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Bharat Forge Ltd
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Ladies and gentlemen, good day, and welcome to Bharat Forge Limited Q4 and FY '23 Results Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Amit Kalyani, Deputy Managing Director, Bharat Forge Limited. Thank you, and over to you, Mr. Kalyani.
Good afternoon, ladies and gentlemen. Michelle, thank you very much for the introduction. Good afternoon, ladies and gentlemen, and thank you very much for attending our Q4 and FY '23 analyst and investor call. This is Amit Kalyani, and I have with me members of our finance and strategy, business and operations team. So I'll quickly take you through highlights across the board and then open up for Q&A.
So if you look at our standalone business, we've had a record sales of almost INR 1,997 crores in Q4 '23 and INR 7,573 crores in FY '23. This has been a growth of roughly about 21% on sales. And this includes the pass-through of raw material and other price increases that we have received. In terms of tonnage, it was about 11% increase.
Our exports were at [ 550-plus million ]. EBITDA margin -- that is for the year. EBITDA margin was 26.2%, which is a 100-basis-point sequential improvement due to product mix. PBT is, of course, impacted by the finance cost and exchange loss. We see a normalized interest outflow of about INR 60 crores to INR 65 crores per quarter based on the current interest rates.
Passenger vehicle revenues have grown about 53% to INR 1,307 crores for FY '23 on the back of a 71% growth in exports. Aerospace has now accounted for 11% of industrial exports and more than doubled from last year. And we expect that this will again grow at a healthy double-digit, 30%, 40% plus number this year as well, possibly even more.
In terms of new order wins in the automotive -- in the stand-alone business, we have new order wins of about INR 1,500 crores across the component business and industrial verticals. And we have successfully seen certain businesses now transition from incubation to hardware space such as defense, which I will talk about much more. And aerospace also is now on a significant growth path, and we are confident that the goal we had set of getting to INR 500 crores, INR 600 crores on an annualized basis is now within reach in a few years with very profitable business.
In terms of ESG, we've made progress across the board on ESG. ESG metrics have substantially improved. Our ratings have improved. We are now a part of the First Movers Coalition, the SDG Global Compact, and we have also been recognized by our global European customers for ESG leadership.
In terms of our overseas subsidiaries, we had an EBITDA loss of INR 49 crores in the Q4 versus INR 63 crores of last quarter. Utilization levels are beginning to increase as production stabilizes. Our aluminum forging facilities, in fact, are booked -- are overbooked, and we can move towards profitability with price increase and with the ramp-up of our business.
Based on the performance in the last 4, 5 weeks, we expect Q1 to be significantly better than Q4. In fact, I would say that the European business should be in the black in Q4 -- Q1, sorry, Q1 and the U.S. business probably from Q3. But we will see sequential improvement in all the businesses, including the aluminum business every quarter.
Coming to JSA, we achieved a revenue of INR 438 crores in the first year. We have won orders in excess of INR 400 crores, and we expect this business to ramp up very substantially over the next 2 years. We have got, across the board, interest from -- and orders from our existing customers of Bharat Forge and some new customers also because of our relationship and our backing of this business. And our acquisition of the new units in Coimbatore for ISML will close in the next 2 weeks.
With this, plus the CapEx that we are doing in Coimbatore in JSA and in ISML, we will double our -- more than double our capacity from about 40,000-odd tons to more than 120,000 tons in the next 2 years. And our revenues will also more than double from what it was in the first year in the next 2 years also. This will be a very profitable business for us and a very good acquisition and paved the way for us to create a new solid vertical, which will allow us to grow and service our customers, both existing and get into new products and segments as well.
Also in this business, we're focusing on green business model. So we are going to create a green foundry by which we have the least carbon footprint, the lease emissions, most recycling and be a supplier of choice to all our customers.
