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Edited Transcript of BHARATFORG.NSE earnings conference call or presentation 13-Aug-19 10:30am GMT

Q1 2020 Bharat Forge Ltd Earnings Call

Pune Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Bharat Forge Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 10:30:00am 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

* Kishore Mukund Saletore

Bharat Forge Limited - CFO & Executive Director

* Krishnakumar Srinivasan

Bharat Forge Limited - President & Director of Strategic Business

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Conference Call Participants

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* Basudeb Banerjee

AMBIT Capital Private Limited, Research Division - Research Analyst & VP

* Girish Raj Sankunny

Quest Investment Advisors Pvt Ltd. - Research Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Kapil R. Singh

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

* Pramod Amthe

CIMB Research - Head of India Research

* Priya Ranjan

Antique Stockbroking Ltd., Research Division - Research Analyst

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - Analyst

* 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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Good day, ladies and gentlemen, and welcome to Bharat Forge Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I will 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, Chris. Good afternoon, ladies and gentlemen, and thank you for joining us for our Q1 analyst call. This is Amit Kalyani. I have with me our -- members of our finance team, our strategic business unit head and our IR teams.

Ladies and gentlemen, first of all, in terms of the numbers, we had total revenue for the quarter of INR 1,346 crores, which was a decline of 9% sequentially -- 9% year-on-year. However, there is an impact of about 2% in the inflationary steel price impact in this quarter. So on a like-to-like basis, it's actually about 11% down. EBITDA is down by about 18%. And PBT by about 25.5%, and PAT by about 26%. It's been a challenging quarter with demand dropping rather rapidly as the quarter progressed, especially in the passenger car sector and especially the commercial vehicle sector, where there was a buoyant demand expected, which had suddenly turned out to be exactly the opposite.

In addition, as we had mentioned in the end of last quarter, there is expected to be -- there was a destocking on the oil and gas exports, which had an impact on the exports to the U.S., but I'm happy to report that this is now mostly behind us, and we will see upturn in the oil and gas exports in this quarter and going forward.

So overall, the total revenues were down by 9%, and the exports down by about 11%, domestic down by about 7%. However, the good news is that we continue to generate strong cash flows. We maintain a good cash surplus. We have not built up any inventories in any sector where we foresee any issues at all. In fact, our inventories are well under control. In terms of the outlook, demand on the domestic market has not improved. In fact, the demand we expect will only get stabilized by the end of this quarter simply because of the inventory that is there in the medium and heavy commercial vehicle sector. And OEMs are very keen to reduce their inventory levels as soon as possible and have taken significant block closures. As you know, BS-VI is mandatory from April 2020. And no OEM is interested in carrying inventory beyond Diwali because they then may have to resort to price cuts or have even get stuck with inventory. We have also secured new businesses in the current quarter for both domestic and exports valued at about $30 million. I'm also happy to report that construction on our Centre for Light Weighting Technology in Nellore is complete, and we have begun final installation and fine-tuning of the equipment, and we'll begin trial production in the next month and start revenue by October.

Our initial capacity that we are installing in this plant will be capacitized to take us to about INR 300 crores of revenue, which will happen in third year of production. I'm also happy to report that we have received a good response from our customers with several export orders that we have won for this new plant.

I think just give you a few more points, and then we can open up for Q&A. So just to reiterate, the few key points are: as the first quarter progressed, domestic sales declined compared to the digital -- initial plan, while exports were more or less okay. Things are still not looking good on the domestics in medium and heavy commercial vehicle front. The Q2 industry volumes will be impacted by the shutdown production cuts undertaken by OEMs to current inventories as we shift to BS-VI. Class 8 U.S. trucks, we expect the build to be at around the INR 335,000 this year in CY '19. Next year, it should be somewhere probably in the -- about 10% less than that. And that is the outlook that we see right now.

On the passenger vehicle sector, it still continues to do well for us. In fact, we have grown our passenger sector business this year, this quarter also because of new OEMs, new products and new customers, and we have large export orders that will start ramping up from next year. So we will see a significant growth and increase in value addition as well.

On the oil and gas side, we had a Q1 decline, which was the inventory destocking by a customer. We are already seeing exports in this quarter higher than last quarter. Construction and mining is basically weak, impacted by the global trade war.

