Bharat Forge Ltd

NSE:BHARATFORG

Earnings Call Analysis

Bharat Forge Reports Strong Q2 Performance

Bharat Forge has delivered a robust performance in Q2, with record volumes, top line, and profitability. Sales increased by 21% year-over-year, spurred by substantial growth in passenger vehicle exports (39%) and domestic industrial business (50%), with the latter boosted by defense orders. The company's EBITDA rose by 36% to INR 616 crores, and profit margin expanded by 300 basis points to 27.4%, driven by an improved product mix and ongoing cost reduction initiatives. The strong balance sheet featured a cash surplus of over INR 2,200 crores, reduced leverage by long-term debt of INR 300 crores in six months, and a return on capital employed (ROCE) of 20% net of cash. New business wins totaled INR 500 crores, including INR 300 crores for e-mobility platforms. The company is focusing on reducing cyclicality and boosting profitability, expanding its defense order book with over INR 1,100 crores in new orders, and pursuing M&As to capitalize on India's industrial growth opportunities while also addressing global opportunities.

Robust Quarter Performance with Record Volumes

Bharat Forge Limited experienced record volume sales and profitability during the second quarter, crafting a promising narrative for investors. Sales soared by 21% year-over-year, anchored by a colossal 39% rise in passenger vehicle exports and a 50% leap in the domestic industrial business, which bolstered a strong revenue stream.

Substantial Growth in Profit Margins and EBITDA

Operating profits matched the top-line growth with EBITDA swelling by 36% to reach INR 616 crores. The company witnessed a substantial margin expansion of 300 basis points, culminating in a robust margin of 27.4%. With prudent cost management and an improved product offering, the financials paint a picture of a well-oiled machine maximizing profitability.

Record Profits Before Tax and Net Income

The success story extends to profit before tax (PBT), which hit an all-time quarterly high of INR 473 crores compared to INR 358 crores in the same quarter last year. Net income stood tall at INR 346 crores, echoing the company's strong performance across the board.

New Business Wins and e-Mobility Growth

The quarter marked a significant stride in business expansion, with Bharat Forge securing new business wins worth INR 500 crores across industrial and commercial vehicle markets, and for the first half of the year, a total of approximately INR 740 crores. Notably, INR 300 crores of this comes from the burgeoning e-mobility platforms, indicating a strategic pivot towards future mobility solutions.

Strengthening Capital Expenditure and Financial Position

A sound capital expenditure plan saw an investment of around INR 170 crores in the first six months, supporting growth initiatives. The company boasts a solid balance sheet with more than INR 2,200 crores in cash. It has adeptly managed to cut down long-term debt by nearly INR 300 crores in half a year, underscoring financial prudence and strength.

Improvement in International Performance

After grappling with losses of around INR 34 crores at EBITDA level in the international segment, a turnaround led to a profit of INR 9 crores across U.S. and European operations. This improvement is expected to continue, targeting a breakeven and then profitable quarters ahead, driven by increased capacity utilization which is currently at 50% in the U.S. and 70% in Europe.

M&A Activities and Defense Business Augmentation

In the realm of mergers and acquisitions, the company has completed strategic deals worth around INR 500 crores, focusing on new technologies and industrial capabilities. These are poised to strengthen their market position in India and bolster export potential. The defense order book is witnessing a robust increase, promising a continued influx of capital and revenue products augmented by a promising order pipeline.

E-Mobility and Repowering Ventures

The company’s push into e-mobility is crystallized by the INR 300 crores orders from global electric vehicle companies, marking it as a significant player in the supply chain for the EV sector. Additionally, the keen interest of the government to electrify buses opens a new avenue for the company's repowering business, pointing towards potential opportunities in the near future.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Bharat Forge Limited Q2 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, Joint Managing Director, Bharat Forge Limited. Thank you, and over to you, sir.

[Amit Kalyani, executive]

Good afternoon, ladies and gentlemen, and thank you for joining our investor call. Today, we're going to have a little change of format, and I'm going to request our CFO, Kedar Dixit, to take you through the call. I will be here in case any Q&A is needed. Thank you.

[Kedar Dixit, executive]

Good afternoon, everyone, and welcome to the Bharat Forge conference call. I'll take you through the highlights of this quarter. So talking about the stand-alone business, Q2 was a strong quarter with robust performance across sectors and geographies. The company has registered record volumes, top line as well as profitability in this quarter. Sales grew by almost 21% on a Y-o-Y basis, which is primarily driven by 2 key sectors, passenger vehicle exports, which has shown a substantial growth of almost 39% and domestic industrial business, which grew by 50%. This is primarily by execution of defense orders, which have started since last 2 quarters.

