Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 and FY '25 Earnings Conference Call hosted by Bharat Forge Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Kalyani, the Vice Chairman and Joint Managing Director of Bharat Forge Limited. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen, and thank you for joining us for our second -- for our year-end conference call. I have with me our Head of Finance, Kedar Dixit; Head of Investor Relations, Rajhagopal; and our finance team members. As usual, I will have them give you an introduction, and then I will take you through the Q&A. Thank you.

Good afternoon. I'll take you through the stand-alone business highlights for the fourth quarter and for full year. We had a stable performance in the quarter with revenues of INR 2,163 crores.

I'm sorry to interrupt, sir. Could you please come a little closer to the microphone.

Yes. We had a stable performance in the quarter with revenues of INR 2,163 crores with Y-o-Y -- with a quarter-on-quarter growth of 3%. Stand-alone EBITDA in Q4 grew by 6.7% vis-a-vis Q3 at INR 629 crores, translating a margin of 29.1%, which is up 100 basis points higher than last quarter. Also in this quarter, we had an exchange loss of INR 12 crores. And in last quarter, we had an exchange gain of INR 20 crores. So if you adjust that, then you will see a 100% margin improvement. PBT before exceptional item was INR 494 crores, which was up 4% quarter-over-quarter. On a full year basis, revenue was at INR 8,844 crores and EBITDA was at INR 2,524 crores with a margin of 28.5%, again, at 100 basis points expansion in margins vis-a-vis last year. Our balance sheet continues to be robust with surplus funds net of long-term loans are at about INR 1,336 crores. For FY '25, ROCE net of cash was 18.1%. At a consolidated level, Q4 revenue was at INR 3,853 crores, which was 7.5% lower on a Y-o-Y basis. However, EBITDA moved higher, translating into margin expansion of 170 basis points. This is largely on account of reducing the losses for our overseas operations as well as e-mobility, and we continue to do that. In FY '25, consolidated revenue was 3.6% lower at INR 15,123 crores. Operationally, EBITDA margin improved by 180 basis points on a Y-o-Y basis to reach 18.2%. During the year, the company secured new business worth INR 6,959 crores across all key businesses. Defense was about INR 5,000 crores. BFL stand-alone was normal operation of INR 1,685 crores, and JSA was INR 245 crores. The CapEx for Indian operations was INR 750 crores in FY '25. We have completed the CapEx for our overseas greenfield projects in U.S. for aluminum 4G, and we don't foresee much of investments in overseas entities for next year. As far as overseas subsidiaries are concerned, operations in EU aluminum have stabilized. However, given the economic situation in Europe, the utilization was between 60% to 65%. U.S. operations have moved in the black for this quarter, recording a positive EBITDA of INR 4 crores. Also, with the action we have taken in terms of reduction of debt of our overseas entity, we have started seeing the benefit of reduction of interest cost for both European as well as U.S. operations. In FY '25, European operations recorded EBITDA of INR 96 crores, while U.S. operations narrowed their EBITDA loss to INR 47 crores. But on a quarterly basis, as I mentioned earlier, we are in positive. Current utilization of aluminum business is about 70% for U.S. We continue to work on our restructuring options for European steel operations, and we will update on the progress in due course. Now I'll hand over to Amit Kalyani.