Coming to the defense business. I think this is the biggest inflection point for our company, a business that has been nurtured for by our management and developed over the last 12 years. All the IP for this is homegrown and developed in-house, has now converted itself from an incubation to a delivery business. We have an order book of export orders of over INR 2,000 crores, and we have already received the AON for 300 guns of the ATAGS. So that means that in this year, the order for the ATAGS will also be placed.
Besides this, we have significant orders on protective vehicles, return systems and components and consumables across the board, both in India and outside, and this business will also now hopefully cross $100 million in this year and move to significantly higher annual numbers going forward with a very solid profitability and return ratios.
So a business that we all were looking forward to. I think the light is -- we reached the end of the tunnel, and there seems to be a lot of light and a lot of opportunity.
In e-mobility, highlights are that on the Tork side, we've sold over 1,000 bikes, more than 2.5 million kilometers, and we have 0 recall, 0 safety incidents and no issues with any of the regulatory side or the incentive side. We are receiving incentives because every part of our vehicle is made in India, except for the batteries, which are imported and, meets all the local sourcing norms and requirements as per the government of India.
We continue to look at expanding our business ramp-up. Our new plant was just announced, start of production 6 weeks ago, and we will steadily ramp up production and cross -- get to the capacity utilization of about 1,500 to 1,800 bikes soon and then get to 2,000 and then beyond that.
Our focus continues to be to build competency, deploy the products in the market, learn from it and build a scalable supply model for components, systems and aggregates in areas where we are not even present today. So this is a completely new area, the 2-wheeler and 3-wheeler area, where we want to supply component subsystems and powertrains and be a solution provider.
In terms of outlook, I think '24 is going to be a seminal year for the company as we pivot from just components to products or from tonnage to technology. As this transformation and momentum gains over the next 2, 3 years, the positive impact on providing both growth and stability to the top line will be evident. There will be many more legs for our business to stand on and more growth drivers for its overall opportunity and growth.
As we look ahead to '24, we expect strong growth across revenues, profitabilities and return ratios driven by, [ of course ], forging business both in India and abroad and amply supported by other platform businesses such as defense, industrial and e-mobility. We believe that many of the problems ailing the overseas aluminum business is behind us, and we expect them to contribute to improvement in ratios for the consolidated entity.
For the stand-alone business, the FY '24 looks to be another good year driven by growth in the end markets globally, ramp-up of new orders won over the last 2, 3 years and increase in market share across the board.
Thank you very much. I think we can take your Q&A now.
[Operator Instructions] We have the first question from the line of Amyn Pirani from JPMorgan.
Thank you for the opening remarks on the newer areas and new revenue streams. I just had a question on the legacy business, especially on the standalone. The domestic truck business quarter-on-quarter growth seems to be a bit behind what we saw in terms of the sales. And it looks like there has been a lot of prebuy. So what is the outlook for that in the next few quarters? Are we at the end of the cycle? Or do you think there is more left in this up cycle?
I think Subodh will answer that.
So we -- can you hear me?
Yes, yes.
Okay. So you're right. We saw some prebuy in the last quarter, and we were able to cross the 400,000 as well as [indiscernible] is concerned. But at this point, at least as we see in Q1 and the projections for the next 1 or 2 quarters, we see a reasonably strong demand continuing. And based on what we see and what we hear and what we experienced, there could be a couple of factors. One is there are no inventories in the system. I think the retail sales have also been strong because of the prebuy. So there is an expectation that there will be some rebuild of inventories in the system. The demand seems to be reasonable as well given all the infra push and all of that.
For the next 3, 4 months, there is a strong projection from everybody. In fact, we are seeing demand higher than Q4 as well at this point. Of course, we are monitoring this carefully. But for now, this is what we see. So we are not seeing any let down from a demand point of view as we speak right now.
That's good to know, sir. And similarly, if you can give a comment on the trends in the global truck business. So you've hit a INR 500 crores plus revenue in this quarter. How are the production trends going forward and your business in the next few quarters?
