Bharat Forge’s Kalyani Sees Pick-Up In Passenger Vehicle Sales In Second Half Of FY20
We have to wait till March-end to start seeing some improvements in the industry, says Baba Kalyani.
The Indian automobile industry has endured a slowdown over the past 15 months or so and the situation isn’t expected to improve in the second half of the current fiscal.
That’s according to Bharat Forge Ltd.’s Chairman Baba Kalyani, who said passenger vehicle sales may improve in the last two quarters of FY20. “But CV (commercial vehicles) segment I’m not so sure because I still see a lot of pain ahead up to March,” he told BloombergQuint in an interview.
Auto sales in India fell to their lowest in over two decades in September, with falling volumes forcing companies to lay off contract workers and dealerships to shut showrooms. Kalyani said once these “pain” points start to fade, things will return to normalcy.
The second quarter was the “toughest period in this decade” for the auto component maker, Kalyani said. Its profit fell 18.75 percent year-on-year to Rs 205.4 crore in the quarter ended September, while revenue fell 17 percent to Rs 2,155.2 crore.
Market analysts expected pre-buying ahead of the implementation of the BS-VI emission standards from April next year. But that hasn’t happened, according to Kalyani. “Pre-buy would have normally happened in the second and third quarter,” he said. “We don’t see any pre-buy.”
He was, however, hopeful of sales picking up in the future. “We have to wait till March-end to start seeing some change or improvement.”
Other Earnings Highlights (YoY):
- Operating profit fell 35.5 percent to Rs 333.8 crore.
- Margin contracted to 15.5 percent versus 19.9 percent.
- Deferred tax gain of Rs 54.5 crore in the current quarter.
Watch the full conversation:
Here is the edited transcript of the interview:
Quarter gone by has been disappointing, it has been a tough period. What lies ahead and how do you tackle that?
What lies ahead is pretty much known to the market. There is a big drop in the CV business in this country. There is a huge pile up of stuff and then there is a change to BS-VI in April 1. So, I think the picture is very clear. We don’t expect to see very high number on the CV side of the business in third and fourth quarter and I think, once all this pain of inventory is over, things will start to be getting back to normalcy. In the meantime, on the patch car side we are doing well. We are gaining market share. We are gaining new customers. So, that is good news. We are also taking the time to restructure our path and do lot more new products and hopefully will see a better sustainable future for us as we come out of this down cycle.
It is difficult to pinpoint when things will start turning for better> but we have already started seeing some recovery in volumes from some of the bigger auto majors. Do you feel second half of the year could be any different from the first half because the first half has been particularly tough?
I think the second half will also be equally tough, but I expect the patch-car segment to do much better than the first half. But the CV segment I am not so sure because I still see a lot of pain ahead up to March end.
You have already highlighted with regard to your guidance for second half which could be even lower than the first half, particularly for the CV segment ahead of the implementation of BS-VI on April 1. Do you expect any sort of pre-buying coming in and when exactly do you see the revival? Till when will this pain last?
If there was a pre-buy, it would have already started happening because pre-buy normally would have happened in the second and third quarter. So, we don’t see any pre-buy. Matter of fact, if you look at the numbers for the second quarter, they are closed to somewhere 50,000-mark as compared to 1,20,000 same time last year. So, it’s pretty much subdued demand that is coming in for this segment and forus it’s the OEM demand that drives out the business. We are B2B business and that’s the demand that drives us and honestly, I think, we have to wait till March-end to start seeing some change or some improvements.
You have also highlighted that you will be using this current environment to cut down more on your cost because the demand is not picking up. Can we then expect your margins to be in the same territory 15-16 percent or there can be some kind of down pick in the second half since you have stated that the second half will be weaker than the first one?
Yes, I think, it will be in the same region. I don’t think the margins will get dramatically impacted. We are taking a lot of measures to cut our cost down. We have already done a lot, and we will still do a lot more. We are also doing a lot of restructuring in terms of production. We have 2-3 production sites, so we are able to restructure this. So, I think that will show its impact but the main factor for our business or any B2B business is demand. The demand has to come back and we have to wait hopefully till the beginning of the next fiscal to start seeing some demand coming back.
Your shareholders would be interested in this since the company has 1,700 crore of cash on their books. What is the capital allocation policy that you will be following, are there any plans in the near future to deploy cash?
Well, we have stopped all the capex. We don’t have any capex going on. We are focusing more on cutting down cost right now. We are happy that we have a large cash reserve with us because I think that’s what is going to save companies like us through difficult times. So, right now we don’t have a strategy of what we are going to do with this cash but we are very clear we are going to conserve cash and make our balance sheet stronger.
The genesis of this pain points to largely global or mix of both global and local equally split?
I think, it is largely local and less global. Global was a non-factor and local is a surprise. I would say largely local.
And the non-auto segment, what do you expect. Because I see a clutch of reports which say that over a medium term, aerospace, defense will all be at the good stead. You have spoken in length about auto. What about the non-auto space?
Non-auto sector we have couple of verticals that we are working very hard in and yes they should see us in the medium term in good state. But areas like defense and aerospace are areas which take a long time to mature. We are now getting to that maturity curve. We have reasonable business even now in this sector and we should see even better traction next year in this sector.
Just moving to geographies as well, there is a lot of talk because of the Brexit, about how Indian component suppliers will have an issue going ahead. Europe at large and you would have some exposure there. How do you expect that geography to do, would it weaker in the coming quarters and due to Brexit, could there some be other challenges as well?
Well, I don’t see any issue as far as our business is concerned with Brexit. We have very little that we supply to U.K. and I don’t think there is any problem for us to supply into the U.K. As far as Europe is concerned, I don’t see any issues that are coming at least from the Brexit point of view.