BHARAT FORGE LIMITED Registered Office Mundhwa, Pune Cantonment, Pune 411 036 
CHAIRMAN'S SPEECH TO THE MEMBERS OF THE COMPANY AT THE 46th ANNUAL GENERAL MEETING ON TUESDAY, 24TH JULY 2007 |
 |
The Annual Report containing the Directors' Report and the audited
accounts for the year ended 31st March 2007 has been with you for some
time and, I am sure, you have had the opportunity to peruse them.
2007 is a landmark year in the history of our country. In a few weeks from now we will celebrate 60 years of our independence. From a purely economic perspective, ‘The India Growth Story’ has captured the world’s attention. Mckinsey Global Institute, in its report released in May 2007 titled “The ‘Bird of Gold’: The Rise of India’s Consumer Market” has observed and I quote:
“India is on the verge of one of the great achievements in economic history. It has the potential to transform itself, within two generations, from the desperately poor nation of 1985, dependant on the vagaries of subsistence agriculture and the monsoon rains, into a nation with a diverse, services-led economy and the world’s second-largest middle class by 2025.”.
Unquote.
According to Goldman Sachs, among Brazil, Russia, India and China, popularly known as the BRIC’s countries, India will record the fastest growth over the next 30-50 years. This is because of some of our natural advantages, the foremost among them being the young and educated workforce that will continue to give us a demographic advantage until the year 2040 and perhaps beyond. Our aspiring middle-class, which is growing in size, is driving demand, production and productivity. In addition, we also have a diversified base of natural resources to support high economic growth. 15 years of reforms have unleashed the energies of India and we have accomplished a lot but I believe that our best is still to come.
There are two factors that have characterized the Indian economy since 2003-04. One is the resurgent Industrial sector and the second is the continuing dynamism of the Services sector. These have contributed to the economy having clocked an annual average growth of 8.6% during the last four years. In 2006-07 GDP grew by 9.4%, the highest growth that we have achieved in 18 years. We have the proud distinction of being the world’s largest and fastest growing free market economy.
The Manufacturing sector grew by 12.3 % in 2006-07. Significantly, this growth was more than the 11% growth in the Services sector. The performance of Manufacturing is more robust than its apparent value because it comes on the back of over 8% growth for the past two consecutive years. Industrial production expanded at double digit rate for the first time since 1995-96. Growth was driven by industries such as cotton textiles, rubber, plastic and petroleum products, machinery and equipment, and basic metals. From your company’s perspective, you would be happy to know that the automobile and auto component manufacturing industries have contributed significantly to country’s economic, industrial and manufacturing growth.
Globalization has played a stellar role in the growth of Indian manufacturing industry. It is now integral to the business strategy of every Indian company. By participating in global market opportunities, companies have been able to build their size and scale of operations, access new skills & technologies, expand into new markets and enlarge their portfolio of customers. In recent years several companies have also established manufacturing footprints abroad. I expect that the dream to achieve global leadership will drive more and more companies in Indian manufacturing industry to aggressively compete for opportunities in global markets.
The challenge before Indian Manufacturing Industry is to achieve 14% growth for the next five years and double its contribution to country’s GDP to 35%. I believe that this would require companies to adopt innovation driven-business-models in which they would have to emphasize on developing a strong culture of innovation within their organization by creating conditions in which people are encouraged to unleash their potential to innovate new products, processes and technologies. At a macro-level ,Government must step-in to make Innovation a national mission and incentivize it through well structured recognition and reward mechanisms. I am glad that in Corporate India innovation has risen to rank among the top three strategic priorities and companies are making sizeable investments in innovation to meet the future challenges of competing in global markets.
In the past year, several global automobile companies have announced new projects in India. Many of these are being located near Pune, a clear indication of our city’s emergence as a global automotive manufacturing hub. General Motors, Daimler AG, Volkswagen AG, Tata-Fiat, International Truck and Engine Corporation (ITEC), Piaggio Vehicles, Hyundai Heavy Industries are some global companies that are setting up manufacturing operations in the Pune region. The presence of a strong local component manufacturing industry has obviously been a crucial factor in determining their choice of location. Equally important is the availability of high quality, skilled knowledge resources which is attracting these global companies. Mr. Carlos Ghosn, Chairman of Renault, categorically acknowledged this when he said, “The strength of India is frugal engineering. There is a thirst for learning here and that makes the Indian engineer innovate and create a product frugally. Engineers in other parts of the world always need more resources to do the same thing.” I believe that Indian component manufacturing companies have the opportunity to leverage these inherent strengths to build unassailable competitive advantage.
The global trend to outsource components from low cost countries has also been driving growth in the Indian auto component industry. Today virtually every global OEM and Tier 1 supplier is sourcing critical components from Indian manufacturers. As a result, several Indian companies are firmly locked in with customers’ global supply chains and are integrated with their long term development programs.
