Bharat Forge Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Pramod Kumar from UBS. Please go ahead.

Amit, my questions are on the defense side. You kind of highlighted in the opening remarks that 80% of the order book is now on exports. Is that number right? And that's for the outstanding Rs. 5200 crore order backlog.

Yes. And this does not include the ATAGS programs in India, which are yet to be concluded, which should happen shortly after the election process is over.

Yes, exactly. So, you preempted that follow up basically that we started the entirely different story with ATAGS opportunity and the defense localization opportunity. But looking at the numbers, the way they're panning out looks like export is turning out to be a pretty big opportunity than what we thought initially. If you could just help us understand what is working in your favor on the export side and also probably some bit of a color of the breakdown of the product categories within the product defense pool and how should one look at the domestic export split once ATAGS comes in and as the business matures so because export is something which is really coming in as a surprise?

So, look, let me answer it in a little different way. I think that globally people have realized that defense spending is going to increase. We have products that a re world class and that are extremely competitive and are able to supply a broad range of requirements of global customers. One thing we're consciously not doing is supplying into any conflict region , b ut we see tremendous opportunities for our products across the world and these are products in the artillery segment. In artillery segments, we have three kinds of guns , we have Towed guns, we have mounted guns, and we have ultra-light guns and we have altogether 9 platforms already ready. So, this is a huge range of guns which can be supplied to multiple different kinds of customers, then we have multiple vehicles, protected vehicles of different categories, different functions and utilities. So, that is another category. Then we have a lot of spares and consumables. That's a third category. And then there are lots of other products which are under development in the unmanned vehicle area which are both land, sea and air and that is another area of huge opportunity that we are pursuing. So, we see global opportunity and just to reinforce what I am saying, we are creating a capability to build initially over 100 guns per year and 550 vehicles a year. But we can scale this up at least on the gun side, to probably almost 5 guns a week kind of numbers or 200 to 250 guns per year kind of a number and close to 1000 vehicles per year. So, we see a very large opportunity and we are taking some steps to let's say capture this opportunity both strategically and tactically.

And Amit, these are all largely government enabled export orders which we are getting here, is understanding, right sir?

So, they are not. I would not say they are. What do you mean government enabled?

The government-to-government relationship or like or you a re scouting for orders globally or independently?

So, we are also scouting for orders on our own. And we will do a lot of business development and new customer acquisition on our own also. But it's clear that the government is supporting this sector and please remember that we have to get permission from the government before we export any weapon platform anywhere in the world.

And on the defense profitability, Amit, given that export is shaping up much better than what we probably thought, what does it do to the longer-term profitability and return metrics on the defense business and what we have already shared as aspiration, is there upside to that number?

The way I would answer this question is that I think the returns on this business will be comparable to our manufacturing business at least what we see now and as it grows, you know, let's see what happens. But I think ROCE is going to be extremely good and it will also be a stabilizing factor because it will become a meaningful size of our business going forward and will provide a lot of shock absorption without any CAPEX that we need to do.

Thank you. Next question is from the line of Arjun Khanna from Kotak Mahindra Asset Management. Please go ahead.

Sir, I just wanted to understand a little bit on this executable order book. So, if I look at the number in the fourth quarter, the presentation you've talked of Rs. 5,192 crores. And if I look at the second quarter, we have talked of Rs. 3000 crores. So, addition of at least 100 0 crores and obviously we have executed all in the past second half, so which are these major orders that we have won? Is there a follow-on order to the European customer that we had or?

Yes, I don't want to get into individual customers and product segments. All I will say is that we have got orders from existing and new customers for existing and new products.

Just wanted to understand in terms of platforms, any newer platforms or its existing platforms which we have been selling?

From all kinds of products, from both.

Sure. Secondly, in terms of the US operations, I did understand from you, sir, that we are looking at further CAPEX in the US given that we have seen issues in this quarter and utilization levels are low. I just wanted to further understand that and what is the outlook in terms of FY25 profitability?

So, look, we have customer orders and commitments that we have to meet for a certain number of parts. That requires us to set up two phases, that is 2 lines in the US. Currently our US capacity utilization is not yet at 100%, but by next quarter or latest by the quarter after that we will be at 100% of Phase-1 and then in 26 -27, we will head to 100% of Phase-2 as well. In this quarter, we had certain one-off costs due to weather and other one -time issues which were out of our control and that is what has impacted the profitability and the numbers to a certain extent. But I think we have a handle on that, and we should see even the US operations with the positive EBITDA in Quarter 4, healthy, profitable EBITDA in Quarter 4.

