Business Profile

Bharat Forge Ltd. (BFL), the flagship company of the US $ 2.1 billion Kalyani Group, is ?Full Service Supplier? of forged and machined - engine & chassis components. It came into existence in 1961 to meet the forging needs of the Indian Automotive Industry. The 80?s saw Bharat Forge grow from a primarily automotive ancillary to an engineering enterprise. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. The company emerged as world?s second largest forging company with the acquisition of Carl Dan Peddinghus GmbH of Germany in 2003. With manufacturing facilities spread over 10 locations and 6 countries ? three in India, three in Germany, one in Sweden, one in Scotland, one in North America and one in China, the company manufacturers a wide range of safety and critical components for passenger cars, commercial vehicles and diesel engines. The company also manufactures specialized components for the railway, construction equipment, oil & gas and other industries. It is capable of producing large volume parts in both steel and aluminum. The company has a fully integrated facility with capabilities in design & engineering, die & tool making, forging a wide range of products, machining and testing & validation. It is the only company having this capability for a complete range of engine & chassis components. Being a leader in steel forging it has diversified presence in other areas such as finished machined crankshafts, component assembly, sub-assembly of industrial machinery, etc. It has total installed capacity of 130000 MT and 177600 numbers of steel forging and front axle assembly & components at Chakan, respectively. It also has an installed capacity of 413000 numbers for finish machined crankshafts at Mundhwa.

Its customer base includes global automotive companies such as Daimler Chrysler, Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo, Caterpillar - Perkins, Iveco, Arvin Meritor, Detroit Diesel, Cummins, Dana Corporation, Honda, Scania etc. and Indian majors such as Tata Motors, Ashok Leyland?s, Bajaj Auto, Escorts, L&T, BHEL, Mahindra, Kirloskar etc.

BFL has technical tie-ups with Tokoyo Drop Forge, Japan, for the closed die forging units; and with Judisha Buhin Kogyo, Japan, for a machine component unit. It has a technical collaboration with Lemmerz-Werke, Germany, to manufacture wheel rims for heavy and light commercial vehicles. The company has joint venture with Metalart Corporation, Japan and Nissho Iwai Corporation, Japan for the manufacture of precision forgings. The company has tied up with Cranfield University, UK, the foremost post-graduate centre of Europe, to form Kalyani Cranfield Manufacturing Management Centre, for technology, professional development and applied research. The centre was set up at Pune. The company has been accredited with the ISO 9002 quality certificate.

Important Developments

BFL had announced that it is working on finalizing four long-term contracts, each having a value in excess of USD 50 million, with global OEM customers. These contracts covered a wide range of parts across automotive and non-automotive applications. BFL has firmed up three out of the four contracts. These will go into serial production in phases over the next 12 to 15 months.

Bharat Forge, is making an entry into the manufacturing components for aerospace applications and marine engines and is investing Rs 3 billion as a first step in a greenfield project at Baramati. The production from Baramati plant will mostly for export market ? especially North America and Europe, where the aerospace and shipping industry has a large presence. The production of the plant will start in the first quarter of 2008.

The company has identified three sectors, namely energy, aerospace and capital goods as the thrust areas. The non-auto forging business currently accounts for 17% of the company?s sales, which the company aspires to increase to 25%, by next year and 40% in the long term.

BFL is planning a capital outlay of close to Rs.350 crores over the next three to four years and is targeting an incremental global revenue of close to Rs.1000 crores.

Company plans to raise $80 million in two equal trenches via overseas convertible bonds. The bonds are convertible into either Global Depository Receipts or equity shares.

BFL negotiates to acquire German major Thyssen Krupp's forgings unit in the US.

BFL plans to set up development centers in foreign locations for product design and development.

BFL, is setting up a second open forge press line at its facility at Mundhwa, Pune at a cost of Rs 1.4 billion. This will cater to the requirements of a range of applications such as Hydro Carbon exploration, mining metals and infrastructure, heavy engineering sector & Energy sector.

BFL is understood to be setting up its tenth worldwide unit at Durgapur in West Bengal.

The plant would be Bharat Forge?s third facility in the country. The company will invest Rs 8 billion for this purpose. Of the unit output, 60% would focus on the non-automotive segment. The plant is expected to boost exports to China and Southeast Asia. At present, 17% of the Bharat Forge?s global revenues are contributed by the non-automotive business.

BFL is mulling an acquisition in South America to tap crucial automotive markets like Brazil. The company will announce acquisition of non-automotive forging business in North America and Europe during this year.

The company plans to make complete engines and transmissions after 2010. As part of that strategy, Bharat Forge will set up a Rs 250 million technology unit in Pune.

BFL plans to expand its non-automotive business from current 17% of total revenue to 40% in four to five years. Its Baramati facility will start operations in April 2008 and it will have the world's largest forging hammer.

