Bharat Forge Ltd (BHARATFORG) Q2 FY23 Earnings Concall Transcript

Bharat Forge Ltd (NSE: BHARATFORG) Q2 FY23 Earnings Concall dated Nov. 14, 2022

Corporate Participants:

Amit Kalyani — Deputy Managing Director

Subodh Tandale — Executive Director

Analysts:

Gunjan Prithyani — Bank of America — Analyst

Kapil Singh — Nomura — Analyst

Pramod Kumar — UBS — Analyst

Pramod Amthe — InCred Capital — Analyst

Unidentified Participant — — Analyst

Aman Vij — Astute Investment — Analyst

Chirag Shah — Nomura — Analyst

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day and welcome to Bharat Forge Q2 FY23 Earnings Conference Call. As a reminder, all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [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.

Amit Kalyani — Deputy Managing Director

Good afternoon ladies and gentlemen and thank you for attending our Q2 Investor call. As usual, I will take you through a short introduction and then open up for Q&A. I have with me our management team heading our component business, our industrial business, and our financial Investor relations teams as well. So, some highlights, we had a total fail drop, about INR18,063 crores which was a growth of about 6% over last quarter. We had exports of about INR1,066 crores, which is the highest we’ve had so-far. Our domestic revenues were also — grew about 13% over last quarter and we’ve seen overall growth in our passenger car business, our commercial vehicle business between India and Europe and on the engine side, we have seen on the high-horsepower engine side, we are seeing growth. And in aerospace and defense, we have seen a significant growth. Our domestic revenues on both commercial vehicles and passenger cars has grown very nicely and our aerospace and defense business also continues to grow well.

So some of the highlights are the highest export revenues this quarter. Domestic revenues include INR80 crores of vehicle sales to the armed forced MOD. So in our domestic, in our overall business, we have a EBIT — we have an EBITDA of 24.3% where we have some one-offs including LD of about INR13 crores or 130 million charged on our defense business, which is a one-time issue and t is being contested because this is an order we received during COVID and the original delivery period was during COVID and it got extended because of exigencies to do with COVID, therefore that impact if it were reversed, our EBITDA margin would move-up to about 25.4%.

RM inflation has impacted margin by about 40 basis-points to 45 basis-points. Our rupee realization was INR81 to the dollar. Passenger vehicle revenue is now at about 18% of total sales which is about INR340 crores which is almost seven x or what it was in FY ’16. We had new orders wins of INR900 crores in this quarter primarily in the export business driven by market-share gains and new business in passenger cars and in industrial sector. Around the overseas business, our aluminum business has had a poor performance this quarter for the first time since the acquisition and this is driven by many factors, primarily external and some internal. We’ve had significantly lower-than-anticipated sales on account of issues of supply-chain within the whole automotive industry. Our energy costs increased which is yet to be passed on. Raw-material price increase and availability issues and higher-level of staffing in anticipation of higher demand. We expect that this will get addressed and come back to steady-state by first-quarter of next year so the next two quarters will be quarters where we see improvements. And by first-quarter, we should be let’s say heading back to track. This does not change the fundamentals of the business at all. In fact, it remains very strong with lots of new traction and new business wins. We are addressing all these issues and we expect this to improve over the next two quarters as I mentioned. The JS Auto acquisition has been completed, in fact in the short period that the acquisition was done from July till end of September, we already won INR100 crores of new business with our customers for high-value and high-value added products.

Our work on cost rationalization, new product development and customer engagement remains strong and in fact, we expect to see very strong double-digit growth Y-o-Y for this company over the next two to three years. We see a lot of interest from our customers in the industrial space, automotive space for a variety of reasons, some of them are for moving production out of China into India. For India, some of them are moving out production from Europe into more competitive location and so on and so forth. And JS Auto being a fully-integrated supplier with machining capability and product development capability. It’s very well-placed to take advantage of this new business.