The initial trigger in the globalization of Indian automotive component manufacturers was exports. Gradually, the emphasis has shifted to establishing manufacturing operations in global markets. This has primarily been through acquisitions. Companies have leveraged global acquisitions to build scale of operations, establish proximity to customers and markets, and access raw material, technology, specialized capabilities and skills. So far, Europe is the preferred destination of Indian companies. This perhaps is because European manufacturers, particularly in the automotive industry, prefer their component suppliers to be located in close proximity to their manufacturing operations. I expect that inorganic growth will continue to play an important role in global strategies of Indian companies.
Your company is at the forefront in pioneering globalization in the Indian manufacturing and automotive industry. Our strategies have resulted in Bharat Forge being the country’s largest manufacturer and exporter of automotive components for the past 7 consecutive years. Since 2004 we have also emphasized on establishing a global manufacturing footprint by acquiring companies abroad. We are now a truly global company with 10 manufacturing plants – 3 in India, 3 in Germany and 1 each in the US, Sweden and Scotland and a joint venture in China. This thrust will continue. Members will be happy to note that we are very close to achieving our dream of global leadership.
2006-07 was a good year for your company. What makes our performance even more satisfying is that it was achieved in spite of the challenges that we had to face on account of rising material and energy costs and an appreciating currency. Simultaneously, we had to also focus on improving operational efficiencies of our newer acquisitions. I am glad that as an organization we have responded well.
Since our Annual Report has been with you for some time, with your permission, I will highlight only some of the key aspects of our performance.
- Total Revenue crossed $ 1 billion to reach Rs. 4275.21 crores – an increase of 38.6% over the previous year..
- Operating profits (PBDIT) of Rs. 743.27 crores was higher by 26.2% over 2005-06.
- Profit after Tax and minority interest (PAT) increased by 16% to Rs.290.59 crores.
- Earnings Per Share (EPS) was Rs. 13.01 for each share of face value of Rs. 2.
Some of the qualitative aspects of our performance include:
- Completion of the forging and machining capacity expansion programme at Mundhwa, Pune.
- Establishment of the global manufacturing footprint with commencement of JV operations in China.
- Further strengthening position with global customers with three long term contracts, each in excess of $ 50 million annual value.
- Significant de-risking of the US business, the largest export market for the company.
- Launching a strategic foray into non-automotive component business through the Centre for Advanced Manufacturing which is being set up at Baramati. This manufacturing facility will enable us to address the huge opportunities that we envisage in non-automotive sectors which include aerospace, oil & gas, conventional and non-conventional energy, railways, marine, mining, metals and infrastructure equipment.
As Members would observe, our performance on all parameters has been good. This provides us with a sound platform to pursue our growth, expansion and diversification strategies during the present year and beyond.
In 2006-07 we identified five thrust areas for concerted focus. While we have achieved significant progress on each of these, during the current year they will continue to receive our attention. These include:
- Consolidation across entities: While basics of consolidation have been completed, we would now emphasize on widening and deepening the process. Our objective is for every plant, business, and function to adopt measurable best-in-class processes and deliver stretched targets in whatever they do.
- Building world-class scale of operations: Your Company is engaged in investing in state-of-the-art capacities to meet significantly higher and growing demand for its products. These are under execution at Mundhwa, at our facility in China and at Baramati. Since we expect capacity enhancement will be a continuous process, our challenge would be to use our skills and capabilities in project execution to derive optimum advantage.
- Broadening client relationships: We now have over 35 global OEM and Tier 1 customers. Our objective is to move up in our customers’ value chain from being an efficient supplier of components to a highly valued development partner and full, first choice service provider.
- Strengthening China business: Presently we are in the process of reorienting our JV to make it a profitable, quality driven, stand-alone manufacturing unit. We are engaged in bringing about operational and strategic changes to become the supplier of choice to all key OEM’s in China. Though this process may take some time, we are confident that we would be able to achieve our objective.
- Strategizing new business opportunities: Our foray into manufacture of non-automotive components is aimed at addressing an exciting growth opportunity and to further de-risk our business. Our emphasis is on potentially high growth sectors of aerospace, oil & gas, conventional and non-conventional energy, rail, marine, mining and infrastructure equipment. The Centre for Advanced Manufacturing that we are setting up at Baramati and the open die forging unit which is being set up at Mundhwa at an aggregate cost of Rs. 350 crores will together enable us to address opportunities in these areas. These facilities will be commissioned in a phased manner in 2008 and would increase our forging capacity by 100,000 MT’s per annum.
We are confident that these initiatives will be successfully completed and would contribute in further consolidating and strengthening your company’s position with customers as a “one-stop-shop” and a “full service provider” for the entire range of forged and machined components across industry segments and throughout customers’ value chain.
Bharat Forge has always been a strong technology driven company. I believe that our technology backbone is one of our key sources of competitiveness. We are committed to continuously strengthen our technical skills and capabilities and to invest in infrastructure that would enable us to maintain our lead on this crucial parameter. This would be in manufacturing, operations and all other areas. Following are some of our recent initiatives:
- Using the base of our existing ERP system, we have successfully created a platform for future IT initiatives like Business Intelligence and Scheduling.
- We have implemented a scheduling software in our Die Shop to provide improved visibility about die availability and to increase planning efficiency.
- We have taken steps to secure critical data and information in our Engineering Design Centre, IT data centre and IT services division.
