Case Study - Bharat Forge

 Bharat Forge – Significant Group Company holdings and non core assets
 BF Utilities – All businesses apart from forging business demerged into BF Utilities

Pre-Demerger Post-Demerger Present Market Cap.

EQ ( In Crs. ) 18.83 BHARAT FORGE BHARAT FORGE @ 110 2,417
Price – Aug 01 12 Listing Price 10 BF UTILITIES @ 735 2,770
Market Cap. 250 Market Cap. 200 Total 5,187
Sensex 2,812 Sensex 3,279 Sensex (Nov4, 2008) 10,631
BF UTILITIES LTD Market Cap ( x ) - Since Aug 01 20.7
Listing Price 18
Market Cap. 54
Sensex 3,279
Total Market Cap.- Demerger 254
Incremental Market Cap. 4
% Wealth Creation 2%

Strictly Private & Confidential 18

1.
History of the Company
Bharat Forge is the world's second largest forging company. The company is based in Pane, India and has 9 manufacturing
plants in India, Germany, Sweden, United States , Scotland, United Kingdom and mainland China. The company's
international operations are carried out by its subsidiary Carl Dan Peddinghaus GmbH. The company was founded by Indian
billionaireBaba Kalyani in 1961. In 2006, Bharat Forge had total sales of US$ 659 million and has a market value of US$ 1.8
billion. It was rated as one of the best companies in Asia by the Forbes magazine because of its high growth rate. The company
increased its sales by more than 50% in 2005.Bharat Forge Ltd is one of the most innovative and exciting companies to emerge
in-to his of the forging industry. 

o The Indian Automotive Industry in the 50’s was more like the story of imported kits. Ancillaries were
nominal and infrastructure was scarce and inadequate. It was then, that Bharat Forge came into existence in 1961 to meet
the forging needs of the Indian Automotive Industry.

2. Continue…..

o Today, the art of forging metal is a tradition at Bharat Forge, and all of our products are built with the
expertise necessary to accommodate various industries. Each customer specification is carefully transformed into a cost-
efficient reality. Every part we create is a representation of our overall dedication to craftsmanship.

o An outstanding reputation for customer service coupled with the Management commitment to quality has
made Bharat Forge the preferred domestic and global supplier for major OEM’s. Under the intense and caring supervision
of the Chairman & Managing Director, Mr. Babasaheb N. Kalyani, the company continues to expand and its markets
continue to grow, while the goal remains the same : to deliver competitive, quality products and services - time after time.
3. Philosophy
4. Vision and Mission of the Company
Mission of the Firm: -
“To be the no.1 forging Company in the world by 2008.” 
Vision of the Company:-
“The greatest strength of Bharat Forge is ability to understand customer needs. Its ability to deliver unsurpassed quality and
reliable products & services to their customer’s globally can be attributed to strong teamwork, continuous R&D and the
dedication and commitment of each and every member of the BFL family.”
5. Strategy of the Company
In expanding global markets, technology based innovation is the most important driver of growth.
The Bharat forge have been building world class manufacturing plants and reaching global scale capacities in there line of
businesses. They now building partnerships with major global OEMs and Tier all companies around the world, offering full
service supply capability.
Innovation runs through everything that done by Bharat Forge. They goal is to move fast in the direction set by they highly
focused strategies. They believe that fast execution of they strategies imparts tremendous velocity for company, and company’s
customer’s progress.
 
‘’ To maintain better Quality is also over objective as well as strategy.’’
 
6. Other Strength and Strategy
They believe that it’s historical success and future prospects are directly related to a combination of strengths, including the
following :
State-of-art, global scale facilities 
Global Dual Shore Manufacturing Capability 
World Class Technology 
Full Service Supply Capability 
Largest single location capacity worldwide 
Wide product profile across Auto & Non Auto segments 
Best ‘Speed to Market’ in Industry 
Cost efficiency 
Comprehensive CAD/CAM/CAE and product development capability 
Highly Qualified & Motivated, Engineering Talent Pool 
7. Other Strategy for Bharat Forge Pvt. Ltd.:-
 

o To become Leader at all sector of Forging in the World.

o To Cover 100% of total shares in the Market of Forging industry.

o Try to be and become more and more strong and powerful in economic condition in World wide.

o To use the Brand name and enter in other sector, like manufacturing and Automobiles, Agricultural
industry, Service Sector etc.

o Try to become and be a no. 1 for a long time.

