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Edited Transcript of BHARATFORG.NSE earnings conference call or presentation 29-Jun-20 10:00am GMT

Full Year 2020 Bharat Forge Ltd Earnings Call

Pune Jun 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Bharat Forge Ltd earnings conference call or presentation Monday, June 29, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amit B. Kalyani

Bharat Forge Limited - Deputy MD & Executive Director

* Subodh E. Tandale

Bharat Forge Limited - Executive Director

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Conference Call Participants

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* Amyn Pirani

CLSA Limited, Research Division - Research Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst

* Pramod Amthe

CIMB Research - Head of India Research

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary

* Sahil Kedia

BofA Merrill Lynch, Research Division - VP

* Sonal Gupta

UBS Investment Bank, Research Division - Director and Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Bharat Forge Q4 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Amit Kalyani. Thank you, and over to you, sir.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [2]

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Good afternoon, ladies and gentlemen, and welcome to our FY '20 year-end con call. I hope everybody is well. And it's very challenging times that we are faced with, but I think challenging times bring out the best in Bharat Forge, and I'm very happy to report that our plants in India are now -- all our plants are fully -- are functioning. They are not functioning at 100% capacity because we are meeting the demand that is required, but all our facilities are running efficiently, and we have no illnesses and incidence of any kind so far. So that's good. We are taking all precautions, including digital mapping of temperature of all the employees on an ongoing basis so that we prevent any kind of COVID-related issues.

So last year was started with high hopes for everyone. It was a year at the end of which the commercial vehicle sector would have transitioned to BS-VI. So there was an expectation from all the CV manufacturers that there would be a pre-buy effect because of the pre-BS-VI emission norms and the costs associated with that, and everybody started building up capacity and ramping up production in anticipation of this, and therefore, we had a very strong Q1, a little less strong Q2 and then a big drop in Q3, and we expected that Q4 would be at the same level of Q3.

And as a company, we were on track that Q4 would have been on track with Q3. However, in the last 13-odd days, we were unable to ship out about INR 200 crores worth of goods, both export and domestic, and that has impacted our earnings by about INR 90 crores for the quarter. However, looking at the bigger picture, there are some trends that are clearly emerging.

I think if you look at Bharat Forge, as a company, we have gained momentum and market share in various critical sectors, both in India and abroad, especially for the BS-VI products, especially for the new passenger car companies and -- both in India and abroad and including the new areas of drivetrain and powertrain that we are targeting. We're making good progress. Machine crankshaft for passenger cars, we're making good progress. And in fact, we won new orders during the downturn as well -- I mean during the lockdown as well. And a sector that we are focused on, and many of you all have commented on the slow pace of progress, which was aerospace, is a sector which we have put a lot of focus on.

Aerospace sector is one which has been damaged the most due to the coronavirus crisis. As you're aware, flights were -- in most countries are still suspended, especially international flights. And therefore, the usage of aircraft and the buying of new aircrafts and production of new aircrafts are also severely impacted besides the other issues which are facing one of the aircraft manufacturers as well.

So ordinarily, this would impact our business and impact our overall sales in the aerospace business, which we were projecting to grow. But in the last 6-odd months, we have been engaged with 2 or 3 new customers in the aerospace supply chain, and I'm very happy to report that during the lockdown period, we have won a significant amount of business from this company and due to which, in spite of the downturn in the aerospace market, we will have a sequential Y-o-Y growth. And we are well on track to achieving a 40 million, 50 million number of revenue in the next 2 to 3 years. If we are lucky and the market rebounds, this could even be higher.

One of the other sectors where we have had a very severe impact is oil and gas. We had -- that's one of the largest parts of our industrial business, which is down substantially, and that is because it's directly related to the oil and gas prices in -- globally and therefore, the production in North America. However, in oil and gas, also, we have acquired 3 new customers for new products. And hopefully, in the next 2 years, we will also start seeing growth in this sector. Business is not going to go to 0 here, but it is severely going to be impacted.

On the flip side, with the whole infrastructure push in the U.S. and the big $3 billion stimulus plus the $1.5 billion infrastructure stimulus that is planned, we expect that our big infra customers in the U.S. such as Caterpillar, Cummins will see a lot of progress and will see a lot of demand and therefore, give us a lot of new demand.

In India as well, we expect that the mining sector, the agri sector, the defense sector are 3 sectors where we see and hope for good demand. The agri sector is already buoyant. The mining sector, now being opened up to private industry, should start throwing up demand. Even the railway sector, being thrown up to private operations, should see some demand and create demand.

And the defense sector, where we have many products which are ready, tested and approved, should -- as soon as I guess the lockdown is over and other distractions for the government are handled, then we should hope to see some new order revenues coming in.

