The Annual Report containing the Directors' Report and the audited accounts for the year ended 31st March 2006 has been with you for some time and, I am sure, you have had the opportunity to peruse them.

In 2005, the world economy recorded real GDP growth of 4.3%. Growth in the US, Europe and China – the three large geographies outside India in which your company operates was 3.5%, 1.3% and 9.9% respectively. We expect growth in the Euro area to marginally improve in 2006, while overall growth in the global economy is likely to remain at the same level as last year. We also anticipate that the upward trend in the global automobile sector will sustain in the current year.

The performance of the Indian economy in 2005-06 was impressive. The economy recorded GDP growth of 8.4%. This was the third consecutive year of 7.5% plus economic growth, which has further consolidated India’s position as one of the fastest growing economies in the world. The global focus on India has been intense and it should be a matter of great pride and satisfaction for all of us that we are seriously being regarded as a major emerging economic power of the 21st Century.

Though manufacturing constitutes only 16% of India’s GDP, it contributes about 53% to country’s exports and attracts about 79% of total FDI inflows. 45 million people, that is 11% of the total workforce, is engaged in manufacturing. Domestic demand for Services is also significantly driven by growth in manufacturing. Every job created in manufacturing has a multiplier effect and leads to the creation of 2-3 jobs in the Services Sector. The importance of a strong manufacturing sector can therefore not be understated and I am happy that the Government is placing considerable emphasis on strengthening growth in manufacturing industry. The Finance Minister recently met representatives of leading Industry Associations to ascertain the support that industry requires from the government to achieve 12% growth in manufacturing. We welcome this consultative process and are confident that the Government-Industry interaction will contribute in scaling up the share of manufacturing in country’s GDP from 16% to at least 30%. I am confident that an export-led manufacturing industry will result in country attaining the manufacturing export target of US $ 300 Billion by 2015.

The future of India’s automotive component industry clearly lies in becoming a global supplier. Industry’s exports have been growing consistently at about 35% per annum and it is imperative to sustain this momentum to achieve the export target of US $ 20-25 billion by 2015. I believe there are exciting times ahead for our industry and I am confident that we will be able to capture the opportunity and make India a global automotive base. Bharat Forge will be at the vanguard of this national effort and I am confident that our performance will immensely contribute in our industry’s growth, development and progress.

To fully realize this potential, we need to forge a strong partnership between government and industry through which we can effectively synergise our efforts. The government needs to provide a strong infrastructure, a stable and conducive policy framework, and simplified and transparent procedures. There are three specific issues that I would like to highlight through which government can facilitate export growth.

1. Full neutralization of taxes, duties and levies on inputs -

It is an acknowledged world-wide practice that countries should export goods and services and not embedded taxes, duties and levies in their export products. In India, there is still no comprehensive mechanism that neutralizes the incidence of all Central, State and Local taxes on inputs used in export production. As a result, the cost competitiveness of our exports continues to be seriously impeded.

There is also a view that government is incurring huge revenue losses on account of export incentives. This is an absolutely misplaced apprehension. The scope of the present duty neutralization schemes is narrow and compensates exporters for only a few taxes, duties and levies. Our view is that the scope of these schemes in fact needs to be widened to ensure that every element of indirect taxes is reimbursed to exporters. This would make Indian exports globally competitive and sustain our export thrust. We urge the government to initiate immediate steps in this area that would enhance industry’s export competitiveness.

2. High transaction costs -

High transaction costs reduce exporters’ margins and, therefore, reduce the incentive to export. There is an overbearing need to standardize procedures, reduce discretionary scope of various authorities, impose penalties for non-compliance and undertake rapid computerization of records. These steps would provide a cutting edge to our exports.

Government had recently set up a Committee to study these issues and we request that the recommendations may be quickly implemented so that export procedures become seamless and hassle free.

3. Infrastructure constraints -

Infrastructure constraints significantly impact cost competitiveness of exports. Availability and cost of power, high freight costs and transportation charges, delays at ports etc. are serious impediments. According to estimates, the cost disadvantage on account of infrastructure inadequacies on Indian exports is a significant 5%.

Creating an efficient, world-class infrastructure is, therefore, a priority not only for exports but also for the economy. We urge the government to forge Public-Private partnerships in infrastructure. Such an approach would help us to address the infrastructure challenge. In the meanwhile and in the interests of sustaining export growth and momentum, government must neutralize, at least to some extent, the cost disadvantage that exporters suffer on account of poor infrastructure by factoring this element into the duty neutralization schemes.

4. The Human Resource challenge – shortage of skilled technical manpower -

It is well established that India’s most sustainable source of competitiveness is the strength of our intellectual capital. The tremendous strides that we have taken in carving a niche in the global Information Technology industry is a manifestation of this. I believe that a time has come to leverage our knowledge resources to create a similar position of leadership in global manufacturing industry. If we strategize and to do this effectively, the impact on our country’s economy in terms of attracting large investments, increase in government revenues and creation of new employment opportunities of the kind that we need would be phenomenal.

I am glad that the Government recognizes the need to create conditions that would enable us to tap this latent potential. The Finance Minister has allocated resources to upgrade 500 ITI’s in the country out of which, 100 have already been scaled up. This is a commendable achievement though I personally believe that there is a lot more that needs to be done. In the first instance we need to set up 500 new ITI’s and many more engineering and technological institutes across the length and breadth of the country.