 
Baba Kalyani’s Bharat Forge is getting rather good at the acquisitions game. On Wednesday, it announced the
purchase of Imatra Kilsta AB of Sweden along with its Scottish Stampings subsidiary in an all-cash deal through a
100 % special purpose vehicle (SPV). Add the earlier two acquisitions in Europe – the November, 2003, purchase of
Carl Dan Peddinghaus (CDP) and the December, 2004, one of CDP Aluminiumtechnik, both in Germany – and
Bharat Forge seems to have pretty much established a dominant presence in Europe.

Between CDP, CDP Aluminiumtechnik (AT) and Imatra, Bharat Forge services almost all the big boys of European
automobiles – from BMW to Audi, Ford, VW, DaimlerChrysler, Volvo, Scania, Saab, DAF, MAN and Iveco, both for
passenger car and commercial vehicles. While CDP is known for it engineering and design capabilities, CDP-AT is a
leader in aluminium-based auto components, used increasingly to make cars light and fuel-efficient. Imatra, on the
other hand, is the largest European front axle beam maker, and the second largest in crankshafts.

In June this year, Bharat Forge established a beachhead in the US by buying Federal Forge, a bankrupt Michigan-
based company, for around $ 9.1 million, but what the Imatra deal signifies is the achievement of Rs 5,500 crore
Kalyani group’s first strategic objective of establishing a very strong presence in Europe.

The next step is to consolidate the US presence, before finally entering China in phase three. The group
strategy, as articulated by Baba Kalyani frequently, is to develop a “dual shore” capability – which means the
ability to service all important customers from at least two locations simultaneously. A dual shore capability
not only assures finicky automobile manufacturers of assured supplies without disruptions, but also gives
them a closer servicing interface.

Even though Bharat Forge is already the world’s second-largest forgings manufacturer, its key challenge has been to
establish itself as a serious quality player in the global league without losing out the India advantage of low-cost
manufacturing, design and service capabilities. This is where the dual shore strategy really kicks in. The acquired
companies abroad bring long-term customer relationships that Bharat Forge on its own would never have been able
to establish quickly. On the other hand, keeping manufacturing and design jobs in high-wage islands like Europe
cannot lead to sustained growth and improved profitability. Dual shoring is thus similar to the kind of business mix
software companies try to achieve in terms of onshore and offshore billings. Onshore deals bill more, but offshore is
where the costs can be pared to the bone.

The results are there for all to see. In the first quarter of 2005-06, the company reported a smart 39% growth in net
profits on sales growth of 42%. Operating margins are clearly under some pressure due to the high costs of raw
material – mainly steel. During April-June, 2005, operating margins fell to 24.4 % from 26.9 % in the corresponding
quarter of the previous year. But the company still maintained net margins at a comfortable 13.5 %,thanks partly to
higher other income.

The company raised $ 100 million through an issue of foreign currency convertible bonds, which was earning interest
while awaiting deployment. The Imatra purchase of Wednesday – reportedly at a cost of around Rs 250 crore – will
presumably bring down interest-earning investments, reducing other income. But that’s a mere short-term worry. With
the acquisitions strategy clicking well, Bharat Forge is on a long-term growth trajectory that can deliver the goods.
The share isn’t exactly cheap. In terms of annualised first quarter earnings per share of Rs 10.4, the current price of
around Rs 318 yields a price-earnings multiple of over 30. At 12-month rolling earnings, the P/E is even higher. But
that’s a premium one pays for a grow-grow company.
Bharat Forge Pulls Ahead of Indian Manufacturing, but Obstacles Lie
Ahead

It's a surprising fact: The world's largest factory for forgings -- parts for engines, axels and
the like -- sits not in Detroit, Tokyo or Stuttgart, but in the industrial city of Pune in
westernIndia.

The factory, equipped with gleaming robots and networked with plants overseas for
technical support, belongs to Bharat Forge, foremost among a group of auto parts
companies that are rapidly putting India on the world map for manufacturing. Bharat Forge
has embraced a strategy that includes heavy investment in technology, a scientifically
skilled workforce, and aggressive overseas acquisitions. Along the way, it has been helped
by a growing domestic auto industry and by fragmentation and ferocious cost-cutting by
large auto manufacturers worldwide. In recent years, the Pune-based firm has emerged as
a bellwether for India's auto parts industry, akin to the position Bangalore-based Infosys
Technologies holds in the far more high-profile information technology industry. Some see
the comparison as particularly apt.

"Information technology leveraged India's intellectual power in services," says Amit Kalyani,

executive director of Bharat Forge and son of the firm's chairman, B.N. Kalyani. "We're
doing the same in manufacturing. It's very similar."

With turnover exceeding $650 million and a roster of blue chip clients that include
DaimlerChrysler, Toyota and Ford, Bharat Forge's success offers a roadmap to other
ambitious Indian manufacturing firms. Sachin Nandgaonkar, a director based in the Boston
Consulting Group's New Delhi office, calls it a classic example of a company with an
entrepreneurial management team that understands the global industry well.