Despite of all the headwinds, as a company, we expect that this year will -- it will be a challenging year, but it will be a year where we will have a profit, we'll have a reasonable numbers overall. We are predicting that sales will be down overall over last year. How much, we don't know because every country has had a different kind of recovery. China has had a V-shaped recovery. Other companies have had a swoosh-shaped recovery. Some companies have had a flat, no recovery yet. So it remains to be seen.

However, the fundamentals of our company are very strong. We have strengthened a lot of things by learning new skills during the lockdown, such as working digitally, becoming more efficient. And in fact, I'm happy to say that within 1 week of starting, we were able to run our -- most of our equipment that we did start running at full capacity, in fact, at full utilization. So we didn't have any lag impact. We have no issues with migrant labor or any of the kind, and we are ready to supply to all our customers based on their demand.

Also, we are hopeful that we will get additional share of revenue because many of our customers are looking at sourcing more locally. Also, there are U.S. customers that are looking at sourcing from new sources away from some existing sources where they want to derisk from. So overall, we see that there is a silver lining going forward in the realignment of global supply chains.

And one of the measures that I want to highlight is that during the lockdown, the company has accelerated the cost reduction measures that we had started last year. By September of last year, it was clear that the second half of the year was going to be difficult, and we had taken effect and measures to reduce cost, both in fixed cost, variable cost, manpower cost in every areas. And to that, we have added another 25%, 30% of additional cost reduction during the lockdown. And once these -- both these measures are fully implemented by quarter 4, and you see the full impact either in quarter 4 or quarter 1, this will help our margins get back to the previous levels, even if the sales values don't get back to previous levels. So we will see a margin accretion once sales values go back to previous levels.

Bharat Forge has always enjoyed a strong operating leverage. We expect that, that will get enhanced due to these factors and the factor that we expect, especially in Europe, some of our supply chain equivalents, people who are present in this part of the supply chain, may not actually make it through the entire corona crisis. And there will be, what do you call it, flight to safety, in a sense, of suppliers. So customers will look at stronger and more steady suppliers rather than looking at only the most conventional option.

So overall, the company will concentrate on being nimble. We will address the dynamic demands of our customers, work more closely with them. In fact, we have a whole new digital exercise on working digitally in a collaborative mode with our customers. We will focus on cash flow generation, cash flow preservation. We have no plans of any CapEx. We will win new business through the customer-facing approach and the cost optimization that we have undertaken, and we will build upon whatever we have achieved in the last few years to go ahead.

Coming to the subsidiaries. The subsidiaries have been badly affected by the sudden shutdowns, but both Germany and Sweden have short-time work provisions, where the government pays 80% of the salary of the person when they are on short-time work. So that has negated some of the negative impact of the fixed cost on the operations. And we have a complete restructuring going on, on manpower and overall cost reduction, where we will have a very substantial double-digit cost reduction over the next 2 years, which will help these companies operate in a profitable manner, even at 20%, 30% lower capacity utilization.

We have set very tough targets for our overseas subsidiaries. And this time, we have not just set targets, but we have put in place a team of external plus internal experts who will make this happen in a time-bound manner with quarterly measurements.

One of the items you may have noticed is that we have taken an impairment charge of about INR 89 crores in the investment in Tevva Motors. Tevva Motors is a company that we invested in, in the U.K., which has developed a range extender and -- electric range extender hybrid trucks. These are ICV-sized trucks, which are in the 9- to 14-tonne category, and these can be applicated to trucks and buses.

The main reason we invested in this company is that we wanted to have the advantage of this knowledge and technology and the license of the technology to be able to produce and supply these components to our customers in India. We do not intend to become a vehicle manufacturer. However, we do want to be a supplier into the electric vehicle supply chain. That was the reason to invest in Tevva Motors. We are a significant minority shareholder with a 35% stake. There are other shareholders, and Tevva was in advanced stages of 2 major events. One was they had received a grant from -- technology grant from the U.K. government. And they were at advanced stages of a large investment by a U.S. company, which wanted to commercialize their technology. However, because of the COVID scenario, that has not fructified and there is lack of clarity over the U.K. government funding as well. And therefore, to be prudent, we are taking a charge on our investment in this company. However, we still have access to the technology, and we are bringing the technology to India. We have a team of about 30 people across power electronics, control electronics, battery technology, embedded systems, who will localize the technology and be able to offer it to our customers, 2 of whom we're already in active discussions.

So we will offer not only the whole solution, but even individual components as and when needed and as and how needed by individual customers. So while we are taking an impairment charge on the investment we have made, looking back, I think we have saved about 3 to 4 years of time and lots of learning that has been accelerated by leveraging the Tevva investment, and we will bring this investment -- we will bring the technology into India and use that to support our local customers.

