A Message from the Chairman and Managing Director

Dear Shareholders,

I am pleased to once again connect with you to report our performance and the progress made during the year. Before I focus on that, it is important to understand the context in which we are operating, as simply saying that FY 2020 was a testing year is to vastly understate the challenges being faced globally.

Economic Overview

Entering FY 2019, positivity in global markets continued from the previous year assisted by accommodative monetary policies by major central banks. This resulted in robust economic growth in several economies; North America, for instance, grew by 2.3% resulting in unemployment rate falling to 50-year low. However, during the second half of FY 2019, geo-political tensions coupled with protectionist trade policies weighed down on global economic growth, particularly manufacturing and trade. Further, the COVID-19 pandemic adversely impacted growth in great measure.

The Indian economy had its own set of challenges - from slowing activity levels across sectors like Automotive, Construction & Mining, and Iron & Steel, to tepid credit growth, corporate credit stress, among others. Signs of a revival looked promising in the second half of the fiscal with manufacturing activity showing a moderate increase. However, the pandemic and the resultant lockdown brought all business activity to a standstill, resulting in the GDP growth declining by 190 basis points to 4.2% for FY 2020.

The COVID-19 outbreak continues to have major socio-economic repercussions globally and its implications are going to be felt for several years to come. A sustained economic revival in the near term looks unlikely as of now, though the Government’s initiative of rolling out a ₹ 1.7 Trillion relief package and ₹ 20 Trillion economic stimuli along with RBI’s intervention of interest rate reduction could assist in kick-starting activities.

Automotive Industry FY 2020

Coming to our business areas, the automobile industry got mired in a downward spiral after several years of strong performance. Factors like emerging technologies, electrification and stringent emission norms weighed down on demand. While this was expected, the market behavior was surprising. The much-anticipated pre-buying of BS IV vehicles, ahead of the BS VI norms implementation, did not materialize. This was an outcome of a combination of factors from poor liquidity due to the NBFC crisis, relaxation in axle-loading norms, to enhanced transport efficiency with GST implementation. This led to OEMs primarily focusing on liquidating existing inventory. Consequently, Medium and Heavy Commercial Vehicles (M&HCV) production volumes declined by 47% in FY 2020 compared to FY 2019.

Performance in FY 2020

The overall weak macro environment and automobile demand made its effect felt on our performance. For our standalone business, both domestic and export segments were impacted. As a result, revenues fell by 30% to ₹ 45,639 Million in FY 2020, EBITDA declined by 45% to ₹ 10,399 Million and PAT by 56% to ₹ 4,735 Million. A major portion of the decline was attributable to the slump in the Indian M&HCV production volumes which contracted by more than 47%. This was divergent from growth expectation on account of pre-buy ahead of emission norm change to BS VI. The 50% decline in Oil & Gas revenues also contributed to the decline in our performance.

Passenger vehicle (PV) segment, however, stood out across both domestic and export markets as we continued ramping up orders. Revenues from this segment grew 1% to ₹ 7,310 Million in FY 2020. More importantly, the PV segment now accounts for 17% of our overall revenues, a sharp increase from 8% five years back and in line with our strategy of diversifying revenues. This growth has been largely driven by exports, where we have been successful in increasing our market share and content per vehicle. We expect the same to play out in the domestic market in the coming years. The strides we are taking inspire confidence that our PV business will outperform in the long run.

Coming to consolidated business, the performance of the overseas subsidiaries was impacted by weak underlying demand. Consolidated revenues declined by 21% to ₹ 80,558 Million and PAT by 66% to ₹ 3,492 Million. To improve the profitability of the overseas subsidiaries, focused and renewed efforts are being made to restructure the business. These include multiple measures like manpower rationalization, sharp focus on product profitability, and a change in product mix. We are confident that these measures will bear fruit and help in creating a sustainable and profitable platform for the years ahead.

PV segment now accounts for 17% of our overall revenues, a sharp increase from 8% five years back and in line with our strategy of diversifying revenues.