On our aerospace, in fact, we are now seeing green shoots than we will see growth coming out. In fact, we've now fine-tuned our strategy and put in place a comprehensive strategy to grow our oil and gas business.

What will happen going forward, if we are just to highlight sector by sector: aerospace will grow, passenger will grow, oil and gas will grow, CapEx will be almost frozen to a minimal level. We have a CapEx spillover from last year that will get paid off this year, and from next year, we anticipate CapEx is at very low level. Net working capital will come down. Free cash flow will go up substantially. We have a very large cash -- cost-reduction program that we're undertaking right now, which includes both productivity improvement and cost reduction and new product development. The progress on our strategic business unit is very satisfactory. We have made good progress on the power electronics and control electronics and embedded systems side. And we hope that this will be a major contributing factor to our business and start growing from 2022 onwards.

If you look at our overseas subsidiary, the total revenue was about INR 810 crores, which was a small -- about 2.5% less than last year. EBITDA was about 5.3%. We had issues in one of our plants. But overall, I think we have a plan and a strategy to set this right by our product mix strategy. And as our aluminum business grows, we will start seeing the impact, both on top line and bottom line.

In terms of our balance sheet, our balance sheet continues to remain strong. Our net -- our long-term debt is about INR 1,580 crores, which is the same as it was in March. Our working capital and build discounting has come down by about INR 65 crores from March 31. Equity has gone up. Cash has also gone up.

Our debt equity net of cash is INR 0.24 crore. And long term -- our debt -- long-term debt equity on a net of cash basis is a negative INR 0.05 crore. On a consolidated basis, our total debt is INR 1,975 crores, which is again almost the same as INR 40 crores more than what it was in March. And the total cash balance on the balance sheet is INR 1,921 crores.

I think that's it. And I'll be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Kapil Singh of Nomura Securities.

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

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Firstly, I wanted to check on the order wins. We've talked about $30 million for automotive applications. Could you give some more details which segments are these and by when should we expect full ramp up?

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

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It's largely pass car and a small portion of it is also commercial vehicles for driveline performance. Excellent driveline performance.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [4]

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And full ramp-up may happen by when?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [5]

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It will start next year, but fully ramp up in '21. But last year's orders will ramp up from early next year.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [6]

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Okay. And from Indian truck market, is there any volume guidance that you would like to give or it's difficult to give at this point?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [7]

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If my customers can't give it, there is no way that I can.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [8]

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Okay. On the Industrial business -- domestic industrial business, you have said that going forward, you are expecting this business to remain fairly stable at these levels. I just want some more color on this. Can you tell us that does this include segments like defense as well? And why are we not including...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [9]

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It includes defense segment -- like defense includes aerospace, it includes energy, it includes agri also. In fact, I would say that it should grow because we are making progress on the agriculture side, we have some new programs on the aerospace side in the domestic market. So in a 2-year period, we should start seeing growth.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [10]

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Okay. Understood. And lastly, on the U.S. trucks, the order inflows have been fairly soft. So when we are giving a guidance of 10% decline, could you give some more color on that, that why we think it will only be a 10% decline?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [11]

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Orders are on a rolling basis. And the orders that are taken in today are not for delivery in the immediate future. They're spread out over a fairly long period of time. So what figures we have projected are based on what our customers have told us as an aggregate of their demand for next year. And then for their production plans.

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Operator [12]

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The next question is from Ronak Sarda of Systematix.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [13]

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So the first question is if I look at on a quarter-on-quarter basis, the realizations have dropped pretty sharply. Is this mainly related to the lumpy defense order which we had as it ended in the quarter? Or if you can just explain why...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [14]

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Yes. It's is a combination of factors, but that is also one of them.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [15]

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Okay. So that has ended in this quarter effectively?

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

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Yes.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [17]

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And any new builds in the industrial space in this...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [18]

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We are working on lots of new defense orders. And hopefully, in the next 6 months, we should have some rectifications. However, our subsidiary -- our joint venture has won a $100 million order, a very prestigious order. In fact, it's the export order for our Kalyani Rafael advance systems joint venture.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [19]

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All right. So pertaining to that order, would all the forgings go from Bharat Forge? Is that the correct...