As far as PV exports are concerned, it's -- now accounts for almost 1/4 of the total export business. It has been a phenomenal success story of market share gains, increasing value add and addition of new geographies. EBITDA has -- also grew by almost 36% to INR 616 crores. There has been a margin expansion of almost 300 basis points, now stands at 27.4% on a Y-o-Y basis, driven majorly by better product mix and cost reduction initiatives by the company, which is -- which are continuing.

PBT before exchange gain loss was at INR 473 crores, which is the highest so far in this quarter as against INR 358 crores for the same quarter last year and PAT for the quarter stands at INR 346 crores. During the quarter, the company has also won INR 500 crores worth of new business spreading between the industrial as well as the CV market. This figure stands at around INR 740 crores for H1 of this year, and this includes business wins of almost INR 300 crores for e-mobility platforms.

Our balance sheet continues to remain strong with cash in excess of INR 2,200 crores. We have reduced our leverage by the long-term debt of almost INR 300 crores in the last 6 months and ROCE net of cash has reached up to 20% mark. Our CapEx during the first 6 months was about INR 170 crores for this -- for stand-alone business. It is also worth highlighting that in first half of '24, we have surpassed what we have posted in -- as a full year of FY '20 in terms of top line EBITDA as well as PBT on almost 40% lower volumes.

This is basically because of the better product mix, cost reduction initiatives and move towards from component to product. Coming to overseas subsidiaries. As compared to last year same quarter, we had a loss of almost INR 34 crores at EBITDA level, which is now a profit of INR 9 crores between U.S. and Europe. As far as European operations are concerned, we have posted EBITDA of INR 35 crores, which is slightly lower than last quarter, but this is mainly on account of the holiday season in Europe.

U.S. operations have posted an EBITDA loss of INR 26 crores in this quarter. But as we go in the subsequent quarters, the losses will come down, and the first target is to have a breakeven at EBITDA followed by breakeven at PBT. It continues to narrow its losses as the utilization level keeps on increasing gradually. The CapEx for Phase 2 is on track in the U.S. And the current capacity utilization as far as aluminum business is concerned is about 50% for U.S. and 70% for Europe. We are seeing month-on-month improvement in operating performance and the numbers in the September quarter are not the true reflection of the improvement, what we have able to achieve. This will -- obviously, will improve over the next quarters.

Talking about the India manufacturing for our subsidiaries, which is our industrial business, for was the first quarter of consolidation of ISML acquisition, which has a positive EPS starting from first quarter itself, JS Auto, our casting venture, has won new business of INR 55 crores during the quarter.

And in this quarter, we have seen about 28% growth in sales for casting business and 38% increase in EBITDA. This is -- this includes about INR 4 cores of acquisition expenses towards ISML, which has been charged off to P&L, and their ability to accelerate is being impended by structural challenges in the wind industry and softness in construction mining, which are the 2 bigger sectors for JSA.

I'll hand over to Mr. Amit Kalyani for the comments on the business.

[Amit Kalyani, executive]

So our PV exports were at an all-time high of about INR 550 crores, despite key markets still down 10% to 15% from ICE. Industrial exports were also at a high, despite the oil and gas business being down, almost 60% from their peaks that we witnessed in Q2 FY '19. This has been possible because of our focus on continuing to address new segments such as construction and mining, aerospace and others. Not only has this further reduced cyclicality, but also improved profitability of the industrial pipe.

On e-mobility, we will continue to make progress. The 2-wheeler side of the business has been affected by the reduction in same subsidy. But we have taken that in our stride, and we are rejigging our platform there to take advantage of what challenges come in place. On the repowering side, we get a good traction. Our test trucks have now covered 200,000 kilometers in test runs and 20,000 kilometers in actual loaded customer use case. So we see this also being a very positive development with a good future coming in the next few quarters.

On the defense holdco, we have won orders worth over INR 1,100 crores for multiple customers and product segments, which will be executed over the next 24 months. We continue to see a strong order pipeline across both capital and revenue products. Our defense order book is steadily increasing and becoming broader based, encompassing artillery systems, unmanned vehicles, components and solutions for naval forces and unmanned systems.

In the -- I'm going to talk about M&A. In the past 3 years, we have done 3 strategic deals with a cumulative outlay of about INR 500 crores focused on industrial and new technologies.