Yes. Good afternoon, ladies and gentlemen. On a stand-alone basis, I think we've had reasonable performance in '25 with 100 basis points margin improvement and a strong robust balance sheet. Few things that stand out are the fact that the business is becoming more diversified and resilient. Over the 2019 to 2025 time frame, industrial exports have been flat at around INR 1,600 crores despite oil and gas declining from around INR 1,100 crores, INR 1,200 crores to about INR 400 crores. This drop has been compensated by other areas such as high horsepower and aerospace. Aerospace is now 15% of industrial exports. It has grown 4x in the past 5 years, and we expect this to continue growing at a high pace going forward. We are now setting up a new dedicated forging and machining facility for aerospace backed by both business wins and customer commitments, including financial commitments. You will witness one new business adding to the growth of industrial exports in the next 3 to 4 years. Overseas, as I mentioned, we continue to evaluate all our options for the European businesses, but our aluminum business in Europe and North America is now falling in place. Already in North America, we are seeing substantial improvement. And as we see capacity utilization go up in Europe, that will also impact positively the European aluminum forging business. In the casting space, I'm very happy to report that our teams at JSA have performed exceedingly well and delivered on the promise that we felt they had during the acquisition. We have now a 15-plus percent EBITDA margin with doubling of profits in '25. We have added a lot of new customers and we are on a solid growth trajectory to a 4-digit number shortly. In defense, we expect to see a 15% to 20% growth in FY '26. We have a strong order book. There are lots of opportunities both in India and outside and, as I mentioned, our order book is almost INR 9,500 crores. We have many new programs that we are working on, which will convert into orders in the coming years and a lot of new geographies that we will open up this year. In terms of e-mobility, we are now very hopeful that our products are at maturity, and we should start seeing revenue progression going forward this year, including moving towards black numbers towards the end of second half of the year. In terms of M&A, we have now received the CCI approval for our American Axles India assets transaction. We expect to conclude this transaction by the end of June. I think this is going to be another good opportunity for us to grow our market penetration and our presence and content per vehicle going forward. And the one thing that I want to mention is due to the U.S. tariff situation, there is a lot of uncertainty. Nobody has an answer right now. I think we all have to wait and watch. What I'm convinced of is that as a manufacturer, we have the right products, the right technology a very good cost structure and extremely strong customer relationships and that we will tide over the situation both as a company and as a country. I think India will be, let's say, a neutral position to advantageous position vis-a-vis many other places. And I think this should give a significant opportunity to Indian companies to both manufacture in India and to partner with global companies for mutual beneficial opportunities. Thank you. Okay, I think we can now do Q&A.

[Operator Instructions] The first question comes from the line of Gunjan Prithyani from Bank of America.

My first question is just trying to understand that now, of course, we don't know how the tariff situation sort of eases. But at the moment, what is the sort of conversations that you're having with the customers? And just also want to be clear, is the tariff already under implementation as far as your exports to U.S. go?

So currently, as you know, the tariff applies to shipments that have left India after 5th of April. So we have time until the third week of May, number one. Number two, is, at this point, there is clarity that the tariffs will be applicable only for the passenger car segment or so-called the automotive tariffs that they are talking about will be applicable for the passenger car segment or light products. And the third part of it is that we are engaged with all our customers, and all our customers are talking positively in terms of taking over the tariffs from our side. We won't be exposed to tariffs is what we think, but that's active discussions ongoing with all the customers and considering the situation in the U.S.

Okay. And just going back to the point you mentioned only to the pass car segment. On the truck -- on the CV segment, is that the implicit message that it's not applicable to trucks? Or there was also a school of thought that forging comes under steel and aluminum derivatives? So if you can sort of just clarify on that as well, whether it's applicable on trucks or not.

So, Gunjan, what we know so far is that it's applicable for passenger cars. We don't know anything more than that because no details have come out. So I think we should wait and watch. And besides that, please remember that our exports are across many sectors, many geographies and many products. So we just have to wait and watch. We don't have any clarity on this yet.

Okay. Got it. And beyond the tariffs, I think generally the sense on the Class 8 cycle, I mean, of course, there is a bit of pessimism in the recent truck orders that we've seen, but it's also a function of where the tariff uncertainties. But if you were to sort of give us a sense on how should we think about the Class 8 cycle, factoring that the EPA emissions are also in a little bit of limbo at the moment. So this year, a dip, and next year comes back, how do we think about that?

Again, Gunjan, it's very difficult to answer this question with the frame of the tariffs uncertainty in place. Typically, if you had a euro norm changing -- or emission norm changing, you have a prebuy because there is a cost increase. Now if there is no cost increase coming, we should have 2 normal years rather than on prebuy and one low year. So we don't know. Typically, that's what you should expect, is 2 normal years. Subodh, am I right?

Yes.

But I think that everybody is right now waiting on the sidelines with the whole tariff issue being such a question mark. So I think that's where we stand.

Okay. And last question. A little bit of your thoughts on this electronics and servers that we are doing. There were 2 sort of announcements you had made, that we'll be manufacturing servers. Can you talk a little bit about this? What's the thought process? Is this a new revenue line item that we should be thinking for future?

I think that electronics are going to be a very large part of the overall industrial landscape. If you look at automotive also, the share of electronics in the automobile as a percentage of total vehicle value is dramatically increasing. So if we want to be in electronics, you can't only be in 1 or 2 areas. You need to build scale, you need to build supply chain capability, you need to build competence. And I think we're going to do that in multiple areas. And the Indian government wants to create Indian electronics players in niche areas where imports are not wanted to be used. So I think there is an opportunity, and that's what we're pursuing.

