Bharat Forge Limited (BHARATFORG.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q1 FY '26 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, Vice Chairman and Joint Managing Director of Bharat Forge Limited. Thank you, and over to you, sir.

Good evening, ladies and gentlemen, and thank you for joining our quarter 1 analyst and investor call. We are definitely in very interesting times. Given the undercurrents, I would take you through first the numbers, and then our team will take your Q&A. I have with me our Finance and Investor Relations teams. Q1 revenue for Bharat Forge on a standalone was INR 2,105 crores, which is about down by 2.7%. The uncertainties around the whole tariffs have created a lot of disruption in the global outlook for automotive global in the U.S. and worldwide. The pause in the emission norms have pushed out the prebuy effect, which was anticipated and some amount of seasonality in the Aerospace business has also contributed to top line weakness. Standalone EBITDA in quarter 1 was INR 588 crores, which is about 6.5% lower due to lower utilization and a different product mix. We have absorbed about INR 14 crores worth of tariff-related expense in Q1. At a consolidated level, Q1 revenue was INR 3,909 crores, which is 1.5% higher quarter-on-quarter. EBITDA moved up to INR 682 crores, which is a margin of 17.4%. And the consolidated performance showed an improvement on the back of better profitability in the overseas business and reduction of losses in the Kalyani Powertrain. During the quarter, we have secured new business worth about INR 588 crores -- sorry, about INR 900 crores, sorry, which is Bharat Forge INR 429 crores, Defense INR 269 crores, and JSE about INR 149 crores. On the overseas subsidiaries, our EU aluminum operations were stable. Utilization levels are at about 70%, and we had an EBITDA of about INR 33 crores. The U.S. aluminum business had a fairly decent quarter driven by operational efficiencies and better utilization with a second consecutive quarter of positive EBITDA margins of 6.1% in quarter 1 and current utilization levels for the aluminum business is also about 70% of Phase 1 volumes. We will continue to evaluate the restructuring options for the European steel business, and we'll update you on the progress in due course. I think we put up a fairly decent show given the current circumstances, which continue to evolve as we speak. Tariff-related uncertainty is definitely something that nobody has ever experienced before and is something that we are engaged with our customers in finding a resolution. I just want to highlight to you that only about 1/3 of our exports from our Indian manufacturing, that is Bharat Forge -- that is India manufacturing, which is BFL plus industrial plus defense, et cetera, were to the United States in Q1. Our overseas aluminum operations have turned the corner, driven by high utilization rates and better operating metrics. In India, a wide portfolio across steel forging, ferrous and aluminum casting is helping us increase our content per customer across sectors and geographies. In the medium to longer term, you will see the center of gravity shift back to our India operations as manufacturing in India becomes larger and more lucrative, and we are already seeing opportunities emerge for machine tools, for supply to emerging sectors in domestic market as well. Our acquisition of the American Axle, India CV assets is another step to build upon our India bet and to add more value-added product in our lineup. This gives us access to the thriving light commercial vehicle and SUV segments as well. In addition to manufacturing facilities, these assets provide us with vital engineering know-how to design axles and approved axle designs. With a good RFQ pipeline in the defense business, we expect to see some orders getting finalized additionally in this fiscal. Q2 looks a little weaker, driven by U.S. exports and hopefully marks a low for this cycle. Second half should be better than the first half. Talking about the rest of the year, we expect that Aerospace should continue its 20-plus percent growth annually Y-o-Y. This business has limited exposure to the U.S. market. American Axle should add about INR 1,000 crores to the consolidated top line for the year. We will see it consolidate from quarter 2 FY '26. A Steel Europe, as I mentioned, in 6 months, we will have a road map in place, which will outline the entire process that we will undertake for this. Q1 in JSA is a seasonally weak quarter, aggravated by tariff uncertainty and some amount of slowdown in the renewable energy sector due to the pullback on renewables in the United States. I think to sum it up from where we are today, we should see positive momentum in news flows and performance, especially in second half. And like the past, we will use this period to pivot and come out stronger than before. Thank you very much. I will now have my team answer your questions.

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

Indeed, a tough quarter, but I would say a good performance considering the circumstances. Just wanted to ask you regarding the tariffs. Firstly, a more fundamental question. Who bears the tariffs? Is it distributed across the entire chain of customer OEM and suppliers? Does Bharat Forge need to bear more? Just your perspective on this thing.

So you're asking essentially how is the tariff compensated?

Who is paying?

Yes. So...

Okay. So right now, irrespective of who pays the tariff, whether it's a customer pay -- whether we pay the tariff or the customer pay the tariff, at the end of the day, it is compensated in price. And usually, what happens is the customers work with us to find such solutions, because obviously, these are extraordinary circumstances. And given the fact that we provide critical products, all customers are working with us to find suitable solutions, because that is the need of tariff right now.

Okay. And sir, this INR 14 crores impact that we -- was that for the full quarter? Or was that for part period?

No, no, that was for full quarter.

Okay. So tariffs were applicable for full quarter?

Yes.