- We have upgraded our communications network which will be further strengthened when we implement a flexible, cost effective platform to build, integrate and expand the next generation of Internet solutions.
Technology leadership in manufacturing, operations and all other areas
will always remain a top priority at Bharat Forge and I am personally
directing our work in this critical area.
As Members would be aware, Indian industry is passing through a challenging phase. This is largely on account of external factors in the macro environment. I would like to briefly speak about three of these.
- Rupee Appreciation - In the past 4 – 5 months the Rupee has appreciated by about 10% against the US Dollar. The appreciation of the Rupee has been very abrupt and has therefore impacted profitability of Indian exporters. Bharat Forge is no exception. Based on our representations to the Government, a package for exporters was announced last week. This would to a limited extent mitigate the situation but on our part we are also taking several internal measures to control costs and improve operational efficiencies. However, a strong currency will remain to be a cause of concern for Indian industry and your company.
- Domestic Market - After showing robust growth over the past few years, the domestic automotive market in the first quarter of 2007-08 has slowed down. This is largely on account of rising interest rates. Since macro economic fundamentals of the economy continue to be strong, we expect growth will gradually restore over the next few quarters. Your company has a strong presence with customers in the domestic market. Our relationships have been forged over decades and we are confident that we will continue to be partner of choice to all our domestic customers.
- US Market – The US Commercial Vehicle (CV) market is presently witnessing a slow off take, primarily on account of change in emission norms effective 1st January 2007. This has impacted your company’s sales in the traditional US CV segment. To counter such cyclicality, your company has, over the years, consciously de-risked its US revenue by addressing a diverse range of products and customer segments ranging from Passenger Cars, CV Engines to various non automotive applications. Based on the current market indications, your company believes that the US CV market will see a revival beginning early 2008.
“We are people oriented. Training, empowerment and fostering team spirit are means through which our talented employees can unleash their creativity for the benefit of the organization and its customers.”
In implementing this strategy we are focusing on 4 major areas: These are:
- Creating a talent pipeline to meet the resource requirements on a sustained basis.
- Significant enhancement in the competency levels of the existing human resources to enable their career development and retention.
- Creating a managerial and leadership resource base through training and development activities.
- Educational initiatives for the employees in association with reputed institutions and universities.
Members may kindly recall my addresses to shareholders at our last two Annual General Meetings, I had spoken about our collaboration with BITS, Pilani under which we are offering a 3 year part time engineering programme leading to a BE degree in Mechanical Engineering for our star performers. In addition, you may recall that we have initiated an M. Sc. Degree programme in Manufacturing Engineering Management, which we are running on campus with the University of Warwick, UK. I am glad to report that both these initiatives have been very successful and are contributing in building a strong, dedicated and committed cadre of human resources at Bharat Forge.
Your company is perhaps among the first in the country to have tied up with a State Government to take over the management and operations of an Industrial Training Institute (ITI). We have recently signed a Memorandum of Understanding (MoU) with the Government of Maharashtra through which we have undertaken to run and manage the Government ITI at Khed in Pune District for 5 years. Our dream is to make this ITI a Centre of Excellence and an outstandingly successful Public-Private partnership.
From April 2007, we have also started Vocational Courses that are being conducted on the ITI premises at Khed. These are in basic trades and are aimed at imparting skills to local people. Our aim is two fold; One is to develop a spirit of entrepreneurship and second, we would like to equip people with skills that would help them in finding gainful employment.
We see these initiatives as a part of our larger responsibility to society and the community. We are confident that through these programmes we would be able to make a difference and touch the lives of a large number of people.
Kalyani Group’s association with Pratham Pune Education Foundation, an NGO that I had promoted in the year 2000 continues. We are proud to be financially supporting an initiative which is engaged in providing primary education to young and underprivileged children belonging to disadvantaged sections of the local community. I would like to re-iterate our support to this worthy cause.
Details of our activities in sponsoring various community centres and our initiatives in sustainable development through the use of “Green Energy” are contained in the Management Discussion and Analysis section of our Annual Report.
Besides, I personally interact with groups of business analysts and the media. These interactions are useful in communicating with the external environment and in providing a better understanding about our company’s goals, priorities and working. All information about our company is also available on our company’s official website www.bharatforge.com. I suggest that Members should access the website regularly in order to be fully apprised about developments at Bharat Forge.
I would like to take this opportunity to thank all our valued customers, domestic and international, for their unstinted support. They are a source of great encouragement and motivation for us and I am confident that we will benefit from their continued support.
I would like to express my sincere thanks to the Government of India, the Government of Maharashtra, Financial Institutions and Banks for their sustained encouragement and support to your company. I would also like to thank our collaborators for all their help and assistance.
I sincerely appreciate the contributions of all our employees which have resulted in your company’s excellent performance. I request them to carry on the good work and help us realize the Company’s goals and objectives.
Finally, I convey my personal gratitude for the confidence that you have reposed in your company’s Board of Directors. I sincerely hope that you will continue to extend your whole-hearted support to us so that we, along with the management team, and all employees will further accelerate the growth and progress of your company.
Thank you!