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Edited Transcript of BHARATFORG.NSE earnings conference call or presentation 8-Nov-19 8:30am GMT

Half Year 2020 Bharat Forge Ltd Earnings Call

Pune Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Bharat Forge Ltd earnings conference call or presentation Friday, November 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amit B. Kalyani

Bharat Forge Limited - Deputy MD & Executive Director

* Kedar Dixit

* Kishore Mukund Saletore

Bharat Forge Limited - CFO & Executive Director

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Conference Call Participants

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* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

* Mahesh Bendre

KARVY Stock Broking Limited, Research Division - Research Analyst

* Manoj Garg

* Pramod Amthe

CIMB Research - Head of India Research

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary

* Sahil Kedia

BofA Merrill Lynch, Research Division - VP

* Sonal Gupta

UBS Investment Bank, Research Division - Director and Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to Bharat Forge Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Amit Kalyani. Thank you, and over to you, sir.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [2]

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Thank you very much. Good afternoon, ladies and gentlemen, and welcome to our conference call for the Q2 FY '20 results. I think as everyone is aware, the industry -- the whole automotive industry is passing through an extremely difficult time right now, probably one of the most challenging periods of its history in a long time. The second quarter was a tough and challenging quarter for the company as well, probably one of most tough ones of the quarter -- of the decade, and this was largely driven by the extreme weakness in the commercial vehicle center in India.

The export market have performed as well anticipated, but the domestic market has really had the bottom fall out of it. The domestic market declined to a level which was unprecedented. In fact, it's never been seen, this kind of decline in the history of the automotive industry [in India]. So there are multiple reasons for this. Basically, the production has been cut to reduce the stock of BS-IV vehicles before the introduction of BS-VI from 1st April. There are approximately 40-odd thousand million heavy commercial vehicles, which need to be destocked before April 1, so they need to be sold to end consumers.

Although there are many reasons being ascribed to this, one of the main factors, in our opinion, is that, as has been seen globally, there is typically a prebuy before any emission change or any kind of structural, technological change [takes hold], which has a significant cost increase. So a lot of the commercial vehicle companies ramp up production in the first quarter and in the first half of the second quarter, anticipating a big prebuy. But because of the financial crisis in the NBFC sector and the actual loading norms coming -- being changed, which opened up more capacity, because the same vehicle could carry between 15% and 22% more load, they increased the available load-carrying capacity in the market. Plus, GST implementation reduced the stoppage time at state borders, which increased the efficiency of transportation. So if you put all these into the context, you will see that the medium and heavy commercial vehicle production was down 45% quarter-on-quarter and close to 58% Y-o-Y.

So for the quarter, our revenues were down by about 6.5% compared to Q1 and 25% compared to Q2 of last year at INR 1,260 crores. Our EBITDA margins were almost 24%, which is down 220 basis points and [240] basis points. Our PBT was INR 251 crores, which is down [4%] compared to Q1 and about 27% compared to last year. And if you look at the verticals, the passenger vehicle sector has done extremely well, both domestically and on the export front, we have seen a strong outperformance. And with our strategy playing out in terms of all the new products and new contracts we have won, we expect this to continue growing at a strong rate, with new products and new customer additions.

On the industrial sector, honestly, the real story here is the reduction in inventory of the oil and gas companies because of end of year. So there has been a reduction in volume, and that has reduced the overall industrial sector. On the commercial vehicle global side, we are at the upcycle on the [flatbed] front is plateauing. And also there, you are seeing some production reductions to avoid an inventory buildup, not that after the inventory comes up. So we expect some decline between, I would say, roughly 20% in next year and Europe to be single digits. But it's not -- these are our assumptions. It's not really a figure we've got from our customers yet because there is a lot of talk of infrastructure buildup in the U.S. became (inaudible). So in the event that does happen, then this could change.

