Bharat Forge Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 Earnings Conference Call, hosted by Bharat Forge Limited. [Operator Instructions]. Please note that this conference is being recorded. I will now hand the conference over to Mr. Amit Kalyani, Vice Chairman and Joint Managing Director, Bharat Forge Limited. Thank you. Over to you, sir.

Good afternoon, ladies and gentlemen, and thank you for participating in our analyst call. I have with me Kedar Dixit; [indiscernible] to both handle and [ Amitabh ] and [ Chennai ]. So we're here to answer your questions. And I'll first request Kedar to take us through the commentary of the quarter, and then we can move to Q&A.

Good afternoon, everyone. I'll just take you through the highlights of the quarter. In quarter 1, stand-alone revenues were INR 2,347 crores, which was up by 11.5%. EBITDA stood at INR 640 crores, which was up 4.5% Y-o-Y, resulting in EBITDA margin of 26.2%. This is 26.2% more the impact of escalation in energy prices and other cut costs and logistics. The overall cost impact of these costs was about 160 basis points on our EBITDA margin. And we continue to work on the recovery of the indirect cost increases with our customers. Normalized obviously, our EBITDA margin have stood at almost 28% in quarter 1. Q1 stand-alone also include exceptional item of INR 24 crores towards consultancy charges for the [ BF CDP ] restructuring exercise, which we have initiated. The Y-o-Y performance saw an all-around improvement in exports and strong execution in defense. Q1 FY '27 was the second straight quarter of recovery in export revenue and this momentum continues. Our Q1 '27 consolidated revenue stood at INR 4,640 crores, which was up 18.7% on a Y-o-Y basis. EBITDA was at INR 72 crores, 10.3% up with [indiscernible] last year's same quarter, with EBITDA margins of 16.2%. Our Indian subsidiaries posted a strong performance during this quarter. [ Canal ] Strategic Systems, which is a [indiscernible] recorded strong operating performance driven by higher realization and better product mix. On [indiscernible], which is our casting out pit has also had a good quarter with revenue and EBITDA growing 20% and 30%, respectively, on a Y-o-Y basis. Consol balance sheet remains strong with net debt-to-equity ratio of 0.5. During the quarter, company has secured new orders across business with forging business recording of INR 522 crores, defense INR 681 crores and [indiscernible] casting of INR 150 crores during the quarter. The outstanding order book in defense now stands at INR 1,196 crores as of the end of the quarter. Talking about overseas business is quite a difficult quarter. The European business recorded positive EBITDA. It saw revenue of INR 1,074 crores and EBITDA of INR 30 crores [indiscernible] taking the margin of around 3%. U.S. revenues were at INR 461 crores with an EBITDA loss of INR 4 crores. This was impacted mainly because of the breakdown of a couple of prices in our steel operations. Now both it has been fixed and the [indiscernible] is expected in this quarter, Q2. On the restructuring process of Bharat [indiscernible] CDB, which is a steel business in Germany is on track and we estimate to complete restructuring bit of calendar '27. We have taken an impact of about 30 million towards the sales restructuring. There is not a cash outflow. The cash outflow will happen post 12 months only. And we are on track as far as our restructuring exercise is concerned. Now I will hand over to Amit sir for his comments.

