Analyzing...
Ladies and gentlemen, good day and welcome to the Bharat Forge Limited Q3 FY24 Earnings Conference Call.
As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the call, please signal an operator by pressing “*” then “0” on your touchtone phone.
Please note that this conference is being recorded.
I now hand the conference over to Mr. Amit Kalyani. Thank you and over to you sir.
Good afternoon, ladies and gentlemen and thank you for attending our Q3 Analysts Call. I am going to hand over to our CFO – Kedar Dixit and I’ll be here to answer your questions.
Good afternoon everyone. I’ll just take you through the “Highlights” for the Quarter on the standalone as well as on the consolidated performance.
So, we had another quarter of strong performance registered in Quarter 3:
Standalone revenues grew by 16% to Rs.2263 crores and EBITDA grew by almost 31% to 645 crores. EBITDA margins are at 28.5% which is the expansion of almost 330 basis points on a Y-o-Y basis driven primarily on account of favorable product mix, and cost optimization. PBT and PAT grew by 31% to Rs.504 crore and Rs.378 crore respectively.
The balance sheet continues to remain strong with surplus cash net of long-term loans now stands at almost Rs.1000 crores.
At a consolidated level also, the revenue grew by almost 15% to Rs.3867 crores and EBITDA grew by 66% to Rs.673 crores.
For the nine months ended on 31st December 2023. Sales have grown by 19% to Rs.6640 crores, EBITDA grew by 29% to 1.15 crores and PBT grew by 30% to Rs.1385 crores, which is more or less equal to what we have achieved in this entire year of FY23.
During the quarter, the company has secured new business worth Rs.550 crore on an annualized basis across various segments including automotive, industry, defense, aerospace and casting. And out of which 90% are export driven.
In terms of the total exports out of India’s manufacturing operations now stands at $200 million for the quarter, which is 36% up from on a Y-o-Y basis.
Page 3 of 11 European operations have posted EBITDA of Rs.22 crore. While the US operations have achieved breakeven at EBITDA level in the last quarter. The Phase-2 CAPEX of about $100 million in the US is on track. Current capacity utilization on aluminum business is about 50% for US and about 70% in Europe.
As far as the aluminum operations are concerned in Europe, the operations have been stabilized and now we are working on getting price increases from the customers which is underway.
US operations are yet to be fully stabilized while there is a continuous improvement in operations quarter-over-quarter.
Now, I will hand over to Mr. Amit Kalyani for the comments on the outlook.
So, I would say that the near-term outlook remains positive. Its mix bag we have a stronger outlook in the passenger car sector and in our industrial and defense sector. On the truck side in Europe, we expect to see small tapering and in the US it should be flat. Medium term, we will continue to accelerate our growth going forward. We have many new growth drivers for our business especially our industrial business, our casting business, also moving from components into systems and subsystems and new export opportunities that we are getting across our verticals such as aerospace, etc., will provide adequate growth momentum for our company to sustain a strong double-digit growth going forward.
There will be years when the growth is slightly less there are years when growth will be slightly more, but I expect that on an overall basis, profitable growth and profitability will be maintained.
And we should continue growing in a healthy manner going forward as well.
We also should see in the next 18 months also, e-mobility and aluminum casting business should start growing and generate solid contributions to our bottom line and our top line.
Additionally, one European and US operations, especially our European operations which is now on operational bases performing well, get their price increases under control, we will have a very good performance and a very good contribution to bottom line coming from there.
Similarly, as we get fully stabilize and ramp up our US operations that we should provide a favorable contribution to our top and bottom line.
So, that’s really all I have to say. I’m happy to take your questions now.
Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Kapil from Nomura. Please go ahead.
Sir there were a couple of segments during this quarter which had stopped performance numbers.
So, I was saying that, there are a couple of segments here which had a decline with one was the
Page 4 of 11 non-auto exports and the second was domestic PV business. So, could you just share what was the reason for that and what is the outlook for these segments and also domestic CV business?
Okay. So, the non-automotive export which was down was oil and gas. On the PV side, we had a couple of programs that got over. And we will have strong growth on the PV side overall, because we have a lot of new programs that are starting and ramping up over the next two to three quarters. On the domestic CV, there has been a quarter-on-quarter slowdown or flattish nature of business, it’s actually flat next quarter which is typically the strongest quarter of the year should see a better performance. And Indian CV on a secular basis should be positive because there is a good demand coming from the overall infrastructure build and the CAPEX build taking place in India.
