Stock Insight: New Mould

Bharat Forge, part of the $1.5-billion Kalyani Group, is amongst the largest and technologically most advanced makers of forged components for the automotive sector. It is the second-largest forging company in the world after Thyssen.

The company has manufacturing facilities at nine locations across the world, including India, Germany, Sweden, Scotland, North America and China. In 2004 the company acquired Carl Dan Peddinghaus (CDP), the second-largest forging company in Germany engaged in the manufacture of passenger car components. This was followed up by acquisition of Germany-based CDP Aluminiumtechnik. In 2005, the company acquired Federal Forge, now called Bharat Forge America. The company has also inked a pact with the largest automotive group in China, FAW Corporation. Through this joint venture, BFL has made foray into the fast growing Chinese market. This joint venture makes BFL the largest forging company in China, too.

The company is on an expansion drive to ramp up capacities by acquiring small forging companies across the world to enlarge customer base. The global acquisition strategy has two key elements. Firstly, it hopes to broaden customer base by bringing in a wider portfolio of product offerings. Secondly, the company's global facilities would provide it an opportunity to work with renowned OEMs as an engineering and development partner. The company would expand capacities for automobile forging by 20 per cent to 240,000 tonnes, crankshafts by 40 per cent and front axle by 47 per cent by the end of the current financial year.

BFL's capacity at 600,000 tpa gives it the scale to procure steel at competitive prices. The global procurement scale also gives it access to more suppliers with increased focus on quality, cost and sustained availability.

BFL has an impressive list of clients. Some of the names in its list include Daimler Chrysler, Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo, Caterpillar, Iveco, Arvin Meritor, Detroit Diesel, Cummins, Dana Corporation, Honda etc. Segment wise, top five car and top five truck manufacturers in the world are BFL's customers.

BFL is continuously increasing its presence in the passenger car segment. The company is also on the verge of signing four large contracts with global customers with an annual size of around $50 million each. It has concluded a long-term supply contract with a large OEM to supply auto components in the third quarter of the current financial year. BFL is also in the advanced stages of negotiations for the supply of high-end critical safety components both for automotive and non-automotive sectors such as energy, hydrocarbons, locomotive and aerospace sector. It has embarked on a Rs 350-crore capex programme for the next two years to emerge as a key player in the non-automotive sector also.

Post-capacity additions in the non-auotmotive sector, the company hopes to earn Rs 1,000 crore from this segment and corner 30 per cent of the global market by 2011. As margins in this sector are 2-2.5 per cent higher, the diversification would lend strong support to the margins.

It is targeting 30 per cent global market share indicating that the company is expected to grow at a fast pace in the coming years.

European auto manufacturers, in their effort to control costs, also provide BFL with immense opportunities.

The company is continuously de-risking its business model by improving product mix and establishing presence in key markets like the US, Europe and China. The purpose is to increase its presence in different business segments and geographies.

BFL follows a dual shore manufacturing strategy to cater to its global customers. Dual shore manufacturing means the capacity to manufacture all key products across engine and chassis components from a minimum of two locations. This ensures smooth supply of components under all circumstances, while providing a long-term cost advantage. Under this strategy, the company has established more than one manufacturing location for all core components, one close to the customer and one in a low-cost but technologically competitive destination such as India. Proximity to clients and low-cost advantages would enhance the company's margins.

The company is also focusing on increasing its capacity utilisation from 50-60 per cent to 70-80 per cent. If it is able to achieve that kind of capacity utilisation then it will significantly boost the top line. BFL is also setting up a multi-product special economic zone (SEZ) in Khed in Pune at a cost of Rs 9,000 crore. The SEZ will attract world-class domestic and foreign companies in automotive, machinery and equipment, machine building, general engineering industries among others. The project is expected to attract investments worth Rs 25,000 crore. The company, however, faces the risk of decline in demand for passenger cars and commercial vehicles in foreign markets particularly, in the United States since it is one of the largest contributors to BFL. Additionally if the company fails to turn the acquired units around which have a low capacity utilization, it could dent its margins.

The future of the Indian forging industry looks encouraging given the surge in the global demand. Many Indian companies are leaving global footprint and are in expansion mode. The increasing cost of inputs like petroleum products, power, fuel, steel, stringent pollution norms are challenges which the industry is trying to address.

This article was originally published on March 01, 2007.