In my earlier communications to you I had dwelt extensively on enhancing opportunitiesthrough transformation. This is even more relevant in uncertain times like these where theglobal economy continues to struggle with fragile growth environment and dynamictechnological transformation.
The year gone by did not witness any significant surge in global activity. The macropicture is still evolving; industries and governments across the world are carefullycalibrating strategies to avoid unpredictable headwinds and seek new growth avenues.
In advanced economies the recovery was modest during the year and largely uneven. TheUS economy was supported by relatively easy financial conditions with strengtheninghousing and labour markets. In the Euro area robust private consumption was propped up bylower oil prices and quantitative easing. On the other hand the rebalancing of theChinese economy low commodity prices and geopolitical tensions in West Asia continued toweigh on growth prospects of emerging market and developing economies.
Amid a challenging global scenario India remains one of the most attractive economiesof the world with a 7.6% growth. During the year the Government has been successful onmany fronts including sticking to fiscal deficit target and achieving significantly lowercurrent account deficit supported by lower crude oil prices.
There are other positives as well. Forex reserves are at an all-time high investorconfidence is robust and the Governments Make in India initiative has been hugelysuccessful in encouraging domestic entrepreneurship and attractingFDI.
The global automotive sector whose fortunes are closely linked with the performance ofthe global economy witnessed mixed fortunes during the year. Passenger vehicles globallygrew across most major geographies while the commercial vehicle sector was particularlyweak in the Americas & China while robust volumes were recorded in Europe & India.
The Indian auto industry stood out with all segments barring tractors deliveringpositive growth volumes. The key drivers for the market included replacement demandpick-up in infrastructure related activities record low fuel prices declining interestrates and healthy economic growth.
Our financial performance was again impacted by the volatility in the macroenvironment. On a standalone basis our total revenue declined by 5.3% driven bycontinued weakness in the industrial sector across both domestic and internationalmarkets and unexpected slowdown in the North American Class 8 truck market. Despitetop-line challenges EBITDA margins expanded by 110 bps driven by focus on cost controland supported by benign commodity prices. We continue to strengthen our balance sheet; andwe will be a net cash positive company in the next two years. We have focused on creatingan efficient cost structure and will continue to rationalise costs in order to improvecompetitiveness. We continue to put more thrust on operational efficiency acceleratingnew product development and new customer acquisition.
FY 2016 was a challenging year because of headwinds in the form of a global slowdownwhich impacted three of our key exports verticals; North American Class 8 truck marketsOil & Gas Metal & Mining and allied commodity sector. These three verticals willcontinue to pose a challenge to growth in FY 2017.
The passenger vehicle segment one of our key focus areas performed extremely well inFY 2016 and the export revenues from this segment registered a growth of 87%. We have alsomade progress in our Aerospace & Rail verticals with supply of products for existingcontracts as well as winning new contracts.
Over the past few years the external demand environment has been the biggestimpediment to your Companys growth. Two years of strong growth (FY 2014/FY 2015) wasfollowed by a sluggish demand environment due to volatility in the end-markets. FY 2016performance was a resultant of the same.
Your Companys management is focusing on this particular aspect on how best tomitigate the impact of external factors on the Companys performance. Steps alreadytaken over the past few years will go a long way in developing a more resilient businessmodel.
Following are the key transformation areas of the business over the next few years. Theoverarching theme is increasing penetration with existing customers & sectorsforaying into new sectors and enhancing product portfolio.
All of this will be achieved by leveraging our innovation metallurgical &technology capabilities to develop products which will address problems faced by ourcustomers related to performance light weighting or emissions.
1. Increase product portfolio in commercial vehicle segment: We have developed a rangeof new products in the commercial vehicle segment and secured orders for the same from ourexisting customers both in the domestic and international markets which will aid incontributing to the top-line from FY 2018.
2. Enhance presence in passenger vehicle segment: The structural shift in PV segmentglobally is giving us tremendous opportunity to build out this vertical into a US$100+million over the next 2-3 years. This will be driven by new product development increasein market share and a simultaneous product portfolio expansion.
3. Increase presence in transportation sector: With the focus on railways being a keycornerstone of our new business diversification we expect revenues per locomotive to growsubstantially in the coming years.
4. Grow aerospace business: The progress made in the past 3 years in terms of winningnew customers and developing products "first time right" using the asset lightmodel is a statement to our technological capabilities. Over the next few years theaerospace business will evolve into one of the fastest growing vertical largely driven bycustomer traction product expansion and enhanced value addition.