Although the current scenario is very difficult, and it's really hard to give you a prediction on what is going to happen, I'm very confident of one thing that Bharat Forge will perform amongst the best in its pure category in India, and we will definitely emerge stronger, and we hope that as the dust settles and the corona crisis is, let's say, more subdued and if God willing, if we get a vaccine or something and then things could have a very quick bounce back, but notwithstanding any of that, we will still have a year that will end in black figures. We will not have red figures for the year. And we will build a foundation for a stronger tomorrow. And as a company, we have a big moat, and we will use this year to deepen that moat and make it even stronger and bigger for the future.

So that's really all I have to say, and I'll be happy to take Q&As. One of the areas that I didn't cover is in Atmanirbhar Bharat as we talk about it, we expect that 2 areas or 3 areas will have big opportunity in India. One is the mining sector, the other is agricultural sector and the third is the defense sector.

Now in the mining sector, we have developed a lot of products over the last few years. So we are in the growth phase there. In the agri sector, we have a lot of products. And in fact, we have developed a lot of products in the next -- last 2 years, which are on the automation side of agri, which means harvesters, pickers and those kind of things.

And on the defense side, we already have 3 or 4 major products that are ready, tested and ready for full-scale production and supply. So any one of these that gets a kicker will provide a big boost to Bharat Forge's numbers. We don't need any investment for this. We already have capacities. We already have the manpower. All we have to do is produce and ship.

So that's really all I wanted to say, and I'd be happy to take your -- I and our team would be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Kapil Singh from Nomura Securities.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [2]

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Firstly, I wanted to get a sense of where are we in each of the segments in terms of current production levels?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [3]

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Where are we in segments...

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [4]

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So the major segments that we report, passenger vehicles...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [5]

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Basically, on the CV side -- you're talking about for Q1?

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [6]

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Maybe we can talk about current Q1, obviously would be...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [7]

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Yes, Q1. So Q1, we had almost no production for 2 months, okay? We will only have production for 1 month this year -- for this quarter. But we will have pretty robust production for 1 month. I think we'll be at between 60% to 70% capacity utilization of 1 month.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [8]

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Okay. Okay. And any thoughts at where are the operating as for each of the segments, for example, domestic CV, export CV?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [9]

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Domestic CV -- just 1 second. As per our knowledge, the first quarter CV production in India, that is medium and heavy commercial vehicle, it is somewhere in the region of 6,000 to 7,000 trucks as far as our understanding goes. So if you consider that the installed capacity is 600,000 roughly, that is 50,000 a month or 150,000 a quarter, we're talking about 6,000 to 7,000 which is like 5%, 6%. So -- I mean you can't even talk about capacity utilization. It's just -- it's a nightmare.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [10]

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Got it. Got it. And overseas business?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [11]

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Overseas is substantially better. I would say, U.S. market is running at about 50%, and Europe would be at about -- maybe about 40%.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [12]

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Okay. Okay. Understood.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [13]

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But please understand that this is still the corona-impacted period.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [14]

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Of course. Of course. I'm sure it will see a...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [15]

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Tractor sector in U.S. is operating at, I would say, about 70% and Europe would be at about 50%, 55%. India, tractor sector, I would say, is probably at about 25%. Only maybe SUV sector is operating slightly higher than that.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [16]

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Right, sir. And any outlook you have to share or it's too early to say right now?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [17]

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If you have any outlook to share, I'd be interested because all of our customers -- I mean, I literally spoke to 2 customers on Friday and nobody knows. Except for the tractor customers, nobody has a clue what's happening. And what is happening? See, if you look at -- you open the newspaper today, Times of India, Maharastra will extend the lockdown. When you read such things, the common man also gets even more perplexed. Now in Tamil Nadu also, they had opened up the manufacturing, again after 10 days, they shut it down. So this creates a lot of uncertainty, a lot of costs. So now people are taking a wait-and-watch approach saying that what is the point of starting, if I have to close it again in 10 days. So everybody is being cautious. See, we have 2 black sawn events taking place right now. And one black sawn event -- that's why it's called a black sawn event because it happens once in a while. You have 2 of them hitting India at one time: one which is impacting the whole world, one which is impacting us to our Northeast.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [18]

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Right. And sir, second question is on cost reduction. Any numbers to share where is our...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [19]

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No. I'm not going to share any numbers, but it will be very substantial, and it will have a substantive long-term impact on our cost structure. It's a structural changes, it's not just cost reduction.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director & India Auto and Auto Parts Research Analyst [20]

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Okay. Okay. And sir, how much is our monthly fixed cost currently?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [21]

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INR 60 crores.