On the balance sheet side, we have a strong balance sheet and we continue to strengthen our balance sheet. We currently have in excess of close to 70 -- almost INR 1,700 crores of cash on our books. Our long-term debt equity is 0 and minus 0.01. Our first half operating cash flow is about INR 470 crores. We are using the downturn to cut cost, to structurally transform the organization and put in place long-term measures that make us more efficient, leaner and better cost-structured when production improves. And you have to put into perspective that we are currently running at roughly 50% capacity utilization and, in certain areas, they are absolutely -- I mean, even certain facilities which don't have demand are being shut down and production is being restructured or it has been combined and basically reducing fixed costs. This will take 2 to 3 quarters. But when we come out of it, we will be leaner, meaner and fitter. And we are also pursuing a lot of new product development either through R&D or through customers where we have opportunities to grow our business. So like every other downturn, we hope that we will come out of this stronger with some new business and new products, which will give us long-term benefits. And we are, in fact, doing collaborative work with a lot of our customers. We see lot of merit in using this time to also outsource or restructure their operations and do more work with high-technology and value-added players like us.

In terms of outlook, given the prevailing environment in India and the overall shortness in North America and Europe, we would caution that the second half would be slightly weaker than the first half. And as we focus on strengthening our balance sheet, reducing cost, focus on cost reduction and free cash generation, we will see, again, a revival or improvement in performance, once, I would say the (inaudible). One of the highlights for the last quarter personally for us has been that we have won significant orders for our (inaudible) customer, passenger car customers in North America, who justify setting up a full-fledged aluminum forging operations, which will be very similar to what we have in Germany. And the first phase of this plant is fully sold out with committed contracts, and we will break ground on this facility in the next 2 months. And if you start -- it will be ready for production by about June of '21.

So that is the highlight. And we've chosen the location Sanford county -- I mean, Sanford in Lee County, North Carolina, which is geographically proximate to many of our European transplants, Japanese OEMs. And a lot of talent available in there (inaudible) Raleigh, Durham, North Carolina area. So I believe that this will be beginning of a growth path for our subsidiary, which will also allow us to take some time and restructure our steel-oriented subsidiary in Europe, make them leaner and fitter and ready for the kind of new business environment that we are seeing.

So overall, I'd like to just say that we're using this crisis to do massive restructuring and bring down costs. We're not particularly worried about the global PV cycle, more concerned about the situation in India. I think that is a structural issue. We are running at close to 50% capacity utilization right now. Hopefully, in a few quarters, that will start improving. And our pass car vehicle business is doing quite well, and we are expecting to see this grow very substantially with the business that we've already signed and brought on hand. At the same time, CapEx is going to be ready, even though brought to a minimum in India, and we will focus on setting our assets and using our facilities fungibly to do new things.

I think I don't need to say anything else. I have my team with us, and we should be ready to -- we'll be happy to answer your questions. And I think we'll open the floor now, and we're ready for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Kapil Singh from Nomura Securities.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [2]

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Firstly, on the cost side, just wanted to check the raw material to sales ratio has seen a spike this quarter. Seems a bit odd. So can you just give some color what exactly happened over there?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [3]

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Yes, I'll request my colleague, Kedar, to answer that.

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Kedar Dixit, [4]

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Yes. So this is mainly because of the inventory effect, some of the product mix and the defense products, which has a high margin, high margin in terms of EBITDA. But the raw material ratio is also on a higher side. But if you look at variable cost, there is a significant reduction in variable costs, which sits in other expenses. So at an operating margin level, we are more or less at the same level as last quarter.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [5]

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Okay. Sir, is there also a phenomena where OEMs have taken some discounts in anticipation of drop in commodities like steel?

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Kedar Dixit, [6]

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No.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [7]

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Okay. Okay. Secondly, I wanted to check on the CapEx. Like, we have seen somewhere close to INR 400 crores of cash outflow in the first half on the stand-alone and close to INR 600 crores the consolidated. So full year, what are we looking at on CapEx and investments?

