BHARATFORGNSEQ3 FY21February 17, 2021

Bharat Forge Limited

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Management on call

Amit Kalyani

DEPUTY MANAGING DIRECTOR, BHARAT FORGE LIMITED

Subodh Tandale

EXECUTIVE DIRECTOR, BHARAT FORGE LIMITED

Kishore Saletore

CFO, BHARAT FORGE LIMITED

Key numbers — 40 extracted

515 crore

ded December 31st, we had a full shipment tonnage of about 51,000 tonnes, domestic sales of about 515 crores, exports of about 511, total revenue of 1,035, an EBITDA of 232, which was 22.4%, and a PBT of 1

22.4%

es of about 515 crores, exports of about 511, total revenue of 1,035, an EBITDA of 232, which was 22.4%, and a PBT of 144 and a PBT after exchange gain or loss of 126 and profit after tax of 926 after

5.5 crore

a PBT after exchange gain or loss of 126 and profit after tax of 926 after an exceptional item of 5.5 crores, which was towards VRS. The shipment tonnage was about 25% higher. Overall, sales was about 18%

25%

26 after an exceptional item of 5.5 crores, which was towards VRS. The shipment tonnage was about 25% higher. Overall, sales was about 18% higher. EBITDA was 40% higher than last quarter, PBT was 42%

18%

rores, which was towards VRS. The shipment tonnage was about 25% higher. Overall, sales was about 18% higher. EBITDA was 40% higher than last quarter, PBT was 42% higher and PBT after exchange gain o

40%

VRS. The shipment tonnage was about 25% higher. Overall, sales was about 18% higher. EBITDA was 40% higher than last quarter, PBT was 42% higher and PBT after exchange gain or loss was also 37% hig

42%

25% higher. Overall, sales was about 18% higher. EBITDA was 40% higher than last quarter, PBT was 42% higher and PBT after exchange gain or loss was also 37% higher. In terms of distribution of reven

37%

s 40% higher than last quarter, PBT was 42% higher and PBT after exchange gain or loss was also 37% higher. In terms of distribution of revenue, India was, as I mentioned, 524 crores, America was 3

524 crore

gain or loss was also 37% higher. In terms of distribution of revenue, India was, as I mentioned, 524 crores, America was 351, Europe was 134 and the rest of the world was about 26. We are starting to se

2,600 crore

strengthening. We continue to strengthen our balance sheet, and cash on the books today is over 2,600 crores. Cash position is positive net of long-term loans today. We are working on a strategy to supplem

rs,

ecovery in most of our traditional businesses. However, we are now building three new growth drivers, which will, over the next five years, become very meaningful new businesses. One is in the area of

50 million

eighting business, which is made up of currently forging and casting. This currently is at about $50 million and we believe that in the next three to four years, this can easily get to somewhere in the rang

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Guidance — 20 items

Amit Kalyani

opening

“I’ll quickly take you through a few highlights, and then I will be happy to answer your questions.”

Amit Kalyani

opening

“We are working on a strategy to supplement or substitute a large part of oil and gas business with other sectors over the next two to three years and we will start seeing some meaningful positive accretion on this from the middle of next year.”

Amit Kalyani

opening

“This fine will be paid over 5 years from the cash flow of our subsidiaries.”

Amit Kalyani

opening

“All our safety and other checks will be completed in the next 10 to 15 days, and our training will then start, and then we will start trial production.”

Amit Kalyani

opening

“So we expect to see tremendous growth opportunities coming from there.”

Amit Kalyani

opening

“And we expect that this will help create a pipeline for the future of large new business and also give us engineering and prototyping business with these customers.”

Amit Kalyani

opening

“Some of the new initiatives that we expect is that we expect to see positive traction on the defense, e-mobility and our aluminum casting venture this year.”

Amit Kalyani

“But, we expect to get some orders and we expect that even in the defense business, we will have a recurring kind of business and the project type of business going forward.”

Amit Kalyani

“But this quarter, it was less than 2-3 million, and we expect this to go up slightly, but it’s not going to go back to the numbers that there were, therefore we are now replacing this business with business in other sectors, including metals and mining and renewables.”

Subodh Tandale

“In addition to what Amit just said, from our point of view, we think there will be some positive movement just based on oil prices stabilizing between 50 and 60.”

Risks & concerns — 10 flagged

But given the way oil prices have moved, is there any visibility of this 2-3 million becoming more like 10 million, 15 million in the near future, or still uncertain?

— Amyn Pirani

We have seen a sequential decline of about 60% as well.

— Nishit Jalan

So is there, any shipment which has got delayed or there is some negative impact, which has come from any segment and your analyst update says that our construction and mining equipment sales in the international markets is under pressure.

— Nishit Jalan

But right now, we have to be very cautious about India, and we are taking it month by month.

— Subodh Tandale

And will there be any impact of mix shift, like if India grows faster than exports?

— Binay Singh

Yes, absolutely there was no challenge on the technology side as such.

