Bharat Forge Ltd

NSE:BHARATFORG

Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months FY '25 Earnings Conference Call hosted by Bharat Forge Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Kalyani, Vice Chairman and Joint Managing Director, Bharat Forge Limited. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen, and thank you for attending our Q3 conference call. This is Amit Kalyani. I have with me members of our finance team, Investor Relations. I will now hand over to Kedar Dixit, CFO, to take you through the numbers, and then I'll make a few comments, and then we'll do a Q&A.

Good afternoon, ladies and gentlemen. I take you through the stand-alone business for quarter 3 performance was soft given the demand conditions in our underlying markets. Our top line was low by about 7% at INR 2,096 crores, while the margin was stable at about 8.1%. Europe continued to struggle with dynamic demand impacting both CV as well as EV exports. Defense vertical also recorded lower revenues as a lumpy nature of the business continue to impact the performance.

Talking about domestic passenger vehicles recorded a sharp rebound in performance driven by better penetration with our customers. Return ratios continue to hold steady with ROC net of cash coming to about 19%. The standard of business Q1 orders was about INR 723 crores in this quarter.

Talking about overseas business, a combination of the weak demand in Europe and some customer-specific weakness impacted performance of our overseas business. In quarter 3, the European operations posted EBITDA of about INR 10 crores while US operations reduced their EBITDA losses to INR 6 crores in this quarter. Talking about the Indian subsidiaries, JSA continued to register strong performance. In quarter 3, it had grew revenue by 20% to reach INR 166 crores. And margins have improved by 50 basis points to scale up to almost 40%.

The significant customer and product diversification achieved over the last 2 years, JSA has been able to significantly derisk its revenue stream. Europe plus 1 team and JSA's strong competence are likely to see the business to scale up to INR 50 crores top line over the next 2 years.

Talking about defense business, the group's defense business posted a revenue of INR 337 crores in quarter 3. As of 9 months this year, the revenue was INR 1,488 crores, translating a Y-o-Y growth of 49%. With order wins of about INR 100 crores in quarter 3, the executable order book as now stands at of December 31 is INR 5,700 crores. This order book does not include any potential orders from domestic or the export market. We would like to reiterate that translation of order book to revenues is governed by contractual timelines and thus may create some lumpiness in performance when viewed from a quarter-over-quarter from the standpoint. However, from a 2- to 3-year perspective, the business remains on a solid footing with capabilities across artillery guns, vehicles and consumables.

Talking about consolidated business highlights for the 9 months. On a Y-o-Y basis, consolidated revenues were 2% lower at INR 11,270 crores, while the EBITDA grew by 9.1% to reach at INR 2,017 crores and PBT increased by 15% to in INR 1,224 crores. There has been an increase in EBITDA margin by 190 basis points Y-o-Y to reach to 18.5% for the first 9 months, with bulk of improvement driven by Indian entities.

Consolidated balance sheet continues to remain robust with ROCE of 16.5% as of December 24. More importantly, the leverage has gone down as QIP funds were deployed to take down the debt. The resultant gearing position has improved with net debt-to-equity improving to 0.36 as of 31st December '24. The company has secured new business worth INR 2,616 crores in April to December period across defense, aluminium and ferrous castings and core coatings business. And balance sheet continues to remain strong with ROCE and ROW improving amongst our strong liquidity position.

I will hand over to Amit Kalyani for performance.

Ladies and gentlemen, I thought we'll adapt -- adopt a slightly different approach to our con call this time. Let's break up the performance into what was great, what was good and what was not so good.

I think on the great, I think the new business verticals that is casting and aerospace are doing well and I expect it to continue doing so. For aerospace, we have now approved a new investment of machining of landing gear components and a ring mill to manufacture high precision forgings for the growing demands of the jet engine components globally. This will help increase our business in the aerospace sector quite substantially with business that has been tied up. So this will be a new accelerant for our aerospace business.

On the ferrous casting space, we continue to witness excellent customer traction subject to demand holding up, we should be able to hit an annualized run rate of INR 1,000 crores, we're hoping within the next 6 to 8 quarters. I'm fairly confident within the 6 to 8 quarters. Additionally, we expect to see the margins increase by at least 250 to 300 basis points from where we are in the next 2 years. So that will give us excellent return on capital employed, asset turnover and also help us grow the business through internal accruals and generate returns and free cash flow for the company.

