Bharat Forge Ltd

NSE:BHARATFORG

Earnings Call Analysis

Bharat Forge Drives Growth with Robust Orders and Margin Expansion

Bharat Forge reported stable Q2 performance with revenue flat at INR 2,247 crores but margin growth by 140 basis points to 28.8%, driven by a favorable product mix. The order book expanded to INR 6,000 crores, with defense orders totaling INR 1,400 crores in H1. The company anticipates continued growth in the aerospace sector, projecting substantial annual increases. Though facing challenges in Europe, U.S. operations remain strong, and domestic growth is expected to surpass exports moving forward. Bharat Forge outlines a targeted 40%-50% growth in defense revenues this fiscal year, indicating a positive outlook for the long term.

Earnings Overview and Financials

Bharat Forge Limited reported a Year-over-Year revenue growth of approximately 2%, reaching INR 7,795 crores for the first half of the fiscal year. Notably, EBITDA improved by 16.8%, reaching INR 1,449 crores, and profit before tax (PBT) surged 24.5% to INR 872 crores. Furthermore, EBITDA margins increased by 40 basis points to 18.6%, primarily driven by strong performance from the Indian market. The company's Return on Capital Employed (ROCE) stands at 18%, indicating a robust financial position amidst maintaining a strong liquidity status.

Geographic and Sectoral Insights

The operational landscape reveals contrasting demand across different geographies. In Europe, there are challenges, with analysts noting a weakening environment. However, in India, the outlook appears optimistic post-elections, as government spending is anticipated to boost various sectors including Commercial Vehicles (CV), agriculture, and passenger cars. In the U.S., strong demand is expected to persist. Bharat Forge's strategy of diversifying revenue across multiple sectors like defense, industrial, aerospace, and casting is expected to cushion against regional downturns.

Defense and Aerospace Business Growth

The defense sector remains a key focus, showcasing an impressive order book with INR 1,400 crores won in the first half of the fiscal year. The company foresees substantial growth in the aerospace segment, projecting an increase from last year’s business of INR 240 crores to over INR 300 crores this year alone. The management expects the defense and aerospace verticals to become significant revenue drivers and emphasizes that results should be evaluated on an annual, rather than quarterly basis due to the long-term nature of these contracts.

Future Revenue Expectations and Investments

Looking ahead, Bharat Forge anticipates domestic revenues to grow faster than export revenues, signaling a shift in focus as the business matures. Management forecasts that domestic revenue could account for 30% to 40% of overall business in two years. The potential for new orders in the defense sector is abundant, with a current order book of approximately INR 6,000 crores, not including upcoming contracts for artillery systems with a estimated market size of INR 7,000 crores, where Bharat Forge could capture around 60%.

Challenges and Strategic Directions

Despite the positive growth trajectory, Bharat Forge faces operational headwinds in Europe and parts of North America, with indications of a demand slump potentially necessitating reforms in the overseas business. Management plans to streamline operations in troubled regions and remains cautious about quarterly earnings volatility due to the lumpiness of order conversions. A significant reduction in CapEx, especially in Indian operations, is on the horizon, with CapEx for the next half of the fiscal year expected to be substantially lower than the first half.

Conclusion and Long-term Prospects

In conclusion, Bharat Forge's diversified portfolio, robust balance sheet, and strategic growth in the defense and aerospace sectors position the company for sustained growth. The management is keen on leveraging M&A opportunities that align with its growth strategies, particularly in expanding local manufacturing capabilities as part of the 'Make in India' initiative. As global demands shift, Bharat Forge is poised to adapt and thrive in its core markets, driving long-term shareholder value.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Bharat Forge Limited Q2 FY '25 Earnings Conference Call. [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, Bharat Forge Limited. Thank you, and over to you, sir.

[Amit Kalyani, executive]

Good afternoon, ladies and gentlemen, and thank you for your time in attending our call. I will now hand over the explanation part of the call to my colleagues, Kedar and Raj Gopal, and then I will be happy to take your Q&A.