Okay. And sir what is the traction you are seeing on the defense business. We have, are there more programs, both in the domestic and export, where we can win orders? How is the progress there, if you could just talk about that?
We have a lot of new programs that we are working on, on defense as you know there are programs which are both on the artillery side, programs on the vehicle side and programs both in Naval Air Force, as well as the components and MRO, which we are working on. All of which are starting to yield results, we have good healthy export order books, and we will continue to build this and continue to execute against the orders that we already have. We are participating in new development programs which have very, very large business potential, both within India and globally. And as these reach some amount of finality. We will talk about them more publicly.
Sir any update on the ATAGS guns order, are you expecting it?
It’s expected to be coming out anytime soon. So, let’s see.
Okay. And just one question on the margins. We had a very good improvement in gross margins.
So, if you could just talk about what exactly in the mix was there that drove it or were there any other factors?
So, if you have seen our product mix, we now have a higher share of contribution coming from both subsystems and systems, both in industrial and in defense. And this is really what helps our margins. Additionally cost control and efficiency improvement is also working well.
Thank you. Next question is from the line of Gunjan Prithyani from Bank of America. Please go ahead.
My first question is on the follow up on the defense business itself. Can you talk about the order book, because last quarter you all had mentioned somewhere around 3000 crores. And what I picked up in the media was 2000 crore. So, just trying to understand what is the difference between the two numbers and also broadly, if you can talk given the visibility that you are seeing
Page 5 of 11 from the new programs you are engaging in, how should we think about this business scaling up in terms of revenues over the next two, three years?
So, we expect our defense business to grow to a very meaningful size of our overall business in the next two to three years. In fact, already we expect this business to be over Rs.1000 crores this year, when we had talked about this Rs.3000 crore order book, we are already executing a Rs.1000 crores out of that. So, what is remaining will be about 2000 crores. So, the number of Rs.3000 cores was correct. We are in the bid for some very large new business. And, as this comes through that will add significantly to our overall order book as well as our revenue per year annually. To look at us getting to a Rs.2000 crores, 2500 crores annual business in defense as the first milestone and then grow from there is a realistic target in the next two, I would say two, two and half years.
Okay, got it. And I’m just trying to understand the margin that you typically say around +20% on the defense, how do I read it, because the subsidiary business does have like a mid-high single digit margin. So, part of that margin of entire defense vertical is captured in standalone is that the way to think about defense revenues?
Yes, you have to think of defense revenue and margins on an aggregate basis.
Okay, got it. Which I assume, even now would be close to, would be in the double digit? Yes, strong double digit.
Got it. My second question is on the classic truck outlook. Now, what you mentioned in the initial comments where you are looking at US class eight being still flat. And some of the third party industry estimates talk about a meaningful decline this year, given the order book is running down or general weakness in macro. Is that something, to really huge, is that something that you are picking up in your engagement with the customers is it going to be a decline year at all the way you are engaging with the customers?
So, the US order book will be strong, as in US will continue to remain strong. Europe is where there’s a bit of a question mark.
Okay, Europe. So, US, you are still looking at flattish for the year given that there is some backlog still to execute. And there was this mention of emission that you spoke about.
Emission norm changes happen next year in 27. So, there will be a pre-buy in ‘25 and ‘26. I don’t think the next two years we will see a slowdown in the US.
Okay, got it. And my last question is, anything to call out on the EU sub, European subsidiaries margin trajectory you mentioned 12 to 18 months, how should we see it progressing from current
Page 6 of 11 low single digit like do we see them getting significantly better in F25 or it’s going to be a few more quarters?
It will get significantly better is ‘25. But the US will probably take a little more time. That is where I talked about the 12 to 18 months. But in 12 months there will be also a significant improvement there but will be a higher improvement in Europe.
So, overseas subs would still be in the range of mid to high single digit in FY25 is that a fair way to look at it overall, not just Europe the entire overseas? I would take it may be higher inventory.
Thank you. Next question is from the line Jinesh Gandhi from Ambit Capital. Please go ahead.
Can you talk about what was the defense revenue in this quarter and how much of that would be from the gun order on the exports side?
We are not giving you any breakup but, overall, our defense business for the quarter was about 350 crores.
Got it. And secondly, you talked about US classic to be strong for CY24 as well, but if I look at the commentary of some of your customers which is indicating towards 10% to 15% decline from high base of CY23. So, is that an indication of what you are also getting or that’s something different?
