J S Auto Cast Foundry India Private Limited (500493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Bharat Forge conference call to discuss acquisition of JS Autocast. [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.

Thank you. Ladies and gentlemen, good morning -- good evening. I'm sorry for the extremely late hour in the day. Unfortunately, I happen to be in the U.S., so it's quite early over here. I'm happy to announce that Bharat Forge has entered into an agreement for the acquisition of JS Auto Cast, which has facilities located in Coimbatore. This is a privately owned company, entrepreneur set up and run, which is primarily present in the industrial space of castings. They make critical and complex machine castings for a variety of industries, the largest being the renewable energy industry, meaning wind. They also cater to hydraulic sector, off-highway, and some amount of specialty automotive segments. They manufacturer castings from about 7 kilos to about 0.5 tonne. They have a very strong position in the market with marquee customers, many of whom are existing customers of Bharat Forge and the Kalyani Group, and they are a preferred customer -- preferred supplier to quite a few of our customers as well. They have a strong operating team, very good operations, profitable and with a lot of headroom to grow in terms of capacity as well as in terms of space. As you're aware, in the near past, we also acquired another industrial company. And we intend to grow our industrial vertical very substantially because we see tremendous opportunities in the industrial space, whether it is industrial off-highway, whether it is industrial renewable or other specialty industrial. We believe this acquisition will allow us to broaden our product portfolio and grow our revenues, bring in more new customers and make us a much more critical and, let's say, strategic supplier to many of our customers and move up the value chain as well as being EPS accretive from day 1. This will also substantially increase our revenues from the clean tech sector, which is an area which we are focusing on because it's good for the environment. It's also an area of high growth, and India becoming a strong player in that area. So this company had a revenue of about INR 260 crores in 2021. This is in spite of the impact of COVID. It's had a 10-year CAGR of about 20%, 5 -- year of about 18%. It has a healthy ROCE and RONW of greater than 20%, and we expect to close this transaction in Q1 of FY '23. I think what we're trying to say basically is that it is our entry into the casting sector as a process. As you already know, we have an entry in aluminum -- I mean we are already present in the aluminum casting sector for lightweighting. This is now our second presence in the casting sector, more from an industrial point of view. Allow us to address a larger range of products, increase our supply content per customer and increase our industrial revenue quite substantially. So that's really all I wanted to say, and I think we can now do a Q&A.

[Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Congrats on entry into casting through this acquisition. I have a few questions with respect to -- can you share what's the kind of valuation you have stated for this company?

So I just want to say this right up front, we will not share the valuation as of this time. So I don't want to -- any more questions on that. But as I -- all I'm saying is that I think it's a good valuation, it's a fair valuation for a good company.

Okay. Okay, sure.

What is your next question, Mr. Gandhi?

Yes. Sir, second question is with respect to the revenue breakup. So you indicated it will increase our revenue from renewable space quite materially. Can you give a [ breakup ] of revenues we get from renewal space and other segments?

So our industrial revenue, as you know, is close to 40%, and that is broken up into 3 primary areas. One is energy, which is largely oil and gas. The second is construction and mining. And the third is renewable energy, where we supply a lot of products into wind energy-related components. So our current revenues for renewable energy I don't have exactly, but let's just put it this way, that this will move us in the direction of creating somewhere in the region of triple-digit value for -- give us a road way -- roadmap for getting into a triple-digit million dollar renewable energy business in the near future. Not -- this will not make that happen, but this will take us along that path, because it will allow us to expand our product portfolio and then grow this business as well.

Okay. Okay. Okay. And in terms of synergies, it would be largely front end, right, with respect to common customers? On back end, do you see any material synergies and scope to improve margin for this company?

There should be some synergies. There are definitely going to be synergies on procurement because a lot of the stuff that we procure is foundry-related grades of pig iron scrap, et cetera, which we also procure for our steel plant. So there should be some -- there will be synergies on those sides as well.

Okay. Okay. And lastly, can you share...

And of course, the whole cost optimization on financial costs, et cetera.

Okay. And can you share the capacity -- what is the capacity and what utilization would they operate at.