[Kedar Dixit, executive]

Good afternoon, ladies and gentlemen, and welcome to our conference call. Talking about the stand-alone business, Q2 stand-alone performance was resilient given the underlying demand conditions. While the top line was flat at INR 2,247 crores, the margin expanded by 140 basis points to 28.8%, reflective of a favorable product mix. Europe was the weak link in otherwise strong quarter across Commercial Vehicle and passenger vehicle export business.

The return ratios continue to inch higher with ROCE net of cash at 20.5% from last year of 20%. Our leverage continues to go down while we repay our debt with our gross debt to equity ratio now at 0.46x and 0.24x on net basis. A stronger balance sheet and cash on hand of almost INR 2,000 crores put us in an invariable position to tap new opportunities as they arise. Both in organic and inorganic front.

The traditional business won new orders of about INR 646 crores in H1. And during the same period, across the segments, we won orders of INR 2,200 crores, largely dominated by defense of almost INR 1,400 crores followed by JSA, aerospace and the traditional business.

Talking about the overseas business, the performance should be viewed in the background of seasonally weak quarter because of holiday season. Weak demand environment in Europe and specific customer-related issues impacting European and North American utilization. In H1, European operations posted EBITDA of INR 75 crores, while U.S. operations reduced the EBITDA loss to INR 45 crores.

Talking about Indian operation, JSA continues to register strong performance -- operating performance in Q2 with revenue and margins both showing improvement, coupled with robust orders wins of INR 173 crores in the first half. The most heartening aspect of the business is the diversification on the customer and product front, which has happened over the past 2 years with our automobile traditional business.

Talking about defense, the Group posted a revenue of INR 509 crores in Q2, registering jump of impressive 6% to 7% year-over-year. And with order reach of almost INR 1,400 crores in H1, the executable order book as of 30th September now stands at about INR 5,900 crores.

This order book does not include any potential orders from domestic or export market. The sequential drop in revenue is due to completion of orders on exports front. Important to understand that new orders will take time to convert into revenues and may create lumpiness in quarterly performance.

While the business remains on a strong fundamental will be later the 3- to 5-year horizon. Talking about the consolidated business for H1. On a Y-o-Y basis, the revenue grew by about 2% to INR 7,795 crores. While EBITDA grew by 16.8% to INR 1,449 crores and PBT increased by 24.5% to INR 872 crores.

EBITDA margins have also improved by 40 basis points to 18.6% in the first half by the bulk of the improvement driven by our Indian entity. Consolidated balance sheet continues to remain robust with ROCE of about 18% as of September '24 and the balance sheet continues to remain strong with ROCE [indiscernible] improving amidst the strong liquidity position. Now I hand over to Amit.

[Amit Kalyani, executive]

So, I just want to give you a little high level, let's say, thoughts about what I think about the current environment and going forward. I think the demand environment is challenging in Europe. In India, I'm hoping that with the stability in the government and the elections, all behind us now that the spending is starting. This is what we're hearing from people and that should have a, let's say, a follow-on effect on the CV market and hopefully, on the agro market as well and then also on the passenger car industry.

However, America is strong, and we expect it to remain strong next year as well. Also, our diversified revenue streams across geographies and sectors such as defense, industrial, aerospace and casting, both aluminum and iron should insulate us to a great extent because in many of these areas, we're growing our market share and increasing our total business levels. And most of this we're doing with capacity that's already in place.

This is what we believe is going to drive our business for the remaining part of the year. In terms of order book and order wins, we have a strong order book across sectors, and we continue to win business, just as Kedar mentioned, we have won INR 2,200 crores of business in the first half. INR 1,400 crores that was defense, almost INR 300 crores of that is aerospace. Put that into context. Last year, Aerospace business was INR 240 crores.

So it's more than the entire business we did last year. And this is annualized kind of business that we will do going forward once it fully ramps up. So we expect to see the aerospace business grow quite substantially and become multiple times the size of its business that it is now.

