Bharat Forge decided to exit the Chinese joint venture (FAW Bharat Forge (Changchun) Company Ltd) because it was struggling to make money given the economic hardships in China, executive director Amit Kalyani told CNBC-TV18.
Since the venture became economically unviable, Bharat Forge's indirect subsidiary in Hong Kong sold its 51.85 percent stake in this JV to its joint venture partner, China FAW Corporation for Rs 175 crore, thus ending the eight-year old partnership.
He said that the company had incurred a loss of up to Rs 2 in EPS terms last year due to this JV. “It was definitely an impact of slowdown in China especially on the medium and heavy commercial vehicles segment where this company was largely focused. In the current year, up to October, it (EPS impact) will be about little less than Re 1,” he added.
Also, the company’s debt of Rs 500 crore would get reduced from its consolidated balance sheet on JV exit and it would receive Rs 175 crore cash, he said.
Meanwhile, Kalyani said that its subsidiaries in Europe continue to do very well and the auto components maker is eyeing export growth in double digits in near-term.
Below is the edited transcript of Amit Kalyani’s interview with CNBC-TV18
Q: You all have exited from the Chinese joint venture, was it loss making and how might it relieve your balance sheet or your profit and loss immediately?
A: We have been in this JV for eight years, we have had good relations with our partners but it was struggling to make money. We had a hard time trying to convert it into a profit making entity. We then decided that we have worked at it long enough and we need to reevaluate our strategy for China and therefore we divested our stake in favour of our partner entirely. This was an amicable split. I want to thank our partners for being gracious and supportive of us during these eight years and also during the separation period.
Q: In terms of numbers is this reflective of any slowdown in China?
A: It was definitely an impact of slowdown in China especially on the medium and heavy commercial vehicles where this company was largely focused. Last year we had a loss in the total entity attributable to our EPS of almost Rs 2. In the current year, up to October, it will be about little less than Re 1. On a consolidated balance sheet basis, we had a debt in the subsidiary of close to Rs 500 crore which will now go away from our consolidated balance sheet and we will receive Rs 175 crore of cash.
Q: How much did you invest about eight years back and in terms of opportunity cost what would be your total ballpark loss?
A: We invested Rs 178 crore in a period of eight years in four tranches. We recovered Rs 175 crore. Considering the position of the company and what we received, I think we got a very fair deal.
Q: Did you make any money at all or did you have to pay something because of the debt on the books, is there any other impact is what I am asking?
A: No, we have no impact, infact it is a positive impact. We are getting rid of Rs 500 crore of consolidated debt and getting Rs 175 crore of cash.
Q: For the other JVs that you may have you have already exited from BF Utilities in the US, you have also consolidated the European operations, is there anything more left in terms of an external operation?
A: We did not have a JV in the US, it was BF America, a subsidiary which we shut down and we sold the assets. All our subsidiaries in Europe are doing well and are making good profits. We are on track for a very good year.
Q: Last time you told us that the ruling had come in your favor, did that actually not come about in that case?
A: It did but there are multiple steps following that which are still ongoing.
Q: Is your external consolidation over now?
A: Our focus is profitability and clear signal that performance has to matter. Our focus is on generating cash, free cash flow and incremental return on capital employed. Therefore our European subsidiaries have been consolidated very well, they are performing very well and I think their performance going forward also will be very strong. We should see growth and good margins so yes we are on track.
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