Bharat Forge - Chairman And Managing Director

Macro-economic scenario

In global macro-economic terms, CY 2018 was an eventful year. Despite a growth of 3.7% in GDP terms, VUCA (Volatility, Uncertainty, Complexity and Ambiguity) prevailed. Factors including concern over trade wars, weak financial market sentiments and disruption in Germany’s auto sector over the new vehicle fuel emission standards have weighed down the outlook. Having said that, CY 2018 was a strong year for the Company’s main segments; global automotive and industrial sectors.

In India, the economic scenario improved, on the back of strong household spending and corporate fundamentals. Sustained spending on infrastructure and defence supported by the ‘Make in India’ movement kept the economy buoyant, besides unlocking a virtuous cycle of investment opportunities. The automotive demand after 5 years of strong volume growth across all segments started to face headwinds in the form of increased costs on account of regulatory and safety upgrades towards the latter part of FY 2019.

Performance review for the year

FY 2019 proved to be another positive year for the Company, thanks to robust demand from the domestic and export markets across several sectors. Despite facing some macro challenges in the latter part of the year, we recorded the highest-ever turnover and profitability, even as we strengthened our balance sheet and improved our market position. The good progress we witnessed in each of our businesses was gratifying.

During the year, we recorded a 23% growth in revenues to ₹65,200 Million. A significant achievement has been balanced revenue generation from multiple streams. We witnessed some pressure on the bottom line, which was driven by surging input costs, as commodity prices of steel and energy rose during the year. EBITDA and PAT increased by 19% to ₹18,761 Million and 52% to ₹10,713 Million, respectively.

Our consolidated revenues also witnessed a strong performance, with a top line growth of 21% to ₹101,457 Million and PAT growth of 37% to ₹10,326 Million.

Some of the salient highlights of the year on the domestic side included growth in commercial vehicle volumes driven by a pick-up in construction & infrastructure activity; healthy demand from agri equipment and execution of defence orders. On the exports business front, demand growth in the global truck and industrial sector, and ramp-up of the passenger vehicle program emerged as the key drivers.

Revenue

₹65,200 Mn

for FY 2019

23%

PAT

₹10,713 Mn

for FY 2019

52%

Establishing new engines of growth

As a constantly-evolving organization, we leverage our existing competencies in technology and engineering to explore new growth opportunities. This is an essential process to create additional revenue streams, amplify growth, and de-risk the business. In line with this strategy, we forayed into newer sectors such as Light-weighting technology (LWT) and e-mobility, while also deepening our presence in the defence and aerospace segments.

Defence and Aerospace

It has been an encouraging year for the defence business with revenues more than doubling compared to FY 2018. We commenced execution of a ₹2,000 Million-order received in CY 2017 from the defence establishment and we are steadfastly working to create a steady revenue stream across domestic and export markets in the defence components business.

Moving ahead, our strategic priority shall entail graduating from the manufacturing of critical components to making sub-systems and systems. Being a technical field with high entry restrictions and long gestation, defence has significant entry barriers in terms of capability and capacity. We have achieved reasonable success in defence exports, with the support of the Government, which resulted in several global enquiries. We envisage increased opportunities on the back of higher defence budgetary allocation to strengthen India’s security.

Aerospace is another technical field where we have established a commendable position, maintaining good relationships with three prestigious clients in a short span of time. With the Government’s focus on indigenizing manufacturing, we expect to create a robust ecosystem with significant offset opportunities that we can leverage.

Light-weighting: The auto industry is witnessing large scale disruption because of new technologies including Hybrid Vehicles, E-Vehicles, Ride Sharing etc. These disruptions will continue and BFL as a Company has to take steps to provide solutions to these changes. Light-weighting is currently a key focus area for automotive companies because of its potential to reduce weight resulting in improved fuel efficiency and better range for E-Vehicles. To capitalize on the opportunity, we have committed a capital investment of ₹2,000 Million in the 1st phase for establishing a Center for Light-weighting Technology (CLWT), which we expect to commercialize in the second half of CY 2019. The Center will focus on manufacturing aluminum components and undertake research on Light-weighting through composites and hydro-forming processes. This will help us attract new business opportunities and grow our portfolio. We have already bagged orders from domestic and export OEMs and received expressions of interest from several potential customers.