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Kedar Dixit, [8]

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So in current year, we don't have much of CapEx. It's only the cash outflow of the CapEx, which we have already announced last year. So's it's more of a payments for that. Annual would be about INR 600 crores or so. And in the overseas, the CapEx will be more on expansion of our aluminum facilities in Europe and U.S.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [9]

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What would be the amount for that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [10]

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Current CapEx, let me just explain, the current CapEx of INR 400 crores is basically payments for CapEx that were committed last year, and we have not committed any new CapEx from the first quarter onwards. In Europe, we have a new plant under construction. And actually, the construction is complete and very soon, we will start trial production in Germany, which is our new aluminum forging plant expansion, and that is the CapEx for that.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [11]

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Sir, could you actually give us a consolidated number what should we expect for the cash outflow?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [12]

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Kedar?

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Kedar Dixit, [13]

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Yes, about INR 800 crores.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [14]

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Okay. And where will this drop to next year?

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Kedar Dixit, [15]

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As far as the India operations are concerned, you should see a significant reduction. On the overseas, it would be a completion of U.S. plant buildup.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [16]

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U.S. plant buildup will take place over 2 years, so next year and year after next. The total CapEx will be roughly $60 million, so about INR 400 crores, over 2 years, funded by equity plus debt. And in India, I don't think we should have a CapEx of more than INR 150 crores -- between, well, INR 250 crores to INR 150 crores.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [17]

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Okay. Okay. And sir, for the U.S. facility, what is the revenue potential from those facilities?

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Kedar Dixit, [18]

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So from that facility, we should have a revenue of slightly over 1:1, so about close to $70 million, $75 million. We're very strong [on it].

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [19]

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Okay. Okay. Sir, lastly, just wanted to refer to Slide #10, the results. There is some restructuring going on, the notes around Slide #10. Can you just explain is this for tax earnings?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [20]

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With the new tax floor coming up, we have transformed -- transferred our aluminum subsidiary, the aluminum casting plant in Nellore into a 100% -- owned subsidiary.

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Kedar Dixit, [21]

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I think this decision was taken well before the new tax code came into effect. In fact, in our last board meeting, in August meeting itself, we had -- the Board has approved to form it in a separate entity.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [22]

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So this will have a 15% corporate tax rate, right?

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Kedar Dixit, [23]

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Yes, that's correct.

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Operator [24]

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The next question is from the line of Puneet Gulati from HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [25]

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[So just on this answer], (inaudible) when this facility expected to be complete this year?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [26]

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It goes into production this year.

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Puneet J. Gulati, HSBC, Research Division - Analyst [27]

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Yes. So it goes into...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [28]

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Kedar, do you want to answer?

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Kedar Dixit, [29]

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Yes. It's basically going into commercial production by December 2019.

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Puneet J. Gulati, HSBC, Research Division - Analyst [30]

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Yes, but -- so how do you get the corporate tax benefit for it? Because you would have installed the machineries before that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [31]

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Yes, it's actually the machinery are under installation. We have not yet put to use. The commercial production has not yet started.

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Puneet J. Gulati, HSBC, Research Division - Analyst [32]

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Okay. So you still get the benefits, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [33]

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We are -- that was the last entity. We have a new entity which is incorporated to enjoy that 15%. So we will get that benefit.

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Puneet J. Gulati, HSBC, Research Division - Analyst [34]

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Okay. And how much investment have you done in this so far?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [35]

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About INR 150 crores.

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Puneet J. Gulati, HSBC, Research Division - Analyst [36]

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INR 150 crores. And what should we think of as a revenue potential?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [37]

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About INR 200 crores in first sales.

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Puneet J. Gulati, HSBC, Research Division - Analyst [38]

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In first sales. Okay. Secondly, if you can give a little more color. You said that Q -- H2 is likely to be slightly lower than H1. So is it only slightly or could there be a bigger dip? And specifically, if you can give some color on Q3 versus Q2 sequentially.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [39]

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If you look at the domestic market, right now, the Indian domestic market is pretty much at the lowest figure that we have seen in a long time. It's almost 50% down from last year. So I don't know how much lower it can go. In fact, Q3, we don't know how quickly the inventory will get neutralized. But obviously, in Q4, they have to start producing for filling the pipeline of BS-VI.

