Dec 05, 2017 04:57 PM IST | Source: CNBC-TV18

To invest Rs 700 cr in domestic capex; defence orders healthy: Bharat Forge

The order book for oil and gas business is pretty strong, it is almost 4-5 times last year, said Baba Kalyani, CMD, Bharat Forge.

CNBC TV18 @moneycontrolcom

The Bharat Forge stock has been outperforming off late, spurred by steady rise in North American Class 8 truck orders as well as a steady improvement in the oil & gas segment.

The first half saw the company post 30 percent growth in revenue and 40 percent in EBITDA. Baba Kalyani, CMD, Bharat Forge is confident of not only maintaining the growth rate but said they aim to do better than that going forward.

The company also has big expansion plans for the domestic market, said Kalyani, adding that they would spend Rs 500 crore expanding capacity within their facilities outside Pune and also spend Rs 200 crore to set up facility in Andhra Pradesh for light weight components.

The orderbook for oil and gas business is also pretty strong he said, it is almost 4-5 times last year. He said they are manufacturing more and more products in that segment in an effort to increase the share of that in the total pie. The response from customers is very encouraging, he added.

He said North American economy is doing extremely well and so the company is benefiting from that. However, only 12 percent of company’s revenues comes from North American Class 8 Trucks, he specified. So, no longer are highly dependent on that market, although their market share in that market has gone up.

On the defence business, he said the order pipeline is healthy and they are beginning to get export orders as well. He said, they recently test-fired two artillery guns in Pokhran and will be going for winter-trial to Sikkim. Expect defence orders to come through in the next 24 months.

With regards to BEML, he said they are pursuing it but the process has not started in the way it was expected. With regards to Amtek Auto they will be doing due diligence by the middle of this month, he said.

The demand for aluminium power train products have increased multifold in Europe, said Kalyani.

Below is the verbatim transcript of the interview.

Sonia: Tells us about what your view is on the overall North American market because you have gained so much from that market, is there a genuine pick up that we are seeing over there and do you get a sense of that could continue in the months to come?

A: The North American economy overall is doing extremely well. The growth rates are high and the truck numbers that you see are a derivative of the growth in North America. Almost every sector whether it is oil and gas, whether it is industrials, whether it is trucks, autos, defence everything is increasing in that part of the world. Obviously, we are benefiting from that, but I just want to make one simple clarification. Our exposure, or our business with North American truck Class 8 business is only about 12 percent of our revenue. So, we are not so highly dependent on that as we were a few years ago.

But our market share in that market is much higher than what it was before. So, we have been able to broad base our revenue mix in North American market between trucks, automotive, oil and gas, industrials and some other sectors. The point I am trying to make is you guys tag me like a truck manufacturer, so we are much more than that.

Latha: Exactly, where is the defence order book headed? Is there anything we should expect in the next one year? Are you supplying anything already to defence and how might that look in the next 12 or 24 months?

A: I think in the next 24 months it looks extremely good. In the last three months we have been able to test fire 2 of our artillery guns in Pokhran. They have done extremely well. Now it is going for winter trial to Sikkim. It is all progressing pretty well. In the meantime we are getting smaller orders for components and parts that go into many of the defence products that are made within the country by the defence PSUs, Ordnance Factories Board (OFB) and other. We are also now beginning to get export orders for defence so that portfolio base is beginning to look pretty good.

Latha: You said in the next 24 months you will expect orders. Your investors were expecting that in the next one year you will be getting some big defence order, no?

A: Well, we are hoping, but we have one customer in the defence business and that is the government of India, so we have to wait and watch how things pan out. However, we are pretty much up in the top couple of companies in this field as far as India is concerned and we are quite hopeful that we will have something going.

Anuj: Once again I just wanted to revisit BEML where are we right now on that because there have been couple of issues on government part and is there a plan B for Bharat Forge?

A: As far as Bharat Forge is concerned let me tell you, just summarise you in short way - we are seeing very strong traction on exports. We are seeing very strong traction in the domestic market even with the domestic commercial vehicle (CV) business and other businesses. So, we are right now getting into a capacity expansion cycle. We are now going to increase our Capex, we are going to build new plants and increase capacity because we see by next year our capacities are going to be completely full. So, this is good news.

After a very long time, we are going to invest in new capacities, so we are seeing very strong almost in every market and every sector not withstanding what is likely to happen in the defence sector - that is a separate thing. For example - in the first half of the year our exports grew by 60 percent compared to last year. So, you can see the level of traction that we are able to generate. In the domestic markets the heavy trucks now use more than two axles per truck in the front.

Anuj: You are evading my question, so should we assume that you are not pursuing BEML anymore?

A: No, we are pursuing but the process is still not started in the way we expect it to start.

Sonia: Is that the case with Amtek Auto as well?

A: We have given our bit to the people who are involved in Amtek Auto, let say process of sale, so we are now in the second round. We have to go and do due diligence and visit the plants which is going to happen in the middle of this month, so the process is on.

Latha: We are given to understand that in Amtek Auto the problem is that the parts are manufactured in various subsidiaries and all of those are not under National Company Law Tribunal (NCLT) is there an operational problem in buying Amtek Auto? Do you see it getting successfully come to a fruition?

A: That largely depends on the Asset Reconstruction Company (ARC) and the banker and the NCLT as to how they deal with that. If they are going to put a company for let us say sale which is under their process they would have to provide all the information that is required for any potential buyer to analyse and find out whether it is worth they while to pursue this. For that they would have to provide information about all their subsidiaries and everything else.

Latha: What is the likely haircuts in a plant like that? Do you think anything goes for above a 50 percent loan cut?

A: I don’t think I can answer that question. That is best answered by the bankers.

Sonia: I quickly want to squeeze in one question on the evolving electric vehicle (EV) segment because you are putting in a centre for light weighting technology as well in Andhra Pradesh. Tell us a little more about what your plans are over there and what kind of revenue could it bring on board for you?

A: I mean there are three areas that we are pursuing as far as EVs are concerned. One is the electric powertrain technology itself because we make a lot of powertrain component so we need to transit ourselves between the traditional internal combustion (IC) engine powertrains to EV powertrains. So we are doing that and you will hear very soon some announcements as far as that is concerned.

Second, when EVs come in there will be a lot more light weighting that is required in the vehicles so lot more usage of light weight material, light weight components. so we are setting up a facility to do that. We are seeing the same traction in Europe. Demand for our aluminium products have increased multi fold in Europe. The same thing is happening in North America and I think the same thing will happen in India, so we have a pretty comprehensive strategy on this.

Anuj: On Indian particulars because that would be important from the economy and the market point of view as well how much of Capex do we see in India?

A: We are going to spend something like Rs 500 crore plus in expanding capacity within our facilities not in Pune outside Pune plus we are going to spend about Rs 200 crore in setting up our facility in Andhra Pradesh for light weighting components and in that plant the investments will gradually increase even more as the demand for light weight products keeps going up.

Latha: Finally a question on your oil and gas business? Can you give us an idea of how much the order book is increasing since that long last that industry is showing signs of sustained price increase?

A: Our order book is pretty strong. We are many times, I think 4 or 5 times more than what it was last year. Important thing is we are now getting into more and more products in the oil and gas business and trying to increase our share of that total pie, and I think that is very encouraging. We are getting lot of good response from many of our customers who want us to do many more things and that is encouraging.

Latha: It was a giddy rise in your first half whether it was revenues or EBITDA, is that a maintainable run rate - 30 percent revenue, 40 percent EBITDA?

A: Well, let us see. We are trying to do better than that but I am sure that is maintainable.
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