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

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Anything that's used in any of our subsidiaries will go from Bharat Forge.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [21]

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Sure, sir. And the second question is on the domestic series. I mean if I look at your top line, it has shrunk almost 30%, which is much higher. On the India CV business, the top line has gone down nearly 30% versus the industry decline of 18%. So I mean is it some inventory correction happening at our end? Or how do you explain the incremental revenue bit?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [22]

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Commercial vehicle, at least our customers are down by close to 30%. And we have also not dumped any inventory with our customers and not overproduced and supplied, like some other people have. We have been very frugal and managed our working capital and net working position very tightly.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst [23]

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Sure, sir. And sir, on the Nellore plant, can you also highlight, I mean, when you gave the overall top line guidance, but how will the profitability be for the first 12 months. How does that ramp up?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [24]

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Well, it's going to first start through product validation and ramp up in the first 12 months. So again, on the first 12 months, I wouldn't put too much of profit expectations there. In the third year, it will ramp up to INR 300 crores in terms of sales, with a strong margin profile as well.

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Operator [25]

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The next question is from Pramod Amthe of CGS-CIMB.

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Pramod Amthe, CIMB Research - Head of India Research [26]

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Two questions. One, can -- would you be able to quantify a couple of measures you had taken in these tough times, especially as you talked about cost cutting and also the CapEx reduction?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [27]

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Well, there's no CapEx reduction, Pramod. First of all, whatever CapEx had to be spent is spent. But we don't need any more CapEx now for the next 2 to 3 years, okay? Because we have got huge volume capacity, we have installed a new big forging press in Baramati. So we have added almost 40,000 tons of volume capacity. And we have a lot of new machining lines in place. We have 8 new machining lines. So we don't need any more forging and machining capacities, plus we've added some smaller forging presses, cold forging, et cetera. What we are going to do is reduce a lot of our fixed costs. We're working on a variety of areas, which will help us come up stronger from this downturn, just like we have out of everyone, and grow our business, grow our profits and grow our margins.

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Pramod Amthe, CIMB Research - Head of India Research [28]

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Okay. And do you see, considering that it's not just an India slowdown, seems to be like on opportunity even in global on the M&A side. Are there any product gaps or opportunities you see to do some acquisitions. And in which areas?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [29]

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No. We are not looking at any acquisitions right now. I mean even if we do, it'll be very strategic, and it's not something that I will talk about very publicly. But there's nothing that we are targeting right now.

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Pramod Amthe, CIMB Research - Head of India Research [30]

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Okay. And the last one is...

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

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We have to be clear on what we want to acquire and what we don't. Right now, I think we want to use whatever capacities we have, whatever capabilities we have fungibly to grow our business. We have a lot of ideas that we have developed over the last few years, and we want to use that to get into new products, new segments and grow, of course.

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Pramod Amthe, CIMB Research - Head of India Research [32]

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And lastly, with regard to the whole new owned subsidiaries, there also the performance seems to have deteriorated. Would you put reasons to what has gone wrong? And how you plan to rectify in the coming quarters?

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

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Yes. I want to let my colleague, Kishore, answer that.

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [34]

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So I think -- thanks, it's Kishore Saletore. So I think the performance of the overseas subsidiaries is in line what -- with what you're seeing globally. And actually, I'd like to start by saying that this is not something that we are satisfied with and -- but it is in line with what we are seeing globally. We are taking some steps which will be long term in terms of changing the product portfolio without suffering the overseas business, the entire business without any one-off costs or anything.

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

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Correct.

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [36]

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So -- and I think you will see this change in the next few months. It's going to be a combination of newer products, cost reduction and we are also, like, we are also setting up an aluminum plant. We are expanding our aluminum business in the -- in Europe, which is a much more profitable business. The EBITDA margin are in the high teens as compared to what you currently see in the steel business. So I think this is actually giving us an opportunity to do a lot of restructuring. And I think the results will be there to be seen in the next few months or next few quarters, I'd say. It's not going to happen overnight.

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Operator [37]

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The next question is from Jinesh Gandhi of Motilal Oswal.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [38]

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My question pertains to CapEx. So for FY '20, probably you'd be targeting, what, about INR 400 crores, INR 450 crores as maintenance...

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

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Sorry, what is that? I can't hear you Mr. Jinesh.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [40]

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CapEx for FY '20?