On the demand front, I’m very happy to report that our 100% owned subsidiary Kalyani Strategic System has won an export order worth $155.5 million for the export of artillery guns systems to a non conflict zone. These orders will be executed in a 36 month period from the time of order placement. Now one of the reasons we’re able to do this is because this is a indigenously designed, developed and manufactured product with 100% of the IP owned by Bharat Forge or by the Kalyani Strategic Systems Limited and BFL will supply a large number of components for this product and the integration, testing and supply will be done by KSFL. We believe that this is the beginning of a series of new order wins for our defense vertical. I’m also happy to report that we have secured multiple orders for export of components and consumables in the defense space both for repair and maintenance and operation across segments in the defense space. And this also will continue over the long-term and all this will do taking our defense business on the level of INR300 crores to INR500 crores we believe to somewhere in the [INR700, INR800] to INR1,000 crores per year basis without any big programs kicking-in. And as and when big programs kick-in, this will obviously increase substantially as well. On e-mobility, I’m very happy to report that we have finally got the same two approval for TOT. We were actually waiting for this to happen and because of a lot of technical issues and some manipulation at some of the other two-wheeler manufacturer claiming FAME 2 without actually having indigenous content, the whole scrutiny process was much longer. We successfully passed-through this and we have now covered close to almost half a million kilometers without any incidents recall or technical issues.

We continue to remain positive overall, our sales growth across automotive vertical and other segment, e-mobility will start growing in terms of revenue from ’24. Next year will be also a growth here, but it is the beginning of the growth phase. We see all our EV vertical, whether it is re-powering or two-wheeler, three-wheeler or power electronics, control electronics all beginning to start taking off by the second-half of next year and in the year-after next, we should see a substantial growth and accretion to both topline and bottom-line. That’s really all I wanted to say. I just wanted to on my behalf and that of the management invite everyone here or to an analyst meet, where we will talk about the next two to three years and our business strategy and goals. This will take place on the 9th of December, which I believe is Friday in Pune at our Centre for Technology and Innovation and our IR team will send out an invite and make arrangements for all of you. So we very much like to have this opportunity of interacting with all of you and I’d like to request you to save the date this is the 9th of December ’22 in Pune. So that’s all that I wanted to pay and we’ll now open up for Q&A. Thank you

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The. First question is from the line of Gunjan Prithyani from Bank of America. Please go ahead.

Gunjan Prithyani — Bank of America — Analyst

Yeah, hi, thanks for taking my question. Two questions from my side. Firstly on the class 8 truck outlook. Clearly, there has been a big positive surprise in terms of the order intake in the last two months which is at a disconnect with the general industrial macro indicators so any color on this will help us understand how should be thinking about production because if I annualize the order intake, then it shows a very meaningful growth. So, maybe some color on how we should be thinking about class 8 US truck production over the next 12 months or so?

Unidentified Speaker —

Yeah. I’m going to let my colleague [Indecipherable], so please go ahead.

So, y

Unidentified Speaker —

So you know by now that there are the orders that come in there for production at a later date and this is more of a sales orders that are booked by the OEMs. We’ve seen ups and downs in the last, I would say, 8, 10 months. But. if you look at the statements that all OEMs have been making their production slots for most of ’23 have been booked, and they are all following a discipline to maintain and month-on month steady monthly bill rate which varies between somewhere in the region of 28,000 to 29,000 trucks. So from that perspective, there should be stability for the next 12 months to 14 months and these are the high intake of orders, hopefully, should continue the momentum for 2024 which in any case is supposed to be a strong year as well it’s being forecasted.

Gunjan Prithyani — Bank of America — Analyst

Okay sir, ’28 to ’29. Okay, that helps. The other question was on the [Indecipherable], is it possible to get you know where the revenue level right now is of these subsets and how should we see that ramping-up maybe ’24 and the rest of the year?

Unidentified Speaker —

[Indecipherable] when we bought it was at a revenue of about INR45 crores to INR50 crores per year, we are now doubled the revenue of that company. In terms of their sort of when we bought it, it was about INR400 odd crores. This year we will see let’s say in the 10% to15% growth. Next year we will be a growth upwards of I would say 20%. Maybe even 25%.