The second question is currently, with the tariffs currently at 25%, how is the competitiveness of Indian exports? And which are the geographies from which we are facing competition for products like rank shafts and front axle?

So let me just -- I'll answer this in a very simple way. All the countries that produce these parts have the same tariffs. I mean, either we are the lowest or we are equal to what anybody else is. Nobody is lower than India. The other two geographies are China plus another one, both of which are at higher levels.

Okay. And is there a case that you need to think about setting up manufacturing for some of these products in U.S.? Or -- and if the tariff uncertainty is affecting any order inflow from the customers as well? That would be the last question for me.

So we are not looking at setting up any other facilities right now anywhere outside India. On order inflows, I think I'll let Subodh answer that.

At this point, there is no impact on order inflows, because typically, for the products that we are engaged with, it takes anywhere between 2 years to 4 years, 3 years to complete the whole approval and validation cycle, even if we have to move it anywhere ourselves. So it's a very complex process. So currently, there is no impact on the order flow because of this reason.

[Operator Instructions] The next question is from the line of Gunjan from Bank of America.

Just one quick follow-up on tariff and I'll then get to the rest of the business. You mentioned in the prior call that the tariff was different for industrial and autos, right? Is there any change to that with the recent 25% imposition? Does the industrial also get -- has the same tariff now that that's the CV part of the business also gets impacted and we see 25% implication on that?

Currently, that is the scenario, and that is under evaluation by the U.S. government as well.

And this INR 14 crores, again, what Kapil was asking, the tariff is applicable only when the shipment reaches U.S., in which case the tariff would have been applicable only maybe towards June or something. So is it fair to assume that we will see more impact of tariff going into the second quarter?

Even for this tariff that is applicable now, the effective date of implementation will be 7th of October or something like that. So we will have some time for whatever is being shipped. 7th of October.

August. 7th of August. Implementation is on 7th of August.

August.

Okay. Okay. Got it. Let me move on to some other parts. I think, maybe it will be good to hear from you on the defense bit. You do mention that there is a pipeline -- you referred to some pipeline and strong visibility on that. Can you talk a little bit around it? What is it we're seeing? Is it on exports? And is it still..

As you know that we have announced that we had a pipeline of INR 9,000 crores, after which we have one more tender, which has to get converted into a signed order. Once that happens, that will add another INR 1,400-odd crores to our order book.

And that's domestic?

That's a combination. This last order that I'm talking about is domestic.

Okay. Got it. And lastly, just on the...

Ma'am, could you please rejoin the queue? The next question is from the line of Mr. Pramod Kumar from UBS.

Amit, I just wanted to understand, you said every country which is exporting into U.S. is either paying a tariff as low as India or higher. But is there no...

I said for the countries which are producing the same parts.

Yes. So -- but is there no onshore U.S. plant for forging by Thyssenkrupp or anyone, which...

There are forging plants, but not for machine.

Not machining. So on the forging side, there could be some competition or cannibalization with the -- sorry?

Not really. I don't think there's any capacity.

They don't have capacity.

No additional capacity as far as we understand.

Fair enough. Fair enough, sir. And you did talk about second half being better than first half. I'm just trying to understand the reasoning behind that. And also within the first half, how should then one look at 2Q versus 1Q, sir? If you can just help us -- it will help us navigate this uncertainty in a much better way.

Honestly, look, the tariffs were announced 3 days ago, okay? So I think we have to wait to understand the overall situation and then come back to you. This is basis what we are hearing from our customers.

Okay. Okay. Second half assessment is based on what you're picking up from customers basically?

Yes.

Yes. Fair enough, sir. And on the defense side, last one. We have seen that recent orders, the entire -- the situation what we had in India, even the Israel, Iran, that increasingly the war theater, the action is moving towards air -- air-based system, drones, missiles, anti-drones. So what is the group's strategy, because you have very deep roots on the land side?

No, we have a presence in every sector. As you are aware, we signed an agreement with a company called Turgis Gaillard for MALE drones. We have a solution right from MALE to super light drones. So we have an entire range of airborne unmanned aircraft. We have for land-based unmanned products and for water-based unmanned products.

And if you can just help us understand out of the defense order backlog, including the INR 1,400 crores that you're talking about, how much will be the component of non-land system, sir? Because ATAG is normally what everyone associates Bharat Forge and even the carbines. So if you can just help us understand the split.

See, land, when you say, it includes specialty vehicles, it includes artillery systems. It includes a lot of things. So artillery itself is about INR 4,000 crores.

Artillery alone?

Yes. So it's less than half.

And carbines and other stuff, as in carbines is a recent order, right?

It's not yet included in that.

It's not included in that? Because if I'm not wrong, media report suggests that you are L1 already on that.

Yes, we are L1, but the contract is not yet signed.

And how big that could -- that opportunity be, sir? Because that's part of the large one.

I already discussed that, that is INR 1,400 crores.

Okay. That's INR 1,400 crores. And is the market much larger for such carbines? Because I believe there are procurement in the state government level.