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Puneet J. Gulati, HSBC, Research Division - Analyst [40]

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Right. So Q3 will likely to be lower than Q2?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [41]

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I don't know whether it's lower or what, but maybe flattish, maybe slightly. I think it can't be much lower, but I think Q4 should see some improvement.

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Puneet J. Gulati, HSBC, Research Division - Analyst [42]

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Okay, fair enough. And I also wanted to understand, when I look at this [DFL] trading subsidiary, it seems that the trading subsidiary has made a loss at EBITDA level. How should one think about that?

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Kedar Dixit, [43]

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There is no loss at trading company level. It also includes intercompany elimination on the profit of the unsold inventory. And since we are ramping up all of our passenger car business in Europe and the U.S., there is a slight increase in the inventory as compared to last quarter. So that is the effect of the elimination. But trading entity can't make losses.

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Puneet J. Gulati, HSBC, Research Division - Analyst [44]

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Yes. Okay. So it's just the inventory sitting in that book?

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Kedar Dixit, [45]

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Yes.

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Operator [46]

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The next question is from the line of Ronak Sarda from Systematix Group.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [47]

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Sir, the first question is in continuation of the previous question on domestic fee. If you can help us understand the inventory level, let's say, at our plant and at the OEM level.

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Unidentified Company Representative, [48]

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We have no inventory at our plant. We do not hold payment. (inaudible) only pertain to what is in WIP plus minimal edge. We don't have any inventory in our system.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [49]

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So would you be able to help us understand how was the inventory in the system currently? And when do you see wholesale production...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [50]

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What we understand is that there are roughly 40,000 medium and heavy commercial vehicles in inventory as on end of October. Okay?

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [51]

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Yes.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [52]

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And currently, the sale level is somewhere in the region of about between 14,000 to 16,000, maybe 17,000 vehicles a month. And production is running at roughly about 8,000 also a month. So roughly 10,000 are getting situated from (inaudible) a month.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [53]

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And, sir, usually Q4 is the most heavy quarter for PVs. Do you see that pattern also changing this year because of the uncertainty and transition on BS-VI side? I mean is there any indication which is...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [54]

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You know the commercial nature of the industry. People will fill inventory of BS-VI and push it into the system for sure. So I anticipate that production in Q4 will be higher than sales in Q4.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [55]

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Sure, sir. And sir, the second question is on the domestic industrial side. We had a lumpy defense business last year. But if I see in quarter 2, we had some sequential growth as well. If you can help us understand what is contributing to that.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [56]

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We have won a lot of new business on the industrial side in India. I'm not going to get into more detail than that. But we have some business, which is a medium term -- medium to long term, which we have won, which will continue giving us growth, and some amount of the tail of the last [10 years].

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [57]

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Okay. But there's no lumpy business which can offset the drop which has happened? The current trend rate should continue. Is that the way you look at this?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [58]

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Current run rate will continue. And then as the new orders that we have won start, it will go up slightly. But it's not a big -- there's no big, lumpy business that we have won right now.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [59]

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Sure, sure. And sir, on international, especially on North America side, the production -- or in anticipation of production cut inventory has started to already use. But if you see the order book for this month, it had -- for the last month, is currently surprised with 20,000 -- more than 20,000 units. So when do you usually see inventory increasing in the system? I mean is it usually a 2, 3 quarters -- 2, 3 months lag? Should we assume that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [60]

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Look, every cycle is different. It's very difficult to generalize and say like that because it really depends on the overall scenario in the economy, how much confidence is in the economy, how quickly the order slowdown takes place. So each time it is different. So I don't want to generalize that.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [61]

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Okay. But is there a production level where the manufacturers are comfortable at 275,000 per annum. Is that something a benchmark?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [62]

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275,000 to 300,000 was a normal figure.