Gunjan Prithyani — Bank of America — Analyst

And the margin profile on this is, is it any different from standalone?

Unidentified Speaker —

So in [Indecipherable] we don’t go machining. So the margins are at about 20%. In [Indecipherable] the margins are at the top-end of the casting industry, but with all the measures that we are taking jointly our goal is to get it also to a double-digit, with a starting with a 2 to 3 year period.

Gunjan Prithyani — Bank of America — Analyst

Okay, just a last question maybe clarification in your comments you mentioned we expect these subsidiaries the aluminum business heading back to track. I mean by heading that we means we will be back in green, or is it we are thinking about getting back to that high-single-digit or the margins that we have been guiding to a [Speech Overlap]

Unidentified Speaker —

Business or margin goals are high teens 16, 18,18% percent or so. And for a variety of reasons we have had a significant impact in this quarter and this will take about two quarters to get cleaned up and we will expect that by the end of next year we will get back to very close to the normal EBITDA levels that we had in this business In Europe.

Gunjan Prithyani — Bank of America — Analyst

Okay. Got it. Thank you so much.

Operator

Thank you the next question is from the line of Kapil Singh from Nomura. Please go ahead.

Kapil Singh — Nomura — Analyst

Sir good afternoon. First of all congratulations for winning the defense artillery guns export order. It’s great to see the progress. I had a few questions on Defense. Are there more countries with which we are negotiating such type of orders. And what is the ordering time period that we normally see because this has come fairly — fairly short period I would guess? Also, what is the asset turn-in this type of business?

Unidentified Speaker —

Yeah, so that’s a very — your second question is actually a very good question because to execute this order, we don’t need large [Technical Issues]. We need an investment in a facility which will be roughly — which is already underway of about INR30 crores to INR40 crores because this will be an assembly facility a, large part of the higher-value components will be made in bar codes and we supply and design. I mean, say, integrated in this new company. So the asset turns up very, very high, and the margins are good for both, VFL as well as for the supplying companies. So that’s the second question of yours.

First question is this whole Make in India Atmanirbhar Bharat and the way the Defense industry of India is being marketed by the government through its various channels has proven to be very successful during the defense expo that took place last month in Gujurat, we had more than 16 countries visit us with fairly serious intent of pursuing some business opportunity with us, while everything will not fructify, some things will take more time than the other but it’s now very apparent that the world recognizes the capability of India independent manufacturing just as they did 15, 20 years ago in auto components and we believe that the kind of growth that the auto component industry saw in supplying to the world will potentially start in this field going forward because we have very good manufacturing and technology capability and for companies which have their own IP of design and product then nobody can restrict you.

So if you have both those let’s say qualification, then I think there is a huge opportunity going forward.

The answer to your question in very simple ways, yes, we are engaged with multiple customers across the world for a similar program in a variety of space.

Kapil Singh — Nomura — Analyst

Okay. Great. The second question is on passenger vehicle business we have seen a good uptick this quarter so if you could just talk us through what are the product segments that are driving this and also how this will ramp up and the margin profile of this business, how does it contrast with the CV business?

Unidentified Speaker —

So. A lot of these businesses are what let’s say we had planned through the pipeline so, they are actually coming, they are getting mature now and we are implementing series production as we speak. We expect this traction to continue in the quarters coming ahead with some more new programs launching and then we expect them to stabilize. As far as the margin profile goes, it is similar to the CV business overall the only difference in this case, it’s above it is more of supply as compared to in CV business we tend to have more value addition in terms of machining; at least for now, these are un machine program, but they present opportunity for us in future to add more value, which is also being worked upon.

Unidentified Speaker —

And we have a lot of more business that will ramp up over the next two years.

Kapil Singh — Nomura — Analyst

Okay. And sir, just one last comment on debt — net debt has gone up, what has caused this and how do you see this evolving from here on?

