Focus on technology and moving up the value chain paid off: Amit Kalyani, Bharat Forge
We have more than $200 mn cash on books and good profitability, says Kalyani
What has led to the healthy margin expansion at a time when most of your peers were struggling with high commodity costs?
We have basically focussed a lot on cost, on efficiency, value addition and I think it has paid off. Our strategy of focussing on technology and moving up the value chain has paid off and that is evident both in top line as well as bottom line.
How sustainable would you say is this run rate amid the slowdown in the domestic market and moderation in the North American class A truck orders?
Let us correct one perception. The slowdown in the North American order intake is for a significantly future date of production. So the orders, the intake that is currently already on the books of the truck companies is enough to sustain a similar level of production for this year as last year if you look at our financial year or their calendar year. So, that is the US market. We expect it to remain robust even next year.
Coming to the Indian market, there has been a slowdown in Q3 undoubtedly but that is largely to correct the inventory overhang that was there in the pipeline and in another four to six weeks, that should get corrected and then we should be back to normal levels and it is highly expected that considering the Euro VI implementation from 1stApril 2020, there should be a pretty strong pre-buy from July to December or so. This is basically what we hear from most of the channels and from our customers.
To what extend do you think diversifying your portfolio, new products as well as the stronger balance sheet have helped to insulate your performance or perhaps derisk it from concerns surrounding the core business?
That is undoubtedly the reason why our business is still strong. If we were the only hitch to one segment such as the Indian commercial vehicle industry or the Indian passenger car industry, our business would reflect the vagaries that are there in that one geography and one segment. It is because we are diversified across geographies, segments, products, technologies and are further adding more products and technologies to further diversification, that is undoubtedly the reason why we still manage to grow even in times of uncertainty.
The fact that we have done this growth in a capital light model or asset light model, focussing more on technology and fungibly using similar assets or the same asset for multiple products and sectors is what is giving us the higher return and the higher cash flow so as a company we have a solid balance sheet. We have more than $200 million of cash on the books and good profitability and return on capital employed - all the ingredients you need for a strong business and a stable foundation to move forward.
We started to see weakness in the stocks since February last year. Most investors thought that the US heavy truck cycle had peaked and that the trade war would bring down the global capex cycle. But none of that has really materialised till now. What is your view on what seems like heightened concern in the market, how real do you feel these worries are?
I would not comment on geopolitics and things like that. But what I will say is that as a company we have always found opportunity in adversity and we have always grown in spite of downturns and things like that. In fact, in every downturn, we have come out stronger and I expect that that is part of our DNA and that is something that we will continue to do and we will do that on the back of technology we develop, on the back of small acquisitions or bolton initiatives that we do such as R&D centres abroad or small acquisitions that we do which will then help create another vertical like our industrial vertical today which has become a big bedrock of our growth and stability.
How much time has it taken for auto players and your company to come out with any plan to adjust your capacity utilisations lower in line with the global slowdown?
We do not have a high fixed cost business. We have a very low breakeven. Our breakeven levels are extremely low in India and that gives us tremendous flexibility in operations. We have a very high degree of fungibility between manufacturing products for variety of sectors using the same asset and do not forget that as a company we have been investing very heavily in R&D. That means we have a fairly large product pipeline.
You put all these factors together and then at the same time you put the disruption happening in the automotive industry in the form of electric vehicles, autonomous mobility and all that. The need for solid manufacturing partners with engineering capability, high quality and capability and scale becomes inevitable and if there are downturns, outsourcing opportunities or opportunities to take larger share of somebody’s else pie becomes even more possible.
We have to look at our business both how do you play offence and how do you play defence I think that is the name of the game. You have to find opportunity when people see adversity and with your balance sheet, your strength, your capability, your engineering, it allows you to do that I think that is what differentiates us.
What is the capacity you are looking at post commencement of the Baramati and Nellore plants?
When those two plants run at full capacity, they will add a 1,000 crore on top line with margins which are similar to what we have today.
And on the order book for the CV sector -- both domestic and exports, what is the expected demand going ahead?
The demand for next year based on the order backlog should be similar to this year for the export market because Europe is still strong and US also still has a very strong order backlog. India should be even stronger in the next six-eight months because of the pre-buy effect from the Euro VI or BS-VI implementation on 1st April 2020.
Most experts are painting a very red picture when it comes to Europe and you have considerable exposure in European auto market. What is happening in Europe? Are things as bad as what we hear here in India?
Things are not bleak for sure. There was emission related issue in Germany where registration of vehicle could not take place till the new emission cycle testing could be done and that actually put a damper on sales for two to three months. But that has now picked up. I was just talking to the CEO of our German business and he said that waiting period for certain popular vehicles was as much as four to six months. So, there is not a bleak situation in Germany.
One of the big overhangs in Europe is what happens with Brexit and what happens with car companies that are manufacturing and selling in the UK. But the UK is not the largest market in Europe by any standards. It is in fact one of the smaller markets. But geopolitics, the change of government in Germany in the near future, the trade war between US and China is weighing down on the overall sentiment in Europe. However, the underlying fundamentals have not changed. We do not see a change in demand in vehicles.
A lot of European car companies have now decided to launch a large number of electrical vehicles. That means that a lot of new products will come into the pipeline. There are a lot of new products which we are already involved with for which we have received large nominations and I think there is opportunity to find growth in this.
Our whole strategy of light weighting, setting up the Nellore facility, our new aluminium forging facility in Europe -- all are very well aligned to the future requirements of the industry and that is where we see a tremendous opportunity and current growth as well.