We see multiple new customers, and we also see tremendous momentum of China Plus One and movement from other parts of the world into India and increased interest -- substantially increased interest of U.S. customers, especially after the elections. We are feeling some pain in our European and Swedish operations. We are downsizing these operations. And we have committed that we will fix these businesses in a short period of time, and that is what we are working on.

In terms of defense, I just want to mention one thing, please don't look at quarterly revenues because these are not quarterly kind of businesses, please look at it on a Y-o-Y basis. And as we have mentioned, we are guided for a strong Y-o-Y growth, and we maintain that. In terms of M&A opportunities, there are plenty of opportunities, but we are looking at opportunities which are synergistic, which are complementary and where we can significantly add value and go from components to systems, get into new products, new sectors, new geographies and also where we can expand the Make in India strategy that we have.

So we will pursue this opportunity. But please remember, this is only in India. In terms of business vertical, I will expect the CV vertical to break the EBITDA breakeven in the next 2 to 3 quarters. Because of the current slowdown in downturn in Europe, it is taking a little longer, but we are still working hard at it, and we are confident that we will get this under control as soon as possible. That's really all I wanted to say, except that we are -- business is strong. We keep winning a lot more business. We're increasing our market share with our strategic customers, and we continue to get into new sectors and geographies.

And sorry, I forgot to mention that we have added three new customers in the first half of this year in the component business. So that's really all I wanted to say, and now we are happy to take your questions.

[Operator]

[Operator Instructions] The first question is from the line of Jinesh Gandhi from AMBIT Capital.

[Jinesh Gandhi, analyst]

A couple of questions from my side. One is with respect to the defense business. So the revenues which we have seen so far or the order book which we have today, is it now without any gun orders, are the export gun orders being largely delivered? Or there is any pending order -- pending...

[Amit Kalyani, executive]

I'm not able to hear you. It's very muffled, your sound. It is very unclear.

[Operator]

Mr. Ganesh could you come a bit closer to your handset.

[Jinesh Gandhi, analyst]

Is it better now?

[Amit Kalyani, executive]

Yes. Yes. Much better.

[Jinesh Gandhi, analyst]

Sorry, my question was on our defense business. So is the export gun order, which we have got now being totally serviced or there is anything pending on that side?

[Amit Kalyani, executive]

No, it's not fully serviced. It's still being delivered. We still have a large order pipeline. Our total order pipeline right now is about close to INR 6,000 crores.

[Jinesh Gandhi, analyst]

Okay. Sorry, referring to the gun export order, which we had got, I believe that was supposed to be serviced by end of FY '25 if I'm not mistaken.

[Amit Kalyani, executive]

It is still being delivered. And we have also got -- as I mentioned, we have a total auto book, which is already signed of INR 6,000 crores.

[Jinesh Gandhi, analyst]

Right, right. And secondly, there have been news article about Bharat Forge being selected as one for [indiscernible] guns. So how should we think about ordering now? Are there any further steps left before ordering is done? And in that context, how do you see orders to come and by when you see orders to come?

[Amit Kalyani, executive]

Yes. So there is a process that goes on, which is currently going on. And this potential order book that will come from, this is not included in our existing order book.

[Jinesh Gandhi, analyst]

Sure, sure. So do you expect it to come in this financial year or?

[Amit Kalyani, executive]

Yes. That's correct.

[Jinesh Gandhi, analyst]

Okay. Secondly, with respect to the aerospace business, so how should we think about -- you're talking about exponential growth from where we are, and there are clearly tailwinds there. But any sense on what was the revenue of aerospace in the first half?

[Amit Kalyani, executive]

It's in the region of about INR 100 crores.

[Jinesh Gandhi, analyst]

INR 100 crores. Okay. Got it. And last question is on CapEx. So if I look at our CapEx...

[Amit Kalyani, executive]

You have a question on CapEx? Please go ahead.