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Operator [63]

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The next question is from the line of Sonal Gupta from UBS Securities.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [64]

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So just wanted to understand, again, on the -- one was on the North America or the U.S. oil and gas thing. I think we've already seen a pretty sharp slowdown from the last quarter onwards. So are we towards the end of the inventory adjustment on the oil and gas side? Or do you think there's still more to go?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [65]

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[What is, then?] See, right now, all the oil measures, all the exploration measures are cutting capacity because of less -- they're reducing the inventories because of end of year. Plus because the pipeline, which take the oil from the Permian Basin, are not yet fully operating expanded capacity. The cost of taking oil and gas out of the Permian is still quite high. So we are waiting for the pipeline to be fully up in the new (inaudible) pipeline. And say that will be a trigger once that is there already.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [66]

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So when is that expected? Any time lines are there?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [67]

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They have the same situation in the last environment will and -- fast and overall project-related issues. It's a very uncertain time right now. And there's very poor visibility on anything. So I think it's very difficult to really say anything.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [68]

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Right. But we're not seeing any further deterioration, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [69]

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Not right now. I think we're at the last level.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [70]

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Q1 level. Okay. And just the -- I mean, the one thing which is going well is clearly the passenger vehicle export. So just to -- on that side, I mean, we expect this to sort of continue, right? And even for next year, we have a fair amount of...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [71]

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Yes, absolutely. As we had said that we expect the passenger car basically, what we had said was that the sub side, the non-auto side and the [fast cars] will become more or less the same size. I mean, it may not be exactly the same. It could be 35, 35, 30 or 40, 35, 25, but somewhere in that ballpark.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [72]

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Right, right. So -- okay, okay. So I'm just asking that in terms of near-term and maybe the next 6- to 12-month visibility, we should see these run rates?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [73]

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Yes. We should see a significant growth in the [fast car space.]

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [74]

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Okay. And just lastly, on the India CV, I mean, like -- so the -- I mean, because you are saying that we've already seen a fair amount of inventory adjustment. I mean, do we see that then on this base you should see some growth next year? Or do you think that's very hard to say as of now?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [75]

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Very hard to say as of now. See, simply because the first half of this year was not representative of what actual market consumed. We've reduced almost 25,000 to 30,000 more vehicles. We had a carryover inventory of about 15-odd thousand. And as peak in September, the inventory had gone to 49,000. So that is an increase in inventory of 35,000, which at today, production level is more like 3 months for the business.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [76]

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And then the last thing was in terms of your statement like, you already have a very good balance sheet. And then you're saying that we want to strengthen the balance sheet. So what exactly do you mean in terms of...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [77]

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Yes, reduce cost, reduce CapEx, spread our assets more. That's it. We're not doing it -- we're not going to raise money or anything, we don't need that. But just strengthen the balance sheet, keep focusing on cash generation, reduce inventory, reduce working capital, pre-disciplined improvements.

See, what is happening, there are people who have spent a lot of money and CapEx over the last 2, 3 years. And suddenly, the market is at 50% or lower, okay? Large companies worldwide are going to be in deep financial problem, might even go bankrupt. So we should be ready to fill up our capacity with business from trading companies. Our brand, people who are solid. So you should be strong when others are weak and give confidence to your customers.

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Operator [78]

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The next question is from the line from Pramod Amthe from CGS-CIMB.

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Pramod Amthe, CIMB Research - Head of India Research [79]

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Amit, first, with regard to BS-VI, what's your production plan when you plan to produce and start applying to the customers in India?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [80]

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We have been producing BS -- Euro VI parts for the last 5 years, we've also started Euro VII. We committed development 2 years ago, we've already started. So making Euro VI, we have been making for a long time. And even for some Indian customers who are exporting Euro VI engine, we've been making for now 3 to 4 years. So we have absolutely no issue. We've been making this for a long time. We've done Euro IV. We've done Euro V. We've done Euro VI. We've done Euro VII, okay? So it's absolutely no issue for us.

We've been working with our domestic customers. There are 3 customers who have their own Euro VI engines, so our BS-VI engines. BS, given them prototypes and production lot sample, along that.

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Pramod Amthe, CIMB Research - Head of India Research [81]

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In terms of commercial production, will that be in December quarter? Or would that should be lower to...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [82]

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We did some amount of commercial production, a few hundred or few thousand numbers. And then we had to slow down. So we are ready. We anticipate this will happen in January, February, March.