As far as global business is concerned, if I look at the U.S. in particular, then the demand is still holding on. The production levels have not changed. They've been pretty constant over the last 18 to 20 months, and that continues right now. I think in previous calls, we have also explained that the backlogs are still reasonably healthy. And as a result, truck builds continue.
There are some challenges that the market is facing relative to supply chain. It's not just semiconductors. It's a couple of other things as well. So there is a certain up and down from that point of view. But somehow, we are seeing production steady. And as a result, we are also seeing our demand steady. We are also seeing some growth, in fact, like in India as well because we are seeing improvement in market share across the board. And that is also a factor as far as Bharat Forge is concerned.
We see a similar condition in Europe, where the demand is holding reasonably strong. Of course, in Europe, also there are some supply chain factors that are affecting build. But by and large, the OEMs are still managing to build one way or the other. The expectation is the rest of this year also will be reasonably strong, like in the U.S. And there is a strong optimism for next year as well to remain at similar levels although now we have to monitor this literally month by month.
As far as -- we also play in South America. We are seeing some small declines in South America. But then in our case, we are going from a relatively small base to a higher base. So for us, we see this as an increment in our business really. So overall, this is the view that we see of the world as far as the commercial vehicle is concerned.
Yes. So it seems that we are still in a supply-tight situation and demand really is not so much of a concern at this moment.
Yes, I would say demand is stable, and we are -- so we are catering to a stable demand, but we are also seeing growth because of market share factors.
The next question is from the line of Gunjan Prithyani from Bank of America.
My first question is on this overseas subs losses. Now if I recall, last quarter, you had laid out that the utilization in the new plants in U.S. is about 20%, 25%. Can you give us a little bit more color on where we are in terms of utilization rate? And what's really ailing the business? Is it the operating leverage being low? Or is it just the costs have elevated so much that it needs renegotiations with the customer base? A little bit of color as to how we should see that, please.
It's very simple. There are 2 issues. One is we have to ramp up production, and we have to increase prices. The prices have, on average, gone up by anywhere between 25% to 30%, in some cases, even 40%. So we need to get that price pass-through. And the second is we need to grow our top line. Those are the 2 issues.
And where are we on the utilization like -- versus where we can get...
Close to 50% now.
So that's not really a bad level. So...
The issue is the price. Please understand when your production increases and your cost is not recovered, you have a bigger problem. But we have now got cost recovery from several customers. Few are pending, and that will all get closed out by about another 1.5 months or so.
Okay. So by the second half of this fiscal, we should see this business...
We should see black numbers in this next quarter. U.S., I'm very hopeful the quarter after that.
And how about the medium-term target that is the low teen EBITDA margin. I mean you've clearly...
That still remains. That still remains. Mid-teens EBITDA margin still remains.
So that's something that we should be looking at for next year once the [indiscernible].
Next year, yes. Maybe towards the second half of next year, yes.
Okay. Got it. My second question is on defense. Now clearly, this is one business which is surprising positively in terms of the way the order book is building out. Now can you just share as to how we think about the revenue scale-up where we are right now in F '23? And do you see this going to INR 1,000 crores, INR 2,000 crores? Some guidance around the revenue [indiscernible].
I think we should be above $100 million this year. That is our goal. And obviously, next year, we want to grow that quite substantially because this year, till December, we will have production happening in our existing facilities. And our new mega plant will be ready by January, February of next year of FY '20 -- I mean in January '20 -- January, February of '24. So by March, April of '24, that facility will be ready for production. And that will be a quantum jump in our capacity. We will have almost 3x as much capacity as we have today.
And in terms of profitability, it's fair to assume that it won't be dilutive at the -- I mean at the conso level when the revenue starts scaling up?
No, I think it will be positively surprising for everyone. See the difference is these are our products. These are not something that we are contract manufacturing or someone else's IP that we're doing. So we control the IP. We control the entire value chain. So I think we will have a good control over the numbers as well.