We continue to focus on M&A transactions, largely domestic with strong manufacturing and management capabilities, addressing the India industrial opportunity, but also with the potential to export globally. As our near-term outlook gets clouded by geopolitical crisis, we continue to focus on increasing our market share in the traditional business sectors, execute orders on our defense business, continue with growing our e-mobility part of the business across components, power electronics and repowering.

We will leverage our strong balance sheet to do opportunistic M&A in India. And last but not least, we will work to fix the overseas business profitability with the clear and concrete steps across both steel and aluminum. Thank you very much. I think our team will now be happy to take your questions.

[Operator]

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

[Kapil Singh, analyst]

Congratulations on a strong performance for the quarter. My first question is on EV orders. The INR 300 crores orders, which you could talk about what is the profile of customers here? Are these leading 2-wheeler or 3-wheeler companies? And what is also the type of products mainly where these orders have come from?

[Amit Kalyani, executive]

So I will only say this. These are global companies manufacturing electric vehicles and -- electric vehicle products. And our orders are to supply them components and subsystems.

[Kapil Singh, analyst]

Sir, is it possible to share some details like which segments they are in this? Or which type of products these are?

[Amit Kalyani, executive]

I can't share any more than that right now. It's not 2 and 3-wheeler, okay? It's definitely not 2 and 3-wheeler. That's all I'd say.

[Kapil Singh, analyst]

Understood, sir. And sir, you also talked about repowering business for CVs. We also hear that the government is very keen to electrify buses. So in case of buses also, is there a opportunity for repowering the buses?

[Amit Kalyani, executive]

Yes, we are already running POCs -- I mean we are already doing repowering for certain customers with whom we will run the POC. And this is a completely made in India solution, designed in India, engineered in India. So I think it is a good solution for a country like ours. And that is something that we are focusing on.

[Kapil Singh, analyst]

Sure sir. And on the revenues mix, if I look at it, the domestic CV revenue has seen a little bit of a dip, whereas the export CV revenues have seen Q-o-Q increase. If you could just talk us through what's happening there, that would be helpful.

[Amit Kalyani, executive]

No. But if you look at some of the manufacturers of CVs, there has been a destocking that they are doing because of inventory levels. So I think we're in line with that in India. And globally, we have lots of new programs that are coming on board, new market share that we have won and new products that we have developed. So that's allowing us to grow our overseas business.

[Kapil Singh, analyst]

Sure, sir. And lastly, if you could talk about the PV exports. We've seen a very good ramp-up this quarter. So which geography are you mainly seeing this ramp-up? And through the year, should we expect further ramp-up in revenues from these levels?

[Amit Kalyani, executive]

So on the PV side, we will expect to see growth continuing because we have a lot of business that we have won, where some of it is already ramped up, some of it is yet to ramp up. Some of it got affected because of the current problems that are being faced in the U.S. in the vehicle market. But we expect to see the PV sector grow for us globally with a large part of the growth coming from exports and from pure Indian OEMs.

[Operator]

Next question is from Amyn Pirani from JPMorgan.

[Amyn Pirani, analyst]

Yes. My question was on the U.S. aluminum business. The losses have been coming down quite sharply. But you also mentioned that you are already hitting 50% utilization levels. So what is the kind of utilization level, which we should consider for a breakeven for this kind of business?

[Amit Kalyani, executive]

See, the breakeven year is a combination of not just breakeven -- I mean not just capacity utilization. It also needs the pricing to come into effect, the repricing. So it's a combination of the 2. But at 70% to 75%, we should be able to break even with our pricing having been adjusted.

[Amyn Pirani, analyst]

Okay. Okay. And over a period of time, is there an opportunity to bring down this breakeven level like over the next 2 to 3 years or...

[Amit Kalyani, executive]

Once the second phase comes into place, yes, because fixed costs will get amortized across a larger amount of products.

[Amyn Pirani, analyst]

Okay. That's helpful. And on the defense side, we had seen a very strong uptick in KSSL revenues last quarter. This quarter also, there has been an improvement. Given the order book, can we expect a very sharp quarter-on-quarter ramp-up going forward? Or is it like a step change and then it will stabilize and then grow from there?

[Amit Kalyani, executive]

Going from INR 300 crores, INR 400 crores of revenue to over INR 1,000 crores is quite a large jump. And I would say that whatever we are doing now is quite a large jump. Please remember that these are sectors that are very -- let's say, they're not easy sectors to export into. And they have their own procedures in which they work -- processes and procedures in which they work. So I think we are set for a good medium to long-term growth strategy here. And you will see that as we develop new markets and new products, this will only continue growing.