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

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No. CapEx, there is no fresh CapEx for '20. There is only payment of the CapEx from last year.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [42]

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Yes. So that could be, what, about INR 400 crores, INR 450 crores, including maintenance?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [43]

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About -- yes, in that ballpark.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [44]

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Okay. And second question pertains to oil and gas business. So you have been talking about new products and new customers. Can you shed some more details or throw some light on where we are in business development cycle and..

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [45]

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We have now developed our new customers. And in fact, this year, almost 20% of our revenue for the year will be from this new customer, and next year that will go up to almost 35%.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [46]

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Okay. This year, you said 20%?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [47]

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Yes.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [48]

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Okay. And on new product side?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [49]

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New products will be around 5% this year, that will grow to 10% next year.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [50]

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Okay. And second question pertains to the strategic business unit which you talked about on the electronics side. So the first family on -- entirely for electrification components used in electrification or something else?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [51]

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Yes. Largely for PV. We will have the President of the business, Mr. Krishnakumar, answer that.

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Krishnakumar Srinivasan, Bharat Forge Limited - President & Director of Strategic Business [52]

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Yes, Mr. Gandhi. It's primarily going to be for the PV business, but we have -- in the business, we have both mobile and also some industrial applications like mobile cranes and all that. So a lot of existing business that we already have, and we are looking at really growing the technology that we have to -- in a big way in the automotive applications.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [53]

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And as we have stepped into the first year, our power and control electronic business to be about, for half year, close to INR 150 crores to INR 200 crores.

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Operator [54]

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The next question is from Sonal Gupta of UBS Securities.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [55]

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Just continuing with the same. So you mentioned INR 100 -- sorry, INR 200 crores in the first year when, I mean...

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

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Between INR 150 crores and INR 200 crores.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [57]

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For FY '20 itself, is it?

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [58]

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2021.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [59]

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'21.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [60]

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'21. And could you again sort of talk about which are the products or sort of what products are you focusing on?

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [61]

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Yes. Basically -- yes, basically we are looking at all the major inverters, all kinds of inverters ranging from something like close to 4 kilowatts ranging up to 200 kilowatts and above.

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

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So that means right from 2 wheeler, 3 wheeler to a bus and truck application.

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [63]

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Yes. And this will be -- all the inverters that will be required on the e-mobility vehicles. And we'll also be -- there are a lot of DC-DC convertors, DC/AC convertors and controllers, including BMS systems and BMS controllers.

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

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So -- okay. DC/DC, DC/AC. And BMS, also you're doing. So do you have any types on this part of electronic side? Or you're doing it in-house?

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

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Yes. So I think we've announced that we've acquired 50% stake in -- or we are acquiring a 50% stake in a German company. That process is going on. And within the next 45 to 50 days that will be complete.

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

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Okay. And just -- okay, sure. And just on the -- I mean, on the domestic side, in terms of the passenger vehicle business, given that even the passenger vehicle market is sort of daily in a slump. I mean, you have -- you're saying that, that segment should continue to grow, right?

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

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I think that our segment is in a slump, but if you look at the secular trend, it will grow. And for us, we have grown because we have 1 new business, especially for the BS-VI component and BS-VI engine, and for also new customers that have come into the market.

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

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Okay. And just lastly, on the passenger export side also, you said that we should see, again, growth coming back next year. Is that how you say?

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

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See, on the passenger segment, because we have new customers and new products, we expect to see growth. Plus, we have new programs that we will be ramping up for exports from next year. So we will have a solid growth in passenger car next year.

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Operator [70]

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

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [71]

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Two questions here. Historically, it's been -- as our understanding goes that the machining content is profitable from a margin perspective. When we think about the newer verticals, as described by Amit on the aerospace and the PV side, would they likely to have a higher or lower machining content versus, let's say, commercial vehicles or industrial that we are doing?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [72]

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(inaudible) the new products that we are doing, everything is fully machined.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [73]

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It's fully machined. So -- okay. So intuitively, it's not just the revenue, it's also profitable from a margin perspective?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [74]

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Yes.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [75]

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Okay. And kind of sticking to this, would BS-VI changeover in India have any change to your product profile, either machining content or anything on that sort that can be expected?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [76]

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Yes. We will -- it will be greater because a lot of companies that either are sourced from others or through in-house machining will have to change their products. And this is where we see a good opportunity.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [77]

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So are you already seeing any discussions with OEMs because a lot of them...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [78]

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Actually, we're already tied up.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [79]

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Okay. So is it, therefore, right to say that currently if an OEM is doing it in-house, they may choose not to do it in-house and kind of push it out to you guys? Because as we understand, a lot of the CV business is largely forged in India. Is that the way to think about it?