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Operator [22]

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The next question is from the line of Ronak Sarda from Systematix.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [23]

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Sir, first question on the Tevva Motors. I mean you highlighted the reasons for write-off, but is there -- I mean, is there some capital requirement for Tevva itself and we'll have to invest in it? Or that's also in...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [24]

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No, we are not investing anything in this company right now.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [25]

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Okay. So when you meant a large U.S. investor was supposed, our stake would have got diluted?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [26]

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Yes. Absolutely.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [27]

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Okay. But we are fairly confident on the utilization of the technology in India, the one, which we have discussed?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [28]

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Yes.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [29]

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So that plan doesn't change?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [30]

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No. It doesn't change. It might get a little delayed because of the whole overall situation right now, but that's all. We don't lose any.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [31]

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Sure. And secondly, I wanted to understand on the supply side, I mean you highlighted the fixed cost impact and -- but on the raw material side, how's the situation right now? I mean are we seeing any benefits or the production is too small to see any benefit on that side? And at the same time...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [32]

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You're absolutely right. Right now, the production is so low. But obviously, if there is less demand than supply availability then companies which are able to pay and which have the ability to buy will have an advantage.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [33]

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Sure. And at the same time, how are we looking at the INR benefit? I mean it's substantially almost 10% to 12%...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [34]

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How are we looking at?

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [35]

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The rupee depreciation, it's almost a 10%, 12% benefit there?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [36]

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We will get some benefit on the rupee because we have a 1-year rolling hedging forecast -- I mean, hedging strategy. So only on the open portion, we will get a benefit. And nobody had anticipated such a big drop in revenue either. So we have to take that into account because if you see where we were at, we were at roughly $510 million, $520 million of exports. So from that, if you substantially go down, then there will be an impact. But realization will be, I would say, similar to last year.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [37]

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Okay. Sure. Sure. And the final question is on the Nellore facility. Have we -- I mean, will we -- will the Q1 and the Q2 numbers include the Nellore facility or will...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [38]

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No. There will be no [Nellore] in Q1 and Q2 because of the lockdown, it was shut. We have just started last week, and we have submitted samples to our customers for final validation and that revenues will only start from Q3 and Q4.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [39]

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Sure. So all the H1 numbers will be capitalized in that sense...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [40]

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We are not capitalizing any numbers. Our -- all our variable cost, manpower cost are all being charged off.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [41]

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It's already part of the P&L breakdown?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [42]

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Yes. So we don't capitalize any costs.

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Operator [43]

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The next question is from the line of Amyn Pirani from CLSA.

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Amyn Pirani, CLSA Limited, Research Division - Research Analyst [44]

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My first question was on the balance sheet. So even this year despite a weak revenue year, you managed to keep your debt under control. So as we look into next year, operating cash flows will again be under some pressure, but how are you looking at working capital and CapEx from the point of view of cash -- free cash flow generation in that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [45]

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No question. So first of all, no CapEx. We -- on working capital, we expect that our receivables should be higher than our payables because we have a larger amount of exports from the past that are getting paid off now. And so we will have a strong cash flow, which will help increase our cash balance by the end of the year.

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Amyn Pirani, CLSA Limited, Research Division - Research Analyst [46]

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Okay. Okay. Okay. So there are no, like, concerns on hitting any debt covenants this year, right? And I don't think that should be a problem?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [47]

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Absolutely none.

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Amyn Pirani, CLSA Limited, Research Division - Research Analyst [48]

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Okay. Okay. And just on the oil and gas business, obviously, this year, revenues have almost halved, and you have given a 2- to 3-year time line of growth, but apart from the oil price, what is it that would drive the coming back of the business? Are there any...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [49]

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Yes. That's a dam good question because it is not just driven by oil price. See, this is an industry that now has been declared as a critical industry by the U.S. government because it helps insulate them from geopolitical issues. If you look at 20 years ago, the Middle East had a big impact. And it may happened in the Middle East had a big impact on the U.S. economy because they were solely dependent on Saudi and a few other countries for oil. Now the U.S. is a net exporter of oil. So the cost of supporting that is something that I think the U.S. government has decided to live with.

Secondly, this is a very different kind of oil and gas industry compared to these big offshore oil wells and oil rigs that you are probably picturing in your mind when you think of oil wells and oil things. Because -- I mean, there are literally a concept called wildcatters, which means somebody buys a piece of land in Odessa, Texas, puts in $5 million of -- gets -- puts in $0.5 million, gets a $5 million loan and drills up a pad, and if they're lucky, they can make $3 million, $4 million a year of cash flow out of that. So it's a very entrepreneurial business.