Amit Kalyani — Deputy Managing Director

So the net debt has gone it basically for the new debt which we have taken of INR400 crores in first-quarter and the terms of the cash — the cash has come down marginally also because of the working capital increased because of volumes. Now we can borrow additional money, but you’ll see that the negative EBITDA results we are using optimum use of our cash and putting it in the business.

Kapil Singh — Nomura — Analyst

Sir just if you could just talk about how this will evolve is the working capital higher-than-normal or is at a normal level now?

Amit Kalyani — Deputy Managing Director

So I said in line with the business, as there is the inflation in the business and growth in the business and number of days remains the same it’s just volume goes up and also since export proportionality growing which is a higher recovery fashion, it is more of a volume effect rather than anything. So volume plus inflation.

Kapil Singh — Nomura — Analyst

Okay. Thank you. Thanks. I’ll come back in a queue.

Operator

Thank you. The next question is from the line of Pramod Kumar from UBS, please go ahead.

Pramod Kumar — UBS — Analyst

Yeah thanks for the opportunity. I missed on the artillery gun order motive what we’ve been talking about, I believe you guys have made some four or five different types of artillery gun and this one is clearly not ATAGS which is like the main other showpiece in terms of the technology, So can just help us understand what kind of potential is there in ATAGS, because I believe the supply to the Indian Ministry — Indian Defense is not recognized in the quarter in the revenues yet. So how should one look at the revenue potential from that again in the domestic market and also in the international market perspective for ATAGS?

Amit Kalyani — Deputy Managing Director

Look ATAGS was developed as the mainline gun for the Indian Armed Forces. There is a requirement of something like 1,500 guns of ATAGS of that category. To replace all the other guns which are of various starting from 60’s onwards. So the revenue potential is tremendous. I mean 1,500 guns is a very large amount and we also have the opportunity to export the same product. So this is a tremendous long-term opportunity and this is not an opportunity which has — which is yet fructified or is in our order book in anyway. And besides that, we have five other guns and there are discussions happening with multiple users for multiple different platforms. For example, the order that we have received is also for non-ATAGS gun,developed by us and from scratch.

Pramod Kumar — UBS — Analyst

So and Amit I think there was earlier talk that in addition to ATAG the government could also look at an import option, but I believe in recent days the expectation is that they may not actually go for that and rather focus on the ATAG kind of a product, right? So are you also picking up because that will significantly upsize the potential for Bharat Forge, right? Because earlier (Speech Overlap)

Amit Kalyani — Deputy Managing Director

You know with the clear focus on Make in India

Pramod Kumar — UBS — Analyst

Yeah

Amit Kalyani — Deputy Managing Director

In India IIDM is the highest category, which is Indian designed, developed, and manufactured. And the advantage of that is that there is no potential for anyone to hold you ransom for technology.

Pramod Kumar — UBS — Analyst

Absolutely.

Amit Kalyani — Deputy Managing Director

It is a 100% indigenous product. All of the subsystems, electronics, everything has been localized, or is local. So it’s very clear, in our scenario where you may have technology denial. Nobody wants to rely on someone else’s technology especially if you have that with you. If you talk about aircraft and you talk about advanced — super advanced technologies like that yet that is the choice one has to make, but in areas where you already have your technology, why would you go anywhere else and that is what MOD has decided in fact they have come up with a negative list last year and that negative list clearly says that products of these categories which are enumerated in that list may not be imported.

Pramod Kumar — UBS — Analyst

So in a way ATAGS is like the prime candidate for those 1500 guns over a period of time, right?

Amit Kalyani — Deputy Managing Director

Anybody that can design, develop and manufacture a product in India that meets the criteria and that is in that fray.

Pramod Kumar — UBS — Analyst

Absolutely and what the expectation was that this year we should see the revenues and for the tax so are we still on course for that?

Amit Kalyani — Deputy Managing Director

You know unfortunately that is not in my hands and I think we’ll just have to wait-and-watch, everybody is working hard towards it, but. As I said not in my hand, but sooner than later, things have to happen. I think there are lots of people waiting in the line so maybe we’ll move onto the next question please.