The vehicle electrification segment is at a nascent stage with concerns about capital allocation and strategies. Extensive R&D will be required to arrive at the right technology solution. This will involve large investment in people, capital and supply chain enhancement. This makes India an attractive destination given its low-cost advantage; and Bharat Forge, a prospective partner given our proven capabilities and quality focus. The Government strongly supports this segment through incentivization and subsidies which will benefit the industry and consumers. This is a huge opportunity that requires the right strategies to move ahead and succeed.

E-Mobility: This represents a large and growing global opportunity. We have started making inroads in this segment through stake acquisition in Tork Motors and Tevva Motors to scale our capabilities and gain access to their extensive R&D knowledge base. We have also set up an R&D center in MIRA Technology Park. Over the last couple of years, we have worked on this segment by putting together building blocks at the component, system and technology levels. We expect activity in this segment to gather pace in the coming years.

Pursuing growth through innovation

Innovation is central to everything we do. We are motivated by the need to stay ahead of technological advancements and market changes to emerge as the preferred global partner. R&D is our means to sustain this edge.

Our world-class R&D centers – KCTI (Kalyani Center for Technical Innovation) and KCMI (Kalyani Center for Manufacturing Innovation) are the two significant enablers for our innovation charter. These Centers work to augment knowledge and skills in advanced materials and technologies, identify new opportunities in process improvement, besides undertaking new products and materials development.

During the year, we commissioned Industry 4.0 Center of Excellence in partnership with PTC. The Center aims to incubate ideas related to digital transformation, machine learning and artificial intelligence. These will contribute towards preventive maintenance, cost reduction, productivity improvement, product quality enhancement and faster time-to-market.

Countering business cyclicality

We operate in a cyclical business where demand varies according to the economic environment. Although we witnessed troughs and peaks, it is pertinent to note that the trend line of our business has always been on the rise. Capital investments in the right areas, focus on adding new customers and becoming preferred suppliers for existing ones, in addition to initiatives for lower operating costs have placed us on the right trajectory to counter the down cycles.

Moreover, our investments in the businesses of aerospace, defence and rail sector have added resilience by de-risking us from the primary automotive business. The lower volatility of these ventures will provide the necessary cushion when we face challenging environments. Though these ventures are still in the nascent stages, we are satisfied with their individual progress. Today, we are amongst the top global companies with strengthened capabilities and growing relationships.

Going forward

Over the years, one of our strategic strengths has been our ability to generate healthy cash flows, despite sustained capital investments in capacity creation and R&D. We remain committed to making prudent financial decisions and maximizing cash flows so as to improve our returns. This is essential for us to be able to pursue inorganic growth during economic downturns.

We expect to witness fairly volatile and uncertain demand environment across sectors and geographies. The Company’s focus in the coming 12-18 months shall include reducing cost, accelerating new product development, maximizing free cash generation and exploring organic/inorganic growth avenues.

The one who follows the crowd will usually go no further than the crowd. The one who walks alone is likely to find himself in places no one has ever been before - Albert Einstein

Though Albert Einstein said these lines several decades ago, we continue to incorporate it in our business outlook. Exactly a decade ago, we were predominantly in the automotive space. However, we took a conscious decision to move out of this position and with steadfast focus we built a multi-sectoral, globally diversified organization with additional revenue verticals that drive newer opportunities. This has steered us towards a model which is more resilient and we continue to further strengthen it. We have ensured that we not only raise the bar in terms of performance, but more importantly instill the habit of executing our tasks with excellence. The hallmark of our work is that innovation and excellence propels performance.

In conclusion, I thank each of our stakeholders for being a part of our exciting and enriching journey. We have built a business with a competitive edge. We have created an enabling ecosystem, along with a product and technology pipeline.

Now, it is all about scaling these to create added value for all the stakeholders.

Strategic Communiqué from the Chairman and Managing Director

Dear Shareholders,