[Jinesh Gandhi, analyst]

Yes. So CapEx in first half was close to INR 820 crores. How should we think from the full year CapEx and there all we are investing because at subsidiaries, it seems we have invested close to INR 500 crores in the first half. So can you talk about...

[Amit Kalyani, executive]

There's not much CapEx left in the subsidiaries. This was for our second phase in the U.S., there's hardly anything left there, maybe about $8 million to $10 million. The rest of it was all in India. And I think second half in India, we have about significantly lower CapEx.

[Jinesh Gandhi, analyst]

Okay. So the CapEx...

[Amit Kalyani, executive]

specifically maintenance CapEx.

[Jinesh Gandhi, analyst]

Okay. The second phase of U.S. aluminum has already been invested, and we will see doubling of capacity or?

[Amit Kalyani, executive]

Yes. Doubling the capacity.

[Jinesh Gandhi, analyst]

And this will be again by...

[Amit Kalyani, executive]

Only next year.

[Operator]

The next question is from the line of Kapil Singh from Nomura Wealth.

[Kapil Singh, analyst]

My question was on defense orders. Can you throw some light on the products and maybe if the geographies from where we have won these orders? And also, how do we calculate the order book? Just because last quarter, it was about INR 5,400 crores, and we have executed INR 500 crores, and we have won INR 640 crores more orders. So just trying to understand the math around the order book.

[Amit Kalyani, executive]

No, see, we have -- last quarter, it was INR 5,000 crores -- INR 5,400 crores. In the first half, we have executed about INR 900 crores, and we have added INR 1,400 crores in the first half, okay?

[Kapil Singh, analyst]

Understood. So because in the first quarter, we had mentioned that the order book was already INR 5,400 crores.

[Amit Kalyani, executive]

Today the order book is about INR 6,000 crores.

[Kapil Singh, analyst]

Okay. So I mean this is -- from INR 5,400 crores, if I add INR 640 crores for the new orders in and I subtract INR 509 crores for the execution this quarter, the math is not adding up to INR 5,900 crores.

[Amit Kalyani, executive]

Okay. We can take that offline because you're talking about a difference of 10% that's what I will try to explain to you.

[Kapil Singh, analyst]

Sure, sir. And on the areas from which we have won the order...

[Amit Kalyani, executive]

Areas. I can talk about the products. It's a combination of vehicles, guns and components.

[Kapil Singh, analyst]

Okay. Okay. The second question was on overseas. You talked about some weakness in Europe. And also if you could give some perspective on Europe, in particular. Is there a concern that you can drop further or already they or what are the customers saying there, whether there is a further risk of drop...

[Amit Kalyani, executive]

Than anything from customers on a long-term basis. It's -- the projections come on a monthly basis, and that's very all. Everybody is saying that things are going to get better next month, next year or so I think next year, realistically, I think next year, things will probably improve.

[Kapil Singh, analyst]

What about the progress on margin improvement trajectory, how things are shaping up there?

[Amit Kalyani, executive]

Yes. I think if our business was at the level which we had projected, our margins would have been significantly better. But obviously, we have to adjust our costs to make sure that even at this level we achieved fairly decent margins. So I think we are about a quarter or 2 away from getting to that level in Europe. On the aluminum side, we've made a lot of good progress. And I think from next year, we will have a much better situation. On the steel side, we have issues on the demand, and therefore, we are doing a lot of work on the cost side.

[Kapil Singh, analyst]

Okay. Like earlier, we were talking about reaching double-digit margins. So any visibility you have by -- is there any compensation pending from the customers on costs?

[Amit Kalyani, executive]

I think whatever actions we have to take on the aluminum side are done and that will all result in [indiscernible] the results for the next year. On the steel side, we have only a demand issue.

[Kapil Singh, analyst]

Okay. And sir, you were also -- there is this discussion about tariffs coming up in the U.S. market. So how is the company and the customers thinking about it in terms of contingency planning?