Okay. Got just last one from me. This whole inorganic and acquisition is something which is totally -- we've made small acquisitions, but it seems like there's also a talk of making large acquisitions on the defense side. Any thought process around how will we approach inorganic opportunities, which streams it would be -- it will help us think through because I mean, that's something that clearly came as a surprise to us.
I don't know what you're talking about, but we are not looking at any large opportunities. We will only look at opportunities which are platform opportunities like JSA, which provided us complementary business area where we could, a, enter some new segments and also provide products and services to our existing customers.
So one of the things that we will do is look at bolt-ons to JSA like we have with ISML and many others so that we are able to grow our capacities there, leverage the strong management and technology that we have in increasing our revenue and profitability fast. There is no plan at all of buying anything else complicated or anything else for sure. I'm definitely not going to buy anything outside of India. I think India is the best place for manufacturing, and the whole world is coming to India. So this is where we will look at acquisitions and growth going forward.
The next question is from the line of Kapil Singh from Nomura Group.
Just a follow-up on defense. This $100 million that we are talking about, this includes artillery guns as well, right?
So this is our total revenue, in rupee terms, will be over $100 million. This will include everything that we do in defense, including artillery guns, yes.
Okay. And can you also let us know how the defense orders will roll in going ahead? Is there -- every year, there is a new [ initiative ] -- or how does it work?
So right now, there is, Kapil, an AON for 307 ATAGS guns that is out. The RFP will come out very soon, and then the whole order process will go through. But the guns are approved. They finished all their trials, and they are ready for induction based on the process being completed.
And sir, this 307 guns will be over what period?
That is over a 4-year period from the first year of supply.
Okay. And then rolling basis, then every 3 or 4 years, update would come on this, right?
If the total requirement is huge, okay? This is only an initial order.
Understood. Second, can you share an update on the industrial business, both in India and overseas, also the oil and gas business? What is the outlook there?
Oil and gas business outlook is steady. It is better than last year. Industrial business is growing, thanks to a lot of boost of the renewable energy sector and the make in India and China Plus One. A lot of those companies are moving into India. Plus the fact that India is the only country where infrastructure development is taking place, at such a pace, I think India is the place to be for industrial sector, and this is where a lot of growth is going to happen. We expect to continue a double-digit growth in the industrial sector as overall, including both forging and casting.
The next question is from the line of Mumuksh Mandlesha from Anand Rathi.
Sir, can you just share some outlook for the construction equipment for the overseas market, sir?
I don't have the construction equipment outlook. I know that we are a supplier to that sector across various different components and fields, and our business is growing quite dramatically. I don't have details of which company is growing in this geography.
Maybe Subodh has that. Maybe he can add something to that.
Yes, Amit, you are right. There is no such specific benchmark, but we deal with pretty much everybody in that segment in the construction and mining segment globally. And currently, we are seeing very strong demand, which again is a factor of the strength of the market to a certain extent and also for us, growth in, let's say, either a market share or acquisition of new business. So it's a combination factor, but that segment for us is growing quite well.
And one more thing that will start happening in the near future is you will start seeing capacities being created in India to service India and to export from India.
All right, sir. And sir, this quarter, PV revenue was lower sequentially in both domestic and exports market. Any reason for that, sir?
Sorry, sorry, can you say that again?
The PV revenues were lower sequentially this quarter in both domestic and exports, sir?
Subodh?
There is no such -- there is no structural issue here. It is -- as I mentioned earlier, there are some challenges that the OEMs are facing in supply. And again, it's not just semiconductors. It's a combination of various different things. It is a combination of tires. It's a combination of other parts and so on. So there are some demand adjustments going on, but there is nothing which is a structural problem right now. They are still expecting, for example, the U.S. to go up from this year. A lot of it is going to be steady, and we have growth in India as well. So we should be able to make it up. That is not an issue.
The next question is from the line of Pramod Amthe from Incred Capital.