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

Sir, just one clarification on the tariffs. The non-passenger car revenues, will there be a reciprocal tariffs that will be there on those? And how are the customers reacting to this? Are they going slow and waiting for the tariff situation to settle? Are you seeing some rundown schedules because of that?

I would say that we're in a holding pattern. Nobody knows anything that is going on right now, okay? We are all waiting for some amount of clarity until the smoke settles. So I don't think anybody can answer these questions today. I think we just have to wait and watch.

Sir, for your U.S. operations, there was a tariff on steel and aluminum also that has come in U.S. So could you just help us understand what is the impact there? Because we see that actually that operation has turned profitable this quarter.

Yes. We are producing steel and aluminum components in the U.S. We buy our steel locally and we also produce our alloyed aluminum in-house by buying aluminum ingots. So I think that in general we don't have an impact, and whatever impact we have will be passed off.

Okay. So steel and aluminum prices had gone...

The tariffs are on raw materials. It is on raw materials.

Sir, has the cost gone up there? And have you been able to pass it on?

Yes. For cost, it's has not gone up yet.

We have raw material pass-through. For us, the way our agreement stands, it's automatically passed through.

Understood. And sir, just lastly, on the defense side, what was the revenue for the full year on defense? And when we talk of 15% to 20% growth, if you could give some color, like what will be driving that? And when will the ATAGS revenue start reflecting?

Yes. So the defense sales was about INR 1,500 crores, a little above INR 1,500 crores on a consolidated basis.

INR 1,550 crores.

Does that answer your question, Kapil?

No. Actually -- yes, partly. I had also asked what will drive the 15% to 20% growth this year, which segments?

We've won a lot of new orders, including the ATAGS order. So that should also start delivering by the end of this year towards the later part of this year. Plus we have many new programs and orders that we have in the fire, and which should fortify by then.

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

Just on tariffs, if you allow one more question. Last week or I think 10 days back, there was some offset which was allowed to some of the U.S. OEMs who are importing components. So in your opinion, does that offset reduce the impact of tariffs at least for auto components also in the near term? Or that is not something that you think is substantial?

Yes. The offset is basically they have given us -- they have given a 2-year plan that for the OEMs, they have 25% tariffs. And in the first year, they can get a refund of 15% from the government. The second year, they will get a refund of 10%. And in the third year, it will be reviewed depending on what happens. But that's what announced as offset.

Okay, okay, okay. And secondly, on this server and electronics thing, so this will be utilizing your KPTL investment that you've done in the capacity?

Yes. We've set up electronics -- SMT lines and electronics manufacturing, which will be used.

And any broad time line by when we could start seeing this reflect on...

Second half.

Second half of this financial year?

Yes.

The next question comes from the line of Arjun Khanna from Kotak Mutual Funds.

Sir, the first question is on U.S. manufacturing operations. Now that the tariffs are in place, et cetera, how do you see the further scale-up of this business? You have already seen good growth on a Y-on-Y quarter-on-quarter level for U.S. manufacturing operations. What is our outlook for FY '26?

So one comment is we have been growing in the U.S. from an order book position and spread irrespective of all these tariffs. And whatever happens right now, it will only help us in accelerating it. So currently, we can't give you numbers in that regard, obviously. But we see a very strong order book. And we are also ramping up our existing capacities, both for steel and aluminum. So the outlook is good. So now the focus is for us to make it happen. And obviously, we continue to look for more opportunity.

So if you look at the turnover of roughly [ INR 3,200 crores ], what we did for this quarter, what would be the utilization rates?

In the U.S., our utilization rate would be about 60% to 65%.

And peak would be around 80%, sir?

No. So this is of phase 1 of aluminum plus the steel. Phase 2 is 0 right now. Phase 2 is just completing. That is getting completed. So phase 2 will allow us to double the output.

Okay, sure. Sure. Very helpful, sir. And in terms of our margins, we had indicated that...

I'm sorry to interrupt, Arjun. Those were your 2 questions. Would you please rejoin the queue?

This was just one question. Can I go to the second one?

Okay. Go ahead.

Sure. Sir, just on the aerospace bit, we have mentioned in our press release also in terms of CY '27 where our new facilities come in. And this quarter also, we did see good growth when compared to on an annualized basis. So if you could just talk about which are these components. Are they impacted by tariffs going into the U.S.? Or where are we selling this?

