Bharat Forge sees 'tremendous biz growth upside' ahead

“We are still operating at 60 percent of capacity utilisation. That says that we have tremendous headroom from growth and the business upside could be phenomenal from here,” Kalyani said.

Below is the interview of Amit Kalyani, Executive Director, Bharat Forge with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: I was reading a couple of channel checks from analysts and they point out that within the European Union (EU) and the US market, where 60 percent of your revenue comes from, there has been a surge not just in the truck business but also in the passenger vehicle business. Can you give us a sense of how much the increase momentum could add on to your revenue profile in 2014 or even in FY15?

A: In ’14 we are one quarter left so while we had guided last, in the analyst meet post our Q3 results that we see a flattish quarter. I am happy to report that Q4 is turning out to be better than that basically driven by slight increase in the domestic market commercial vehicles (CV) performance and increase business in some of our non automotive spaces and the US and European truck markets.

The passenger vehicle (PV) market in Europe has improved definitely and that impact will be felt more by our subsidiaries in Germany because they are more PV oriented than we are although in Bharat Forge India we have significant new PV programme wins, they will only start generating revenue in the year ’15 and onwards. So, overall the momentum is positive and do remember that we are still operating at about 60 percent capacity utilisation. So, we have tremendous headroom for growth and the upside from that growth will be phenomenal.

Latha: You raised several points in arguing about the improvement in demand. Let me start with the domestic market – you said you see a slight increase in domestic demand. Where exactly are people asking for your products?

A: Basically there is a pretty substantive demand increase in the commercial vehicle (CV) market right now. The medium and heavy commercial vehicle market was the lowest in Q3; in the last five-six years and that has rebounded. It is probably a combination of inventory, combination of the excise duty reductions and little bit of feel good factor from the overall industrial growth etc which is now prompting people to take advantage of this time.

Latha: What about the personal vehicle market – two wheelers or four wheelers? Do you provide products for them, are you noticing any improvement?

A: In Indian market we are not a supplier to the two wheelers market. Four wheelers yes, we are; we are a big supplier to Mahindra & Mahindra, Tata Motors, Maruti Suzuki, Toyota and many other. There is an improvement taking place there but it is not so much of a growth issue but it is more bottoming out and slight improvement.

Sonia: I wanted to understand a little bit about your non-auto business because most of the analysts I speak to believe that the next trigger for your margin profile to improve beyond 26 percent level will come from the non-auto business. Are you seeing higher orders in the oil and gas space, in the railway space etc. what could the quantum of the orders be and how will your margin profile improve because of that?

A: We got into non-auto industrial business about five years ago and at that time it was 2-3 percent of our sales. Now it is about 44 percent of sales in the last quarter and while in the beginning it was a general basket of non-auto. We have now created five distinct verticals and we believe each vertical has a potential to grow to USD 100 million of revenue annually, if not more. There are certain verticals which we are very close to that. There are certain verticals which we are still quite a way away and in certain verticals we believe we can easily blow well, pass that USD 100 million number because of the kind of product debt.

The verticals are oil and gas; we see a definite huge potential, rail and marine; good potential, power and energy; good potential and construction and mining. The one where we believe there is long-term potential but will take timing being realised is aerospace because the product validation and approval cycle in that is six to seven years.

Latha: What is your percentage of sales that comes from exports and at what rupee value would you worry?

A: Our exports today are about 50 percent and the rupee value for the last quarter was roughly little below 60.

Latha: Will the rupee going back to 60 or to 59 be a worry for you?

A: No because some of the costs also come down.

Latha: In that case how are margins faring because metal prices have also crashed a bit. How are you margins likely to be in Q4 of FY15?

A: Margins should be wholly equivalent to slightly positive. FY15 – we believe that driven by capacity utilisation margin should be slightly more positive, above 26 percent.

Sonia: A couple of months ago you divested some stake in your Chinese joint venture (JV), the loss making JV, any more plans to divest stake or monetise any assets?

A: We have no plans to monetise or sell any stakes in any of our subsidiaries. They are all profit making and growing and doing well, so we do not see any need to do that, in fact they should be fairly earning accretive this year.