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

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In the CV business anywhere there are big suppliers, but if there were some customers that were buying elsewhere, we will see that transfer to us, and we're already seeing that.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [81]

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Okay. And lastly, just to -- going back to -- you may have answered this question before, but given those sudden kind of sluggishness in -- or in kind of revenues that have happened. And you've already outlined that there are 3, 4 areas that you can use to fill up capacity. Are there other products, et cetera, that are large segments or gaps that you can use or potentially tap in to offset the kind of lower utilization?

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

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Absolutely. But the only problem is that it doesn't happen in 6 to 8 months, but it will happen. I mean now this will -- you will see us as a big supplier in certain other segments, like how we have in the industrial segment, in oil and gas, that way into new segments.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [83]

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But you're not at liberty to give us anymore color on that?

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

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I won't say anything more. But no, I would rather demonstrate than talk about it.

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Operator [85]

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The next question is from Puneet Gulati of HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [86]

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You mentioned that now you're likely to get new customers on the passenger car segment, especially on BS-VI. Would you expect a similar market share growth in the CV side as well? Or do you think that might be lesser than what you see here in pass car?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [87]

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On CV side, if you look at it, 50% to 60% of CV market, the engines are supplied by one company and that is Kalyani. Then we're already a major supplier. But now for the other players, they're also well supplied. So it will only be implementing growth in those customers where we are buying from them or if we are supplying some new components to them.

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Puneet J. Gulati, HSBC, Research Division - Analyst [88]

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So when you transitioned from -- when we move from FY '20 to '21, should we expect, on a like-to-like, same customer volume, which is a much higher revenue? Or you think that...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [89]

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Not much. I would say maybe 10%.

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Puneet J. Gulati, HSBC, Research Division - Analyst [90]

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Okay. 10%.

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Operator [91]

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The next question is from Kapil Singh of Nomura Securities.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [92]

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This cap on oil and gas business, could you share some more details and what happened exactly during the quarter? How much have the revenues been for the quarter? And what to expect for the fiscal...

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

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Kapil, I don't feel comfortable sharing that level of detail. But the revenues did come down quite substantially this quarter. But we are already seeing a growth in the Q2. And so basically a destocking. And they expect us that -- problem with this business is stock management. You have to understand the wide gap of mentality of the operators in the oil and gas business. If you ever go to the Permian Basin or you go Odessa, Texas, you would see over 300 different entrepreneurs who are already (inaudible). And it's not like India has had resources that are under your ground belong to the government. In the U.S., anything that is under -- on or under the ground that you own belongs to you. So every lad there wants to take a chance and want to spend $250,000, $0.5 million drilling to see what is under it. So when the prices are good, people get funding, people get private equity, get a cost yield to drill, and when suddenly the prices are reduced, suddenly those -- the liquidity dries up, and then things slow down. But again, in this case, what we're doing is, we started about 1.5 year ago on derisking oil and gas business, but focusing on more customers, most sectors and more products. And this will help us in the next up cycle.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [94]

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Okay. For the full year, should we expect flattish kind of revenues or...

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

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No. It will be down, but by next year, I think we should be back to the same level.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [96]

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Okay. That is helpful. And could you also update on the capacity utilization, both in India and overseas currently?

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

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In sales we operate at 2% or 3% that is not that much. I mean tonnage is not that much difference. Yes, I think last year, it was about the 60 -- I think it's 66,000, and now they are 62,000 or somewhere thereabout -- sorry, 62,000 to 61,000, so it's not significantly different.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [98]

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And the overlap in business?

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

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The overlap is about 60%.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [100]

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60%, okay. And on the overseas business?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [101]

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Overseas would also be about 60%.