Amit, this is with regard to the EV component. Any update on 2 of the plants you were supposed to start and also incremental customer orders in the similar space?
So we have received -- so 1 plant has started, which is the 2-wheeler contract manufacturing plant. First month was month of April. The other plant will start in middle of June. And in terms of our power and control electronics, we have supplied samples for testing to 4 OEMs in the country, and we should see feedback probably by June once the testing is complete. So we have delivered -- these are not prototypes. These are samples. So they are 20 to 50 number. These are significant volume for fleet testing.
Is it relatively behind schedule? And any reason for the same from customers or from your side?
The customer is also developing products. So it's going through its own product development and debugging cycle. When you're developing EVs as related to IC components, the challenges are very different. And all OEMs, when they have gotten into this sector, have faced these challenges.
Okay. And the second one is related to some of the tie-ups or the investments which you have made in the EV space. Do you see a risk of mark-to-market downwards in case the funding scenario tightens for your international entities? And how do you see through in the last 3, 4 years of your investment experience in this business? Is it more like a one-off which comes back? Or how do you look into -- or the technology absorption from the same is much bigger than the investments which are...
Yes. That's exactly the point. We are not investing as a financial investor. In every case, we have got the, let's say, the rights to access the technology and manufacture component, subsystem systems, subject to obviously paying them some royalty where needed. But we are using this whole process to assimilate the technology and knowledge and develop a larger product profile or product network for ourselves for this sector because I believe that the EV sector is not a sprint, neither is it a marathon, I think it's a series of sprints because there's a reset taking place every 12 to 18 months in terms of technology, in terms of new technologies, regulations, new development in the battery technology, in sensor technology, in motor technology. So one has to remain agile, invest in some base foundation technology and then adapt to what is happening.
Sure. That's interesting, sir. And the last one is, as you talked about these new business initiatives...
Hold on for one second, Pramod. Even if you read what the CEO of the largest Japanese company said after he took over, I think it was very profound to learn the admission made by someone that strong and that powerful that making electric vehicles is not like making cars. In fact, it is anything unlike making cars. That is like making a computer or making a cell phone or something like that because it's more about the electronics, the control systems, the software, the embedded systems. The vehicle is a box which all that goes in. So it's that, which is the unlearning that needs to be done in order to go forward. And the challenges in this sector and the opportunities in this sector are 2 sides of the same coin. So we are going to have to be agile, be nimble. But at the end of the day, EVs are going to be the future. I don't think 25 years from now, there's going to be more than 20%, 25% of combustion engines.
Okay. Interesting perspective. One more question is considering that some of the verticals took some time to fortify like aerospace or on defense. If you have to look at 3 years or 5 years down the line, as we continue to get [ fearsome ] from your exposure to CV, where do you see CV as a proportion will be for you, might be 3 or 5 years down the line?
Yes, Pramod. That's a very difficult question to answer because in CV, if electrification of CV takes place and we get the kind of market share that we want and we believe that we have the potential to get, we may have a very strong growth in that. So if you remove EV, then it may be different. Although if you include EV, I think that we have a growth opportunity -- a significant growth opportunity.
The next question is from the line of Mahesh from LIC Mutual Fund.
Most of questions have been answered. But just One query. Sir, what kind of growth do you expect in Indian truck market for this financial year?
Subodh?
See, this -- I'll just give you a longer answer for this. Until Q3, the market was supposed to operate at last -- Q3 last year, the market was supposed to operate somewhere in the region of about [ 360,000, 370,000 ] -- let's say, [ 375,000 PM ]. And suddenly, Q4 was pretty good -- over the last 4 months were pretty good, and then we ended up [ 405,000 ], which was originally the projections supposed to be for this year. So our expectation right now is it will be within single-digit growth is what we expect from this level, but this is also considering the significant growth seen in the last, I would say, 3, 4 months. But overall, our demand for the next 2, 3 -- 2 years or 3 years, generally, we expect it on a positive side. This is our view for now.