[Amit Kalyani, executive]

First, everybody -- there's a lot of speculation about it. So first, let the guy come into the White House. Let him make it concrete what is it that is going to happen. Then we'll have to react. But the point is I think that India is going to be in a good position. I think that we have enough capacities and capability to deliver, and we should be well poised to take advantage of the opportunity if it shows up.

[Kapil Singh, analyst]

Sure, sir. Just lastly, Asia revenues also saw Y-o-Y decline. Any color there? What happened?

[Amit Kalyani, executive]

So we had a few countries where we were supplying where they have a slowdown right now. So those numbers are not very large. And there are also inventory correction happening there.

[Operator]

The next question is from the line of Amyn Pirani from JPMorgan.

[Amyn Pirani, analyst]

You mentioned something on the India business, especially on the Commercial Vehicle side, also hopefully improving as government CapEx starts -- so probably, the first half has been quite tough on a weak base of last year as far as trucks are concerned.

Right now, are the customers giving any sign of any production improvement in the monthly or quarterly order book? Or is it more of an expectation for next year that you are hopeful?

[Unknown Executive]

See, the first half, you have to also consider that it's come back, it's been on the back of an election, and there is a cycle associated with it. There are some inventory factors associated with it. and so on. So that has obviously seen a muted demand the general belief is that the India growth story is still intact, and we should start seeing a better traction in terms of orders, including MHCV and -- but it might take maybe 1 or 2 quarters for it to start being more visible as inventory and all of that disappears from the system. But overall, the outlook of most OEMs is reasonably positive. Not excessively positive but positive.

[Operator]

[Operator Instructions] The next question is from the line of Pramod Amthe from Intra Research.

[Pramod Amthe, analyst]

So the first question is with regard to the subsidiary investments. I think you have indicated some investments in three of the subsidiaries. Can you elaborate the reason for the same?

[Amit Kalyani, executive]

So one subsidiary is we have invested in the second phase of our CapEx in the U.S. Second is to invest in our CV business to set up some assets which will start generating revenue from next year.

[Pramod Amthe, analyst]

And there's one for a power train, if I'm not wrong.

[Amit Kalyani, executive]

Power trading is for solar.

[Pramod Amthe, analyst]

Power train.

[Amit Kalyani, executive]

Oh. Power train. Sorry. that is same thing, that is the EV.

[Pramod Amthe, analyst]

Okay. And that is for what capacity enhancement for the product lines or.

[Amit Kalyani, executive]

What are you talking about? Are you talking about enabling resolution, or are you talking about what we have already invested?

[Pramod Amthe, analyst]

No, along with some key management personnel change, you have given a table where the...

[Kedar Dixit, executive]

So these are enabling resolutions. The investment will happen over a period of time, but this is not a new investment or we are not going to do any new projects outside India, this is largely India based and some of the loan repayments, which we are planning to do.

[Pramod Amthe, analyst]

No, this is an enabling resolution for a future period? And what period for this is involved?

[Kedar Dixit, executive]

This is maybe up to next 12 to 18 months.

[Pramod Amthe, analyst]

Okay. And second one is with regard to defense, it's good to see the bulging order book on the defense side. Can you give some qualitative information in terms of what type of client feedback or engagements you are having, which can result into better order inflow visibility to your pipeline?

[Amit Kalyani, executive]

Only in the defense business, we cannot talk about that level of detail. But we have significant engagement and we are very confident that we will continue to grow our order book very substantially. And we expect our defense business to be one of the main drivers of our growth of the company going forward.

[Pramod Amthe, analyst]

And excluding the domestic, which has taken the time, any targets you are internally looking at in the order book buildup by end of '25 or '26?

[Amit Kalyani, executive]

The whole order book that we have right now is largely exports. The largest exporter of defense equipment from India.

[Pramod Amthe, analyst]

Right. But Amit, the challenge is for us to get some visibility because these are like a one-on-one interactions.

[Amit Kalyani, executive]

So, like I said, if you look at the defense business, please look at it as an annual business, not on a quarter-to-quarter basis.