Pramod Kumar — UBS — Analyst

Next one, last question from my end on the industrial side, export industrial given the macro uncertainty to kind of help us understand how do you see this business evolving and whether should one too much overall macro or Bharat Forge footprint is not that large enough which gives you the headroom to keep gaining market share, so how should one look at the export industrial piece Amit?

Amit Kalyani — Deputy Managing Director

We see a lot of opportunity for exporting Industrial Components, especially to Europe and to some parts North America as well, and other parts of the world. You know till now we only supplying forging now we also have castings as a large growth opportunity in fact we see the casting export is as big an opportunity if not bigger than forging, and I think both of these combined will provide a tremendous growth for our Industrial business going forward, and allow us to grow our Industrial business very significantly by 2025, 2026.

Pramod Kumar — UBS — Analyst

And this comment would include (Speech Overlap).

Amit Kalyani — Deputy Managing Director

Gentlemen and ladies another question a lot of questions that you’re asking right now we’ll will be addressed at our analyst meet on the 9th of December. If I answer everything now none of you will want to come there so let’s save something.

Pramod Kumar — UBS — Analyst

We get to drive the armored vehicle, right?

Amit Kalyani — Deputy Managing Director

Yes, we will we will have one available for you all to drive.

Pramod Kumar — UBS — Analyst

That’s good enough thanks a lot Amit thank you. (Speech Overlap)

Operator

Thank you and the next question is from the line of Pramod Amthe from InCred Capital, please go-ahead.

Pramod Amthe — InCred Capital — Analyst

Yeah Amit thanks for this opportunity and congrats for we are winning because it depends on. Some more detail the same yes what is the rule of thumb in terms of value-add from events, how much by for the in the guidance what the assuming [Indecipherable].

Amit Kalyani — Deputy Managing Director

I’m not going to get into that because of this too much comparative knowledge and information in that. Every– whoever supplies thing it will be supplied on an ongoing basis with the right returns that it takes for both entities, but please remember that KSSL is a 100% subsidiary of BSL. So everything comes under in one-way or the other.

Pramod Amthe — InCred Capital — Analyst

Okay and second one related to is considering these are like government orders, how are the payment terms for them, will there be a long receivable cycle or how are you building it?

Amit Kalyani — Deputy Managing Director

No It’s actually quite clear and simple and there are no such issues. We today can talk about that. But it’s — it’s not an issue at all.

Pramod Amthe — InCred Capital — Analyst

And considering that this might be a make or customer some of them so, will there be a scale benefit for them all these are like day-one superior margin products that cause you in that sector.

Amit Kalyani — Deputy Managing Director

We’ll make profit from day-one.

Pramod Amthe — InCred Capital — Analyst

And second one is this is more for a disclosure point-of-view considering that defense is a completely new sector and it’s very difficult to get a handle on the what you guys are negotiating our industry the other side and all. Is there a scope to give the way you once you announced the orders that’s one second in terms of anything in terms of the negotiations, how much you are doing. The book size or any of that that would be able to give us some color as you look forward to.[Speech Overlap]

Amit Kalyani — Deputy Managing Director

Nothing and nothing as of now and I’d like to make one thing very clear statement on ESG with regards to defense. We will never make any banned weapons systems or subsystems under the various UN conventions so nothing to do with chemical, biological or weapons of mass destruction. And we will only sell to entities that are approved by the Government of India. As the Government which — we are company that is in the country. So we will never supplier to any one who is outside of these parameter. And we will never produce, design or supply anything that is brand or comes under those categories of BCG. Biological, chemical and weapons of mass destruction.

Pramod Amthe — InCred Capital — Analyst

Sure thanks a lot.

Operator

Thank you. The next question is from the line of [Indecipherable] from Emkay Global. Please go ahead.