So ladies and gentlemen, on the whole, I would say Q1 was a reasonable quarter given the operating environment we were in, there were a lot of challenges especially the most unexpected and difficult channel challenge was the one on manpower which once the Iran was started and the LPG crisis hit, a lot of the contract and, let's say, migrant labor, all were traveled back to their home locations. And this is not so much of a direct impact on us, but a lot of steel companies and other sub suppliers, et cetera, face a lot of issues because of this. I think despite this and the challenges even on energy, our teams manage the production schedules quite well. We've had a strong business sentiment in North America, driven by higher corporate CapEx, which is boosting demand for construction mining and data center and power systems businesses. This morning, the U.S. government and the President announced a massive plan to restart the mining economy in the U.S., starting right from setting up programs for training people for these kinds of businesses in community colleges and universities. So this should be something that gives a sustained boom to the U.S. if it continues. On the defense side, I would say that we have been present on land systems and on aerial systems, and now we have made a big breakthrough on the marine systems. We won a large new order for marine best turbine generators for the [indiscernible] ships with the Ministry of Defense. And the largest order we have won 2 date on naval systems. And as our product range in turbine growth and especially on the complementary naval systems side, we expect the Navy to become a very large customer for us, especially with the announcement of the 140 new ships that are going to be built. We expect the defense business to expand its breadth and depth across many more products with many more applications rolling out. Our new defense [ Jejuri ] facility will enter [indiscernible] production this year, and it will play a major role in the deliveries of [ AAG ] and the CQP carbine to the Indian armed forces. On the aerospace side, our business saw record wins in '26. I was -- our team was at the [indiscernible], where we had a lot of positive engagement and I think once our [ mill ] in Baramati starts in Q4, it will lead to a further step jump in increase in production. Similarly, when our new forging facility in Baramati comes online, it will also give a big boost to production for our customers in the high horsepower engine and power generation sector, companies that produce engines in the range of 5,500 to 5,000 horsepower or so. And this is a very important sector for us, and it's a sector where we're paying a lot of attention and making large investments to grow this business. And this is a business that is growing because of, a, migration of manufacturing to India from Europe and other locations and dramatic increase in demand for infrastructure-based assets and the build-out and rollout of infrastructure in India. Talking about our castings business, our [ ferrous ] casting business continues to perform well. I think we're on track to triple the revenue of the business since the time we bought it. The run rate should hit that by the end of this year. And I think besides the size of the revenue, it's also the quality of the revenue. We've added a lot more value addition. We've added a lot of new high-volume products as well and doing a lot more machining. So I think this business is also growing very nicely and it's going to really add a lot to what we have offered to our customers. For example, the stake that we acquired in the company, a company called [ Fortuna ], is also going to allow us to service more of the large engine customers because they make contracts for them. So it allows us to service them with more customer -- with more products and meet their needs locally through a single point of cover. You may have seen an announcement about [indiscernible]. I want to explain that this is a fund raise for growth CapEx in our hard core manufacturing areas in sectors that we already are present in, plus in some new sectors. So the sectors that we are targeting from this are the large engine sector, the power gen market, the semiconductor components market and aerospace and a few others such as including an investment in an energetic plant in Andre Pradesh where we will be able to do filling off shelf and other propellants and energetics use the defense applications. I think -- so this CapEx is going to be -- this CapEx is something that we will complete over the next 18 months. and it will give us a high capital output ratio as well as good margins and will allow us to accelerate our growth going forward and the fund raise of INR 2,500 -- up to INR 2,500 crores is basically for growth CapEx and the instrument act -- in terms of outlook, I think the outlook remains very strong. There are some temporary blips, including cost escalations taking place in energy and logistics which are going to be -- which will be negotiated and redeemed from our customers where we have paid them. And with the resumption of our plant in the U.S., I think the margin should also come back to better levels. Many of our businesses are now starting to hit their stride. If you look at the aerospace business, it is now beginning to make a meaningful impact to our overall business. And as -- our new manufacturing facilities come online. This business will dramatically increase in size. The same will be said for the semiconductor business where we have already won double-digit million of business, and we need some new facilities to come online before that can then further go up, especially on the machining side. So I think barring any major new geopolitical [indiscernible] or supply chain shocks, we expect '27 to be a very good year with the second half being driven more robustly with some of these interruptions behind us and both across exports and the commencement of deliveries for the domestic defense orders of [indiscernible]. That's really all I have to say, and now we'll be happy to take your questions and answers.

Sorry, hold on one second, please. One of the things that we are going back to building capacity slightly ahead of demand, but demand is coming so fast that we need to accelerate our capacity build up as well. And that's really why we're increasing our CapEx to build up this capacity in our traditional business as well. Thank you.

[Operator Instructions]. We take the first question from the line of Kapil Singh from Nomura.

My first question is on the fund raise that we have announced. If you could just let's know what kind of asset turns margins or return on capital will be there for these new businesses since these are new businesses? Any color on this will help -- and what is the overall CapEx plan for -- on a consolidated basis for FY '27 or '28 related to avenue thoughts?

Yes. after CapEx will be in the INR 1,800-odd crore range. This is the organic CapEx that we will do in India. And this is spread across forging, machining, helmet, and related quality control and other related assets in the forging and machining space, ring rolling space. And these are assets that are not for one industry, but can be used in a variety of industries. They will have a significantly, let's say, accretive capital output ratio and very good margins. So we have business tied up, and that will give us enough ramp up, and then we will also add more business. Additionally, the Energetics plant is a facility we are setting up to fill shells and to produce energetics and solid propellant, et cetera, in the future in a new facility coming up in other position.

And second question is just on the outlook for some of the key segments. If you could talk about CVs and PVs, both for India and overseas? And also the auto segment, and we note that the growth in TV and TV this quarter for the domestic business was below the industry growth. Were there any supply challenges, if you could just give some color there also?

Yes. Honestly, there were supply challenges towards the middle of the quarter when the steel sector all had issues of labor and getting supplies and also an energy issue in. When the Iran war had really hit, [indiscernible] freshen during the beginning. And it took us all some time to switch over from one kind of fuel to another. And these are the challenges that you faced. But in spite of, I think we've done well. And going ahead, I think we will be even better.