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Pramod Amthe, CIMB Research - Head of India Research [83]

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So there's no lead advantage for you in terms of a couple of months before the client in the recent quarter? You feel that you won't come through in the March quarter?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [84]

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I mean, they are all building small amount of BS-VI vehicles right now, only to get iron out firstly from their own systems.

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Pramod Amthe, CIMB Research - Head of India Research [85]

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Okay, sure. And second is with regard to the [E&P] plant. Since you have moved it as part of a subsidiary and you'll get the -- a much better tax advantage in that sense. So what is the priority for the additional cash flows, which you may have now versus might be when you initially started to put the plant in place? Would that -- you see it a priority to win clients or would that be at the shareholders?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [86]

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No. See, we are not going to reduce -- I think [I'll present it by this way. The promos --] I don't think that -- we don't play a price game, okay? We'd rather play a high technology, high-value differentiator game. Once you give away your price and cost, you can never get it back.

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Pramod Amthe, CIMB Research - Head of India Research [87]

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Okay. But considering that, that should give a substantial competitive advantage. Would this help you to win more clients or that should not be the case?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [88]

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That's probably. I'm sorry because we should have the most competitive position in the market. Already, our technology and cost structure, they were very good. And now this will make us even better. So hopefully, what it will mean is that we get larger growth opportunities there.

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Pramod Amthe, CIMB Research - Head of India Research [89]

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Okay. And the last one is with regard to the...

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [90]

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Pramod, this is Kishore. Just to add to what Amit said, if your question was that to the extent we are saving tax, are we going to get -- give a price discount to the customer? There's no question of that happening, absolutely no question of that's happening. So I just want to make that clear.

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Pramod Amthe, CIMB Research - Head of India Research [91]

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No. Would that [imply] improved cash flows, would that help you to expand that facility in a much aggressive way than what you usually are?

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [92]

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Of course, it will.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [93]

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Yes. obviously...

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Pramod Amthe, CIMB Research - Head of India Research [94]

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That's what I was asking, what was the priority in terms of spending that additional cash flow for you?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [95]

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The priority is always growth. If you don't have growth opportunities, then you spend your cash and pay out the dividend.

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [96]

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So we are looking at a phased expansion of that plant. So we will first look at the Phase 1, which we are in currently, and we'll evaluate it when we say 2 years from now. And if there is surplus cash flow, which I'm sure there will be, we will use it for that expansion.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [97]

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Yes, an example of this is what we did in Germany, okay? We head up a new plant and just as we were developing the product from the customers that I am talking about aluminum forging now, as we develop that, the customer saw that and was so impressed that parallelly their U.S. counterparts say, hey, we want local content. We wanted to set up a plant in U.S. to do that. So one good plant and operation and success created another opportunity. So that's how it works. So you need to wait when it goes into [see] production.

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Pramod Amthe, CIMB Research - Head of India Research [98]

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Okay. And the last one is with regard to concern that you are at the current stressful situation you are cutting the cost left, right and center. In case any of these stimulus comes through, would the system be flexible enough to bounce back? Would that -- or would it take you much...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [99]

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Pramod, [we'd hardly lose] any capacity or capabilities, okay? Only we will make certain things which are historic into more strategic. When you have to plan on a readymade at high-speed in order to just stay in the same place, you don't necessarily have the chance to do things in a strategic and thought-out manner. You have to just deal with speed and the first doing what is required first. But this is where we want to make the change and create structural change whatever it does.

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Operator [100]

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The next question is from the line for people from the line of [Pradeep Poddar] from [Nippon] India.

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Unidentified Analyst, [101]

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Sir, could you just talk a bit about this [hang-up we're seeing] in terms of the roadmap for the next 1, 1.5 years?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [102]

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So this is the [highest answer that I was asking for before you. Kedar,] will you answer?

