Bharat Forge cranks up for the future as Covid dents biz at home and abroad

The second part of the series looks at Bharat Forge's strategy during Covid to restructure overseas units

Amit Kalyani, 44, deputy managing director, Bharat Forge, is prepping the 54-year-old firm for the future. The strategy involves a two-pronged approach: Setting tough targets for the company’s overseas subsidiaries and taking the group into newer businesses.

With its core commercial vehicle (CV) segment (in both domestic and export markets), which accounts for close to 47 per cent of consolidated revenue, seeing a near collapse due to the pandemic and non-auto segments such as oil and gas also under pressure, the world’s largest forging company is looking at newer horizons.

“We will always have something in Horizon 2 and something in Horizon 3 that we are working on,” Kalyani told investors in a post-earnings call.

This is not the first time Bharat Forge is looking to leverage a crisis. Following the 2008 global meltdown , the company, which till then was highly dependent on the automotive sector, diversified into making parts and aggregates for the oil and gas and power sectors. The strategy, stitched together by the father, Baba N Kalyani, and son, paid off.

Poor consolidated earnings in 2019-20 and the global health crisis showing no signs of waning are the reasons for the father-son duo looking to shift gear again.

Bharat Forge’s revenue in 2019-20 dropped 20 per cent to Rs 8,056 crore while profit before tax dropped to a seven-year low of Rs 462 crore. Net profit at Rs 350 crore was also the lowest in seven years. Ebitda (earnings before interest tax depreciation and ammortisation) margins  also took a hard knock, touching an 11-year low at 14.7 per cent. Analysts fear the financials will deteriorate further in the current year.

Kapil Singh, research analyst at Nomura, expects a steeper drop in 2020-21 before recovery in 2021-22.

“We expect a further 30 per cent year-on-year decline in revenue in FY21 due to weak demand in both domestic and export markets. While we expect steeper 39 per cent YoY revenue growth in FY22, this is still 90 per cent of FY20 levels.”

On the domestic front, analysts estimate CV demand to be affected the most due to the weak economy. For passenger vehicles (PVs, 15 per cent of revenue), the company’s focus on aluminium components and past new order wins should help sustain healthy growth in the medium term, wrote Singh.

A collapse in MHCV (medium and heavy commercial vehicles) volumes in the home market and exports to the US has singed earnings. “It’s a nightmare,” Kalyani told analysts alluding to the abysmal capacity utilisation levels in the domestic MHCV market.

The installed capacity for the MHCVs industry in India is 600,000. But the industry is producing 6,000-7,000 units a month. This is 5-6 per cent of installed capacity, he said.

The situation overseas is substantially better, he pointed out. While the US market is running at about 50 per cent, it is around 40 per cent in the other markets, said Kalyani.

Much before the pandemic struck, the company’s overseas manufacturing operations took a major hit in (CY) calendar year 2019 owing to the cyclical nature of the CV business. Combined manufacturing operations in Europe turned in a loss of Rs 113 crore in CY2019 against a net profit of Rs 26 crore in CY2018. Revenue fell 13.7 per cent to Rs 2,786 crore from Rs 3,232 crore a year ago.

The overseas business accounts for 10-12 per cent of consolidated revenue. The firm hasn’t shared the earnings for the current CY or FY20. In all likelihood, given the steep fall in volumes, they would have only worsened.

“The subsidiaries have been badly affected by the sudden shutdowns,” said Kalyani. The German and Swedish governments’ policy of paying 80 per cent salary when the employees are on short-term work has negated some impact of the shutdown on fixed costs, he said.

Bharat Forge is restructuring its overseas operations. This includes manpower and overall cost reduction.

“We have set very tough targets for our overseas subsidiaries. And this time we have not just set targets, we have put in place a team of external, plus internal experts, who will make this happen in a time-bound manner with quarterly measurements,” said Kalyani. 

An impairment charge of about Rs 89 crore in investment in Tevva Motors, a company it invested in, is part of the exercise.

Even for the domestic business, it is planning to pare the quarterly fixed cost to Rs 50 crore by the end of the financial year from the current Rs 60 crore. This will include consolidating the facilities, and reducing energy and manpower costs. 

It has also initiated a voluntary retirement scheme.

On the positive side, the company expects to gain share in the domestic passenger vehicle business. Within its non-auto business, the management sees good long-term potential in the mining, agri, and defence segments.

Mitul Shah, vice-president, research, Reliance Securities, remains bullish on the long-term prospects of the company.

“A strong rebound in the automobile business after a major slump and strong double-digit growth in the high-margin engineering business will be the biggest triggers for the company’s earnings and valuation re-rating close to engineering conglomerates,” said Shah.