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Operator [102]

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The next question is from Girish Raj of Quest Investment.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [103]

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Yes. So again, on the international business, Amit. Based on the outlook that you have on the oil and gas, should we take first quarter FY '20 base in the industrial export and grow from here? Or...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [104]

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Yes. I would take this as a base and then we can say quarter-on-quarter base.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [105]

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Quarter-over-quarter growth. Okay, if that is. And PV export, we have good order wins in the past, which we thought we would grow much higher, but first quarter somehow the growth rate...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [106]

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You have to understand the entire automotive industry globally is in a flux between test cars, CV, model changes. So I mean, there is a little bit of time delay that can happen on order ramp ups. Really, we are an uncharted territory right now. But the point is that all the platforms that we are on are the only engine platforms that these companies have.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [107]

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Okay. Fair point. So on the domestic CV, Amit, FY '19 was impacted due to capacity constraint. And first quarter decline quarter-over-quarter was only 5%, despite 23% decline in the industry production, right? So we have done fairly good on a quarter-over-quarter basis. I would appreciate if you can give some color -- again, you mentioned that there will be production cut. But how to look at this particular...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [108]

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So what happened is, in Q1, people have overproduced, okay? Everybody knows this. There is 59,000 vehicle inventory, okay? At least there was on June 30 -- June 31 (sic) [June 30]. So on top of that, we built up inventories at our own level. And now we will -- in fact, we have substantial destocking of inventory and the production cuts. So I think Q2 is going to be quite tough. From Q3 and Q4, we should start seeing more reality.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [109]

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Okay. But from a year-on-year perspective, there will be decline, isn't it?

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

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Absolutely.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [111]

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Okay. On the...

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

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Within the first half. Second quarter is no (inaudible). And with BS-IV is coming, everybody thought there'd be a big ramp.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [113]

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Third question is on industrial domestic. There is a quarter-over-quarter decline in revenue of INR 80 crore. I would assume tractor has played a big role...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [114]

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We had a defense order, which finished last quarter.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [115]

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I thought that continued this quarter. So there was nothing -- so quarter run rate was INR 50 crore descent that was not there...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [116]

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It was a smaller amount. It wasn't that high as it was in the past.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [117]

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Okay. But -- so that...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [118]

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It's a combination of a variety factors. It's the combination of the tractor market, the construction and mining market and the results order.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [119]

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So you see this impact growing into...

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

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Agriculture has already improved, plus we have 1 new business on that sector. Over the next few quarters, this will improve.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [121]

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This should improve. Okay. My last question is on the EBITDA margin outlook, you said cost...

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

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I hope that EBITDA margin will only go up from here. One quarter might be stagnant, but for the year, I think we should do better than this.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [123]

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FY '19 level, sir?

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

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No, no, no. In year -- next half -- I mean, year after next, we should aim to get back to close to those kind of numbers.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [125]

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Okay. Any view on interest expenses was higher despite...

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

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Interest expense is higher because of the accounting standard. Part of exchange law gets accounted for air maintenance cost, so might be because of that.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [127]

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Any quantification?

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

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About INR 10 crores for this quarter.

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Girish Raj Sankunny, Quest Investment Advisors Pvt Ltd. - Research Analyst [129]

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Which was not there in the fourth quarter, is it?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [130]

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No.

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Operator [131]

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The next question is from Sonal Gupta of UBS Securities.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [132]

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Some clarification. So just on the AS 116, what is the impacted EBITDA level?

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

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It's not central at all.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [134]

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So it's INR 10 crores for the interest. I you would imagine there will be some for depreciation as well, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [135]

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No. The INR 10 crore impact is not because of lease standards. The lease standard impact is hardly anything. That INR 10 crore is because of part of exchange law gets reclassified as interest. That has nothing to do with 1-month sick leave.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [136]

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Okay. And just on -- sorry, could you remind us on the gross that you stated was INR 1,975 crores?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [137]

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INR (inaudible) crores on a consolidated basis, and we have a gross cash of INR 1,900 crores.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [138]

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So basically, net debt is negligible, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [139]

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On a long-term basis. We have working capital debt. That's it.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [140]

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Okay. And that is how much?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [141]

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INR 1,300 crores. But that is self-liquidating inventory and receivables.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [142]

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Sure. And just on the CapEx, like you mentioned for domestic. I mean any updates on what sort of CapEx are we doing at the sub...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [143]

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I think what we are doing abroad is the new aluminum plant, which will always -- almost by December, we will start trial production, and in March we will be fully in production.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [144]

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So the spend this year would be how much?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [145]

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It's about...

