Casting Profits

Despite the improvement in fundamentals of small forging companies in recent quarters, the rise in their share prices may not be sustained

The forging industry finally seems to be emerging out of its sluggish phase. In the past few years, domestic forging companies have been ailing due to a slowdown in the automobile industry, which contributes to around 70 per cent of their business. This apart, reckless capacity expansion by many domestic forging companies during the boom of the early nineties only added to the industry's woes.

Since most of these projects were largely funded by bank borrowings -- with interest rates as high as 17-18 per cent prevailing at that time -- these domestic companies were saddled with high-cost debt on their balance sheets. Low capacity utilisation, rising interest outgo and bloated labour costs led to severe pressure, with many companies slipping into the red in the last two fiscals.

 

In the past few quarters, however, the situation seems to have improved considerably. The automobile sector is looking up again. Moreover, with enhanced focus on cost savings, multinational automobile majors like Toyota, General Motors, Volvo and others are aggressively outsourcing components from developing countries like India.

Industry leader Bharat Forge has turned out to be the biggest beneficiary of the component outsourcing trend by global auto majors from India. And rightly so, as the company has emerged as one of the lowest cost producers in the world. The company's exports income vaulted to Rs 71.6 crore in the last quarter ended September 2002 as compared to Rs 74.5 crore for the entire fiscal 2001. Exports income contributed around 45 per cent of Bharat Forge's turnover in the last quarter.

"We have already cornered 50 per cent of the marketshare in axles for the heavyload commercial vehicle segment in the US. In short, every second truck in the US has a Bharat Forge axle," boasts Baba Kalyani, chairman and managing director of Bharat Forge.

Improving market conditions have also rubbed off on smaller players. Amforge, M M Forging, Kalyani Forge and Ahmednagar Forging, for instance, have shown significant improvement in their performance during the September 2002 quarter. While Amforge and Ahmednagar Forge have turned around, posting profits compared to losses in the corresponding period last year, Kalyani Forge and M M Forging have posted growth of 110 per cent to Rs 3.32 crore and 69 per cent to Rs 6 crore in gross profits. These companies have also done their bit by focusing on operational efficiencies and curtailing costs.

Taking advantage of the soft interest rate regime, many companies have either replaced their high cost debt and/or repaid part of the outstanding debt by selling some assets. For instance, Amforge exited the non-core wheel rim business by selling the Faridabad manufacturing facility to Wheels India for Rs 10.28 crore. "Amforge exited non-core businesses and the proceeds were used to repay the high cost debt on its books," points out Arvind Joshi, head of research, Valuequest.

Besides, some companies have also pruned their workforce. Amforge rationalised its workforce to 900 employees from around 1,500 in the last fiscal. Consequently, the profitability of forging companies has vaulted in the last few quarters, with the impact being more prominent in the last quarter. While operating profit margins of Amforge and Ahmednagar Forging have almost doubled to 8.7 per cent and 11.6 per cent respectively, MM Forging has shown a seven per cent jump in its margins to 24.8 per cent last quarter.

Will small forging companies be able to show sustainable growth in future also? This will, to a large extent, depend upon the demand from key user sectors like automobiles, power and oil & gas. Despite robust growth in exports income, the performance of smaller companies hinges on domestic markets, as they still generate the bulk of their revenues from it. The domestic market has become highly competitive and auto manufacturers are fiercely negotiating lower rates with their vendors. "Given the competition-led price undercutting in the auto sector, domestic auto majors are actively looking at curtailing costs to maintain margins. Thus, forging companies catering to the domestic market will continue to face pressure on the pricing front," warns Avinash Gorakshakar, analyst, Emkay Securities.

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