So there are hundreds of people who are involved in this. There are probably a few dozen oilfield services companies. And these are people who are able to be very flexible and very nimble because they are like that. They are not these big (inaudible) companies. And you're not drilling somewhere in the middle of the ocean and have to fly people out in helicopters and back, and it's not that kind of environment. It's a very frugal kind of environment.

I would urge you to do a Google search of shale fracing site in Permian Basin or in that Odessa, Midland Texas area. It will give you a good sense of what I mean. My hope that -- and I'm quite confident that earlier -- 3 years ago -- 4 years ago, the common knowledge was that fracing is only competitive at $70 of oil and above. Then they brought it down to $55, then they brought it down to $35. I'm confident that, that is a very innovative approach that they have taken to this. They could even bring it down to $20. And at $20, I think they will be competing -- able to compete with anyone.

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Operator [50]

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The next question is from the line of Pramod Amthe from CGS-CIMB.

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Pramod Amthe, CIMB Research - Head of India Research [51]

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Amit, first is with regard to the investments, have you done other than Tevva, are the other investments just test cases? And...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [52]

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Yes. Absolutely.

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Pramod Amthe, CIMB Research - Head of India Research [53]

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And is there -- like you also have a 2-wheeler EV business investments and others, is there a risk there also, you may have to put in more money? Or...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [54]

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No, no, no. We have a good line of sight to revenue there. And in the Tork Motors business, we are going to, again, supply drivelines to 3-wheeler companies. That is going to be our first line of business. We are not going to make vehicles, we are only going to supply the driveline.

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Pramod Amthe, CIMB Research - Head of India Research [55]

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Okay. And considering that your outlook is decently optimistic on the passenger vehicle business and the wins there, how do you see the -- some of the incentives given in the global market? And would you be beneficial in any of the markets there with your suppliers...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [56]

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So one of the reasons we are growing our passenger car engagement substantially is because we have developed a fairly unique range of products, both on the chassis components in aluminum, chassis components and structural components in aluminum in India. We also make aluminum forgings in India, which we supply to both Indian and non-Indian customers. We make structural components in aluminum in India, which we export outside, and we make both driveline and powertrain components, which we are now exporting. So a combination of these factors is what is giving us a pretty good growth opportunity in the global passenger car market. And a lot of the products that we are making, in fact, everything, except the engine components, go into both hybrid and electric vehicles. So the range of applicability is also fairly large.

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Operator [57]

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The next question is from the line of Sahil Kedia from Bank of America.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [58]

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I had 2 questions. One, you mentioned that you guys are looking at gaining market share. This, obviously, is credit to your balance sheet and the profile that you've built over the years. What are the areas that you could be looking to gain sort of market share? And how should we think about this in your core segments?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [59]

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Every sector. Whether it is rail; whether it is truck; whether it is pass car; whether it is agricultural equipment, which is tractors; whether it is defense. And in defense, I don't mean the big programs, I even mean the components. There are consumables, there are things that are used in the day-to-day running of the fleet and those kind of products also we see a huge demand. Aerospace also we expect to gain substantial market share -- or rather not market share, but substantial new business which we've already signed during the lockdown. I'm very proud of our team here, which has managed to develop products, get them certified and put them in front of the customer for validation during and just before the lockdown and take them through the whole process of documentation during the lockdown so that we are able to get contracts signed.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [60]

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So just on that, there are many products where the process of validation from a customer can be very long type, particularly 12 months, 18 months, in some cases even more, are you seeing a change in the way customers are approaching the new orders? Are they more eager to kind of...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [61]

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So let me answer that in a little different way. For a aerospace customer, they'll always go through the entire validation process as an issue. But suppose I'm already making a turbine blade for them. If I'm making 3 families of blades then they want a fourth family, they don't have to start with every piece of my equipment. They only have to actually validate the part that I make through a testing process, which is probably 3 to 4 months or maybe 6 months at the most. It's not 2 years. But if they had to do that with any new suppliers, it would take 2 to 3 years.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [62]

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So what you are in effect saying that this time around...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [63]

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The family of products now we have a baseline. So only the individual product performance has to be tested, not the manufacturing process.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [64]

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So in effect, you will see a faster, I would say, P&L impact or revenue impact from some of these orders because the validation time, whatever incremental validation that you need to get, is much smaller than what you've got in the past. Is that a right way thinking about it?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [65]

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Yes. That is true.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [66]

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Okay. The second question I had is that you guys are large exporters, are you guys facing issues on the export side from just availability of shares or whatever? How containers, however...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [67]

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No, no, no.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [68]

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No issues, right? So your export side is still okay. It's more a demand issue there. Is that right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [69]

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See, in the end of the fourth quarter, there was a complete shutdown of JNPT, okay? And it started with that villages around JNPT preventing any trucks from going in or coming out. And then JNPT itself shutdown. So that was the time when all this happened. And then when the -- during the initial start-up phase of the plant, there was trouble getting containers and getting trucks, but not anymore. Now it's streamlined. And again, our team has done a great job in getting stuff altogether.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [70]

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So exports are -- I mean, demand is an issue, but from a time line perspective, you guys are still supplying on the earlier time lines that you would normally do?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [71]

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Yes. We have not delayed or shutdown a single customer anywhere in the world.