Bharat Forge Limited: The Past Decade

We operate in an industry where cyclical downturns in certain geographies are at par for the course. These are then followed by an upturn, which companies can benefit from, provided they have utilized the down cycle to further strengthen their business, both internally and externally. The global economy is now in a synchronized downturn, similar to the one witnessed during the global financial crisis more than a decade ago. At this juncture, it is pertinent to pause and reflect on our achievements over the past decade, as a ten-year period is a reasonably long time to gauge the performance of a company through various business cycles.

In the past decade (FY 2010-FY 2020), headline numbers for the Company read as follows:

The above growth rates are after witnessing a sharp decline in key parameters in FY 2020. The key financial transformation over the past decade is converting a fragile balance sheet into a resilient one with negligible leverage.

On the business front, the most significant change is the setting up and operationalization of our main R&D centers at Pune - Kalyani Centre for Technology and Innovation (KCTI) and Kalyani Centre for Manufacturing Innovation (KCMI). These centers are driven by a highly qualified internal team of engineers and M. Tech / Ph.D. degree holders, empowering the Company to do things faster and better across existing business and newer ventures. This aspect of our business will continue to evolve to address new opportunities such as e-Mobility, Railways and Defence, among others.

Our transformation from being just an auto-component supplier to one with presence across key verticals such as Aerospace, Defence, Railways is another key cornerstone of the decade gone by. These segments are small today but provide huge addressable market and the aim is to make them the additional pillars of growth for your Company in the coming decade.

Our journey over the past decade was a step in the direction of revenue diversification, investing for the future and capability enhancement while simultaneously strengthening the balance sheet. I believe the Bharat Forge Limited of the future will have the same strain of DNA as today - focused on innovation and leveraging technology to offer products and solutions to the most discerning customers globally.

Our journey over the past decade was a step in the direction of revenue diversification, investing for the future and capability enhancement while simultaneously strengthening the balance sheet.

Addressing the Challenges

Coming to the current situation; while downturns are challenging for any company, this one has unique challenges in the form of uncertainty about consumer behavior, and disruption in production and supply chains due to lockdowns.

Every crisis also presents an excellent opportunity to introspect and improve things internally. Keeping this in mind, we have taken a three-pronged approach to effectively manage this downturn and emerge stronger.

One, we have halted new capex. As we have built sufficient capacity through our investments of over ₹ 1,300 Crores across our plants in Maharashtra and Telangana, this postponement of capex will not impact our near and mid-term growth plans. Our focus, instead, is on effectively filling the capacity with new business.

Two, given that we are amidst a demand decline since the latter part of FY 2020, we have undertaken multiple cost reduction exercise, structural in nature, targeted at every variable and fixed cost item. We expect significant cost optimization across all units through this exercise, while ensuring focus on R&D investment and new product development remain unaffected. The benefits of these will be visible in FY 2022 onwards.

Finally, we are focused on making our international operations sustainable in the long run. These units have witnessed a decline in end market in CY 2019 and posted a loss at the PAT level. Here also, we are undertaking a cost reduction exercise primarily focused on manpower redundancy to reduce their break-even level and bring them back into green. A more important aspect towards making them more robust financially was the focus on aluminum forgings which is gaining demand among automotive companies and other industries for lightweighting components. Our capex in this area in the Europe and North America operations will enhance share of aluminum forgings from 15-20% currently to 50% in the next five years.

In North America, the pandemic has forced us to be cautious and defer part of the capex for the North Carolina facility. The project completion will be closely coordinated with our US customers to ensure that their requirements are met ahead of time.

As far as our COVID-19 response is concerned, I am glad to state that as a responsible organization we are ensuring utmost precautions for the safety of our people and surroundings. We have been disseminating relevant information and ensuring that best health and hygiene practices are followed at our plants. We utilized the lockdown period effectively by staying in touch with our customers to better plan and ensure their demands are met adequately once activities resume.

Nurturing Technologies to be Ahead of Transformation

The future of manufacturing is going to be radically different; the COVID pandemic is only fast-tracking this transformation. For manufacturing, greater connectivity will mean significantly accelerated implementation of Industrial IoT (Internet of Things) including sensing, data visualization, remote collaboration tools and Artificial Intelligence (AI) based insights inside operations.