[Amyn Pirani, analyst]

Okay. And lastly, any update from the government on the ATAGS ordering time line?

[Amit Kalyani, executive]

As I said earlier, it's going to happen sooner than later, the process is -- I mean it's WIP right now, the whole process so it's -- I can't say anything more than that.

[Operator]

Next question is from the line of Jinesh Gandhi from Motilal Oswal.

[Jinesh Gandhi, analyst]

My first question pertains to clarification on the PV, orders which you have referred to. Given it's in stand-alone, would it be largely for the forging components or there are any electrical components also there?

[Amit Kalyani, executive]

I can't share any more information than I already have.

[Jinesh Gandhi, analyst]

Okay. Okay. Secondly, when I look at the CapEx at consol level, it's almost INR 300 crore plus higher than the standalone. So can you give some flavor on where are we doing this CapEx at subsidiary level?

[Amit Kalyani, executive]

So we have CapEx going on in multiple places. We have CapEx going on in our defense business. We have CapEx going on in our aluminum casting business, aluminum forging business and our EV business.

[Jinesh Gandhi, analyst]

Okay. Okay. And U.S. Phase 2 expansion is -- effectively, are we doubling our capacity there? Or it will be lower than that? And by then, it will start operation?

[Amit Kalyani, executive]

As I said, operation in '25.

[Jinesh Gandhi, analyst]

'25, okay. Got it. Got it. And lastly, if you can share where we are today in terms of revenues from oil and gas, defense and aerospace? I believe all of these are particularly defense...

[Amit Kalyani, executive]

I would like to share that information only on an annual basis. But if you look at our overall industrial revenue, it's growing and it's growing, thanks to our derisking strategy and our new product development strategy.

[Jinesh Gandhi, analyst]

Right, right. No, surely, I mean, clearly, the defense and aerospace are now delivering quite rapidly. So no worries, will take data at the end of the year.

[Operator]

Next question is from the line of Arjun Khanna from Kotak Mutual Fund.

[Arjun Khanna, analyst]

Congratulations on a great set of numbers. Sir, my first question is on the European operations. We've stated in the opening commentary we are at 70% utilization, and we look at EBITDA margins at 3.5%. So as we scale up, what is the peak utilization we could reach? And how do you envisage the EBITDA margins play out over a period of time?

[Amit Kalyani, executive]

Look, as I said earlier, our goal for our aluminum business is to take our EBITDA margin to the teens, okay? The steel business is a 10%, 11% EBITDA margin business. But we are going to do some restructuring there in terms of new products and more value addition, which will allow us to increase our EBITDA margins there as well. I don't think you have to look at capacity utilization only as the driver. It's going to be a combination of cost, value addition and capacity utilization.

[Arjun Khanna, analyst]

So essentially, this is something that's probably 2 years out or probably something longer as we prototype and get new products?

[Amit Kalyani, executive]

This is something we have to achieve by '25.

[Arjun Khanna, analyst]

FY '25?

[Amit Kalyani, executive]

Yes.

[Arjun Khanna, analyst]

Sure. Sir, the second question is on our PV export business. We have, obviously, scaled this up really well. And historically, at least the understanding on the Street was that this is a lower-margin segment, but with higher growth here, we have seen margins also improve. So would it be a fair thing to say that this is not more than our overall margins of the PV business at this scale?

[Amit Kalyani, executive]

I think we have managed to balance our margins with productivity and with product mix and valuation. So we will always focus on doing things that are value accretive to us. Obviously, we don't look at, let's say, return only at EBITDA. You have to look at returns as return on capital employed and not purely EBITDA, but I think even the EBITDA side has been performing quite well right now.

[Arjun Khanna, analyst]

Sure. Just a final question. In terms of defense, on the stand-alone side, would we be breaking out because in KSSL, we've done roughly INR 300 crores? How much would have been the revenues from the stand-alone business in defense?

[Amit Kalyani, executive]

I think about INR 200 crores.

[Operator]

Next question is from the line of Pramod from Incred Capital.

[Pramod Kumar, analyst]

So the first question is with regard to the Asia exports. They seem to have spiked? Is it more a short-term phenomenon or you have won some new business?

[Amit Kalyani, executive]

Pramod, we don't understand you.

[Pramod Kumar, analyst]

Sorry, I was saying these are Asia exports, which seems to have spiked up this quarter. So is it anything one-off which has happened? Or is it any new orders you have won and it's a more sustainable...

[Amit Kalyani, executive]

We have won some new orders.

[Pramod Kumar, analyst]

Okay. Or is it more to do with the China recovery and they have been able to participate?