So there, I think installed capacity is about 45,000 tonnes. They're operating at about 25,000, 26,000 tonnes.

Got it.

So. they're operating at about 50%, 55%.

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

Amit, I think you guys are -- this is the second acquisition in the nonauto space. So if you have to look at the 3 years down the line for you with both this and the earlier acquisition, if you have take into account, what's the mix you are trying to look at nonauto versus auto, and how do you see your action on the ground to...

Yes. I wouldn't -- Pramod, I wouldn't look at mix because we also will grow our auto business, especially on the e-mobility and lightweighting side. So what I would rather say is how will we look at the non-auto business growing. The non-auto, non-oil and gas business will grow like, I would say, more than 2x in the next 3 years.

Okay. 2x in next 3 years?

Yes.

Okay. And second one is in terms of client profile and all, how does this company do you able to leverage existing clients to build the capacity? Or do they bring in any additional clients for you whom you never tapped, how are you looking at it.

No, it definitely brings in additional clients as well, but -- more than additional clients, what it allows us to do is to address a larger share of our customers' wallet and in the future, hopefully, also move up the value chain by doing more value-added work for our customers and become like a -- move towards being like a system supplier kind of thing.

Okay. So this is a step towards that system supplier in that both -- having both the coaching and customer together.

And it will allow us to leverage our global customer relationships and grow our global business.

Okay. And the last 1 is casting is relatively more, I would say, a craft than mechanization. Has that changed? Or do you feel scalability coming through in the casting business with you inching or what hiding in back? And why are you getting into the casting in a full fledged manner?

No, no, no. I don't think that is true. That is true for the very large sand foundries where you're making one-offs and things like that. Here they have volume production and the volumes can range from a few hundred to a few thousand. But obviously, it's not a process such as forging where you have tremendous automation. But nonetheless, they do have some automation, and there is scope for a lot more automation, which we will do going forward.

Okay, sure.

And there are very clearer reasons why we're doing this. I think we're very confident that this will allow us to grow our customer base, grow our revenues, grow our exports. So that's our focus for doing this. Renewable is a megatrend. Renewable is linked to the whole green and clean energy cycle, and this is definitely a megatrend. We believe that we are well poised to take advantage of this from it.

The next question is from the line of Nishit Jalan from Axis Capital.

Amit, can you share some details in terms of the names of the customers? And what are the key products whereas our JS Auto Cast is kind of focusing within these non-auto segments? Some more details on that and...

I don't see any need to share any names of customers in detail. I think this is a bad practice because it's not really -- it's competitive information as well. So I think we need to stop doing that. And all I will say is that we have a lot of similar customers, and this will also bring a few new customers to us.

Got it. Got it. At least possible to share some of the key specific products with these guys have been strong...

Yes, I will talk about the segment. I will talk about the segment and the segments are renewable energy, hydraulics and off-highway.

The next question is from the line of Rustum Tambe from Evalueserve.

My questions have already been answered. Thank you.

Thank you.

[Operator Instructions] The next question is from the line of Basudeb Banerjee from ICICI Securities.

A couple of questions. One, as you said, the utilization levels are 60-odd percentage. So scope to improve utilization, what's the export mix for this entity as of now? Or can you enhance exports from down the line?

No, we can dramatically announce the export. It is somewhere -- the current exports are somewhere in the region of about 45%.

Okay. That's good enough. So it can further move up. And second thing, sir, what is the debt on its books?

That is very, very small, and we've assumed that in our enterprise value.

So nothing?

No, nothing meaningful.

[Operator Instructions] The next question is a follow up from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Yes. Amit, my question is on the capacity you talked about. There is a scope to increase utilization and add capacity. So any sense on what kind of capacity addition can we do from the current infrastructure there?

So we could easily add between -- see, just by debottlenecking and by some amount of minor investment, we could increase capacity by about 25% beyond our new credit capacity. And then, of course, you would have to make investments for additional capacity, but this has potential to grow quite substantially.

