakup, but overall, our Defense business for the quarter was about INR 350 crores.

INR 350 crores, got it. And secondly, you talked about U.S. Class 8 to be strong for CY '24 as well, but if I look at the commentary of some of your customers, it is indicating towards 10% to 15% decline from high base of CY '23. So is that indication what you're also getting? Or is that something different?

What is happening is that because of the '27 emission norms, earlier, as long as the engine was made before '27, you got the emission bypass. Now the vehicle has to be rolled out in '27. So the prebuy is going to be preponed to more like '24 and '25 rather than '25 and '26. So that is why we expect a little bit of that volume to move back into '25 -- into '24 and moderate in '26. The '24, '25 and '26 cumulatively should be somewhere in the region of -- the 3 years put together should be about 1 million vehicles.

Okay. That's fairly a strong number in that case. Okay. Got it. And you talked about Oil and Gas revenues declining. So what is the level now for Oil and Gas because it seems there is a reasonable decline given 9 months itself Oil and Gas growth was about 35%.

I'd just say that is about down 2/3 over what it was at our peak.

So currently, it's down 2/3. Okay, got it.

Around 2/3, yes.

And lastly, JS Autocast revenue growth still seems to be impacted by the Russian order going away. Is that still correct? Or...

I can't understand what you're saying? I'm sorry, can you just -- I don't know if you are very close to the speakers or very far, I don't -- it's not so clear.

Is it better now?

Yes, yes, please.

Yes. So the JS Autocast revenue growth still seems to be impacted by the Russian business going away. Is that still impacting our performance?

I don't know about Russian business. We don't have any Russian business. Oh, Vestas you mean. Sorry, sorry, Vestas. Okay. Yes, Vestas was a big customer. So that has reduced but we are getting a lot of new business. We've already got more than INR 200 crores of new business across sectors, across customers and largely exports from our global customers. And after having acquired JS -- Indo Shell, we will also have a lot of capacity addition for high-volume business.

Got it. And there is a good improvement in margins for JS Autocast. So now we -- and it's back to what it was earlier. So do you expect it to sustain at current 14% level?

No, we expect these margins to go up.

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

I just wanted to stay with the Oil and Gas segment. Is the slowdown because of a general weakness in the category? And can that change if oil prices go up? Or is there something else which is happening? Are you getting out of some products? Yes.

No, it's a combination of destocking and, yes, inventory correction at the customer end basically because of significant increase in interest costs.

Okay. Understood. Understood. And so would you be able to share if the destocking is largely done and we could see an improvement or this is a new level where we could be stuck in the oil and gas specifically for now?

I think right now, the volumes we are projecting are at this level. But hopefully, in the next 2 quarters, it should start improving.

Okay. And just on the -- you mentioned about that India CV 4Q should be a seasonally stronger quarter. But as we are looking into, say, the next financial year, do you think that India CV could show growth? Or do you think that the cycle is peaking out? There are some customers who are also talking about 1Q at least being weaker because of elections. So how are you thinking about that?

Yes, I think 1Q being weaker is not a big thing. I think that is something that one has to get to live with. But I think if you look at -- if our industry -- if the country is going to grow at 7%, 8%, the commercial vehicle market has to grow at 1.5 to 2x that. So overall, I think we are in a good position.

Okay. Okay. That's -- and lastly, you also mentioned that the ATAGS order from the -- on the domestic side, you said that it should be coming anytime soon. Was that correct? I just wanted to know.

Yes, I mean the whole bidding is at the final stages. So we should see something sooner rather than later.

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

Congrats for good set of numbers. Amit, first question is with regard to the CVs and trucks...

Pramod, your voice is very muffled.

Can you hear me better?

Yes, a little better. Can you just -- I don't know, if you are too close to the mic or what I don't know.

Pramod, if you're on a handset, request you to use the handset.

I'm on the handset. Yes, let me try the question. So basically, one of your customers have launched the EV truck, I wanted to know how is your content in the EV -- CV, which you've launched. And I think the same customer is also trying with the tractor trailer on the EV side. What is the content there versus fewer ICE trucks?

So currently, our content on the domestic EV truck is largely power electronics, control electronics. But going forward, we will have the entire suite of products, which we are already in -- let's say, not in development, but like a testing with a couple of customers, which includes the motor, the inverter, converter and the casting chassis components, et cetera. So the content per vehicle is significantly higher than the content per vehicle that we have today.

And the current prototypes, which are running by the clients, do they have these components or it will take you 1 to 2 years to reach there?

No, no. Some of them already have the mature components. Some of them have still components at a prototype level.

And also, the government seems to be pushing for, I think, LNG policy or even hydrogen policy. How does the content change there versus your ICE vehicles in trucks?

See in hydrogen, there are 2 possibilities. One is the Cummins model where hydrogen is used as a fuel in the combustion engine by injecting hydrogen into the engine. There, an engine is an engine. So you have a crankshaft, you have connecting rods, you have pistons, camshafts and so on and so forth. Camshaft may be something that goes away if you have electronic timing or electronic valve lift but the crankshaft, the pistons, a lot of those components still remain. The other source of using hydrogen is through fuel cell. But today, the fuel cell does not have the power density that one needs. So I think we're still a little far away from that. But immediately, hydrogen combustion engines are definitely something that will have adequate opportunity for us to supply components into.