BFL has signed a Memorandum of Understanding (MoU) with the Government of Maharashtra to jointly develop a multi-product Special Economic Zone (SEZ) in Khed Taluka of Pune District. The SEZ is expected to attract investments of about Rs 2,50,000 million and generate 120,000 new employment opportunities. The project has received in-principle approval from the Board of Approval, Ministry of Commerce, Government of India. The project would be implemented through a Special Purpose Vehicle (SPV) to be jointly promoted by the Company / Kalyani Group and the Maharashtra Industrial Development Corporation (MIDC) in which the two promoters would hold up to 74% and 26% of the equity capital respectively.

In December, 2005, BFL, through its wholly owned subsidiaries, Bharat Forge Beteiligungs GmbH and Bharat Forge Hong Kong Limited, concluded a Joint Venture agreement with FAW corporation of China (FAW). The subsidiaries own 52% stake in the JV and the balance 48% is held by China FAW Group Corporation, the largest automotive manufacturing group in China. The Joint-Venture Company (JV) is engaged in manufacturing of highly engineered critical and safety components for the automotive industry. The JV will focus on offering its range of products and services to FAW Group Corporation and the other automotive groups operating within China. The JV will focus on the non - automotive business in the fields such as railways, mining & construction equipment, steel mills, power plant, marine applications and the oil & gas business and highly engineered forgings for the International market. The ownership of the JV will be in the ratio of 52% by the Company and 48% by China FAW Group Corporation. The investment in the JV is the largest by any Indian Company so far in China. The JV company, viz. FAW Bharat Forge (Changchum) Co. Ltd., has commenced operations from 6th April 2006.

In September 2005, BFL has acquired Imatra Kilsta AB, Sweden along with its wholly owned subsidiary Scottish Stampings, Scotland, which are now renamed as Bharat Forge Kilsta AB (BF Kilsta) and Bharat Forge Scottish Stampings Ltd., respectively. BF Kilsta is the leader in the manufacturing of heavy-duty diesel engine crankshaft for the European and Scandinavian truck markets. Imatra Forging Group is one of the world's leading forging group, largest manufacturer of Front Axle Beams and the second largest crankshaft producer in Europe. It has manufacturing facilities at two locations, Karlskoga Sweden, & Ayr Scotland. This acquisition will help BFL to produce - crankshafts, beams, knuckles and pistons in minimum two locations worldwide and provide design & engineering and technology front end support, close to customers for these products.

In 2005, BFL acquired Federal Forge now known as Bharat Forge America Inc., which provided BFL with a manufacturing presence in USA ? one of its largest markets. Federal Forge is engaged in the design and manufacture of complex forged steel components for Automotive Industry. In an all cash deal, Bharat Forge America Inc. USA has acquired the Assets of Federal Forge, effective from June 24, 2005. The transaction has been concluded at a value of US $ 9.1 Million.

BFL has acquired CDP Aluminiumtechnik Gmbh during December 2004. CDPAT belongs to the renowned CDP group and is a significant player in Europe in the area of aluminum forged components used in passenger cars and other automotive applications and name of the company has been changed to Bharat Forge Aluminiumtechnik. Further Bharat Forge America Inc., Delaware, USA has become a subsidiary of the company with effect from 16th May 2005.

The company has completed its capacity expansion program as planned and with this the installed capacity has increased to 240,000 tons per annum. Similarly, the company has completed its Medium & heavy-duty crankshaft-machining program with installation of state of the art lines for machining the crankshafts for global heavy and medium duty engine applications. With this BFL?s crankshaft machining capacity has reached 650,000 units per annum and chassis component machining capacity to over 753,000 per annum.

Exports of auto components from India in 2005-06 were $1.8 billion and Bharat Forge share in this was about 8%. Bharat Forge has been country?s largest exporter of automotive components for the past five consecutive years.

BFL is a recipient of several national and international honors, recognition and awards. Forbes Magazine has listed it for consecutive three years in its global ?Best under a Billion? list. Automotive Component Manufacturers Association of India (ACMA) has honored it over past four years for its export excellence. BFL has also been awarded the Indo German Chamber of Commerce (IGCC) Award for ?Outstanding Contribution towards Promotion of the Indo-German Economic Relations for the Year 2005?. Bharat Forge received GKD-NIQR award for ?Outstanding Organization? in 2005.

Financial Performance

BFL has posted a net profit after tax of US$ 55.47 million for the year ended March 31, 2007 as compared to US$ 46.38 million for the year ended March 31, 2006. Total Income has increased from US$ 365.52 million for the year ended March 31, 2006 to US$ 447.79 million for the year ended March 31, 2007. The Consolidated results are as follows: The Audited consolidated results for the Year ended March 31, 2007 - BFL has posted a net profit after tax of US$ 66.89 million for the year ended March 31, 2007 as compared to US$ 56.14 million for the year ended March 31, 2006. Total Income has increased from US$ 691.40 million for the year ended March 31, 2006 to US$ 984.13 million for the year ended March 31, 2007. Basic earnings per share (EPS) before and after exceptional items was Rs.13.45 and Rs.13.01 respectively.

