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Forging a new future

December 13, 2003 13:44 IST

Baba Kalyani, chairman and managing director, Bharat Forge, has a global-sized ambition. He wants to be world number one in the forgings business

To do that he must take on German giant ThyssenKruppAG, the world's biggest forgings company.

Kalyani's dreams of world domination are still a long way off. But he has just moved a few steps closer to his dream. Last month he muscled out the competition and acquired a 150-year-old German forgings company Carl Dan Peddinghaus GmBH.

The result of the acquisition: in one swoop, Bharat Forge has become the world's second-largest forgings company. Says Kalyani: "We have a clear focus. Inorganic growth is a key growth tool for us."

The Rs 686-crore (Rs 6.86 billion) Bharat Forge is still far behind ThyssenKrupp. The German giant's automotive division -- which is mainly in forgings -- is a whopping 6,295 million Euros.

By comparison Bharat Forge and CDP have a combined capacity of 250,000 tonnes and a turnover of Rs 1,500 crore ($320 million).

Bharat Forge acquired CDP from the Peddinghaus family which owned it for 150 years.

But Kalyani has other factors in his favour. He has revived Bharat Forge from the slump into which it had sunk in the mid-'90s.

The result: profits have almost quadrupled this year. Also, Bharat Forge is steadily expanding exports and that will be the key driver for future growth. Bharat Forge is the flagship of the Rs 2,500 crore (Rs 25 billion) Kalyani Group.

CDP fills a gap in the Bharat Forge business. For a start, CDP has a blue chip client roster that includes Europe's top automakers like Volkswagen, BMW, Daimler Chrysler and Ford.

The company earns 53 per cent of its revenue from Germany itself and 23 per cent from the rest of Europe. Says Kalyani: "Acquiring this company has immense strategic implications for us."

As opposed to this, Bharat Forge is stronger in other regions like China and the US. Bharat Forge bagged two big clients in China last year.

"There are clear synergies geographically as well as in other areas like technology and products," says Kalyani.

Kalyani has figured out that Bharat Forge must boost its exports if it wants to keep growing rapidly. Three years ago, export revenue accounted for less than 15 per cent of Bharat Forge's total revenue.

It is 40 per cent today. Kalyani believes that in about three years' time more than half of Bharat Forge's business will come from abroad.

What's more, Bharat Forge has been steadily extending its geographical reach. In 2000-01, 69 per cent of its exports went to north America.

That's come down to 40 per cent this year. Bharat Forge's business in China has been zooming and now accounts for 35 per cent of exports.

The tricky area where the company hadn't made a dent was Europe which is why getting CDP was important. "We've been focusing on the European market in a big way in the last two years and expect to increase our share there," says Kalyani.

Certainly, Bharat Forge has made a remarkable turnaround in the last few years. Back in the mid-90s, the company was in deep difficulty, facing a sluggish domestic market and an erosion of profits.

In 2001-02, net profit fell to Rs 22 crore (Rs 220 million) as compared to Rs 32.6 crore (Rs 326 million) in the previous year. However, improved domestic demand and the export thrust pushed the company's net profits up to Rs 81.1 crore (Rs 811 million) in 2002-03.

Kalyani is hoping that the acquisition of CDP will help Bharat Forge in more ways than one. For a start the two companies are a perfect fit in terms of product lines.

Today, Bharat Forge has a 30 per cent market share in axle components, an area CDP is not strong in. Then, CDP has a strong product base in pistons, an area where Bharat Forge has no presence. Kalyani wants to develop other product areas benefiting both the companies.

At a different level the largest chunk of Bharat Forge's business -- about 63 per cent -- comes from the commercial vehicle segment. Kalyani has been trying to reduce his dependence on commercial vehicles and he has been partly successful. Three years ago 75 per cent of business came from commercial vehicles.

Nevertheless, only 6 per cent of his business comes from the giant passenger vehicle segment. Again, this is where CDP could come in handy because 51 per cent of its business is from passenger cars.

Another key factor behind the Bharat Forge turnaround has been modern technology. In the last few years the company has been modernising and ramping up capacity.

Recently, additional capacity of 6,000 MT was added  and will be put to full production by the end of this year. The technology enabled Bharat Forge to reduce the number of employees.

In fact, employee cost as a percentage of net sales fell from 10.4 per cent in 2000-01 to 7.3 per cent in 2002-03.

Overall, Bharat Forge's modernisation yielded substantial cost savings of up to Rs 6,000 per tonne. "Now we can better ourselves with their technology and efficient processes and maintain our cost advantage," says Kalyani.

Bharat has also gone up the value chain by offering ready-to-use machined components. Before it forged components which its clients would machine as per their specifications.

Today, ready-to-fit machined components account for 49 per cent of total sales as compared to around 15 per cent in the late '90s.

Kalyani is also hoping to utilise CDP's superior technology in Bharat Forge's Pune plant. Says Kalyani: "The biggest advantage for us is that it is a very technology-oriented plant, very modern and has tremendous product development capabilities."

While there is potential, the immediate challenge for Kalyani, say analysts, is integrating both companies and managing a company abroad. Agrees Kalyani, "Our current challenge is how to manage this growth."

Already, Kalyani and team have drawn up a 100-day integration plan beginning with personnel and then percolating to business and products.

Says Kalyani, "There will be rationalisation in the business and product lines leading to cost efficiencies and advantages."

Currently Bharat Forge's Pune plant enjoys a 15 per cent to 20 per cent cost advantage per unit as compared to CDP.

Bharat Forge has ambitious growth plans for CDP. It hopes to invest Rs 350 crore (Rs 3.50 billion) in the next three years for capital expansion. Kalyani is tightlipped on how he is going to fund his capex.

But analysts believe it could be through an equity dilution or internal accruals. The Kalyani family has a 37.3 per cent stake in Bharat Forge.

However, analysts tracking the company, are watching the process closely. CDP had filed for insolvency because its US business had failed.

But the US business was hived off into a separate company and that should reduce its impact on Bharat Forge's financials.

Nevertheless, Bharat Forge believes that its growth possibilities are immense. Today it supplies to 24 of the world's 31 OEMs.

Besides this, it is also looking at expansions outside the automobile industry.

Currently, industries like sugar and oil and gas contribute 16 per cent to its topline. These businesses are growing at a compounded rate of 7 per cent to 8 per cent.

Clearly, Bharat Forge is poised for growth. The company has even been held up as an example of how India's manufacturing sector has cleaned up its act. But Kalyani has a long road to travel to become the world number one.

Arti Sharma