And any thoughts on LNG or it will remain the same?

LNG is the same as CNG or any combustion engine. The only difference is the tank that is used to store it.

And any update on the retrofit kit, which you have made for trucks? Any timeline for that to come to commercial line.

No. We have now completed testing of more than 250,000 kilometers. We have got homologation certificates, and we are now starting to build vehicles for sale to customers. And I expect that in the next quarter, we should be selling vehicles to customers. Starting with a small volume of beta testing, but then after that, we will be in serious production.

The next question is from the line of Rakesh Roy from Omkara Capital.

My first question regarding your Defense business. Sir, recently, Indian Army has cleared for Made in India, 155 mm towed gun system. So sir, where Bharat Forge stand apart from the ATAGS?

That is for ATAGS only. That program is for the 307 ATAGS.

No, I mean this is only for towed gun system, sir, apart from ATAGS.

Yes. So we have 3 other platforms besides ATAGS. We have Bharat-52, we have ultralight gun, both in titanium and in steel, and we have Bharat-45.

Okay. So sir, both the guns has the weight below 15 tonnes?

Yes, yes.

Right, sir. Sir, next question regarding to your the Aerospace business. I just want -- here, you are making, sir, you are seeing the growth from the landing gear, helicopter part or jet engine. Can you light on this, sir, for landing gear or helicopter part or jet engine?

In Aerospace, also, we are growing at a very high pace. We will continue to grow at very significant double-digit growth. We are almost -- every 2 years, we'll be doubling our business here. So I expect that this business will be growing at a very high pace for at least the next 3 to 4 years.

Sir, this will -- this business will -- looking from the domestic market or export market?

This is global, but more than 80% of it is export.

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

Yes. Can you hear me?

Yes.

Okay. Sir, just one follow-up. On the new products that we are building for electric vehicles, power electronics and also inverter, et cetera, what kind of margin profile will be there for these businesses?

So initially, the margin will be not as high as it potentially can. But I think that overall, the margin and return on investment will be very good.

Understood. And when we look at your...

Please try to understand that our value per vehicle will be significantly higher than what we have today. So profit per vehicle will be very good.

Sure, sir. And when we look at your current margins, how much is the investment going into some of these new areas of development, which potentially may not be generating revenues currently?

Sorry. What did you say again?

The investment [Technical difficulty] which is not generating...

So like our U.S. plant is not generating any adequate return right now. Then our Aerospace business also is not returning -- generating the kind of returns. Our acquisition in the casting space, that is JSA, is not generating as much as -- because it's -- it has much higher capacity than what we have acquired it -- than what we have -- what we are generating today. It can easily double its revenue with the capacities that we have.

Actually, sir, my question was more on the stand-alone margins because it would be having some investment-related costs for these new power electronics and other EV parts side. So just was trying to get a sense like how much investment is going into the stand-alone margins right now, which may be affecting your stand-alone margins?

Yes. Look, to build any business, you have an overhead. So we have an upfront cost, which is our revenue expenses to take care of the operations of this business, which is negative rather than it's not present anywhere. So as that switches, it will go from negative to 0 and then 0 to positive. But you're right, I mean, any business when you build, in the beginning, it has negative margins because you're only investing. And we don't capitalize any of these. We charge it off P&L.

[Operator Instructions] Next question is from the line of Mahesh Bendre from LIC Mutual Fund.

Sir, last 12 quarters, we have been growing in double digit, very strong growth for the last 3, 4 years. Now in the press release that we have released mentioned that the Q4 and FY '25 growth is expected to be moderated. So is it meaning that instead of growing 20%, now growth could be moderate, maybe 10%, 12% kind of growth next year? Is it the right way to look at that?

Yes, exactly. It's not that we're going to become negative growth, growth will probably reduce for a few quarters from 20%. But again, after a few quarters, we will again accelerate.

Okay. So only growth number will moderate?

Yes, exactly. It's not going to de-grow.

Okay. Okay, certainly. And sir, any -- the capital expenditure planned for next 2 years?

Next 2 years is cumulatively between India and outside India all put together INR 1,000 crores.

[Operator Instructions]

I think there's no one else. So maybe I'll just give a closing...

Sure sir, there are no further questions.

So ladies and gentlemen, thank you for attending our call. I don't want to alarm anyone, but -- and I hope that we didn't alarm you with our, let's say, guidance which was softer than what you may have expected. But I think that as a company, we will have robust performance. We'll have strong double digit or -- we'll have strong growth, stronger than the industry and stronger than market, but there are changes taking place in the underlying market. So I just wanted to highlight that. It's a great opportunity for us because a lot of weak suppliers will fall by the wayside and give us a lot of opportunity to move business to ourselves. So we expect growth to continue. We have plans on how to accelerate our growth going forward as well. And I think that the future looks very bright, driven by our existing businesses, some of our emerging businesses and some of our new businesses. So that's all I wanted to say, and I'd like to invite you to come and visit us to get a sense of what we are doing. Thank you very much.

Thank you very much. On behalf of Bharat Forge, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.