What is happening is, that is because of the ‘27 emission norms. Earlier, as long as the engine were made before ‘27, you got the emission bypass. Now the vehicle has to be rolled out in ‘27.
So, the pre-buy is going to be preponed so more like ‘24 and ‘25, rather than ‘25 and ‘26. So, that is why we expect a little bit of that volume to move back into ‘24 and moderate in ‘26. So, ‘24, ‘25 and ‘26, cumulatively should be somewhere in the region of, the three years put together should be about a million vehicles.
Okay, that’s fairly a strong number in that case. And you talked about oil and gas revenues declining. So, what is the level now for oil and gas because it seems there is a reasonable decline given nine-month extra oil and gas growth was about 35%.
I can say that it’s down 2/3rd over what it was at our peak. So, currently down 2/3rd. Down 2/3rd yes.
Page 7 of 11 Right. And lastly, so the JS Auto Cast revenue growth still seems to be impacted by the Russian odd business going away. Is that still impacting our business?
We don’t have any Russian business. Okay, Vestas you mean. Vestas was a big customer. So, that has reduced, but we are getting a lot of new business, we’ve already got more than 200 crores of new business, across sectors, across customers, and largely exports from our global customers. And after having acquired Indo Shell, we will also have a lot of capacity addition for high volume business.
Got it. And there’s a good temperamental margins for JS Auto Cast. So, now we are back to what it was earlier. So, if you expect that to sustain at current 14% level? No, we expect these margins to go up.
Thank you. The next question is from the line of Amyn Pirani from JPMorgan. Please go ahead.
I just wanted to stay with the oil and gas segment, is the slowdown because of a general weakness in the category and can that change if oil prices go up or is there something else which is happening are you getting out of some product?
No, it’s a combination of destocking and inventory correction at the customer end basically. So, significant increase in interest cost.
Okay, understood. So, would you be able to share if the destocking is largely done and we could see an improvement, or this is a new level where we could be stuck in the oil and gas specifically for now?
Right now the volumes we are projecting are at this level, but hopefully in the next two quarters it should start improving.
Okay. And you mentioned about that India CV 4Q should be a seasonally stronger quarter. But as we are looking into say the next financial year, do you think that India CV could show growth or do you think that the cycle is peaking out, there are some customers who are also talking about 1Q at least being weaker because of election. So, how are you thinking about that? 1Q being weaker is not a big thing, that is something that one has to get to, if you look at, if our industry, if the country is going to grow 7%, 8% the commercial vehicle market has to grow at one and a half to two times that. So, overall, we are in a good position.
Okay. And lastly, you also mentioned that the ATAGS order from the domestic side, you said that it should be coming anytime soon. Was that correct?
Page 8 of 11 Yes, the whole bidding process is at its final stages. So, we should see something sooner rather than later.
Thank you. The next question is from the line of Pramod Amte from InCred Capital. Please go Amit first question is with regard to the, so basically one of your customers has launched the EV truck, wanted to know how is your content in the EV truck, SUV which is launched, and the same customer is also trying with the tractor trailer on the EV, what is the content there versus your?
So, currently our content on the domestic EV trucks is largely power electronics control electronics. But going forward, we will have the entire suite of products which we are already in, let’s say not in development but in testing with a couple of customers, which includes the motor, the inverter, converter, and the castings, chassis components, etc. So, the content per vehicle is significantly higher than the content per vehicle that we have today.
And the current prototypes which are running by the clients, do they have these components, or it will take you one to two years to reach there?
No, some of them already have the mature components, some of them have still components at a prototype level.
And also, the government seems to be pushing for revising the policy or even hydrogen policy.
How does the content change versus your ICE vehicle in trucks?
See in hydrogen there are two possibilities one is the Cummins model where hydrogen is used as a fuel in the combustion engine by injecting hydrogen into the engine, there an engine is an engine, so you have a crankshaft, you have connecting rod, you have pistons, camshaft and so on and so forth. Camshaft may be something that goes away if you have electronic timing, or electronic valve lift. But the crankshaft, the pistons, lot of those components still remain. The other source of using hydrogen is through fuel cell. But today the fuel cell doesn’t have the power density that one needs. So, we are still a little far away from that. But immediately, hydrogen, commercial engines definitely something that will have adequate opportunity for us to supply components into.
And any thoughts on LNG or it will remain the same?
LNG is same as CNG or any combustion engine. The only difference is the tank that is used for storage.
And any update on the retrofit kit which you have made for trucks any timeline for that to come to commercial?