Yet, say experts at BCG and Wharton, Bharat Forge's story also illustrates the hurdles
Indian industry must overcome, ranging from weak infrastructure to low labor productivity.
"I see pockets of competitiveness and efficiency in Indian manufacturing, but in a vast sea
that is technologically outdated, labor intensive and not sufficiently quality driven,"
says Saikat Chaudhuri, a Wharton management professor. "Bharat Forge is a primary
example of that island of competitiveness."

Brains, Not Muscle

Bharat Forge was founded in 1961, during the heyday of Nehruvian socialism in India. At
the time, central planning and import substitution were pillars of Indian economic policy.
Although state-owned industries were encouraged to control the so-called commanding
heights of the economy, the private sector was never entirely shut out. The firm, recalls
Kalyani, was formed to serve two somewhat disparate markets -- diesel engines used by
farmers for irrigation and a nascent domestic auto industry.

"It was mainly buses and trucks," says Kalyani. "In those days, the passenger car market
was very small."

At any rate, both irrigation and automobiles required engines, and engines required parts.
Bharat Forge arranged for technical assistance from a firm in Cleveland, Ohio. It helped that
the Kalyanis had close family ties with some of the region's leading industrial houses. Two
of them, the Kirloskars and Tatas, ended up being among Bharat Forge's first customers.

Over the next three decades, India persevered with its brand of socialism even as Asian
tigers such as Korea and Taiwan leapfrogged to prosperity powered by industrialization and
exports. For Bharat Forge this was a time of consolidation within India's protected domestic
market. It focused on technology and quality and carved out a reputation for reliability.
Then in 1988, not long before India embarked upon economic reforms, Bharat Forge
decided to take a big gamble: Realizing that it was not possible to achieve economies of
scale with a relatively low-technology and low-skilled workforce, it invested one billion
rupees (at the time, turnover was only 1.5 billion rupees) in a sophisticated German-
engineered plant.

"We decided to bet the house on technology," says Kalyani.

Along with the investment in technology came an upgrade of manpower. Traditionally,

Bharat Forge, like other Indian firms, had employed a poorly educated workforce often
virtually indistinguishable from farm labor. Now it began the process of replacing them with
the kind of educated workers who would be able to make the most of the new technology.
Through a combination of attractive severance packages and attrition a third of the firm's
1,800-strong workforce was replaced. By the time the transition was completed, a largely
blue-collar factory floor had become largely white collar. Today, Bharat Forge employs
about 4,000 people, but 80% of them are college graduates and a third are engineers.

"These are extremely bright, fast and hardworking people. They have good values," says
Kalyani. "We needed computing and analytical skills which the blue collar guys just didn't
have. For the company this was a cultural change. We replaced muscle power with brain
power."

In retrospect the decision seems obvious, but at the time it was seen as risky. Arindam
Bhattacharya, a New Delhi-based BCG director, credits Bharat Forge chairman B.N. Kalyani
with foresight. "What sets them apart is that in Baba Kalyani they have an outstanding
leader," says Bhattacharya. "He's ambitious, but also an outstanding technical person with a
very deep knowledge of tool design. He's been the key factor in increasing productivity.
They have gone against the grain, which was to use labor costs for competitive advantage.
They are able to get the most out of their machines."

Exports, Exports, Exports

In 1991, India began opening its economy to competition and foreign capital. The country's
auto parts manufacturers moved to upgrade their technology and skills, accelerating a
process that had begun with the government-owned Maruti Udyog's co-production of a
small car with Japanese auto manufacturer Suzuki in 1983. Keeping with Japanese practice,
Suzuki's suppliers in Japan had followed it to India and played a large role in technology
transfer and training. After liberalization, India's potentially vast domestic market attracted
a raft of auto companies. Toyota, Hyundai and Ford manufacture cars in India and source
parts from Indian suppliers.

Bharat Forge's new high-tech plant was already up and running when, in 1996, a sharp
downturn in the domestic market forced it to look outwards more aggressively. Kalyani reels
off the factors that allowed Bharat Forge to grab a toehold in the fiercely competitive global
market. The industry was fragmented worldwide; had it been dominated by a few big
players it would have effectively shut out smaller ones. It was engineering intensive: skilled
manpower mattered more than in labor-intensive industries such as shoes and textiles.
Global auto companies were spread out across the world, which made them open to
sourcing parts from a wide array of suppliers. Finally, in a capital-intensive and highly
competitive industry, outsourcing to reliable high quality suppliers rather than investing the
company's own resources began to make more and more sense. Between 1997 and 2005
Bharat Forge's exports grew more than seven-fold from $16 million to $117 million.