— Amit Kalyani

So basically, then you’re saying that the reduction that we’re seeing in raw material cost to sales is because of the cost-cutting effort or is, because the problem is it’s difficult for us to track because it’s also dependent on obviously commodity prices, et cetera, as well.

— Sonal Gupta

So you’re seeing that that is clearly an impact of cost reduction.

— Amit Kalyani

Because the decline from the normalized levels of Rs.240 a kg is?

— Basudeb Banerjee

I’m very happy with the way our management team has come together and performed over this very difficult period of time.

— Amit Kalyani

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Q&A — 13 exchanges

Sir you alluded to some of the new initiatives that you are taking in terms of e-mobility and defense also. So just to set the context, one of the things we understand is, obviously there’ll be a strong cyclical recovery, which we can see. But to drive growth beyond that, what are the things which are being done, where is Bharat Forge in terms of success in these areas that would be really helpful to understand.

Amit Kalyani

Yes. So thank you for your question. So as you rightly mentioned, we will see a cyclical recovery in most of our traditional businesses. However, we are now building three new growth drivers, which will, over the next five years, become very meaningful new businesses. One is in the area of EVs, where we are producing components; subsystems in the areas of power electronics, control electronics and the entire BMS for both low-voltage extremely small LCVs and intermediate high-voltage intermediate LCVs. And we are now, let’s say in the phase of integrating a couple of solutions for customers for

Just on the oil and gas business, we understand that it’s unlikely to go to that 25 million, 30 million run rate anytime soon. But given the way oil prices have moved, is there any visibility of this 2-3 million becoming more like 10 million, 15 million in the near future, or still uncertain?

Amit Kalyani

I would say that give us another quarter before we can answer that. But maybe Subodh can add something. Yes. In addition to what Amit just said, from our point of view, we think there will be some positive movement just based on oil prices stabilizing between 50 and 60. And based on that positive movement, we will start seeing some traction, whether that is 5 million or 10 million a quarter or a little more, we will know maybe in one or two quarters. Okay. And apart from oil and gas, maybe other things like construction and other mining equipment and all those kinds of things, how are we seein

Sir, my question is a follow-up on non-auto exports. We have seen a sequential decline of about 60% as well. So is there, any shipment which has got delayed or there is some negative impact, which has come from any segment and your analyst update says that our construction and mining equipment sales in the international markets is under pressure. So just wanted some color on that?

Amit Kalyani

So it is largely oil and gas. 95% of that reduction is oil and gas. And there are certain industries, which also get impacted by oil and gas, such as construction equipment also. Okay. So in last quarter, oil and gas revenues were around USD 4 million, USD 5 million only, right? I’m talking about Q2 FY21 and Q3 FY21. So non-auto exports from 178 crores in Q2 FY21, it has come down to about 90 crores in Q3? Yes. That drop is almost entirely oil and gas. So last quarter, oil and gas revenues were closer to 70 crores, 80 crores, is it? Yes. It was about $10 million. Okay. And sir, if you can shar

Sir, first question on the commercial vehicle revenues, both India and exports. We’ve done very well, sharp outperformance in India and registering a positive growth Y-o-Y for exports. Can you help us understand how are these segments seen over the next few quarters?

Amit Kalyani

Yes. My colleague will answer, he is the one who is responsible for delivering this growth. You’ve done a great job. Go ahead, Subodh. So in the global side, based on the present projections, we see reasonably strong traction both in Europe and the U.S. This is of course, considering the fact that there will be no negative impacts of the COVID situation going forward. And as far as India is concerned, we are a little concerned, just given the traction as you know the sales of commercial vehicles are fluctuating quite a lot. Overall, there is optimism, given the rise in construction activity an

Lovely to see great numbers. I have a question. When you’re looking at what the customer schedules are looking like, and you’re seeing that they’re coming back and saying, look we need it sooner, we need it quicker. Is that continuing or is that paused and if linked question is, are you kind of producing to inventory or are you producing to the orders, are you going ahead with what the order book looks like?

Amit Kalyani

No. We produce only against orders, Jeetu. But this urgency is also because a lot of customers, and in turn, some of their supplier plants have not yet ramped up to full capacities or have not ramped up even to 50%, 60%. So when spot orders happen, they are unable to have their entire supply chain respond as fast as we can. We can go from receiving an order to getting steel, forging it, and machining it and out the door in probably 3 weeks. It is very uncommon for many people. So wherever there are spot orders, we are getting a big benefit of that and NPD, value addition, all that is leading t

Is it fair to assume that tractors will be around 20% or so of India non-auto?

Amit Kalyani

India non-auto, yes, approximately, yes. And secondly, how to think about gross margins going ahead, because if I remember correctly, the commodity is a pass-through, right, but mix will have some impact on margins? I would expect gross margins to remain strong, and in fact as the capacity utilization goes up, I would expect gross margins to turn slightly positive from here. Okay. And will there be any impact of mix shift, like if India grows faster than exports? That’s a good point. I would say that, again, if it’s significantly improving capacity utilization, it should more than compensate.

I wanted to check, what is the status of this aluminum casting facility which you’ve set up in India, what is the run rate, what is the ramp-up status?