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Operator [72]

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The next question is from the line of [Abhinai Singh] from Morgan Stanley.

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Unidentified Analyst, [73]

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My first question is on the cost structure. Very encouraging to see your comment that you are embarking on a structural cost change. Could you share a little bit more about it? And what are the areas in which you're looking at some examples of that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [74]

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Every area. We're looking at energy, manpower. We're looking at even consolidating facilities. We have certain older facilities where we have -- for historic reasons, when we had huge demand, we used to run them. So shutting some of those smaller lines down, older lines. For example, when we grew our front axle beam machining, we had lines that did 2,000 pieces a month. And 5 lines of 2,000 pieces a month is now replaced by 2 lines of 5,000 pieces a month. So you have 20% of the manpower or 30% of the manpower versus 3x as much manpower. So those are the kind of things we are doing. And we've also started a VRS. We have roughly about 40-odd people who have taken a VRS. So hopefully, this will -- this is something that we are going to also accelerate.

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Unidentified Analyst, [75]

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And this program will run for the next 4 quarters, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [76]

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The VRS?

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Unidentified Analyst, [77]

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The overall cost cutting...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [78]

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Yes, yes. Of course. Every bucket is identified. It's now in the process of implementation. I'll give a simple example. This work of working digitally is, I think, a huge cost saver. Because right from travel to productivity issues are going. Our productivity is improving. Travel is reducing. I definitely see this as a big positive.

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Unidentified Analyst, [79]

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Right. Right. I know that, that will be very encouraging to see as quarters go by. The second question is on aviation. Will it be fair to assume that in FY '20, your aviation revenues would have been around $3 million, $4 million? Or would it be higher?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [80]

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Yes. Roughly about that much, aerospace. Not aviation, aerospace.

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Unidentified Analyst, [81]

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Yes. Sorry, aerospace, yes.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [82]

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$3 million, $4 million, correct.

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Unidentified Analyst, [83]

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And any -- and which are the geographies wherein you implementing...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [84]

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North America and Europe. And it will remain North America and Europe.

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Operator [85]

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The next question is from the line of Puneet Gulati from HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [86]

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Is the VRS cost final? Or should we expect more of it in the coming year as well?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [87]

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Sorry, sorry?

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Puneet J. Gulati, HSBC, Research Division - Analyst [88]

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The VRS expense, which you highlighted this time, is that done or...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [89]

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Yes, yes. We will charge it off in the quarter where the VRS takes place.

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Puneet J. Gulati, HSBC, Research Division - Analyst [90]

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So will it -- is there more to come in 1Q, 2Q?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [91]

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We have kept the VRS open. We want to get rid -- we want to affect a large reduction of manpower.

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Puneet J. Gulati, HSBC, Research Division - Analyst [92]

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Okay. Okay. Okay. On your CapEx side, what should be the maintenance CapEx that you would still be incurring?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [93]

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I don't anticipate more than INR 100 crores, INR 120 crores.

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Puneet J. Gulati, HSBC, Research Division - Analyst [94]

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Okay. Both stand-alone and consolidated?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [95]

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No. This is standalone.

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Puneet J. Gulati, HSBC, Research Division - Analyst [96]

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Okay. And consolidated level?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [97]

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I would say maybe it's 2 million, 3 million.

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Puneet J. Gulati, HSBC, Research Division - Analyst [98]

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2 million, 3 million. Okay. And any issues that you're facing on your supplier side?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [99]

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No. No. We have no issues. See, our suppliers are basically raw material and then we have companies like Sandvik and all those machine tools and tooling suppliers, so we don't have any issues on supply channel. The only issue we have on supply channel is for some of our raw material which is imported, which because of the lockdown has all been lockdown, but...

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Puneet J. Gulati, HSBC, Research Division - Analyst [100]

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Okay. Okay. So last time around, you mentioned that there could be some potential acquisition opportunities coming with this consolidation. Are you seeing any of it as of now?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [101]

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Yes. We have been approached by customers, but we will be very cautious about this. Unless we have a dam good reason to do it and there is good management in place, I'm not going to put my balance sheet there.