On the good, I think the stand-alone and defense business have displayed resilient performance in the quarter. For the stand-alone business, given where we are in the cycle, with the weakness in Europe, et cetera, the operational profitability has held up pretty well in the 28% range. On defense, we will see accretion to the order book before March end, as the domestic airtags orders and other new orders will get tied up. And we are working on significant new opportunities, including participation in the IDEXX in Abu Dhabi next week, where we hope to increase our visibility and our market access.

On the not so good, quite frankly, disappointing has been the overseas operations. Combination of weak utilization because of demand reduction in Europe and also in the U.S., there was a demand slowdown. There is a huge transition taking place between this EV to IC again. You may have seen announcements by 2 European OEMs in this week that they will each spend upwards of EUR 1 billion to retool their planned new IT platforms for hybrid and also full IT platform going forward. So clearly, there is some amount of, let's say, rethink on the full electrification bandwagon, but yes, this is a temporary issue. Fact is cars will be made. And I think that in 6 months, we'll have a concrete answer on the way forward.

As we have mentioned, we are going to focus on returns. We're going to focus on cash flows and businesses have to be profitable and stand on their own feet going forward.

Overall, at a company level, I think I'm optimistic about how the businesses are progressing, except for the overseas subsidiaries, I think that the U.S. business will see a fairly good progression in the next 6 months. And the European business, we are, as I said, give us 6 months to give you a concrete answer. We are in unpredictable times. We are in times where in addition to all the geopolitical issues, we also have new governments making new policies, so we have to wait and watch and see what that means. But as you have seen Bharat Forge in the past, we have gone through inflection points and come out stronger. So hopefully, the same thing will happen this time as well.

I think I will be -- I'll just make a few more comments. On the India CV outlook, we expect Q4 to be slightly better than Q3. The FY '26 will be more or less flat. As of now, the North American CV market is expected to be buoyant with a 10% growth, but in the second half of the year. So that's the outlook. Europe is flat, too unpredictable. We don't have much of an answer there yet, because there are lots of governments where elections and changes are taking place, including Germany. But I think we have to wait and watch.

So I think I'll be happy to take your questions, comments and me and our team will be -- we'll attempt to answer your points.

[Operator Instructions] Our first question comes from the line of Gunjan Prithyani from Bank of America.

My first question is on the overseas subs, which you pointed out, it's quite a challenging environment. You do also talk about rethinking your manufacturing presence in the overseas business. Could you share more around this because it certainly seems that Europe will take a lot longer to turn around than what we were guiding initially, so how should we think about the losses coming down there? Or how should we think about the business restructuring that you talked about in the presentation?

Yes. Gunjan, so in a very simple way, let me answer. Right now, there is a lot of uncertainty about policy, about what is going to be the way forward, is it a global world, is it a regional world. So like I said, we are undertaking a thorough review of our manufacturing footprint. And within 6 months, we will have a concrete way forward.

Okay. And is it fair to assume that the losses that we're seeing roughly about INR 90 crores PBT in the European business, that sort of stay -- will remain at elevated levels for another 2 or 3 quarters till we find a more lasting solution to this?

I think they'll be in the ballpark. Obviously, our attempt will be to try and reduce them. But like I said, we need 2 quarters more, by which time we will have full clarity on our decision. And everything is based on the current demand in the market. But we are going to take a decision based on a number of factors, and we need about 6 months for that.

Okay. Got it. And the second question was on the defense ATAG order. What are the refreshed time lines there? When do we see that adding up in the order book? Anything that you can share on order book?

So there are 3 steps of the process. One is the contract signing. Then you have FOPM, which is the first of production. And then you have series deliveries. So I think for series deliveries to start, we are at least 15 to 18 months from now.

And if I understand that correctly, that means revenue approval to start is at least 15, 18 months, right?

15 months to 18 months is for the series deliveries to start, but contract will be signed in the next, I would say, 3 to 4 months, maybe even a little sooner.

Okay. Got it. And last question, if I can just -- I know it's very -- there's a lot of uncertainty on this whole tariff noise. Is there anything that you are sort of hearing from your customer base because classic truck does have a pretty dominant Mexico presence, right? So how should we think about this?

There is no clarity on this yet. So if you've seen the [words] coming from the White House, they first talked about commodities. Then next week, they're going to talk about passenger cars. Then they will talk about other things. So I think we have to wait and watch.