Unidentified Participant — — Analyst

Thank you so much for the opportunity sir. Sir can you share any demand outlook for CV the new markets are. And also can you talk about the opportunity that happening because shift towards India due the energy crisis in Europe and also some challenging from China as well

Amit Kalyani — Deputy Managing Director

Sorry shift — shift of demand. To India from Europe because of energy crisis in which area?

Unidentified Participant — — Analyst

Yeah so basically industrial happening which you mentioned commentary initial commentary, the shift happening from Europe and China towards India. Can you talk about the opportunity sir on that sir?

Amit Kalyani — Deputy Managing Director

For supply-chain yes okay. Subodh?

Subodh Tandale — Executive Director

So Europe demand. The demand in Europe is at least on commercial vehicles is flat. As compared to last year and even for next year it is expected to remain at similar levels. We — We are of course monitoring that because there is a lot of talk in Europe about other challenges. As far as supply-chain goes there is — there are some small opportunities coming about but please consider that in the industries that we serve and the products we make, making change at short notice will not be easy, it requires a lot of testing and validation and all that, and that’s and so basically there are some long-term plays that our underway here but it is too early to talk about that in a call like this.

Unidentified Participant — — Analyst

Thank you sir and sir again talk about Harbinger Motors JV which we have formed for the motors. Can you just give something on the opportunities in India and overseas market?

Amit Kalyani — Deputy Managing Director

Yeah, so Harbinger is EV startup. That is founded by three extremely smart guys who have worked in on number of EV startups and they have more than 15 years of experience in the EV domain and electronics domain and they have been funded by private-equity or some very prominent private-equity players. And they were looking for someone who can be a supplier partner and a manufacturing partner. And what they realize is that someone like us can help them bring their product to market easily, because of our engineering and manufacturing capability. So we are their exclusive manufacturing partners for their powertrain which is the EDU of electronic drive units for Class four through Class six/seven commercial vehicles. Their first product that they are coming out with is 350 kilowatt EDU with something like 1,500 newton metre native torque and actual torque of something the order of about 16,000 newton meters. So this is something that will be a very good application for all kinds of delivery vehicle in North America especially for last mile delivery and, I have been spoken from taking it to airports and air cargo facilities, etc.

In fact they have already tied-up with one of the largest recreational vehicle manufacturers in the world who supply their electrification needs for their new vehicles going forward. And we believe, we are planning for FY’24, ’25 start to our production for them. Obviously, it will be a soft launch in ’24-’25 and then scale-up in ’25-’26, but we have a tremendous opportunity to supply high-value products to them across forging, machining, and of course, EV systems which means electronics, motors, drivetrains, etc, all fully manufactured and assembled and tested. So it’s a significant step forward that will take us from a Tier two into a Tier-one kind of situation.

Unidentified Participant — — Analyst

And thank you so much for the opportunity sir.

Operator

Thank you. The next question is from the line of Aman Vij from Astute Investment. Please go ahead.

Aman Vij — Astute Investment — Analyst

Hello. Hello.

Operator

Hello. Aman Vij your line is in talk mode, please proceed. Please go ahead

Aman Vij — Astute Investment — Analyst

Sir my question is on the defense side, last con-call you had given some rough guidelines in terms of how we see the business scale from INR500 crores to INR1,000 crores and then eventually INR1,800 crores kind of number you had talked about a lot of it exports around INR300 crores, INR400 crores but given the order we have already got. So do you think we can cross that number much sooner in export side?

Amit Kalyani — Deputy Managing Director

Obviously as of now we have seen tremendous growth in our addressable market because of this order that we have received and I expect that we will continue to receive orders going forward. And you know I would like to be a little cautious. I prefer to be a little cautious when talking about such things because it takes a lot of time and effort before these things fructify. So, let’s say that, that that was the base-lining and hopefully this baseline will provide some headroom for growth with these kinds of developments.

Aman Vij — Astute Investment — Analyst

Sure sir on the domestic side does this, because we have been doing trial for a long-time now. And does this export order in a way helps us or and maybe convince the government to fast-forward the process for a [Indecipherable] because in a way is a mark of approval and feel of excellence for us?