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Puneet J. Gulati, HSBC, Research Division - Analyst [102]

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Okay. Can you throw some more color on what kind of...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [103]

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No. It's too early. It's too early. No acquisition unless I can -- we can meet face-to-face and go and visit these facilities. Nothing. We're not going to make acquisitions over a Zoom call. I will promise you that.

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Operator [104]

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The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [105]

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Amit, can you shed some light on the cost-cutting side, you indicated you're looking to further reduce breakeven points, so what would be our current breakeven point for the India business? And how it would look like the year down the line?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [106]

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So we have a fixed cost of INR 60 crores a quarter right now, okay? So as long as I make GM to or a contribution operating margin of INR 60 crores, we'll be at a breakeven level on a cash basis.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [107]

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Okay. And the INR 60 crore will -- you expect that to come down to, what, about INR 50 crores by the end of the year?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [108]

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INR 60 crores a month.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [109]

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Yes. The run rate to come down to INR 50 crores by end of this financial year given the cost-cutting initiative?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [110]

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Yes. Definitely.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [111]

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Okay. Okay. Secondly, with respect to the cash loss, which you've indicated of EUR 5 million in [1H FY '20,] that is for the 6 months put together, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [112]

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Yes. Jan to June. Correct.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [113]

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Jan to June. Okay. And lastly, with respect to the U.S. profit-loss commentary, which you have indicated about 160,000 being one of the estimates, is that also the indication from your clients? Or this is more of external (inaudible) estimates, which you're looking at? Hello?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [114]

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See, this is the ACT Research number, it's about 140,000.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [115]

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Sure. But are your clients also indicating on similar lines? Or currently, there is no...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [116]

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Our clients don't talk about this nowadays, especially when it's bad news, nobody wants to talk about it. And you have to rely more on these agencies like ACT and somebody else. Customers are not saying too much different.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [117]

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Okay. Okay. Got it. And lastly, what is the impact of commodity prices in the fourth quarter? Was there a negative impact of that on the revenue growth or realization?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [118]

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No, no, no. There was no impact of RM on -- in the fourth quarter neither way.

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Operator [119]

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The next question is from the line of Sonal Gupta from UBS.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [120]

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Just a couple of questions. One was, what is the rate at which we're hedged? I mean like what is the rate for USD?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [121]

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Between 72 and 73.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [122]

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And this, like you mentioned, would be there for this year as well, right, FY '21?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [123]

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Yes.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [124]

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And just on the oil and gas side, I mean, like you said, it's a critical industry. I know we're facing pressure right now, but -- and -- but you said you gained like 3 more customers. So I mean, like -- so if the production sort of for the industry comes back, then your revenue should sort of bounce back, right?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [125]

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Yes. Absolutely.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [126]

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So what was the revenue in this quarter for this oil and gas, Q4?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [127]

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So it was supposed to be 15 million. But we couldn't ship out about 6 million, 7 million, so it was about 7 million, roughly.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [128]

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Okay. Okay. And just on -- I mean, like you've outlined the areas in terms of Atmanirbhar Bharat and stuff. But I mean, like that will sort of, I guess, take some time to play out. But in terms of supply chain shifts, like you're saying that people are looking to diversify and derisk. And we have a lot of excess now, I mean, given where these...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [129]

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Huge capacity, absolutely.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [130]

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Yes. So to that extent, I mean, are there any quick wins or areas that you see? I mean like can this be -- I mean, given that you have ready...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [131]

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Yes, it can happen. We do have the relationships. However, most countries are still not fully out of the lockdown. They're still just about ramping up. So we need to wait a little longer to see the impacts of any of that.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [132]

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No. I was asking more from a medium-term view, right, 6, 12 months...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [133]

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No, medium term, we've already engaged in a big way. We have some strategic engagement that we have started in these areas. And you'll see some pretty interesting things happening on this front.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [134]

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Right. And just the last question. I mean like you -- the last couple of years, you've given these order win numbers, I mean anything there in terms of for FY '20 and -- or I mean now given the differential volume sort of difficult?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [135]

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We had about INR 600-odd crores of wins last year.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [136]

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This is domestic plus export?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [137]

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Yes.

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Operator [138]

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The next question is from the line of [Jeetu Panjabi] from EM Capital Advisors.

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Unidentified Analyst, [139]

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I have 2 questions. The first one, what is the outlook for the U.S. and European truck markets as you see it? The market, obviously, now is pretty depressed, but is there any view that you have where do you think there could be a very strong or positive outcome in 12 months?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [140]

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So on the U.S. front, while the ACT Research and others are pointing out to a 140 maybe 140, 150 number, if this second -- next year is projected to be 220 and if there is any of the second stimulus in infrastructure that the President in the U.S. has talked about, especially to attract manufacturing, like you may have seen this big investment of TSMC in Arizona, that itself is a $12 billion investment. And to support that $12 billion investment is a $3 billion infrastructure investment that the state is making.