And then EPA emission also sort of goes on a back burner for some time because you don't know how the emission regulation evolves under the current regime. Is that the way we should think about it, a lot of uncertainty?

If you are talking about the U.S., generally speaking, there is uncertainty, but there are certain states where the emission requirements or the emission laws are different from the whole country. For example, California. California has its own CAFE regulations. California air something emissions, whatever, air something. So cars and CAFE, air regulation Board or whatever it is. So they have their own emission standards. So those will go ahead no matter what. But that represents only a small percentage of the overall U.S. automotive market. I think in general, there is going to be a rethink on the whole green push in the U.S. That is what we are hearing from the President.

Next question comes from Jinesh Gandhi from Ambit Capital.

A Couple of questions from my side. [indiscernible], you have commented on margin expansion of 250 to 300 in the next 2 to 3 years, that was for JSA or at a consol level?

That was for the casting business, yes.

For the castings business. Okay. And this would be primarily driven by operating leverage? Or do you expect that Russian business to come back, which had impacted margins?

This is a combination of operating leverage, cost reduction, value product mix.

Okay. Okay. Got it. And secondly, with respect to your comment on and what is happening in the U.S. -- with respect to U.S. and Europe with respect to EV trend reversing. Do we see any risk to our aluminum forging business in both U.S. and Europe because...

Because aluminum forgings and aluminum, in fact, is going to be common no matter whether it's EV or it's gasoline. That's completely agnostic to them.

Got it. And last question pertains to our CapEx expectation for FY '26, given that we are also now investing on the aerospace side and also the ongoing doubling of capacity in the U.S. for aluminum forging. So what should we budget for CapEx for [indiscernible] consol?

The CapEx for the U.S. is done, okay? And in India, we mentioned that we are setting up some new facility for aerospace. And that is already now tied up. We will announce that -- I mean that is now going to take place. And I just want -- and I'd like to let you know that we have signed a long-term agreement with a European company to collaborate to set up a manufacturing facility to manufacture cutting-edge, landing gear and other aerospace components for global OEM requirements. So this is the first of its kind in India and will be a big boost to our overall aerospace capability and business and be unique for this part of the world.

Got it. So overall, FY '26 on a stand-alone basis, would we be investing close to about INR 400 crores, INR 500 crores or could be lower than that?

No, I would say about INR 300-odd crores.

Okay. And similar for subsidiaries total CapEx of INR 600 crore at consol level?

Subsidiaries, only investments in subsidiaries will be in India nowhere else. And I don't think that will exceed maybe INR 200 crores, INR 250 crores at the most.

Got it. And just 1 clarification on the U.S. operations now losses -- EBITDA losses have reduced to just about INR 6 crores on a quarterly basis. This would be at what level of utilization? Are we close to 80%, 85% there now?

Utilization is currently at about 60%.

60%, you said. Okay.

We have reduced costs a lot, and we have improved efficiencies.

Next question comes from the line of Kapil Singh from Nomura.

My question is on export industrial revenues. We have seen a good growth over there. Could you give some color for that? And also aerospace, any -- like any numbers you can give on what is the current revenue and what is the potential of these facilities that we are setting up?

So we have -- like we said last year, when we spoke, our oil and gas -- I mean, sorry, our aerospace revenues are currently running at somewhere in the region of INR 60 crores, INR 70 crores -- INR 50 crores, INR 60 crores a quarter. We expect this to go to triple digits by next year, per quarter. And this new facility that we are adding can almost help us double that capacity. This becomes our path to crossing $100 million going towards $150 million, $200 million of business.

Okay. And on the industrial business, if you could give some color because we saw good growth over there.

On the Industrial business, the only area where we have seen degrowth is on the high horsepower engines, and that is temporary because of some amount of inventory in the system. Otherwise, the business is doing quite well. Rail has seen a small dip as well. That's the only other thing.

Sir, I was asking about the export industrial business, which has gone from INR 360 crores to...

I'm talking about export only. Export Industrial has been more or less flat -- I mean, it's been up by about 8%, 7%, 8% over last year.

Yes. So which segments have grown, that's what I was asking.

Oil and Gas has grown significantly. Aerospace has grown by almost 25%. Oil and gas and aerospace have grown.