Page 9 of 11 We have now completed testing of more than 250,000 kilometers. We have got a homologation certificate. And we are now starting to build vehicles for sale to customers and I expect that in the next quarter we should be selling vehicles to customers, starting with a small volume of beta testing, but then after that, we will be in serious production.
Thank you. The next question is from the line of Rakesh Roy from Omkara Capital. Please go My first question regarding your defense business. Recently Indian Army have clear for Made in India 155 mm Towed Gun System. So, where does Bharat Forge stand apart from the ATAGS?
That is for ATAGS only, that program is for 307 ATAGS.
This is only for 155 mm Towed Gun System apart from ATAGS?
Yes, so we have three other platforms besides the ATAGS, we have Bharat 52, then we have Ultra-Light Gun. Both in titanium and in steel and we have Bharat 45.
Okay. Sir both the guns have the weight below 55 tonnes. Yes.
Sir, next question regarding your aerospace business side, here you are seeing the growth from the landing gear helicopter part or jet engine can you light on this for landing gear or helicopter part jet engine?
So, in aerospace also, we are growing at a very high pace, we will continue to grow at very significant double-digit growth. We are almost every two years we will be doubling our business here. So, I expect that this business will be growing at a very high pace for at least the next three to four years.
So, this business we are looking from the domestic market or export market?
This is a global but more than 80% of it is export.
Thank you. The next question is from the line of Kapil from Nomura. Please go ahead.
Sir just one follow up, on these new products that you are building for electric vehicles, power electronics and also inverter, et cetera, what kind of margin profile will be there for these businesses?
Page 10 of 11 So, initially the margin will not be as high as it potentially can but, overall, the margin and return on investment will be very good. And there is value for vehicles that will be significantly higher than what we have today. So, the profit for vehicle will be very good.
Sure, sir. And when we look at your current margins, how much is the investment going into some of these new areas of development, which potentially may not be generating revenue currently?
So, our US plant is not generating any adequate return right now, then our aerospace business also is not generating the kind of return, our acquisition in the casting space that is JSA is not generating as much as because it has much higher capacity than what we have acquired, than what we are generating today. It can easily double its revenue with the capacities that we have.
Actually, sir my question was more on the standalone margins, because it could be having some investment related costs for these new power electronics and other EV parts. So, trying to get a sense, like how much investment is going into the standalone margins right now, which may be affecting your standalone margins?
To build any business you have an overhead. So, we have an upfront cost, which is our revenue expenses to take care of the operations of this business, which is negative rather than it’s not positive so as that switches it will go from negative to zero and then zero on the positive, but you are right, any business when you build in the beginning it has negative margin, because you are only investing. And we don’t capitalize any of these, we charge it off P&L.
Thank you. Next question is from the line of Mahesh Bendre from LIC Mutual Fund. Please go Sir, last 12 quarters we have been growing in double digit, very strong growth for the last three, four years. Now, in the press release that we have released, mentioned that the Q4 and FY25 growth is expected to be moderated. So, does it mean that instead of growing 20%, now growth could be moderate, maybe 10%, 12% kind of growth next year, is it mean?
It’s not that we are going to become negative growth, growth will probably reduce for a few quarter from 20%, but again after a few quarters we will again accelerate.
Okay. So, only growth number will moderate? Yes, exactly it’s not going to de-grow.
Okay. And sir any capital expenditure plan for next two years?
Next two years is cumulatively between India, Northern India, all put together 1000 crores.
Page 11 of 11 Thank you.
There is no one else, so maybe I will just give a closing.
Sure sir, there are no further questions.
Ladies and gentlemen, thank you for attending our call. I don’t want to alarm anyone, but I hope that we didn’t alarm you with our guidance which was softer than what you may have expected.
But, as a company we will have robust performance, we will have strong double digit, or we will have strong growth stronger than the industry and stronger than the market. But there are changes taking place in the underlying market. So, I just wanted to highlight there, it’s a great opportunity for us because a lot of weak suppliers will fall by the wayside and give us a lot of opportunity to move business to ourselves. So, we expect growth to continue. We have plans of how to accelerate our growth going forward as well. And, that the future looks very bright, driven by our existing businesses, some of our emerging businesses, and some of our new businesses. So, that’s all I wanted to say. And I would like to invite you to come and visit us to get a sense of what we are doing. Thank you very much.
Thank you very much. On behalf of Bharat Forge that concludes the conference. Thank you for joining us, ladies and gentlemen you may now disconnect your lines.