Quarter 4 of FY25?

Yes.

Just one quick one. You mentioned s ir in the comments that we would see the K SSL or the defense business move out. So, if you could just articulate that in terms of what does that mean in terms of profitability of the standalone?

I think you have to stop looking at standalone and it's all owned by BFL. So, you have to look at it because for many strategic and other reasons, it's very important for us to house our defense business in a separate vertical. That's what every global company, even Indian companies have done. Unfortunately, in our case, the licenses were originally received in Bharat Forge because we didn't have a large facility outside of here and we were incubating this business, but now that the business is ramping up and we're seeing significant growth, we need to create standalone facilities which can give us the necessary capability, capacity, safety, security that defense business requires.

Sure. On an earlier occasion, you had mentioned the ATAGS order would come in standard Bharat Forge. So, that also would have shifted to KSSL?

Yes, because that time there was only Bharat Forge. Now obviously everything is moving to KSSL, so the orders will also come into KSSL.

The next question is from the line of Binay Singh from Morgan Stanley. Please go ahead.

Good to see the defense moving up. In the segmental data just on the defense side, again we see that sequentially our defense revenues have gone up, PBIT has gone down a little bit about, what is driving that?

This is all related to the product mix also, so you should look at more like the annual data rather than looking at quarter-to-quarter number.

We have also had significant product development cost that we have charged off.

And secondly, like just I was comparing last call to this call , 2 points over there. One is that when we last spoke in mid-February, we were talking about moderation in growth in both domestic and export. The outlook today sounds a lot more positive. So, could you comment a little bit about outside of defense? Is there any other change that you see in other businesses also a pickup or so? And secondly on CAPEX, we talked about US CAPEX, if you could also share CAPEX for India for FY25?

So, good question. First of all, there is a tremendous amount of order flow taking place from business moving to India from other geographies, including China and including Europe. Point number one. Point number two, at that point in time, we had probably estimated that the impact of the Middle East crisis, with that whole Red Sea thing going on and other things, would be significantly more than what it is turned out to be. And thirdly, we have seen, I would say, a stronger outlook from our customers than what we had anticipated.

One of the factors that we see is we are also winning market share within the existing available market. So, this is both for existing products as well as new products in new areas. This is over competition in India. This is over competition globally. So, we are seeing this as a very marked phenomenon in the last one, one-and-a-half years.

And team, when we talk about a better outlook from customers, are we also commenting on auto or is it largely non-auto?

It's a mix. Auto is CV and industrial is a very wide mix of everything that we are doing.

Thanks, very helpful. If you could just share the CAPEX number for India for FY '25.

So, it would be about 500 crores.

Thank you. Next question is from the line of Amyn Pirani from J P Morgan. Please go ahead.

My first question was , Amit, you mentioned in opening remarks, two sunrise sectors. So, are you talking about defense here and some one other sector or?

No, defense is now already becoming mainstream. These are two new sectors.

And you are winning new order. Would you be able to clarify as to what exactly which segments are you talking about?

No, no. I don't want to clarify yet.

Secondly on the European aluminum business, now we have been talking about the fact that the pricing has been a problem . So, as we look into next year, you ha ve talked about the U .S. business as to how the profitability should look by fourth quarter of FY '25. How should we think about the European business as a whole, including aluminum because that has been a bit of a laggard in terms of margin trajectory?

So, I would say that the European aluminum business will be profitable in 2025, both at EBITDA and at PBT level. So, that will be a big change from this year.

I know you didn't talk about auto and non-auto separately in the last question, but any broad idea as to how the U .S. truck market is looking for us? Are customers talking about a decline this year or are they thinking of a flattish kind of a year? Subodh Tandale: You know, you may have seen some press releases from companies like PACCAR, companies like Daimler in the last maybe 3-4 days, and everybody is talking about a reasonably optimistic scenario, which does not mean necessarily growth, but stability. And that is what we are following. That is also what we are seeing in our order book.

Thank you. Next question is from the line of Gunjan from Bank of America. Please go ahead.

