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We are living through interesting times, when global economies continue to witness either fragile recovery or persistent downturns. FY13 raised expectations at the beginning, but did not offer many reasons to cheer about in the end. Europe continues to grapple with unpredictable headwinds while the Chinese economy grew at its slowest pace since 1999. On the other hand, the US economy has shown marginal improvement in key macro–economic indicators. The situation is one of cautious optimism.
India's growth rate dipped to a decadal low of 5 percent during the period, a reflection of global factors as well as domestic challenges, such as high rate of inflation, growing fiscal deficit, sluggish infrastructure growth, manufacturing slowdown and plummeting investor confidence. Recently, we have witnessed acceleration in policy initiatives to spur growth, but it will take some time, before the results of such initiatives are visible.
During the financial year 2012–13, there has been demand contraction largely in the commercial vehicles' (CV) side of the automotive business globally. While India witnessed a 27 percent demand contraction, global contraction in CV demand was around 10–15 percent, led by China at 25–30 percent, Brazil at 32 percent and Europe at 15 percent. North American class 8 truck market was the only market which was in the green and grew by about 10 percent, but way below market expectations.
As a Tier I supplier, we are dependent on the performance of OEMs. Unexpected decline in demand in the automotive sector caused an increase in inventory across the value chain, impacting us negatively. But it is part of a cyclical process.
We had two good quarters, before economic hardships began to bite. But downturns are often better teachers than years of easy growth. During FY13, we tightened our belts, put a total freeze on future capacity expansion plans and sharpened our focus to create long–term value through our vision of consistent innovation. We are creating new products, developing new markets and rationalising costs through better utilisation of resources.
During the year, our focus on harnessing our internal strengths and resilience stood us in good stead. In FY13, consolidated Total income decreased by 8.6 percent to Rs. 58,148 Million due to slump in demand across segments and geographies in the latter part of the year. EBITDA declined to Rs. 18,978 Million in FY13 from Rs. 10,780 Million in FY12. Net profit for the year declined by 40.1 percent to Rs. 2,476 Million.
Although the full year financials were disappointing, it is encouraging to note the performance of the Indian and overseas operations in the quarter gone by. Profitability at Indian and European operations have improved despite flat sales, a result of focus on productivity and cost control.
Considering the industry landscape, we have reduced our investments into the capital goods sector, without impacting our market position and our product offerings. We also restructured our overseas subsidiaries by selling off the assets of Bharat Forge America.
Our focus is on creating a greater presence in the global passenger vehicle segment which is witnessing a technological shift from castings to forgings driven by better fuel economy and stringent emission norms, generating cash flows and reduction in interest costs and debt.
FOCUSING ON CORE STRATEGIES
We make highly engineered products, and our USP is to use our expertise of engineering, design and technology to create 'partner to print' solutions for our global customers. We are global leaders in the business by virtue of our scale, technological excellence and degree of innovation. We will continue to invest in our fundamental strengths and drive a more diversified business model.
In the 1990s, we were a small company with the potential to become a global enterprise. We had four or five large Indian customers who accounted for 80 percent of our business. Between 2000 and 2008, we grew 10 times in terms of sales largely because we externalised ourselves. Before we started this process, we were a $100–million company and by 2008 we were more than a billion–dollar Indian multinational. In a way, our success helped facilitate the process of India emerging as a global manufacturing destination.
We entered the markets of North America, Europe, Japan, Brazil and China, evolving a more de–risked business model. Developed markets in the world are cyclical in nature, especially in the automotive sector. Generally, they follow the cycles of emission technology changes every four years or so. To reduce the impact of cyclicality, we decided on three business segments, i.e. Passenger vehicles, commercial vehicles and industrials, across three different continents, i.e. North America, Europe and Asia. Historically, all the three continents have never had the same cycles except for September 2008 onwards till part of 2009 and as recently in latter half of 2012. Our presence across these segments helped to largely insulate us from the cyclicality in the automotive sector.
This strategy has been instrumental in the Company's exports to Commercial Vehicle OEMs doubling from 2006 levels despite the North American and European heavy truck industry way below their previous peaks.
At Bharat Forge, the process of diversification never stops; one step paves the way for another. For example, we have now started producing components for the industrial sector. We have entered into five high–growth verticals, which include oil & gas, construction and mining equipment, railways, marine engines and components and aerospace. We are large suppliers to the oil & gas industry in North America, largely for offshore drilling and for shale gas. In the railways vertical, we focus on locomotives, supplying large crankshafts and connecting rods for locomotives around the world, including in India, US, Russia and Europe. The aerospace segment is a difficult sector to enter due to the criticality of the components. We have taken steps to develop the organisation and our organisational capabilities and become AS9100–certified and one of the very few companies in India to achieve NADCAP certification. We have also built relationships with material suppliers, for titanium based products.
Our facilities in Mundhwa and Baramati are capable of making almost all the products for all these five segments. In our Indian operations, 39 percent of our business comes from these industrial sectors, which were hardly 20 percent a few years ago. As we identify more sectors to enter and develop these five verticals further, we expect the share of industrial components to increase further.
Level–next growth can only come through innovation. This is true for both businesses and economies. Innovation can only save businesses and economies from the trap of middle–level earnings and mediocrity. At Bharat Forge, our strategy is to consistently create new products and keep our pipeline full. For industrial verticals, our products are the result of our own R&D expertise. Our focus on innovation lies at the core of our organisation culture, where an inspired workforce pushes the levers of change.
We have already started seeing the focus on innovation paying off. We have developed and are supplying machined crankshaft "first time right" for the Indian railways. With this breakthrough, BFL is the only indigenous supplier of components for the Indian Railways, which used to be imported till now. We have developed "demonstrator parts" for the aerospace sector for global players. These two significant breakthroughs have been driven by the team at Pune using in–house technical know–how and capabilities.
We believe the India Growth Story will gather momentum for the next decade. In the automotive business, four wheelers are expected to grow three times from three million vehicles to almost nine million or more. The opportunity for players in the automotive space, therefore, is tremendous. In the medium term, the passenger car segment will drive growth. Globally, the segment is expected to grow from 55 million cars to nearly 90 million cars annually. The commercial vehicle segment, of which trucks form a major component, will have limited growth. As a result, we are realigning our strategy to address this pattern. Interestingly, global automobile players in the Indian market are the same players we serve today in Europe and North America.
India has the potential to emerge as a strong manufacturing destination for technology products. Multinationals in the automotive space are also beginning to look at India as an emerging supply hub for Asia. This is where India's manufacturing story is going to play a major role in driving national growth.
I had stated in the previous annual report that BFL will focus on becoming lean on manufacturing and leveraging our past investments to take the Company to newer heights. We remain steadfast and on course to achieve these two objectives in the coming years.
We will continue to create value on the strength of our vision and strategies, irrespective of external realities. Across the world our people are working hard to make our vision a reality. I take this opportunity to thank all members of Team Bharat Forge, and other stakeholders who have reposed their trust in our ability to steer forward our organisation, despite challenges.
Baba N. Kalyani
Chairman and Managing Director