Amit Kalyani — Deputy Managing Director

Yo know I haven’t thought of it that way, but obviously it is validation of our product and our capability and it shows the recognition from outside obviously, there is merit to what we do and the product that we produce, it makes it harder to ignore. Let me put it that way.

Aman Vij — Astute Investment — Analyst

Sure final question from my side. You had explained that the main questions are the same figures capital items like vehicle which we are currently doing, artillery guns, and then there are consumables. So — so in terms of in the presentation you had mentioned because of more orders from the vehicle side, the margin was impacted. Does it mean that the defense vehicle has a lower margin if you can block the order?.

Amit Kalyani — Deputy Managing Director

No that was because of the LED that we had, which we are challenging. Okay. It is so that. If you were to write that back then it will be the same.

Aman Vij — Astute Investment — Analyst

Okay but we…

Amit Kalyani — Deputy Managing Director

To be very similar.

Aman Vij — Astute Investment — Analyst

But in terms of order is it safe to assume that the highest would be the ATAG guns followed by consumable and then vehicle in defense business.

Amit Kalyani — Deputy Managing Director

No. It really depends it’s not so you know wherever I feel that you’re selling each vehicle that you sell to each may have a lot of customization, okay. So it really depends on what you’re doing and how much specialization, customization, engineering and application engineering.

Aman Vij — Astute Investment — Analyst

[Indecipherable]

Amit Kalyani — Deputy Managing Director

More than EBITDA you should look at the ROC in this business. EBITDA will be good EBITDA will be strong no doubt. But, [Indecipherable] also be good and what it does is, it will provide us on pace to the business because you will also have element to this for a long period of time.

Aman Vij — Astute Investment — Analyst

Is there any order in terms of ROC in these three subsegments which you talked about.

Amit Kalyani — Deputy Managing Director

Sorry?

Aman Vij — Astute Investment — Analyst

Is there any order in terms of ROC the return (Speech Overlap)

Amit Kalyani — Deputy Managing Director

The ROC will be significant that we will see significantly higher than the standalone ROC. If you can just give a range sir. I just. As I said higher than our existing ROC. Okay, business is take-off mode.

Aman Vij — Astute Investment — Analyst

Sure, Sir. That is it from my side.

Amit Kalyani — Deputy Managing Director

Thank you.

Operator

Thank you. Before we take the next question a reminder to the participants please limit your questions to two per participant for any follow-up may we request you to rejoin the queue. The next question is from the line of Chirag Shah from Nomura, please go ahead.

Chirag Shah — Nomura — Analyst

Hello, thanks for the opportunity. Sir my first question is slightly different one, now that we have lot of businesses originating from India whether for international markets or domestic markets. Is there a thought process of restructuring the way who are convinced structuring design know, most of them are 100% subsidiary. But are you looking to consolidate them, so that we have a different reporting structure?

Amit Kalyani — Deputy Managing Director

A good point made because we have many different vertical business areas under the same company. So, right now we are looking at this. First, we will do it internally. And then we’ll look at it externally.

Chirag Shah — Nomura — Analyst

Okay, this is helpful sir. Second question or I missed again coming back to defense and apologies for harping on, just for recap kind of a purpose, between KSSL and Bharat Forge how should we look at the overall capital investment in defense. Right know indicated is more of an assembly business and the last thing would be done a lot of things would be done by Bharat Forge. So how should we look at what our capital investment or you are leveraging on the existing investments in the effort to bear even incremental capital deployment very much?

Amit Kalyani — Deputy Managing Director

See core manufacturing which involves forging, machining, heat treatment of the main artillery products. The artillery gun the barrel those kinds of things will happen in Bharat Forge. And then, what do you call it, the finished product assembly, integration and testing will happen in the dedicated entity which does it so that will happen in the defense entity.

Chirag Shah — Nomura — Analyst

Okay, This is also for export order also right. The same process will be followed for this point export product also?