Okay. And sir, in India, you have mentioned that there is some CapEx slowing down and that has potential to impact industrial business in the near term. which segments should be affected there?

I couldn't understand your question, sorry.

Sir, may we request to use the handset, please.

Yes. On Slide 4, you have mentioned that despite CapEx momentum slowing down and its potential impact on industrial business.

CapEx slowdown is basically in 2 areas. One is on infrastructure. And the second is on new capital formation in industrial sectors. So power plants, water projects. These are really -- there's no big CapEx that is taking place. Like in '15, '16, the big CapEx that were announced for '14, '15 in the mega power projects in these mega projects, those have now come to an end. The next set of mega projects are now yet to start.

Understood. And sir, lastly, just wanted to understand the exposure in case of exports, so is there export going from Europe to U.S. for either Bharat Forge or from Bharat Forge customers?

No, not much. Very small.

And the tariffs which have been put in U.S. on steel and aluminum, is there any impact on the company or these will be passed on to the customer?

So we don't know that yet, as I told you. We don't know what the tariffs are how they will be calculated, what is the base, what exactly are the adjacent codes. We don't know that yet.

The next question comes from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.

Good to see the 2 more business going to touch INR 1,000 crores. Sir, firstly, just on the previous question, can you help us what was the revenue for oil and gas for this quarter and for 9 months, sir?

For the growth. The growth over last year is almost over 60% to 70%.

Got it. Got it. And I mean...

Nine months, the growth is about 30%.

And sir, recovery has been driven -- I mean, any indication going ahead, how do we see the growth for this segment?

The oil and gas sector in the U.S. is limited by only 1 thing, and that is the ability to get the gas out of where it is -- where it is coming out of the ground to where it is consumed or where it is converted into some other products. The only place today where they can do that is Texas, where within Texas, the oil and gas that is pump is being consumed in various different industries in Texas. But many of the other states where they are generating shale oil or shale gas, they are not able to -- the pipelines aren't in place. So if you remember what President Trump said when he came to office is I want to get the Keystone pipeline done.

So that the benefit of the gas and the -- for the economy in the form of cheap energy will start. I'm sure you saw that. So that is going to lead to a big infrastructure boom in the U.S. and infrastructure boom in the U.S. in such sectors will lead to a virtual cycle where a lot of other sectors will get benefits. So construction sector, companies like Caterpillar and all these companies, companies that make power gen equipment, all of them will get benefit. So we expect that very, very shortly once the shovel hits the dirt, you will start seeing the impacts of this.

Got it, sir. Coming to different segment, just in near term, the next few quarters, how do you see the run rate for the defense revenue, sir?

So I would say that I would look at the defense on an annual basis rather than a quarterly basis. So we had guided that we will see close to 50% growth in or 40% growth Y-o-Y. And I think we should be fairly close to that. Maybe a little less than that because of some of the delays in the processes that we have thought will be passed. But once that happens, I think it will catch up.

Got it, sir. And sir, recently, there was a new MOU with the L3Harris. Anything just to indicate what kind of opportunity this business can bring, sir?

That is a sector for C4I. It is -- L3Harris is one of the largest companies in the -- it's in the whole imaging and electronics that are used in defense. And this is a very large company, L3Harris and these are new sectors that we're getting into related to defense, electronics and systems for India.

Got it, sir. Sir, lastly, you mentioned in the presentation about the nuclear segment, nuclear industry opportunity. Can you indicate how we are shaping up for this segment?

Yes. So there are 2 factors to the nuclear sector. One is the conventional large nuclear power plants that are coming up, which are either NPCL technology or foreign technology. These are typically 700 to 1,000 or 1,200 1,400-megawatt per unit and each location is multiple units. So it can be anywhere from 4 to 6 units. If you remember, Jaitapur was supposed to be 1,600 into 6, which was 9,600 megawatts. So those are the mega nuclear power plants.

Now India has an installed base of roughly, I think, about 10,000 or 11,000 megawatts of nuclear power. I think that is going to more than triple in the next 10 years with the projects that are announced and underway. Plus now globally, there is a push for SMR, which is small modular reactors because of the huge energy requirements of data centers and also of EVs. And of a lot of other sectors, which are going to consume nonfossil-based fuel energy could be to generate hydrogen or whatever. So, these are going to be big opportunities and even the Indian government has talked about allowing SMRs and private sector to get into this. So this is another opportunity.