Amit Kalyani

So our facility is fully ready and just making trial production, we lost about 10 months because of COVID. So basically, I would say we lost one year. We have this year’s plan of about 25 crores, and next year will be about closer to 70, 80 crores that is on an organic basis. But you had orders in hand and all, right, for this, and how are the customers? Yes. We have orders of about 35 crores, that is all ramping up because even those customers, this is all for new platforms. Okay. And this is only to do with the COVID, nothing to do with the operational challenges per se for this, because thi

Amit, just wanted to understand, like last year we were talking about a lot of cost reduction and cost-cutting program and if I look at compared to say Q3 FY20, your top line is almost similar and your profitability is similar because I still understand yes, you improved. But if I look at the absolute like your other expenses or staff cost, there’s not much of a change. So is there like delay in that cost cutting and the digitalization and all those cost reductions?

Amit Kalyani

No, one second, we have had a lot of reduction on variable costs. The only area where we have not done anything is on manpower because when COVID has hit, it is we found it morally wrong to reduce or terminate people during this period. And that is why we have chosen not to do that. That will happen subsequently, and we’ve already now started seeing VRS happening and people reducing. Right okay, sure. So basically, then you’re saying that the reduction that we’re seeing in raw material cost to sales is because of the cost-cutting effort or is, because the problem is it’s difficult for us to tr

A couple of questions from my side. First is, if we see the blended realizations in third quarter, they have dropped quite sharply. This is, a, partly because of blended realizations, net revenues divided by your tonnage?

Amit Kalyani

So, that is multiple reasons, our product mix has changed. Okay. So primarily, it’s due to much lower oil and gas revenues and? Exports are lower, passenger car is higher. Okay. So that is the key reason, and second question pertains to the U.S. aluminum forging plant. So can you just throw some light on, over the next two to three years, how much ramp-up do we expect there and what is the scope? We should be at full ramp, which is about $70 million in revenue. 70 million in revenues, okay. And have we decided upon the second plant in Europe for aluminum forging? Our second plant is already in

The amount that you paid for the FCO, basically will be paid over 5 years. So cash flow impact will be five years, just to speak on the exceptional item this quarter?

Amit Kalyani

We’ve just taken a charge-off for it this quarter.

Just wanted to understand the strong set of margins for foreign subsidiaries which you reported. Is that the after effect of the restructuring exercises, and how to look at the sustainability of that going ahead?

Amit Kalyani

Yes. That is the result of the restructuring and hopefully, this will continue, and in fact, strengthen going forward. Okay, that’s great and sir if I look at your realization per kg, it’s like a five-year low. So how to look at those drivers, for example, oil and gas being a higher realization? No. See, I’ll tell you honestly, it’s because oil and gas is at the lowest it ever was, exports are significantly lower, and passenger car is higher. It’s a combination of too many different things. Because the decline from the normalized levels of Rs.240 a kg is? So you will see that change in the nex

Sir, could you just give some highlights in terms of what has helped the improvement of overseas operations margins and what is a sustainable run rate from here on?

Amit Kalyani

So basically, we’ve changed the entire operating model or let’s say tried to change the operating model from a fixed cost-oriented model to a variable cost-oriented model. We’ve brought in a lot of efficiencies and cost reductions on every area. And hopefully, we are on track with, if we continue with this level of business in terms of revenue and from hereon only go up, we should have margins that are at this or above this level. And as our aluminum forging facility comes online, we should see margins improving.

So ladies and gentlemen, thank you very much for joining our call and your support to our company. I’m very happy with the way our management team has come together and performed over this very difficult period of time. I’m very proud of our entire team that not a single customer anywhere in the world was affected by us in spite of us being a sole supplier or a single supplier to many, many customers in many different locations around the world. We’ve had to manage raw materials, manufacturing, COVID permissions, supply chain, deliveries, logistics. And our team has done it effortlessly, despi

Management

Speaking time

Amit Kalyani

Moderator

Pramod Amthe

Sonal Gupta

Subodh Tandale

Jinesh Gandhi

Basudeb Banerjee

Ronak Sarda

Binay Singh

Kapil Singh

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Opening remarks

Amit Kalyani

Thank you very much. Good afternoon, ladies, and gentlemen, and thank you for making the time to attend our call. I have with me our management team from Finance, Investor Relations and on the Sales and Marketing and Business Development side. I’ll quickly take you through a few highlights, and then I will be happy to answer your questions. For the quarter ended December 31st, we had a full shipment tonnage of about 51,000 tonnes, domestic sales of about 515 crores, exports of about 511, total revenue of 1,035, an EBITDA of 232, which was 22.4%, and a PBT of 144 and a PBT after exchange gain or loss of 126 and profit after tax of 926 after an exceptional item of 5.5 crores, which was towards VRS. The shipment tonnage was about 25% higher. Overall, sales was about 18% higher. EBITDA was 40% higher than last quarter, PBT was 42% higher and PBT after exchange gain or loss was also 37% higher. In terms of distribution of revenue, India was, as I mentioned, 524 crores, America was 351, Euro

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