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Unidentified Company Representative, [103]

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Yes. so basically -- it's basically a light weighting center. So what we have decided is, we go -- the first setup is with the diecasting machines, which has the capability of doing both aluminum and magnesium casting on the same machines. And these machines are equipped with very ultra-modern features like jet cooling and vacuum casting and other, thereby giving us a big commercial -- a big advantage in the market in terms of production of production of very thin wired products and, thereby, allowing us to basically attack on very specific structural components that are required in the both automotive and industrial world. So we are looking at...

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Unidentified Analyst, [104]

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Including for EVs and hybrids.

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Unidentified Analyst, [105]

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Including for EVs and hybrids for -- primarily this is being focused for -- more for BS-VI and EV and hybrid requirements, along with various other requirements. For example, things like very specific applications for lighting and others in the industrial sector.

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Unidentified Analyst, [106]

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Sure. And just to take this forward, I believe, is it fair to understand that similar to the U.S. operations, which we are setting up in the U.S. plant, this plant also adds 4 more auto backing as of now. And in terms of utilization, it shouldn't be a problem.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [107]

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Yes. We already have been out -- got some confirmed orders, and we are in the process of also getting some big -- big orders coming in from our other customers. So we're working on that. And finally, it is -- I think it's fair to say that the machines would get easily booked over the next 1 year.

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Operator [108]

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We'll move on to the next question. That is from the line of Mahesh Bendre from KARVY Stock Broking.

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Mahesh Bendre, KARVY Stock Broking Limited, Research Division - Research Analyst [109]

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Sir, what is the outlook for the Industrial business, both domestic and international for next year?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [110]

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No. Mahesh, it's very difficult to get an outlook for anything right now. I would say, global, it's flat. For domestic. I think we should see some of it.

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Mahesh Bendre, KARVY Stock Broking Limited, Research Division - Research Analyst [111]

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Okay, sure. And so typically, historically, we are seeing in that whenever we reporting the growth in the revenue for particular years, next 2 years, we see a very sharp jump in our revenues and all the financial indicators. So like it is the case next year also will then?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [112]

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I hope. So, but as far as some market is concerned, it's very difficult to say what is going to happen. But as far as the company is concerned, we are taking all the measures required to reduce costs and become more efficient.

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Operator [113]

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The next question is from the line of [Pawan Pandit] from [Latin -- Monhalal] Securities.

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Unidentified Analyst, [114]

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I just wanted some data points. Can I have the breakup of sales for the non-auto sector, percentage-wise in terms of agriculture, oil and gas [and everything else.]

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [115]

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I'm sorry, we don't share it at that level.

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Unidentified Analyst, [116]

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Okay. And you said your R&D cost is going to increase because of low CapEx for the next 1 or 2 years. Could you quantify it like as a percentage of sales, how much is that going to be?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [117]

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If you look at what is our R&D spend today, it's going to remain more or less in the same ballpark, or maybe 20% more. 20% more over.

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Operator [118]

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The next question is from the line of Puneet Gulati from HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [119]

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Just on the export potential of the passenger car, you've already hit a INR 160 crore run rate this quarter. Is the ramp-up still on? Do you expect this growth to continue from the INR 160 crore, INR 150 crore per quarter number?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [120]

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Well, we're at the -- we're in the beginning of the ramp-up.

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Puneet J. Gulati, HSBC, Research Division - Analyst [121]

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Okay. And in next 2 years, where should you be on this?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [122]

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I don't want to give you a forward-looking statement, but substantially higher than that, because today, we are still doing engine components. As our driveline components, exports ramp up, the result is going to be a big opportunity.

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Puneet J. Gulati, HSBC, Research Division - Analyst [123]

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And you have model for that as well?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [124]

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Yes, also.

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Puneet J. Gulati, HSBC, Research Division - Analyst [125]

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Okay. And how should one think about margins from this business?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [126]

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Also very good, and the machine products also very good.

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Puneet J. Gulati, HSBC, Research Division - Analyst [127]

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On the oil and gas side, while I understand the environment is uncertain, but do you think the inventory drawdown cycle is now complete? And at least from this level, one should see a further drop?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [128]

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Yes, I think that's actually what this is.

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Operator [129]

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The next question is from the line of Manoj Garg from White Oak Capital.