Got it. Sir, just -- I mean, any revenue currently, sir, from the nuclear segment, sir?

Yes, yes, we are -- we generate anywhere between, I would say, INR 50 crores to INR 100 crores a year, depending on the how much orders are there in the system. Every power plant in India has parts made by us.

And any order books for going ahead, sir, for [indiscernible]...

We've continuous order book in this sector, but it's not very large. It's basically every time they're building a new power plant, they place orders on for various different parts. So we make both the material and the components that come out of this. These are typically big parts anywhere in weight from 5 tonnes to 30, 40 tonnes for single piece.

[Operator Instructions] The next question comes from the line of Arjun from Kotak Mahindra Asset Management.

Sir, the first one is given in light of what comments also you've made and with change in the regime in the U.S. So effectively, we had come up with this last man standing strategy in terms of continuity of business. So in the current context, do you see that the launch activity of our business has possibly increased and could you comment on how you see competitive pressures, et cetera, as a result of this?

Arjun, I think it's too early to comment on that level of detail. because we don't know -- I mean, generally, if you were to ask me, I think the longevity has gone up. But if you want me to specify, I don't think I'm able to because on one side, longevity has gone up, on second side, you have talk of tariffs and other things. So it's very difficult to be able to, what do you call it, to bridge both and to come up with a total picture of where we stand. The only thing is that we have a strategy where we are able to utilize our assets to do multiple things. And I think it just allows us a little more flexibility and a little more breathing room to make a longer runway with our existing products especially because a lot of the OEMs have already started the process of deintegration, so it gives us some bigger newer opportunities going forward.

Sure. Sir, the next question I had was on the defense piece. So you did mention, say, for ATAGs, et cetera, series, this delivery may take 15 months. Is that for all such contracts because you're hearing their possible contracts...

Contract, export contracts can be much sooner. But domestic contracts, there's -- it's a pretty lengthy process.

Okay. So if we do get export contracts, that could possibly be done, revenues may hit the revenue line item.

We got export contract and it translated into revenue in under 6 months.

Fair. Sir, the last question is...

Products that we already make. To increase the number of products that are already in our ready-to-make category, this marketplace becomes bigger for us.

Perfect. Lastly, sir, there was a news report of us possibly entering the semiconductor space. Just wanted to understand what are we targeting? What products are we looking at for this piece?

It's too early to talk about that in detail. So I think we'll talk about that at a later point.

The next question comes from the line of Nitin Jain from Fairview Investment Private Limited.

Congratulations on the resilient quarter. So most of my questions have been answered, but I just need a few clarifications. So for the Aerospace business, you've given the triple-digit quarterly revenue guidance, so can we expect that from Q1 FY '26 or more like a...

About Q1, but in FY '26, you would expect that.

Right. And by when would the new facility be operation?

This will be operational in 2027 towards the end of '27, takes about 18 months.

Okay. And your comment that FY '26 would mainly be flat. So was that just for the CV business or consolidated?

No. Right now, given the pluses and minuses, I would say it's overall, but it doesn't mean that on a profitability level, it will be the same because we're hoping that we will reduce losses in our overseas subsidiaries.

The next question comes from Pramod Amthe from InCred Equities.

First I wanted to check, in the domestic passenger vehicles, you have been consistently improving revenues in spite of the demand slowdown. What's going right here for you?

So we have new customers and new products. That is what is helping us.

Okay. And do you expect that trend to continue in spite of the slowdown?

We expect the trend to continue because most of our customers who we have got in the last few years are increasing their localization and that is where we are now supplying a lot of new components, both engine and transmission, chassis, especially transmission components, et cetera. So that is a big growth area.

And looking at this sort of expo where there have been a series of EVs unveiled by the carmakers and considering the improved presence in cars. Is there any components you are winning even in the space for domestic manufacturing?

Yes. We are making motor parts. We are making a lot of aluminum parts for electric car companies.

Ladies and gentlemen, we will take that as a last question for today. On behalf of Bharat Forge, that concludes this conference.

Ladies and gentlemen, thank you very much for your participation and interest. It's always great to have a good dialogue with our investors and analysts. And we look forward to continuing this engagement and keeping you abreast of what's happening at Bharat Forge. Thank you, and have a nice day.

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