Sure, sir. And on the outlook for the different segments?

So I would say that all the segments have a strong outlook. India is fairly strong. U.S. is very strong. Europe, CV strong TV is not as strong, but I think it's not weak either. If you saw yesterday, GM has raised their guidance again. So clearly, the economy in the United States is doing well. India is doing fairly well. So I think these 2 are the key markets for us.

We take the next question from the line of Binay Singh from Morgan Stanley.

So fair of you to ask ...

I do apologize to interrupt you, but your audio is not clear. Can you speak to your handset?

Apologies for that. Just to be clear, the entire CapEx of INR 1,800 crores is all non-auto, right? And could you guide us a little bit about --

Allow me to apologize 1 second to interrupt you. There's a lot of traffic coming in from your line.

Okay. I'll just come back in the ...

I'll answer the first question you asked. It is a into auto and non-auto. There is -- in the auto, there is both forging and machining and non-auto is forging in rolling and machine.

What sort of aside turnover to him on this number? Any guidance?

I think it will be above 1.5.

And secondly, when I look at the quarterly presentation this quarter to last quarter, last quarter, we talked about 20% to 25% growth in India-linked businesses. This quarter, we are saying 20% to 25% growth. So is there any sort of delay in approvals for [ AAC ] or something that we are building in to slightly create a range? Or am I doing too much?

The [indiscernible] approval once it comes, then in 2 to 3 months, we will start. There is still testing going on of both the suppliers and I think we probably are looking at a few weeks of delay, but that's nothing that we can do. It's a procedural issue. So I think the order is there. The product is there. I think we just have to get the process completed and then the delivery started.

We take the next question the line of Amyn Pirani from JPMorgan.

Firstly, just a clarification. This INR 1,800 crores of CapEx that you've mentioned, these INR 2,500 crores fundraising that you're talking about future growth opportunities. Will that -- will that investment be over and above this INR 1,800 or this is all part of the similar investment plan that you have?

This INR 2,500 is for this current CapEx and then it will also give us a strong base for any additional CapEx that we may need for further growth.

Okay. Okay. So then my second question is that given that your balance sheet is still quite strong and net debt to equity, net debt-to-EBITDA is quite strong. I mean just trying to understand your --

No, we are very conservative when it comes to our financials. We like to have cash on the balance sheet, at least INR 2,000-odd crores of cash on the balance sheet. And it's good. It will help us accelerate our growth going forward. Plus there's some M&A opportunities in India, and we have found that M&A opportunities that we have undertaken in India so far, whether it is [indiscernible] are proving to be very popular, such opportunities are arising, and it's a good time to look at that.

And just secondly, on your defense or the [ KSSL ] business, I know that it tends to be very volatile on a quarterly basis. But the margin outcome in this quarter seems to be a very strong one. So anything that you can help us understand the -- how should we think about this margin? And how should we think about the future?

But as we mentioned, the margins on a steady-state annual basis, we are targeting in the 20% to 23% of rates. I mean does that answer your question?

Sorry. There was some disturbance, sorry, I can't hear you.

Can you hear me or no?

I can hear you, but there seems to be a lot of disturbance. So maybe I don't know if it's a problem with my line or not.

No, I don't know -- I don't know if the [indiscernible] disturbance or I can hear.

No, sir. Yes, audio loud and clear.

Okay. So maybe there's some issue on my line. Maybe I'll try and come back in the queue.

We take the next question from the line of Gunjan from Bank of America.

Just continuing with the margin guide that you mentioned is 22% to 23% that you mentioned at the control level. That's how we should read this guidance?

No, that is for the defense business.

That was for the defense business and 22% to 23%. My first question is, again, on the similar lines, the newer opportunities that you call out a space, data centers, semiconductor. Is there some sense that you can give in the next 3 to 4 years, how do you see the build-out of these businesses? You may be a little bit more color on these 3 aerospace semiconductors and data centers, where the scale of [indiscernible] ...

I can talk about aerospace and semiconductor and my colleague, [indiscernible] can talk about the data center side. On aerospace, we will double our business in the next 2 years or so. And hello, can you hear me?

Yes. Yes.

And then on the semiconductor side, I think we are aiming for something in the region of INR 30 million, INR 40 million of business in the next 2 years organically. And then we also have to set up some machining facilities, which will then allow us to grow that business almost double it. So that's the kind of business that we are looking at to doing in the semiconductor space. I will let [ Subodh ] answer the question on the semiconductor and related sectors.

Sorry, how big is aerospace at the moment you said doubling where would that revenue be in --

About INR 400 crores right now.