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Manoj Garg, [130]

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Amit, in your prepared remarks, you've indicated that there are structural challenges in the domestic steel industry. Can you just put some more color on that? What we've been about?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [131]

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Problem is, if you look at what has impacted the overall market right now, there are 3 platforms. One is the non-availability of financing. Earlier, you could buy approximately 10% to 15% down. Now financing is only available, that too less amount of financing, and that too with the down payment of anywhere between 35% to 40%, okay? So that automatically moves a large percentage of buyers on the potential buying opportunity.

Second is, because of the [manufacturing norms] hasn't changed, you have created a capacity increase of roughly 15% to 20% in a certain category of those colleagues' platform.

Thirdly, because of GST and the stoppage of vehicles and state models going away, we are seeing anywhere between 10% to 25% reduction in freight and in logistics travel time. So this is all creating more capacity on one side and less buying ability on the other side. So this is a strategic problem.

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Manoj Garg, [132]

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Okay, okay. And given that like the [excellent norms,] which have increased somewhat in the last year, August, September, and by the time we'll be there over the next few months, would you say most of these challenges will be in the base? And what could the different time where you start seeing maybe some demand coming back in this sector?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [133]

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So I think the government has realized that structural changes need to be made and some interventions are required. If you saw that [Davis] announced an11,000 bus order again. Usually state governments and municipality [re] placed order. If you remember, in 2008, after the Lehman Brothers crisis, the government under [again you are in] place orders for almost 70,000 buses. And that completely revised the sentiment in the sector. And I think something like that is again required. So again, we're talking about multiple of less options, improving scrappage, et cetera, et cetera, et cetera. But something structurally and strategically has to be done.

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Operator [134]

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The next question is from the line of Sahil Kedia from Bank of America.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [135]

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I have just one question. I want to get some more detail about your U.S. plant because it represents a kind of reentry back into the U.S. passenger vehicle segment in a big way. Can you tell us a couple of things? One, what has changed in -- versus the earlier experience than we had when we had exited the U.S. market, number one?

And number two, how big of an opportunity can this be once this is fully set up?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [136]

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Yes. So this is fundamentally very different in every way from what we've done in the past in the U.S. In the past, in the U.S., we have bought old operations and try to run them. Here, what we're doing is we're bringing our globally cutting edge, proven renowned technology, which is attracting our customers. We have our full order book, sold-out plant, established technology to a market, which does not have these products. So with the localization and the new models coming out, aluminum usage and light-weighting is going up in the U.S. So a combination of these 2 factors is what we do, plus we're locating it in a place, where it is easy to attract and retain high-quality talent, because we believe that this should be a home for us for the future, where we will be able to grow multiple times of this in the next 5 to 10 years.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [137]

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And if -- please, correct me if I'm wrong. In the previous U.S. manufacturing, the value-addition, et cetera, component was low as we understand it...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [138]

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No. No. There was no value-addition, there's only [that...]

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [139]

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Correct. So is it -- is this -- sorry, sir, could you repeat that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [140]

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(inaudible) fully machine parts.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [141]

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Fully machine parts is also. So therefore, from that perspective, your supply to the OEM and also your margins, et cetera, should be much better for this business?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [142]

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Yes.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [143]

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Okay. Sir, can you remind us in terms of what is the potential initial numbers that you guys said would be the...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [144]

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We said the number that we can do is about 75 million [out of this lot.]

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [145]

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75 million. And do you have more than one OEM signed up for this?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [146]

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We have 4 -- 5 OEMs.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [147]

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Five OEMs signed up for this.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [148]

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Five OEMs in multiple platforms. I think that's the last question. Am I right? Maxine tells me that's the last question. So ladies and gentlemen, thank you very much for your interest and your participation. If anybody has any follow-on questions on the details that you would like, so you can either reach out to Mr. [Santosh Bhave] or [Keena] or Kishore or whoever and get that information. Thank you very much, and I look forward to remaining in touch with you. Thank you.

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Operator [149]

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Thank you. Ladies and gentlemen, on behalf of Bharat Forge, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.