We also need to place equal emphasis on radically upgrading the skills and quality of our human resources to make them relevant to the needs of industry in the 21st Century. This can be achieved through greater Industry – Institute co-operation. I believe such collaborative approach will be a catalyst in sustaining this most critical source of competitiveness.

2005-06 was a significant year in your Company’s journey towards global leadership. On the qualitative side, we were able to establish “dual shore” manufacturing presence across the world, deepen relationships with our global customers, build global technological capabilities, enhance scale of operations and continue to place emphasis on creating a high quality global human resource base.

Your Company’s global acquisition strategy comprised two key elements. The first to widen and broaden the company’s customer base by bringing in a wider portfolio of product offerings to a larger group of customers. And, second, to have global facilities that enable us to work with OEMs as an engineering and development partner. The strategy, therefore, focused on acquiring such companies that had product complementarities and manufacturing facilities, which were synergistic and could be leveraged for cost effective and flexible production systems.

In 2005-06 your company built upon its earlier global acquisition forays and made three further strategic acquisitions – Federal Forge in USA, Imatra Kilsta in Sweden together with Scottish Stampings in Scotland, UK, which are now subsidiaries of BFL and a joint venture in China with the First Auto Works (FAW) in their forging business.

Your company now has 9 manufacturing facilities in 6 countries spread over 4 major geographies – Europe, North America, China and India. Your company today has over 35 global OEM & tier I customers, which include top five passenger car manufacturers and top five Commercial Vehicle manufacturers. Our network of manufacturing facilities complement each other in terms of production capabilities, product range, customer and engineering capabilities, which enables us to efficiently service our global customers. Being in close proximity of our customers, our overseas facilities enable us to build strong relationships and effectively synergise product and customer requirements. Our JV in China has the potential to complement our Indian operations as a globally competitive sourcing base. With our global strategy firmly in place, your company is now focusing on developing a global organization structure that will support and implement our long term vision.

Your company is proud that it is regarded to be among the first Indian MNC’s in manufacturing industry. We recognize the responsibilities that are associated with being a leader and are committed to do our business diligently and in the process become a bridge to unite people from diverse countries, cultures and backgrounds.

Over the years your company has achieved a position of leadership in the global forged and machined automotive component space. Your company expects this business to witness strong growth in the coming years on the back of scaling up of the global operations, wider product offering and significant higher customer traction.

In order to open up new avenues of growth by leveraging our technology, engineering and manufacturing capabilities, your company is focusing on high value added niche business in the Non Automotive Field.

Presently, about 17% of the company’s global revenues are contributed by the non-automotive business. This was because of a conscious decision taken by us a few years ago whose aim was to de-risk our business. I have in the past shared this strategy with Members. These are the sectors that are seeing steady demand growth and capital investments globally. As a result, we are now witnessing significant growth opportunities in several key non-automotive sectors such as:

• Hydro carbon exploration;
• Mining & Metals;
• Conventional and non conventional energy; and
• The Aerospace sector.

These sectors, on a global basis, need critical components in forged & machined condition. These are high value, high value added components. Your company has the unique advantage of having the domain knowledge, technology and resources to manufacture these products. We have also developed relationships with key global customers in these fields. Keeping all these factors in view, your company is taking effective steps to establish a strong global presence in these businesses in the next 3 to 4 years. This would be achieved through a judicious combination of organic and inorganic growth. Your company is planning a capital outlay of close to Rs.350 crores over the next three to four years and is targeting an incremental global revenue of close to Rs.1000 crores.

Your company’s people are our greatest strength. It is the competence, capabilities and commitment of our human resources that have driven us to reach out to new geographies, broaden our product range and establish industry benchmarks in efficiency and productivity. On our part we continuously strive to upgrade the skills of our people and provide them with an environment in which they can innovate and unleash their creative talents.

In addition to the three year part time engineering course that we conduct on campus with BITS, Pilani about which I had spoken last year, we have this year initiated a M.Sc. degree in Manufacturing Engineering Management in collaboration with the University of Warwick, U.K. The programme designed for senior management will be imparted over 2-3 years and will be sponsored entirely by your company. The first group of 25 employees have been admitted and the programme is well underway.

For me personally, it is a matter of great pride to lead a team of highly talented people at Bharat Forge and in our global operations. Their contributions are valuable in realizing our Vision for our company.

Pratham Pune Education Foundation, an NGO that I have initiated with the support of some of our city’s Corporate houses and the GE Foundation, USA is doing exemplary work in providing primary education to young, needy and socially disadvantaged children in under privileged section of society in Pune. Your company is proud of its association with Pratham and we are committed to support this worthy cause.

I would like to sincerely thank all our valued customers, both domestic and international, for their unstinted support at all times. Their active involvement has been a source of great encouragement and motivation. I am sure that your company will continue to have their support.

I take this opportunity to express my sincere thanks to the government of India, the Government of Maharashtra, and the financial institutions and Banks for their encouragement and support to our company. I would like to thank our collaborators for their help and assistance.

I sincerely appreciate the contributions of all our employees which has resulted in your company’s excellent performance. I request them to carry on the good work and help us realize our common objectives and goals.

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.