Our current aerospace market is largely Europe and non-USA. But obviously, the U.S. is a big market. And eventually, the U.S. will also have to be a big market for us. But currently, our growth is coming from Europe and non-U.S. markets.

And this quarter growth which we have seen, is it sustainable? Or is there some...

We will continue growing. Our annual numbers will continue growing. Every year, you will see growth. Don't look at it on a quarter-to-quarter basis.

The next question comes from the line of Arvind Sharma from Citibank.

This ATAGS order, the INR 3,417 crore order, this is the Indian ATAGS order, I believe.

Yes.

So is it the whole order, sir? Or could we see further increase in this number?

This is only a phase 1 order, which is 307 guns, of which we are 60%. Overall, India needs 1,500, close to 2,000 artillery guns.

Okay. So the 307 guns are the INR 3,417 crores, and there could be further increase there?

Yes. We [indiscernible] in different kinds of guns and lots of them.

Okay. And sir, when should we see the revenue for this order in the numbers of the company?

I would say Q4 onwards.

Q4 this fiscal?

Yes.

All right. And it would be spread over how many years or quarters, if you could share that?

2 years. For this order, 2 years.

2 years beginning 4Q FY '26.

Yes.

The next question comes from the line of Rucheeta Kadge from I-WEALTH Management.

So, sir, my question was on the Kalyani Strategic Systems Limited. So in that, how much was the domestic revenue and how much came from exports?

So in Kalyani Strategic Systems, most of the revenue was exports. And one clarification, the INR 1,567 crores number, what you mentioned for defense, that is only for Kalyani Strategics Systems. On a consolidated basis, it's about INR 1,700 crores.

We supply components and other things to other players as well in the field, which go from Bharat.

Understood. And sir, this Kalyani Strategics number that you have said, most of this came from exports. So last year, how was this ratio, like domestic to export?

So last year also, it was exports. And this year also, it was exports also. Because the domestic orders are yet to supply.

Domestic big orders have yet to start.

Okay, okay. And in the JS Auto, sir, during the quarter what was the revenue, if we could just tell?

I think it was INR 200 crores for the quarter.

INR 200 crores. And the margins?

About 50% to 60%, yes.

The next question comes from the line of Lakshminarayanan from Tunga Investments.

Just want to understand what has been the tonnage growth in India, the commercial vehicle and the passenger car, because the revenue growth we have seen...

We have to stop looking at tonnage now because we're not only a forging company. I think you have to look beyond that and look at revenue. And we're not breaking it up that way anymore.

Got it. And you have mentioned that you have got some new -- you opened certain new products or also clients or applications. Can you just talk a bit about that in terms of commercial vehicles and industrial? And just for domestic, what -- some color on that, that would be helpful, sir.

I can't understand. I'm sorry, you're very unclear.

You mentioned you have actually won certain new orders or you have actually gone -- deepened some relationships in the domestic market. I just wanted to understand a bit more about it, if you can share some details.

No, I don't know what order -- what you want to know more. We have received multi orders from several customers, which are coming to roughly about almost INR 7,000 crores, of which INR 5,000 crores are for defense and INR 2,000 crores are for our component businesses.

And there's a lot of -- they are spread over all sectors in India. And we don't disclose the specifics out of that for confidentiality agreements with customers.

Got it. And your outlook for India, domestic business?

Overall positive because we are expanding in all segments.

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

Sir, just one question. On the CapEx, if you could give an indication for next year for stand-alone and consol, what kind of numbers you expect?

I think roughly both put together would be in the region of INR 500 crores next year.

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Amit Kalyani to give us his closing remarks.

So ladies and gentlemen, thank you for your time, interest and questions. I'm sorry, we don't have any more answers than we could answer today because things are in a flux. And I think the Indian government and Indian manufacturing are cooperating to make sure that we take advantage and are in a good situation even with the United States tariff situation. India is a strong country with very good manufacturing capability, and we think that we will see light at the end of this tunnel, thanks to the leadership and, let's say, the way the Indian government is handling the situation on tariffs. I think there should be a good solution in place for us sooner than later and will provide clarity on this and allow us to all manage to grow our businesses going forward. So thank you very much, and I wish you all a healthy and a safe end of the week and a weekend in these rather difficult times. Thank you.

Thank you, sir. Ladies and gentlemen, on behalf of Bharat Forge, that concludes this conference. You may now disconnect your lines.