Amit Kalyani — Deputy Managing Director

Yes.

Chirag Shah — Nomura — Analyst

Yeah, so in that case just to understand how you are likely to report where would this be reported in Bharat so this would be a part of Defense line, which [Speech Overlap]

Amit Kalyani — Deputy Managing Director

But the component supplier from KFSL from BFL to KSFL we come in…

Chirag Shah — Nomura — Analyst

But between it would it be classified as a separate defense or is it part of industrial?

Amit Kalyani — Deputy Managing Director

Not at all consolidated no it will be one entity. Yes. From here of it will be part of the Industrial.

Chirag Shah — Nomura — Analyst

We want to win that we will be part of industry disclosure yes okay yeah that was the question related and lastly our outlook on the India CV if you can share what you what does gathering from your customers from near-term perspective and over the next 12 months perspective also. I think we are better placed to them as that Vijay Dr wider section of the company’s. You have a much better handle more and experience of often when you take into it’s no you would be we look upon the view as to how we look at it.

Subodh Tandale — Executive Director

Yeah at this point. Overall the big-picture for India looks positive but as compared to Q2 we are seeing. You know sort of slightly depressed usually. That’s based on lesser than expected sales in the festive season and all of those kind of things but. But the broader expectation is at least for the year and going-forward we the segment should continue doing well so that is that is the expectation we have as well.

Chirag Shah — Nomura — Analyst

Okay thanks sir.

Operator

Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services please go-ahead.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Hi, my question pertains to the European aluminum forging business so in the first-half and, any indication of what utilization we would have operated 30,000 ton capacity.

Amit Kalyani — Deputy Managing Director

About 50% – 55%

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay and the last part of impact on margins is also because of energy cost? Or largely because of all the inflationary impact?

Amit Kalyani — Deputy Managing Director

All the inflatory impact.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay and

Amit Kalyani — Deputy Managing Director

Material and increase manpower and because of large absenteeism et-cetera that we are larger number of manpower.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

That’s right. Would it be fair to, say at least term energy and freight perspective we have seen the peak in 4Q and expect from 2Q onwards.

Amit Kalyani — Deputy Managing Director

Well it’s not going up anymore as of now it needs. And you know there are lots of very complicated things taking place right now in Europe so. I don’t think we can. You know. And the winter is coming. Although it’s been a very mild winter so-far. If it get worse. Then obviously there will be some psychological impact as well. So we have to wait-and-watch.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Right. So can you just speak with respect to the guns on which they got so this would be sir, how many guns and by when we would expect?

Amit Kalyani — Deputy Managing Director

I can’t share that information all I said is it will be over a period of three years. Where we will finish the delivery.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay, okay

Amit Kalyani — Deputy Managing Director

We are unable to provide any more information.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Sure, sure and that export vehicle supply believes that being done or we’ll see some more of your revenues coming in.

Amit Kalyani — Deputy Managing Director

We have large new large orders still remaining to be executed.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay okay and last question on the broadening RM cost inflation on the standalone entity. On the steel prices particularly so where do we expect some bit of privacy is coming into play on industrial correction.

Amit Kalyani — Deputy Managing Director

Yes as and when the sales price gets corrected obviously, things will improve. But it is still it’s still flat. It is going down slowly but it has not gone down substantially.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Got Got it i’ll come back-in queue.

Operator

Thank you. Ladies and gentlemen we take that as the last question for today. I now hand the conference over to Mr. Amit Kalyani for closing comments over to you sir

Amit Kalyani — Deputy Managing Director

So ladies and gentlemen thank you very much for all your questions and your interest. I will be very happy to answer your questions even more during our Investor Conference on Analyst Meet which we will have in person on December 9th in Pune. Thank you for your interest in our company and please continue remaining in touch and we look-forward to seeing you in Pune very soon. Thank you.

Operator

Ladies and gentlemen on behalf of Bharat Forge that concludes this conference we thank you all for joining us and you may now disconnect your lines.