5. Make in India: Your Company with its full scope of products supplied into theglobal markets is excited about the prospects of the industrial sector in India. Thisincreasing product portfolio coupled with the Government initiative puts us in a sweetspot to capture this opportunity. Key focus sectors for the Company will be supply ofcomponents & sub-systems into mining transportation aerospace and the defencesector. We are targeting import substitution across all verticals and have built upon ourextensive knowledge to deliver solutions across these different verticals. Your Companyhas started making initial breakthrough with development orders with existing as well asnew customers in India. Our Make in India strategy is well on its way.
Developing the above new businesses/products does not happen quickly but your Companyhas the unique ability to do this on its own. We can develop new products improveprocesses and enhance the product portfolio by using our asset light model which willeventually help in improving the return ratios.
We are benefiting from the focus on new technologies and innovation created throughin-house R&D. This has resulted in higher productivity increased cash flows andconsequent debt reduction. We are confident that the de-risked business model would takethe Company back on the growth track very soon.
Businesses that can survive the shifting dynamics of global economies and industrieswill be the ones that can create enduring stakeholder value. Since inception Bharat Forgehas seen and adapted to Big Change; and will continue to recalibrate strategies andproduct mix not just to embrace change but to lead change. There is a structural shiftin the manufacturing space globally driven by focus on emission control light weightingasset light model and so on...
We at Bharat Forge are aligning our innovation strategy and product mix in accordancewith that shift. We are reinventing ourselves as a global engineering company with adeeper presence across varied sectors.
Industry 4.0 can be defined as the next phase in the digital transformation of themanufacturing sector where machines and IT systems along with other components in thevalue chain will be connected to create a fully integrated automated and optimizedmanufacturing system. This will help increase manufacturing productivity improveefficiency shift economics and foster industrial growth - ultimately changing thecompetitive landscape of all the companies.
Industry 4.0 has a strong potential to change the way factories work and it presentstremendous opportunities for innovative manufacturers like us. The Company is preparing totake advantage of this opportunity and trying to create our own ecosystem of a digitalorganization. We have started this journey in areas of connected enterprise big datamobility augmented reality (human-machine interface) and additive manufacturing. We aimto apply this initiative across the entire value chain and create a cohesive manufacturingecosystem. We see substantial potential of Industry 4.0 in helping us improve efficiencyand increase productivity thereby reducing costs and increasing our competitiveness.
R&D and Innovation
Your Company continues to make progress in additive manufacturing by absorbing &adopting new technologies like 3D printing electron beam welding laser welding metalinjection moulding and nanotechnology.
The in-house R&D team remains committed to working on various projects includingdeveloping technologies to reduce carbon footprint and manufacturing light-weight productsand requiring lower energy consumption. New products are being developed not only forproducts in the automotive space but in the industrial space as well.
Your Company will lead the innovation cycle in its diverse areas of operations whilstworking closely with all the customers for new product development to not only meet butalso exceed customer expectations.
Talent and Teamwork
The collective capabilities of our people have taken us far; and we will continue toinvest in developing our team to sharpen their capabilities and introduce industry-leadingpractices. We are now encouraging more people from our team to take up fundamentalresearch and get Ph.D degrees. Our tie-ups with leading academic institutions such asBITS-Pilani IIT Mumbai and Warwick University will also continue offering employees anopportunity to enhance their educational achievements while working.
The essence of Bharat Forge is the unique ability to create value from the intersectionof horizontal capabilities with vertical expertise. Our horizontal capabilities comprisesize (giving us efficiency of scale) and diversity (which reduces risk in a volatileworld); while our vertical expertise includes deep domain knowledge experience andinsight. This uniqueness has brought us to where we are today; and will take us to thenext harbour of opportunities. As we expand our presence across sectors our vision isclear. We are strengthening Indias economic backbone enhancing nationalcapabilities and ensuring a bigger global imprint-for the country and for ourselves.
Your Company had set certain targets to be achieved by FY 2018 which are on track.However the global volatility has resulted in the doubling of top-line target to bepushed out from the initial milestone.
I would like to finish off this years letter with a famous quote of Zig Ziglar"When obstacles arise you change your direction to reach your goal. You do notchange your decision to get there." This truly epitomizes the philosophy and cultureof your Company.
I am grateful to our esteemed customers shareholders business partners Governmentagencies wider community of stakeholders and above all our employees for theircommitment to our vision.
Baba N. Kalyani
Chairman & Managing Director