I just had the follow -ups on the overseas subs in defense again. On the overseas subs, on the U.S. operations, what is the one-off? Can you quantify that? And also, in terms of your guidance by the end of the fiscal we will turn profitable , could you also like little bit share what will be the key drivers because European operations we have been at 75% , right? So, what is the visibility on this improvement that we are guiding for next 3-4 quarters on the overseas subs?

So, demand is there. We have put in place operational improvement measures in Europe which are already showing results. The U .S. plant was a green field plant . So, you know, there is a larger learning curve , but there also now we are clocking OE about 75 -80%. So, I think, the factors that are required for a business to run well, which is having cost under control, production running at certain cycle time and certain OEE and pricing being r easonable are all coming into place and then that is what is going to make this happen.

And do you think that the overall operations put together like we have been saying that over the midterm we expect these margins to get to , let's say, double digit is something that you have spoken about in past. Now if I were to sort of think about that trajectory, where do you think the entire overseas piece will be by exit of Fiscal '25?

Definitely in a double digit. I would say definitely double digit at the EBITDA level, yes.

The second question I had was on the defense. Now this clearly, you know, it's been surprising positively now with the order book we have in ATAGS yet to come. How do you think the scale up of revenues now ? Because I think we were looking at somewhere around 2 ,500 crores in 2 years now that we have 5,000 crore plus order book. One, what is the timeline for execution of this order book? And secondly, any change to the revenue scale up guidance there?

Look I think the revenue scale up going from 1 ,500 to 2 ,500-2,600 is a very strong growth , especially because you are building a new plant, new facilities and then after that obviously the growth can be even more steep.

And what is the timeline typically for execution once you have this 5,200 crores, what would be the typical timeline for execution?

Some of it is 3 years. Some of it is 4 years.

And last one, you know, mainly on the oil and gas, can you quantify what is the contribution now or should we sort of think about any major drag still coming from oil and gas in the industrial segment?

It's about 300 crores right now. I think we expect this to go up a little bit this year because we have new products that we are developing which we haven't supplied before. But I think that is the vicinity in which we are right now. Obviously, it will grow. It will grow quite substantially. But it's not, you know, our dependence on oil and gas in industrial is not as strong as much as it used to be in the past.

300 crores for the fiscal '24, right?

Sorry, yes, '24.

Thank you. Next question is from the line of Jinesh Gandhi from Ambit Capital.

Quickly on the order books that you have for guns and for overall order books for 6,000 crores, would this CAPEX of 500 crores per annum run rate will be sustainable or do you have to invest more in capacities given the opportunities which are coming up for you?

No, our capacity right now is adequate for fabrication and assembly. If you want to do certain more value addition or new product development to go into that, we may have to do some more value addition. I mean, more investment, but currently I don't envisage that.

So, this 5000 odd crores defense order book can be met through the current stock.

Yes.

And secondly, while the defense obviously is having overbearing influence on India, non-auto business, how has ex of defense done in terms of growth? Because I believe there also tailwinds have been fairly good. Ex of defense India, non-auto business, how it has grown in the fourth quarter and how do you see it growing going forward?

So, in non-auto in India, we have business that goes into railways, that goes into construction, mining, agricultural, shipbuilding, energy, space, plenty of sectors.

Is that also seeing very good growth?

Yes, absolutely. Every sector is seeing growth.

And lastly on aerospace, how it has scaled up now in FY '24, I believe that it will also be started to reflect from 2024, and how do you expect that to grow in next two, three years?

So, I expect in the next 3-4 years or 3 years also to double this growth.

Now it would be what about 300 odd crores revenue?

Yes, roughly.

On the defense business, just wanted to check for the quarter, this KSSL revenue of 465 crores represents full defense revenue, or if you could give an indication, what is the overall defense revenue for the quarter?

Yes, it's more or less t he same revenue, because the booking entity or the inv oicing entity is KSSL. That represents the overall defense business.

And sir, just one more question on consolidated CAPEX. I see that this year we have done about 1,500 crores of CAPEX. So, you know, should we expect a consolidated CAPEX in the similar range next year?

No, no, it would be lower than that.

Ballpark, can you give an indicative range?

About 1,000.

I said ballpark, can you give…

Yes, about I would say 800 to 1,000 crores.

And could you give us an indication like, this 1 ,500 crores, what are the areas, broad areas like domestic, overseas, defense, how much of it has gone into which area?