More recently, Bharat Forge's export strategy has been coupled with a series of overseas
acquisitions. In the last two years alone it has snapped up five small foreign companies.
Last year it bought Sweden's Imatra Forging, Europe's largest manufacturer of front axels,
for an estimated $57.5 million. In 2004 it bought German firm CDP Aluminiumtechnik for
€6.3 million. The 2003 acquisition of Carl Dan Peddinghaus for £29 million gave Bharat
Forge an infusion of new technology and access to customers such as BMW and
Volkswagen. At present, Bharat Forge owns eight plants -- two in India, three
in Germany and one each in Sweden, Scotlandand the U.S. In addition, says Kalyani, a new
joint venture with FAW (formerly First Automotive Works) in China commenced production
in March 2006. It will give Bharat Forge access to the Chinese market, which is four times
larger than India's.

The acquisitions strategy is meant to bolster what the company calls its "dual-shore supply
model." In a nutshell it means that it can supply all components to a client from two plants
-- one in India as well as one closer to the client. The plants in the U.S. and Europe reduce
supply chain risks while the flagship plant in India -- with economies of scale and relatively
low-cost skilled labor -- helps keep costs down. Bharat Forge's overseas operations
currently account for about 40% of turnover, and the company expects this to rise to 50%
over the next few years.

Watching for Roadblocks

Bharat Forge dominates India's $615 million market for forgings with about 45% market
share. Over the past four years, the firm has grown at a compounded annual rate of 66%.
Before-tax profit over the same period has shot up by 107%. Should this continue, Kalyani
says the firm hopes to reach a turnover of $1 billion in 2008, more than double the $460
million of 2005.

The opportunities are vast. At present, India only exports about $1.8 billion in auto parts
each year. Countries such as Mexico, Canada and Japan export between $25-35 billion.
Analysts expect the global outsourcing in auto parts pie to keep growing -- from $110 billion
in 2005 to $700 billion in 2015. India's auto component exports have been growing at 25%
annually, and have the potential to grow 15- or 20-fold over this period. To get there, firms
like Bharat Forge will need to keep on performing.

"The India story till recently was driven by the success of the Indian software industry
showcased by firms like Infosys, Wipro and TCS (Tata Consultancy Services)," says BCG's
Nandgaonkar, referring to India's three largest software firms. "They gave confidence to
Indian firms that they can compete on the global platform. Bharat Forge pretty much
exemplifies the same in manufacturing."

But obstacles remain. Kalyani says the two largest are infrastructure and education.
Compared to China, India's infrastructure -- power, roads, ports and airports -- is very poor.
Firms like Bharat Forge have found ways around it. Nearly half of its power, for example, is
generated in-house, but it can't do everything itself. The roads network is still under-
developed, and the turnaround time at ports is sluggish compared to the hyper-efficiency of
Hong Kong and Singapore.

The deficiencies in education, says Kalyani, will begin to become apparent in about five
years. He believes that demand for technically skilled manpower will outstrip supply. "In
some of these institutes they're still using technology that's 30 or 40 years old," he says.

Bhattacharya also argues that more needs to be done to make globally competitive Indian
manufacturing firms the norm rather than the exception. "Several external factors
make Indiauncompetitive," he says. "There's power, transaction costs and tariffs." As an
example he points out that in India, firms pay higher duties on steel than on forgings. And
though the heavy hand of government in business has lightened since liberalization, it
shows no sign of disappearing. "License Raj has gone away, but we still have Inspector
Raj," says Bhattacharya, referring to the plethora of arcane regulations still faced by Indian
businesses.

For India, the lessons of Bharat Forge's success are several. On the one hand, it shows that
a focused and well-managed company can overcome commonly cited constraints such as
poor infrastructure and inflexible labor laws to thrive in a globally competitive environment.
On the other hand, it highlights the challenges to sustain this competitiveness given its
reliance on skilled manpower in a country where most manpower is not skilled. A recent IMF
report points out that overall, the Indian economy is tilted toward services rather than
manufacturing, and that within manufacturing, it is tilted toward the skill-intensive rather
than the labor-intensive kind. Unlike China and the rest of East Asia, India has traditionally
emphasized tertiary rather than primary education. Unless India can broaden its industrial
base to include competitive labor-intensive industries such as electronics, textiles and
shoes, progress toward building large-scale, globally competitive manufacturing will be
slow.

For now, though, analysts remain optimistic that a revolution in Indian industry has begun.
"A lot of small component manufacturers look at [Bharat Forge] and say, 'Today we may be
small, but if those guys could do it, why can't we?'" Nandgaonkar says.
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