[Amit Kalyani, executive]

No, no. We have won some new orders.

[Pramod Kumar, analyst]

So it's more a sustainable trend to go forward?

[Amit Kalyani, executive]

Yes, yes.

[Pramod Kumar, analyst]

And the second one is with regard to the Israel. If I'm right, you have some joint venture, 2 entities in that area. So what is the short-term challenge or opportunity and also medium-term challenge or opportunity considering...

[Amit Kalyani, executive]

No, right now, they're at war. So people who are running businesses have also been recruited to fight -- they're all reserves. So right now, it's not the time to talk to them or bother them with this. But I think clearly, it's going to be more opportunity because they also see the risk of having all their production only in their country. So it's not a very large country. It can be really targeted. So I think when the dust settles from all this, then we will have a chance to talk to them and figure out what to do. But it's terrible what's happening for both sides. And I just hope that this gets over soon.

[Operator]

Next question is from the line of Arvind Sharma from Citi.

[Arvind Sharma, analyst]

Sir, if you could just shed some light on what your target or aspiration levels are for the broader subsidiaries, both Indian subsidiaries and the overseas subsidiaries?

[Amit Kalyani, executive]

We already covered the overseas subsidiaries. On the Indian subsidiaries, if you look at the defense and the industrial verticals, I think they will be close to 25% EBITDA margin. That's our goal.

[Arvind Sharma, analyst]

Okay. So from this current -- obviously, current quarter is not a representative. From this, we need to go to like almost 25%. That's the goal.

[Amit Kalyani, executive]

That's our goal, yes.

[Arvind Sharma, analyst]

And by FY '25, yes sir?

[Amit Kalyani, executive]

Yes. I mean FY -- yes, I would say close to FY '25. I think we should be close to that.

[Operator]

Next question is from the line of Kapil Singh from Nomura, Kapil, can you hear us?

[Kapil Singh, analyst]

Yes. Sir, if you could just talk about the -- there is an improvement in gross margin as well. If you could just talk us through, is there any commodity benefit also visible there? Or is it just the product mix, which is driving there?

[Amit Kalyani, executive]

So this is more of a product mix and better mass comp controls. There's a very less in the way of commodity.

[Kapil Singh, analyst]

Okay. And if you could also talk about the outlook for both the domestic and the global businesses across segments that will be...

[Amit Kalyani, executive]

It continues to remain strong. The only thing -- the only damper could be the geopolitical situation, but we have new products, new programs which are ramping up. So on an overall basis, we should be fairly good on a quarter-to-quarter basis.

[Kapil Singh, analyst]

I was talking more about the U.S. truck industry and domestic truck industry and also industrial. If you could just talk about the industry outlook for these through the next 1 year.

[Amit Kalyani, executive]

No, the industrial outlook for the U.S. is flat, but CVs also it is flat. It's at about 300,000 to 310,000. In India, the CV outlook should become positive next year. And I think the industrial outlook in India is positive. The one sector where we see a lot of concern is the renewable energy sector, especially wind energy because it's a very CapEx-saving sector, and it takes a lot of time to set up anywhere in the world. And because of this, it's not a very -- that sector is under a bit of a cloud.

[Kapil Singh, analyst]

Sure, sir. And lastly, on -- in terms of cost, if you could talk to what could be the impact of much higher interest rates that we are seeing globally for the businesses? And also recently, there have been some news reports that the labor unions, for example, in U.S. are requesting much higher wage hikes. So just your views on these 2 probably..

[Amit Kalyani, executive]

So what you talked about the labor union that also what we read in the news, but this is largely to do with the OEMs and certain Tier 1s. We haven't read the fine print to understand this yet. Interest costs, obviously, are affecting everyone. In fact, the real GDP growth in large parts of the world is now negative because of inflation running anywhere from 5% to 7%, 8%. So, I think we just have to wait and watch. But clearly, interest rates being high are going to have a damping effect on certain sectors. But the government in the U.S. is hell-bent on printing money and funding a lot of these sectors. So it remains to be seen what happens in a run-up to the elections.

[Operator]

Ladies and gentlemen, we will take that as the last question. I now hand the conference over to Mr. Amit Kalyani for closing comments.

[Amit Kalyani, executive]

Ladies and gentlemen, thank you very much for your interest in our company. If you have any more questions, please contact our company directly. And I want to wish you and your family members a very happy Diwali and look forward to a happier and safer year going forward. Thank you very much. Have a nice day.

[Operator]

Thank you very much. On behalf of Bharat Forge Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.