Okay. Okay. So -- but as you've indicated there is additional space. So like we have scope at some we forge in to increase their capacity by 2x, 3x, is the similar scope present over it? Or 25%?

Yes, that's right. And especially on the value-added back, there's a lot of scope to add almost double the capacity.

Okay. Up are only the machining side?

Yes.

The next question is a follow up from the line of Pramod Amthe from Incred Capital.

Yes, Amit. So considering that it's a pretty impressive company looks like on the ROC, I know that. Any reasons why the existing promoters are exiting?

It was a succession issue. The owner wanted to hand it over when it was doing well. And while he didn't have issues immediately, but he wanted to find a good home for it.

Okay. And second when you...

I think he has done a very good job of running the business.

Yes, that's fair answer. And second, when you say you will be a system supplier, would you be able to give some examples in the sense how, what you supply to a wind energy components now, how you can...

Not yet. Not yet. That is what we will aim to do. I'm not going to make an entire system, but I see everybody when they are expanding capacity is not going to do everything in-house. So there will be more outsourcing. So they will move from buying components to buying small assemblies to buying machine assemblies and so on and so forth. So there is opportunity to grow.

Okay. And that will be a much bigger value addition capture than just in the company?

That's a 5-year -- that's the second horizon kind of opportunity, okay? It's not something that's going to happen tomorrow.

Okay, sure.

But it's not -- it's going to be complementary to our existing customers.

Okay. But the designing and all capabilities still lie with the customer in that sense.

Today, that may be the situation. But tomorrow, the customers may expect us to do it for them. So that is doable.

And does the industry still work like part suppliers and Tier 1, Tier 2 there also in the industrial components?

Yes. Yes. Yes.

So with these types of systems, you will get closer and move up the tier line? Or how does it?

I mean it remains to -- look, we just got this -- just buying this company. I think we need 6 months to get our arms around it and decide what to prioritize and how to go about it. But we clearly see significant opportunities.

Okay. And does this -- it also has a small part, if I heard right, in terms of off-highway. Does it also gives you excitement to get into the automobile castings or it's completely narrowed?

They do make some specialty automotive castings, lowish volume, low to medium volume, but very critical parts.

Okay. And that is still EV protected in that sense? And that gives you more opportunity going forward?

Sorry?

Is it protected by the ICE versus EV combination? And does it excite you to expand much bigger?

It does allow us to expand, obviously, but I think our focus is clearly going to be on the bigger component and not the smaller components necessarily. I mean, obviously, look, if we see more traction for supplying machine component on a smaller side, we will pursue that.

Okay. No, I was asking more, you guys have been very strong in forging. This opens a goal for casting. And hence, would you like to look for more automobile castings or anything of that sort?

So our automotive casting focus is going to be more on the aluminum and lightweighting side. That's where the world is moving. This kind of casting, which is on the ferrous side is going to be more industrial.

The next question is a follow up from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Sorry for another question. Just quickly wanted to understand how do we -- I mean, in the last 12 months now, we have done a second acquisition in the industrial space. Does that give you enough additional capabilities to target this renewable segment? And would we be done with the M&A on the industrial side for, I mean, in general going forward?

Yes, I think that it would be very foolish for me to say -- give an answer on that because, look, it's really about getting into a field, getting deeper into a field. From being a peripheral business, we are now putting making this one of our new mainstream businesses. So as we grow our relationship with our customers and we expand our product portfolio and things like that, then we will get guided by what opportunity we -- what is the traction we get from our customer, what are the opportunities we see in the market. So I don't want to say, yes, we're done or no, we're not done, because I don't think we know enough today about this to be able to answer that question.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Amit Kalyani for his closing comments. Over to you, sir.

Thank you. And thank you, ladies and gentlemen, for your interest in our company and for your questions. We look forward to being able to share more with you about this business once we complete the acquisition and start the integration process, and we will also have an opportunity for inviting some of you to assist the facilities that you would like and continue our engagement at a high level -- close level in order to keep you updated with what we are doing and how that will impact our business going forward. So thank you very much, and have a lovely evening, and we look forward to remaining in touch. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, on behalf of Bharat Forge, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.