BFL achieved PBT margin (before exceptional items) of 18.8% for FY 2007 against 19.3% in the previous year. For the Q4 of FY 2007 the margin was 17.9% against 18.3% in the corresponding quarter previous year. The PBT margin reflects a major (in excess of 1%) impact of higher finance cost due to rising cost of borrowing both in India as well as overseas and the higher element of depreciation in respect of the recently completed capacity expansion program. The EBIDTA margin for the year 2007 has improved from 27.1% to 28.2%.

Economic trends and its impact

Global automotive manufacturers now consider sourcing from Indian companies as an effective means to lower their time for product development and to leverage economies of scale. This is giving Indian companies an opportunity to move up suppliers? value chain and become a competitive source for high-end knowledge processes.

Company is now witnessing significant growth opportunities in several key non-automotive sectors such as Hydro carbon exploration; Mining & Metals; Conventional and non conventional energy; and The Aerospace sector. These sectors, on a global basis, need critical components in forged & machined condition. These are high value, high value added components. BFL has the unique advantage of having the domain knowledge, technology and resources to manufacture these products. BFL has planned investment of Rs 350 cr towards Baramati plant, which is to be operation by April '08 and Rs 140 cr toward Pune plant. BFL is targeting to increase revenues from non-automotive segment from 17% to 25% over the next 2 years as Margins of non-automotive segment are much higher.

The railway industry is seeing tremendous surge in investments both in India as well as worldwide. This is being driven by huge growth in bulk freight movement like coal & iron ore driven by infrastructure investment. BFL has already received long term contracts from several leading global OEM?s for their supply requirements. BFL will supply products like Crankshaft, Connecting rods & Pistons in forged & machined condition. The new 80 mtr ton forging equipment being set up in Baramati has given BFL a manufacturing capability for such complex products.

The Indian Automotive Industry witnessed strong growth in all segments for the third year running. The commercial vehicle market Light, medium & heavy vehicle category has been the traditional mainstay of BFL in India. This segment witnessed a handsome growth of 33 % in FY 2007 over the previous year. BFL?s revenue from this segment grew at 30 %, which is in line with the market.

The Infrastructure sector covers industries like mining & construction equipment. Plant & machinery for steel plants, cement plants, sugar mills & other general engineering industry is a key driving sector in all major economies world over. These applications require parts such as crushers, rollers, specialized parts for the off highway vehicles, mining & construction equipments. BFL is setting up a large open forge press line capable of manufacturing components up to single piece weight of about 40 tons. BFL will be setting up facility to machine these parts as well

The global energy sector is one of the fastest growing industrial sectors in the world. It is witnessing exponential growth in both the Environment friendly non-conventional energy sector such as wind power generation & fossil fuel based plants to meet the new demand for electricity. The sector opens opportunity for high value parts such as Crankshaft, Pistons, Connecting rods, Camshaft & Gearbox Internals, Windmill shafts, Turbine components, Rotor Shaft etc. for turbine applications in both types of energy generation applications.

The World over the Hydrocarbon (Oil & Gas) exploration initiatives are intensifying, with the key area of growth being the sub-surf (undersea) explorations. BFL is a major player in the oil & gas segment, with products ranging from valves, chokes, casing heads, shells etc in forged condition. Bharat Forge has developed forged components for high-pressure applications in the oil & gas industry. BFL customers for these components span right across the world from North America to South East Asia.

BFL has accomplished 15% growth in revenue from Passenger car business over the previous year. Similarly, BFL has significantly improved its presence in the tractor & agri equipment business, which grew at 30% during the year 2007.

Long term rupee appreciation will bring down raw material costs of BFL. They have a natural hedge against currency fluctuations as they import a lot of raw materials, so no impact of rupee appreciation.

In developed countries, forging units are being shut down due to noise and air pollution and an intemperate working environment. Given the low availability of a skilled workforce, manpower costs are high there. Hence, countries like India stand to gain from this development.

With multinational automobile companies enhancing their presence in India, the long-term prospects of the forging industry seem fairly bright.

Concerns

In India, there is still no comprehensive mechanism that neutralizes the incidence of all Central, State and Local taxes on inputs used in export production. As a result, the cost competitiveness of companies exports continues to be seriously impeded.

Increase in prices of Steel and Aluminum will affect profitability.

Power accounts for around 10% of the manufacturing cost and availability could be an issue in future.

High transaction costs reduce exporters? margins and, therefore, reduce the incentive to export.

Infrastructure constraints significantly impact cost competitiveness of exports. Availability and cost of power, high freight costs and transportation charges, delays at ports etc. are serious impediments. According to estimates, the cost disadvantage on account of infrastructure inadequacies on Indian exports is a significant 5%.

Shortage of skilled technical manpower may hamper growth.

Any depreciation in rupee will increase raw material cost as they import a lot of raw materials.

Slowdown in US and China economies may affect BFL.

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