Enabled by real-time data, AI-based insights and a range of communication and collaboration tools, the virtual shift will help digitize and scale much-needed expertise across the organization. It will also enable the onsite workforce to become more focused, effective and productive. Such a virtual shift will be a new reality that will fundamentally change manufacturing operations and help accelerate a trend towards lights-out facilities.

We, at Bharat Forge Limited, are systematically digitizing our operations for improving operational efficiencies. With significant parts of our manufacturing operations already automated, our digitization journey will be easier. All interruptions in the digital medium of communication, what we call ‘Media Breaks’, are being systematically eliminated with appropriate digital means to realize accurate and timely actions. IoT solutions are being used to eliminate equipment downtime and improve Overall Equipment Effectiveness (OEE) of plant and machinery. In a capital-intensive industry like ours, OEE improvement results in significant cost reduction.

We have started collaborating on digital platforms to do more with less and launch new products / projects faster. White collar productivity is significantly enhanced due to collaboration on digital platforms. Meetings in virtual digital space are common now; they facilitate social distancing naturally and are more efficient. AI and Machine Learning are being deployed wherever relevant to remove human discretion, often prone to errors, from the equation. We have started running machines unmanned in a limited way to ultimately move to a lights-out facility, wherever realistically feasible.

We have started collaborating on digital platforms to do more with less and launch new products / projects faster. White collar productivity is significantly enhanced due to collaboration on digital platforms.

Geared for the Mega Opportunities

The coming decade is going to be very exciting because of all the occurring changes and influx of technology. As a Company, I feel, we are in a comfortable position to be a part of several emerging opportunities.

E-mobility is a mega trend and the future of automobile industry. We have a headstart in this space with our investments in companies like Tork, Tevva and REFU, who have years of knowledge, expertise and adequate technology in e-mobility. We are strategically targeting the two- and three-wheeler, commercial vehicles and buses segments, given that very few players are operating in this space. REFU, which makes modules (power and control electronics) for e-mobility, is our most recent investment. Although, we have written-off our investment in Tevva Motors as a prudent policy, we have access and license to their technology and are working on calibrating it to suit the Indian conditions.

Defence is another big area where the Government is focused on indigenization with massive investments. We have made significant strides in this segment by developing unique products in the areas of artillery, protected vehicles, composites and augmented reality (AR). The focus now is to advance our research and enhance our capabilities. For this, we have invested in creating defence technology/research ecosystem at KCTI/ KCMI, two defence incubation centers and acquiring stake in defence start-ups.

Alongside this, we are also making several innovations in nanotechnology and working in the areas of material sciences, technology innovation and breakthrough innovation. While all these are still in nascent stage, they hold immense potential for multiple future growth opportunities.

Message to the Shareholders

The coming year will be challenging both for our Indian operations as well as for our overseas subsidiaries. We will have to withstand the turbulence and uncertainty caused by COVID-19 and the consequent decline in end-market demand. This is likely to result in a significant impact on profitability, especially for the overseas subsidiaries, given their high fixed cost structure. To counter this, we are undertaking a host of steps to reduce costs and breakeven levels and return the subsidiaries to acceptable profit levels. This is by no means an easy task, but we are hopeful of getting things back on track.

When I look at our ten-year journey, I believe we have made good progress and created value across cycles.

While our current year’s performance has not been as expected, it is important to understand that this is a broad-based trend across the industry. When I look at our ten-year journey, I believe we have made good progress and created value across cycles.

More importantly, it is quintessential to understand the DNA of innovation and transformation of this organization. This is not the first time that we are transforming; it has been a continuous journey to stay ahead of the curve. We have people with high technical and managerial skills. We have the ability to use IoT and digital platform to dramatically improve our productivity. Besides, we are no longer just a product manufacturing company; we also partner customers in development process, positioning us favorably with such capability.

I thank all our stakeholders for their continued support. Going forward, we see immense growth opportunities with support from conducive policies. The Government’s proposal to commit USD 1 Trillion in infrastructure investments over the next five years and the intent to make India a USD 5 Trillion economy by FY 2024 should be a big push for both automobile and industrial sectors. We have created enough growth engines and made necessary investments to be a part of this resurgence. From an organizational standpoint, we are well-prepared for the coming decade and to create value.

Warm regards,

B. N. Kalyani

Chairman and Managing Director