On the data centers, we like to call it energy business. We expect to double in the next 4 years. We already have most of the contracts in place, long-term contract in place. So we are in the process of adding capacities and all of that. We have a very strong global position for [indiscernible].

And what is the scale again of data centers right now in terms of revenues?

It's difficult to say because a lot of our products are going into multiple sectors, including data. But when we see data center growth, a lot of those growth in those sectors is coming because of data centers.

See one more point I'd add is we have already been supplying these products for the last 15, 18 years. And these products take a lot of time to get validated and approved because we have very critical product. It typically gets 3 to 5 years just to get approved and get going. So in our case, all the price has already happened. So now we are at supply and there will be, of course, a growth in what we're doing based on demand.

Got it. And my second question is just a comment that I found very interesting in your annual report where you say that -- we are looking to grow India manufacturing operations at 15% CAGR for the next 5 years. I'm just trying to get a little bit more color on this. I mean, how should we think about the auto and the non-auto piece is that how you internally assess because auto business is certainly a lot more cyclical, right? So any color that you can give us in terms of what will be the salience of auto versus non-auto and growth we are looking between the 2 businesses.

Both sectors will grow also depends on new products because our current products are going to allow us only to grow at the rate of the market. But then the casting, the [indiscernible], all that come in to provide more growth in the non-auto side, of course, the sky is the limit because we are starting from a low base as a country itself.

Okay. And last, just quick, if I can squeeze in on the margin that you mentioned 160 basis point impact in this quarter. Is it fair to assume that this reverses immediately? Or this would take time basis the conversations? Like how do we think about the more normalized margin for the full fiscal year?

So it would be better than quarter 1, but also you need to mention for to consider one specific part at recoveries from the customer. Optically, it has an impact on EBITDA because there are changes in rate also. So optically, you might still look at little better margins, but it will not be fully reflective of back to 28% because it will add to top line also will add the cost also. But it will compensate some full margin per piece. Yes. Also quarter, yes.

We take the next question from the line of Pramod Amthe from Incred Capital.

Amit, I just want to get your details on this marine gas turbine generator wins. How do you see this -- this is going to be obsolete equipment, but at the same time, pretty challenging in terms of technology. So what is the capability you have announced to develop it? Do you need to have a joint venture? How is going to progress and --

We've already developed this product, and it is now going into testing. We have a very strong relationship in delivering this product and a range of turbines for naval applications, ranging from 1.25 to above 25 megawatts.

Okay. And will it be predominantly for defense itself or you can get into commercial?

No, it can get it to commercial also, it can even go into power train and can go into a lot of sectors. And it's market -- it is multifuel.

Okay. And within this, if you look at the content per se, how much group can itself supply versus what you need to source in terms of [indiscernible]?

No, I think in the beginning, the generator will we saw from our side but that's the electrical generator. But the entire turbine will be made by us.

Okay. And does it require further investments or the existing machine?

It requires some small investments. Not largely.

Okay. And the second question is with regard to the AP plant, which are opening up for the substantial investments. Is it going to be predominantly for new areas? Or how are you looking at --

AP is going to be a propellant and explosive facility, for filling ammunition and for making explosives.

Whereas this naval one will continue to be at the [indiscernible].

Naval one will be actually at a new location where we are already working. It's close to our naval shipyard. It's actually almost like a part of the naval ship yard.

But can it open up the [ Naval 1 ] open up a completely new stream for you, both in and out?

Huge new opportunity. See, in the naval side, we were originally only on the shopping and propellers. Now we'll be on the power gen also. And then we will also get into the fight side. So we will be on the entire value stream of the naval side. The content per ship will go up dramatically and 114 new ships coming is a lot.

Right. And any [indiscernible] of town?

So also, I wanted to tell you that we have already tied up the MRO for turbines with the Navy for their existing as well as for the future.

For the existing models?

Yes.

So that is going to be a much more sustainable than just these orders.

Exactly.

We take the next question from the line of Arvind Sharma from Citi.

Just your views on the CDP artful restructuring. Post the restructuring is done, what would be the form of this entity. Will orders be shifted away, will margins improve? How should we [indiscernible] post the restructuring?

So post the end of the restructuring, that [ NTT ] will not survive. It will not exist. And part of their orders are going to be transferred to us. and that will be provided ship parts from India at a good margin. So that's really what's going to happen.

Right. So all the current orders would be intact. It would be shifted to India or other in --

Not all because they also have certain orders that are getting phased out or products that are getting phased out. So the remainder of the orders will move here. But it's a sizable amount.

Got it, sir. And sir, one thing which you have kind of alluded to as well, the [ ATAC ] order -- is there any time line that you would want to share or?