[Pramod Amthe, analyst]

So hence, I was asking a medium term, any thoughts how will you build the order book, what is the scale you will be able to do...

[Amit Kalyani, executive]

Last year, we did about INR 1,300 crores. So we have said that we have close to 40% to 50% growth this year. Now we are hoping that we are able to keep a substantial level of growth even going forward next year.

[Operator]

The next question is from the line of Nitin Jain from [ Fairview ] Investments.

[Unknown Analyst]

I have just one question. It's on the ATAGS order. So you indicated to an earlier caller that we expect to receive the order by the end of this financial year. So would you be able to quantify the size of the order that we will -- that Bharat Forge will receive because like there were some media reports that the current order size is about INR 7,000 crores, and we would be eligible for about 60% of the order. And a follow-up to that is that would it be reasonable to assume that it will contribute to revenue from Q1 of FY '26?

[Amit Kalyani, executive]

So everything you said before the Q1 '26 is directionally correct. Okay. There's a process. First, the order has to get, there's a negotiation process and you get some order contracting is done, then you have to do FOPM supply and then you have start bulk supply once the FOPM is approved, okay? So this whole process of approvals past the -- after getting the full order takes about 6 to 7 months. And then you can start supplies. So let's say, about 12 months at the most.

[Operator]

The next question is from the line of Chirag Shah from White Pine Investment Management Private Limited.

[Chirag Shah, analyst]

Amit, on the defense side again. So the question is while our export order book is building up very well. Do you have any comment on the domestic side because the entire effort when we started originally was for Make in India and the effort that government was putting at that point of time. So if you can just give an update on how are you looking at it today? And from a next 12- to 24-month perspective, at least on the order flow side, not necessarily revenue.

[Amit Kalyani, executive]

Let me answer it this way. I would expect our revenues in India from next year to grow at a faster rate than the revenues from exports simply because we are starting from a smaller base. And eventually, I think domestic will become 30% to 40% of our overall business.

[Chirag Shah, analyst]

Okay. And in domestic from next 12 to 24 months, what part of products is where you are seeing this revenue visibility because you have a number of products, right? Your approvals are -- you have approvals for two, three products or product lines.

[Amit Kalyani, executive]

Sorry?

[Chirag Shah, analyst]

So which part of the product portfolio from India you are seeing the visibility of revenue?

[Amit Kalyani, executive]

Our products are basically land systems, which are artillery, vehicles, then we have -- on the naval side, we have naval guns, we have other systems that go into Naval and we have our entire unmanned systems, okay? These are the three areas that we operate in. And this is where we expect the -- mature business is the artillery and the vehicle business. Then the other business will grow. But our Marine business is now at about 10% to 15% of our overall business. And it will continue to be at this percentage of the overall revenue. And what is not there is now the unmanned systems, which will also pick up.

[Chirag Shah, analyst]

So from a domestic perspective, from Indian government...

[Amit Kalyani, executive]

So the cable naval right now is all domestic. What I'm saying is that is a business that will grow first domestically and then globally.

[Chirag Shah, analyst]

Okay. So naval business is the area where you are seeing percentage for the next 12, 24 months?

[Amit Kalyani, executive]

Yes.

[Chirag Shah, analyst]

That is how I should look from India perspective?

[Amit Kalyani, executive]

That's correct. Exactly.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Amit Kalyani for closing comments.

[Amit Kalyani, executive]

So ladies and gentlemen, thank you for attending our investor call. As I mentioned earlier, we are looking forward to the rest of the year and the coming years with optimism driven by our diversified business portfolio. And we see significant opportunities in our traditional businesses and some of our newer businesses, especially in industrial and in defense and the forging business because we see a lot of migration of demand from other geographies into India. So I think this will drive our medium- to long-term growth and continue to deliver strong returns and improve our return ratios because for most of these businesses, we don't need significant CapEx. Thank you very much.

[Operator]

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