I think Kedar will take that offline and discuss it with you.

Thank you. Next question is from the line of Raghunandhan NL from Nuvama Research. Please go ahead.

On the defense side, revenue to increase from 1,500 to 2,500 crore ex of ATAGS. So, this 2,500 crore would be for FY '25 or '26?

I didn't say 2,500 crores. We said it is going to grow and that was our original what we had talked about. It is going to grow quite healthily. So, what is the question?

How do you see that 1,500-crore revenue growing over the next couple of years given the visibility of order book?

See, based on the business that we have is what we have given the numbers. You know, 5,200 odd crores in between 3 to 4 years or 4 years and the big Indian orders are not yet included in this.

Sir, on the ATAGS, you indicated that post-election hopefully, like, there should be further progress. How do you expect the implementation to happen for that sample order? Do you think that by the second half of FY '25 you will commence and over the next 3 years it should be fulfilled?

Well, simply because I think India realizes that their equipment is old and they don't have enough, and with the kind of neighbors we have , I think it is imperative that we have the beef up our borders.

And on the domestic CV space, how do you see the outlook for the current year? Subodh Tandale: We are expecting it to be flat as compared to last year.

Thank you. Next question is from the line of Pramod Amthe from InCred Capital. Please go ahead.

Amit, to understand more about the speed at which defense is moving, can you give some color in terms of how much of these are repeat orders, who are the competitors here and are these more of negotiated orders? How does this business really work?

I can't do that in this forum at all. I mean , there is no chance I would discuss defense business so openly. First of all, it is defense. It is a business that is bound by certain laws and rules. So, I can't talk about it like I am talking about supplying crankshafts or transmission gear products.

But considering the order book which we disclose , which is very interesting, is there a way to disclose your bid pipeline, which typically the ordering businesses have, in case if you can give those disclosure features? So, that will help us to...

Bid pipeline is huge, significantly larger, much, much, much larger than the orders we have got.

What is the usual hit rate you get there and how to understand this? Is it improving better versus what you used to have hit rates or the customers are more confident now to give repeat orders?

No, I think customer confidence is there. We have a state -of-the-art plant. We have extremely good products and we have great people. So , people once they come and visit us , there is confidence. There are a lot of complications about supplying it to this business. Not a simple business. That is why we are very cautious about who we do business with, how we do business, etc.

And once you move to the new facility for KSSL, how does it change the capability or the speed of execution of these orders?

But in spite of this, you are saying in the initial phase, KSSL plant will have 100 guns per annum scale, the first phase.

That is assembly capacity. Please remember that the ordinance we can make one a day.

Sorry, I lost it. One a day?

One per day is what we can make in terms of barrel, breach and other things.

At the new facility as you move in?

No, here, here, here. That will be an assembly.

Thank you. Next question is from the line of Mahesh Bendre from LIC Mutual Fund. Please go ahead.

Sir, standalone business is doing really well. But cumulative subsidiaries are still making losses. So, will they turn positive in FY '25 or '26 at PAT level?

Yes, Mr. Ben dre, we discussed that. I think maybe you may have joined a little late, but we discussed this in detail, that Europe will be positive for the whole year. And the U.S. will turn positive in the second half of next year.

And sir, last two quarters, the tonnage growth has been a single digit, but our average realizations are going up. In fact, last 13 quarters, our average reali zations are going up. So, will thi s continue? I mean, looking at the volume, our tonnage could not be a good idea.

I think we have to stop looking at tonnage and value as a linked measure. Because, you know, when you are supplying components, that is okay. But when you start supplying products, that one-to-one relationship goes away.

Thank you. Ladies and gentlemen, that was the last question of the day. I now hand the conference over to Mr. Amit Kalyani for closing comments. Over to you.

So, ladies and gentlemen, thank you for joining our Con Call today. I would like to reiterate that we see strong growth going forward for the company. We are firing on all cylinders. Some of the businesses are even moving faster than what we anticipated, like what some of the commentary we heard on the defense side. And we expect that a couple of the other businesses that we incubated over the last few years, such as aerospace and defense and industrial and EV would also start ramping up over this year and next year and become a meaningful contributor to our overall business. Once again, thank you for your time and interest in interacting with us and our team, and your interest in our company. Thank you.

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