Europe biz will not disappoint in FY14: Bharat Forge

Auto components maker Bharat Forge expects its European subsidiary to sustain margins on the back of manufacturing excellence and improved demand.

Read More: Bharat Forge Q4 revenues down 31%, net dips 9% In an interview to CNBC-TV18, Amit Kalyani, Executive Director of Bharat Forge said that the firm's China subsidiary incurred losses because of over 40 percent de-growth in the heavy commercial vehicles market. The firm recently sold its plant and machinery in America, after incurring losses Y-o-Y . Impacted by poor sales, both in the domestic and overseas markets across verticals, the company's FY13  profit fell 15 percent year-on-year to Rs 306 crore. The year was one of the most challenging ones for the Indian auto industry in a decade and hence the company's heavy commercial vehicle segment – its main market - saw a decline of 28 percent during the year. Below is the verbatim transcript of Amit Kalyani's interview on CNBC-TV18 Q: Any signs in global truck demand or the weakness that you have seen for the last couple of quarters will persist through this calendar year? A: We are not seeing any real signs of revival or improvement in business scenario but we are not seeing any decline either. The bottom is being formed although I would like to put an asterisk and say the visibility is very short. Right now, we are seeing visibility of one month at the most, may be one-and-a-half month. There is no longer term visibility available form any customer in the market. On a guarded basis, we have formed a bottom but the summer is still before us and Europe still remains to be an issue. Q: What kind of tonnage did you see in the quarter gone by? Any indications of what you might see in the next couple of quarters? A: We did a tonnage of about 37,000 tonne for the quarter, which was the last quarter of the year. It was flat compared to Q3 and last year same quarter, we had done 57,000 tonne. So, we are down by 45 percent compared to last year. But in this quarter, although we had a flat sale, our EBITDA has improved by almost 9 percent by Q3 and our EBITDA (earnings before interest, taxes, depriciation and amortisation) margin has improved, our profit before tax (PBT) have improved, operating margin has improved. So that is a good sign. In terms of some cost reduction initiative, focus on lean and efficiency has started to pay out. Although the company still needs significant volume in order to regain the kind of topline and bottom line that we used to achieve, we are operating somewhere in the region of 50-55 percent capacity utilization. We have significant capacities available both in the automotive and non-automotive space, which will give us significant new topline. _PAGEBREAK_ Q: How much pressure do you see on your topline through FY14? Could it be as bad as 20-25 percent degrowth? A: I do not normally give a forward looking statement. But, if you look at our current run rate which is Rs 695 crore-700 crore, we should be able to step that up quarter-on-quarter (QoQ) and by the second half of current financial, which is FY13-14, we should be able to see some amount of growth. If you look at Indian truck market, customers are already talking about at least next few months, there being some growth. The passenger car guys are talking about second half seeing some growth. The US market is talking about seeing some growth although it's not translating into any firm delivery schedules or orders, but there is still a talk. The truck market, at least inventory is being depleted. So whether it is raw material inventory, finished good inventory, there is a depletion of inventory. So, production and sales are being realigned on a 1:1 basis and that should see some amount of growth taking place. Q: What about the oversea subsidiaries? They have been loss making for a while now. When do you expect to breakeven there? A: We have losses in the China subsidiary because of over 40 percent degrowth in the Chinese market for heavy commercial vehicles, which is our primary segment. We have losses in the US subsidiary but we have closed and sold that plant and so we no longer have it. In terms of Europe, we have a profit in Europe for the year. If you look at European wholly owned subsidiary on a combined basis, we have a profit for the year. So we do not have a loss situation in Europe and are hoping, although the Europe sentiment is down, we have done a lot of work on cost reduction on lean, on manufacturing excellence, quality where we hope we will be able to sustain the profitable performance for the year as well. Q: Coming to the non-auto part of the business, do you expect the sluggishness that you are seeing right now in the construction equipment side to continue through the year? A: First of all the non-auto business for the year and for the quarter is roughly about 39 percent, which means either they are all operating at the same level or have gone down the same. Unfortunately, the non auto business whether it is oil and gas or construction equipment market, are all badly affected. Oil and gas is largely affected because of this huge glut of gas in North America. Construction and mining equipment is also indirectly affected by this because a lot of the mining equipment in North America and in other parts of the world was for coal mine. Now, with gas being in plenty and cheap, the demand for coal has come down. We feel there is still some lingering weakness in the non auto business in these two sectors. The standby diesel engine and power generation sector is seeing some improvement in India largely because of power shortage due to coal crisis, so that is the bright spot. However, overall the non auto business is quite weak. Q: What about the margin performance, do you expect it to stabilise or do you foresee some deceleration there too? A: There are two factors. If you want to improve margins at the same level of revenue, you have to cut costs. There will be limits to what you can do there, but if this huge headroom in capacity, which is going to have a very large slowdown effect on margins. So, if you combine some amount of growth and some amount of cost reduction, we should look at anywhere between 100-150 bps improvement in margins.