The next question is from the line of Aman Agrawal from Carnelian Capital.
Just one question from my side. So like if we see a slowdown in PV segment in the U.S. in 2024 calendar year, how do you see your aluminum forging operations? That thing affected your progress [indiscernible].
In which sector, sorry?
Sorry, sir?
Which sector? U.S. PV?
U.S. CV, sir, commercial vehicles.
No, we don't have any aluminum exposure to commercial vehicles. It's only to passenger cars.
Okay. And turning to our U.S. CV exports, like if you see a slowdown in 2024 calendar year, any indication we are having with the OEMs about orders for 2024, sir?
Subodh?
Yes. See, 2024 at this point is not considered to be -- it's not supposed to decline. We are seeing -- we are actually seeing projections of a small growth, if not to remain steady. So that is the forecast. But again, nowadays with the volatility, you have to monitor this every month or every quarter. So we'll see how it goes. But at this point, they are not predicting any significant decline at all.
The next question is from the line of Rakesh Roy from Omkara Capital.
Sir, can you highlight on the domestic industrial business [ price ] like the mining sector...
I'm sorry for interrupting, Mr. Roy. There is a slight disturbance which is coming with your voice from your background. So could you please go to a quieter place and take the [ contact ]?
Yes. So my question is, can you highlight on the domestic business for FY '23, especially domestic industrial business? Like how is your mining [ business ] for FY '23 like the tractor space?
See, tractor industry was at an all-time high in '23. '24, I think the projections are yet to be out, but obviously, it was the highest ever production of tractors in India. So everything is relative. Even if the production is down 5% to 10% or 15%, it's still a very high number. I'm not saying that is what they're projecting. But on the other side, on the construction and mining sector, those sectors are booming in India. Everybody is increasing capacity, plus a lot of companies are moving production to India. So I think India will become a major export hub for that equipment, at least for countries like Africa and for Australia and Southeast Asia, et cetera.
Sir, just one last question, sir. Is the mining -- domestic mining revenue contribution for in total industry is how much, sir?
I don't have that number, but probably about 10%.
Okay, sir. Right. Sir, last year, if I'm right, sir, for FY '22 is like [ 400 ], sir, for the domestic business for construction or mining.
I don't have the numbers with me, I'm sorry.
Okay. Sir, in export side, same in industrial side, sir. Sir, you said the oil and gas business is stable. So this year number is on [indiscernible] basis flat?
Subodh?
Yes, the same as last year. It's going to be steady. It is going to be steady, yes.
Okay. Sir, can you highlight on sir, especially for export market, industrial side for aerospace business, sir? How is it doing? And what is for FY '23?
We have done very well. Aerospace has grown more than 100%. And we expect that aerospace will continue to grow, and it will grow at more than 50%, 60% -- maybe 30%, 40%, 50% this year also.
Ladies and gentlemen, this would be the last question for today, which is from the line of [ Godwin S. Fernandes ], an individual investor.
So there was a joint venture that we announced with Talgo for manufacturing of speed trains in India. Can you kindly put some color on that and the future prospects on the same?
So we did not announce a joint venture, [ Mr. Fernandes ]. We have signed an MOU with them to explore the opportunity of setting up a joint venture to supply to the high-speed rail system in India. So we are working through the necessary technicalities to understand the competitiveness, the production, capability, transfer of technology, et cetera. And we should shortly have a conclusion on this.
As it was the last question for today, I would now like to hand the conference over to Mr. Kalyani for closing comments. Over to you, sir.
Thank you, ladies and gentlemen, for your interest and your questions in our company. I look forward to your continued support and engagement with us. And if anybody has to ask some other questions, please get in touch with our Investor Relations team, and they will direct your questions to the right people and get you the required answers. Thank you very much, and have a nice weekend. Bye-bye.
Thank you, sir. On behalf of Bharat Forge Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.