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Kishore Mukund Saletore, Bharat Forge Limited - CFO & Executive Director [146]

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EUR 40 million.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [147]

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Cash flow? EUR 40 million.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [148]

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And -- so we are not pursuing the U.S. plant as of now right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [149]

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We'll give you an update on the U.S. plant in the next quarter.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [150]

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Sure. And just on the -- again, coming back to the defense thing that you mentioned. So the -- so do we see the run rate dropping from here, given that there will be no contribution from that order any longer in...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [151]

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No. What we have is here 2 streams of business for defense. We have the revenue business, which will continue Y-o-Y. And in fact, we will keep growing that. And we have the capital business, which are these one-time orders of these big orders. That was a small order that we had won. But we have many such orders that we are working on. Even without that order, even if we don't get any new order, just based on the existing revenue business that we have, they should be on a flattish basis.

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Operator [152]

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The next question is from Basudeb Banerjee of AMBIT Capital.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [153]

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A couple of questions. One, as you mentioned earlier in the part of the call that bulk of the decline in ASP was back of that lumpy defense business coming out. So if I see it back to almost at INR 140, 139 level, it was before the December '18 quarter. So can I know how much of this decline is because of that different business? And how much is because of the destocking by the major oil and gas client?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [154]

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I think bulk of it is destocking.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [155]

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Bulk of destocking by the oil and gas client?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [156]

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Yes.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [157]

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And how to look at the oil and gas business, strong next quarter again, Amit?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [158]

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Should start going up.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [159]

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It will be right back.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [160]

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Yes. I mean already this quarter will be higher than last quarter.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [161]

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Sure. And that's great. And last question for FICV rupees moving up from INR 68 to INR 71. So maybe change in hedging maybe benefit one should expect? Or is it largely hedged fully?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [162]

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No, No, no, it's not fully hedged. Only on the open portion we will get some benefit. These 3 -- we will not look at an opportunistic hedging policy.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division - Research Analyst & VP [163]

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Surely. And how much will -- of exports outlook will be hedged as of now?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [164]

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50%.

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Operator [165]

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The next question is from Priya Ranjan of Antique Stockbroking.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [166]

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My question is related to the restructuring, which you're talking about the roofing business. So can you just throw some light on that, whether you want to completely do away with steel forging in Europe? I mean you have a bigger press out there. And you want to continue only with aluminum business and rest all can be supplied from India or...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [167]

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This is not something that one can take a unilateral view on. You have to have pretty deep engagement with your customers because for certain products, we are a market leader, both in terms of technology and in terms of market share. So there are certain products that we will continue to make there. But definitely, we'd rather make high-margin products there in a high-cost economy than products which don't have the same margin. So I think you question is in the right direction, but it needs to be tempered by what is the customer's expectations.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [168]

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Okay. And any -- I mean, since you have already had a structure for the large (inaudible). So can it be completely shifted to India given it's...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [169]

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If we wanted to, yes, but with customer [support], of course.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [170]

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Okay. And the second...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [171]

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There is nothing that we can't make in India that we make anywhere.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [172]

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And in terms of earnings on the India industrial part, I mean the business has been growing. And then do you see some -- I mean will it be like in the same range? Or will it be like some new content or new segments where you can see significant amount of improvement going forward?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [173]

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India Industrial is a very big (inaudible) in the [BHEL] results. Clearly, there is a lack of capital formation and CapEx investments. The areas where we see the only opportunity right now is mining or construction, agriculture and to some extent defense, those are the only areas. And of that, I think the one which is still running quite well is mining. Mining is also impacted by rain, especially in Assam in that Jharkand, that side also with Bengal, it's affected by rain. So once the rain effect goes, also there will be a return in that.

Ladies and gentlemen, if there are no other questions, then let me just make a closing comment. If you look at the history of our company and you look at our financials over the last 5, 6, 7 year, we were in the same position in 2015 and '16 where it looked like doom and gloom when the world was collapsing around us but we came back stronger, faster and better and we had a much more robust business model. The environment is quite challenging, but in spite of that, and there are no 2 ways about it, I assure you that our management team is completely pleased with the situation at hand, and we will come out stronger -- very strongly. Thank you very much. And if anyone has any further questions, you can get in touch with our finance team or IR team, and they'll be happy to answer your questions.

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Operator [174]

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