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Unidentified Analyst, [141]

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And what about the European side, do you have thoughts on that?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [142]

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Europe is a little weaker. Europe is not one market in a sense. And Europe also has political issues in terms of what's going to happen in Germany. So I don't know. But Europe, Subodh, do you have a figure, 180,000?

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Subodh E. Tandale, Bharat Forge Limited - Executive Director [143]

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Yes. Between 180,000 to 220,000 is the range.

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [144]

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So between 180,000 and 220,000 is the range, I'm being told, for Europe.

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Unidentified Analyst, [145]

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Okay. The second question is, as you try and normalize out of this COVID crisis and whether that's 6 or 9 or 12 months from now, do you see any significant structural changes in the business that's going to change the dynamics of the business completely for you, either positively or negatively?

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [146]

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Can you give me an example of what you mean?

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Unidentified Analyst, [147]

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No. Like a certain part of the 10% of your business, which was always a great business, just completely disappears because this is never coming back or there is a brand new segment that comes in and is going to be very large...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [148]

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See, we always have something in horizon 2 and something in horizon 3 that we are working on, okay? And you will see in 15, 20 days, we'll make an announcement about some new things that we're doing as a group, maybe in a month or so, which are very unexpected from us as a company. But it's something that we have the ability to do, and we will be in a lot more business areas, lot more domains going forward than just what we are in today. That's a given.

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Unidentified Analyst, [149]

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Right. And on the negative side, is there any business where you see very, very bleak scenarios in your -- you don't expect...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [150]

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Yes. I'll give you an example. If you look at diesel locomotives, now everybody thought that India -- GE is building a plant to make diesel locomotives in India, there's going to be a big opportunity. Then we, one day, decided that we are not going to make any more diesel locomotives, right? Then anybody who set up capacity for something like that, if it was only -- if you were only building a capacity or a capability that can service one customer, which is the Indian Railways, your future is finished. And our approach is, A, we build a capacity that's world-class and capability that's world-class, and our facilities are fungible enough that we should be able to make, using the same equipment, products for large diesel engines, locomotives, marine engines, big compressors, nuclear power, et cetera, using the same equipment. So that gives you some amount of derisking. So that is always the approach that we will take. So what happens is, yes, 1 or 2 years, you may have a lull, but it's not that you have to -- should get some big investment.

Can we make this the second last question, please? Thank you. And if anybody has any questions after that, kindly contact Mr. Rajagopal, and he'll be happy to answer you or anybody else that you know in our finance team.

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Operator [151]

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The next question is from the line of Ronak Sarda from Systematix.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [152]

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Amit, my question is on the commercial vehicle side. Over the last few years, we have seen a sharp improvement in our product mix, both in terms of content supply and the profitability as well. But at the same time, the domestic competitors have invested in a lot of new capacities, which took away some market share on the lower end of the product. Are you seeing, given the capacity in hand, we competing again in the low-value products for forging? Or we'll continue...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [153]

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We will not compete in the low-value products of forging, but what will happen instead is that the -- just like how we are reducing our fixed cost and moving towards the higher variable cost model, our customers will also start doing that. And they will only be able to do that with companies which have a strong management, strong technology and strong balance sheet. So business will flow to strong companies. And the product technology is going up substantially. And we've been supplying these products for the last 10 years. So nobody else in India has, for certain products, the capability.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [154]

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Okay. So I mean, do you mean to say, similar to what happened with Amtek, do you see another round of consolidation happening in the industry in, let's say, next 12 to 18 months? Or that would be too higher task to say or...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [155]

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The leverage of most of the customers, most of the suppliers. I mean most suppliers today have to -- they are buying steel with LCs, okay? They can't get 2 days of credit with their suppliers.

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Operator [156]

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The next question is from the line of Raghunandhan from Emkay Global. Raghunandhan from Emkay Global, please unmute the line from your side and go ahead. Raghunandhan from Emkay Global, please unmute the line from your side and go ahead with the question. As there's no response...

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Amit B. Kalyani, Bharat Forge Limited - Deputy MD & Executive Director [157]

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Okay. If there's no other questions, then I'd like to say thank you, and I hope this has been useful to you. And I'd just like to say that we have a great team. We have a great company, and I think we have a great future. We will come out stronger and bigger and better out of this. And we look forward to your continued support and encouragement going forward. And if you have any questions, please get in touch with any of our team members, or you can e-mail me also, I'd be happy to answer your questions. Thank you very much, and have a wonderful day.

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Operator [158]

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Thank you very much, sir. Ladies and gentlemen, on behalf of Bharat Forge, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.