Bharat Forge to slash output, put expansion on fast track

Bharat Forge, India’s largest auto components maker, said it will cut production as demand from car makers shrink. It also plans to hasten its diversification into high growth areas, including infrastructure and power, to overcome the cyclical nature of auto business.

A majority of the cut in production is likely to be in the overseas market including Europe from where it earns a significant portion of its revenue.

“We have to align production with demand and for that we have to cut production wherever required. The European region has seen a cut of 15-25 per cent in vehicle production in some months and our (production) cut has to be on those lines,’’ Baba Kalyani, chairman & managing director, Bharat Forge told Business Standard in an interview.

Bharat Forge has three plants in Germany and one each in Sweden, Scotland and the US. It also has two plants in China. According to the European Automobile Manufacturer Association, the European Union saw demand for new cars plunge by nearly 26 per cent to 900,000 units in November.

Overall vehicle sales in the European region have dropped more than 7 per cent in the January-November period, where Bharat Forge owns 5 manufacturing plants.

The slowdown is likely to impact Bharat Forge’s margin severely as it earns about 65 per cent of its revenue from supplies to the European and the US vehicle manufacturers, according to analyst reports.

In addition, production of passenger and commercial vehicles has declined drastically in India forcing many auto component suppliers to moderate production. Bharat Forge’s primary customers in India include Tata Motors, Mahindra & Mahindra, Maruti Suzuki, Ashok Leyland, Bajaj Auto among others.

As part of strategy to cut dependence on the automobile business and overcome the cyclical nature of the business, Bharat Forge is hastening the diversification process.

Bharat Forge earns more than 80 per cent of its revenue from the automotive sector alone.

“Non-automotive business’ contribution to our total revenue will jump to 40 per cent by 2012 and will eventually leap to 75 per cent by 2015,” Kalyani said. Bharat Forge India’s non-automotive business currently contributes 17 per cent of the company’s total revenue, he said.

In the last two years, about 80 per cent of the company’s capital investment, or about Rs 450 crore, was made in non-automotive sectors. The company recently signed a joint venture agreement with power system manufacturer Alstom to make supercritical power equipment.