Sanghvi Forging & Engineering Ltd Management Discussions.

Global Economic Review

Global economic growth remained sluggish in 2016, owing to some major factors like feeble pace of global investment, dwindling world trade growth, flagging productivity growth and high levels of debt. Structural adjustments in many countries, efforts to reduce overcapacity, recurring natural disasters, geopolitical events—such as Brexit, a coup detat in Turkey and the ongoing civil war in Syria, also had an impact on the macro sentiments across the globe.

A moderate recovery is expected for 2017 and 2018 with receding obstacles to activity in commodities market. There has been a stronger than expected pickup in growth in advanced economies, mostly due to a reduced drag from inventories coupled with recovery in manufacturing output. Among advanced economies, activity rebounded strongly in the United States after a weak first half of 2016 and the economy is approaching full employment. Output remains below potential in many other advanced economies, particularly in the Euro area.

Advanced economies are now projected to grow by 1.9% in 2017 and 2.0% in 2018. EMDE (emerging market and developing economies) growth is currently estimated at 4.1% in 2016, and is projected to reach 4.5% for 2017. A further pickup in growth to 4.8% is projected for 2018 up.

The growth rate in China was a bit stronger than expected, aided by continued policy stimulus. But activity was weaker than expected in some Latin American countries currently in recession, such as Argentina and Brazil. Russia fared better than expected, in part reflecting firmer oil prices. In the Middle East, growth in Saudi Arabia is expected to be weaker than previously forecast for 2017 as oil production is cut back in line with the recent OPEC agreement, while civil strife continues to take a heavy toll on many other countries.

World gross product is forecast to expand by 3.4% in 2017 and 3.6% in 2018.This modest recovery is more an indication of economic stabilisation rather than a signal of a robust and sustained revival of global demand.

Global Growth Projections (%)

2016 (E) 2017(P) 2018(P)
World Output 3.1 3.4 3.6
Advanced Economies 1.6 1.9 2.0
Emerging Market and Developing Economies 4.1 4.5 4.8

Source: International Monetary Fund (IMF)

India Economic Review

India has firmly established itself as one of the most dynamic and fastest emerging economy among the largest countries and is expected to retain the status backed by robust private consumption and significant domestic reforms gradually being implemented by the government. As per the Economic Survey 2016-17, the Indian economy is expected to grow between 6.75% and 7.5% in FY 201718. The uptick in Indias economic fundamentals has accelerated in the year 2015 with the combined impact of strong government reforms and Reserve Bank of Indias inflation focused policies which was further supported by benign global commodity prices.

Indias consumer confidence index stood at 136 in the fourth quarter of 2016, topping the global list of countries on the same parameter on strong consumer sentiment, according to Nielsen, a leading market research agency.

Indias economic landscape witnessed two landmark initiatives in fiscal 2017, first; passing of long impending Goods and Services Tax (GST) bill, second and the most unexpected; demonetisation of high currency notes.

The GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth. It is also a bold new experiment in the governance of Indias cooperative federalism. Demonetisation has had short-term costs but it holds the potential for long term benefits

Numerous foreign companies are setting up their facilities in India under the umbrella of various government initiatives like Make in India and Digital India to boost the manufacturing sector of Indian economy. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. GDP from manufacturing in India reached an all-time high of 5,010 billion in the second quarter of 2016-17. This happened due to an enormous push by the government to open the economy. The foreign direct investment limit has been increased in 15 sectors and a push to increase ease of doing business, along with a rapidly growing consumer base, has boosted investor confidence. Since forging sector is closely allied to the manufacturing sector, with the increase in the manufacturing activity, the demand for forging is also expected to improve and strengthen over the coming years.

India continues to be a bright spot in the world economy. The manufacturing industry in India has shown resilience and is confident about its growth prospects amidst challenges such as unavailability of adequate raw material, pressure for increased wages and muted demand. Companies are looking to increase their competitiveness by focusing on innovation—by launching new product and service offerings, boosting R&D spend and investing in newer technologies

Industry Overview

Global Forging Industry

According to a research report by Technavio on global forging industry, the market will exhibit a healthy CAGR of around 8% and expected to reach at USD 111.1 billion by 2020. But with the automotive industry reaching a mature stage in the forging market, it is expected that other nonautomotive sectors will mostly contribute to the growth of the global forging market until 2020. The introduction of hybrid forging techniques will drive the growth prospects for the global forging market in the forthcoming years. Hybrid forgings is basically using the advantages of open die forging combined with the near-net shape capability of closed die forging, wherein the forging process can be tailored to optimize time and cost savings. Also, with the growing use of computer-aided designing (CAD) and innovations, the costs as well as the time is optimised, which further increases the demand for hybrid forging techniques in the market.

In terms of geography, APAC (Asia Pacific) accounts for the maximum market share in 2016 and will continue to dominate the market for the next few years. One of the major factors responsible for the markets growth in the region is the increasing outsourcing of forging activities to developing countries, which results in the low cost of labour and raw materials.

The global forging market is fragmented and dominated by large international players. The small vendors find it difficult to compete against international vendors in terms of quality, features, functionalities and services.

The global forging industry is oscillating between low cost manufacturing and differentiated solution manufacturing.

China has low cost manufacturing with huge spare capacities and capability to do reverse engineering. Japan competes on total quality and productivity. On the other hand, Germany and the USA are changing the part configuration all together so that manufacturing of those components will require a specific technology which may not be affordable by low cost countries. Indian forging industry is tactically positioned with lost cost and high technical capabilities

Indian Forging Industry

The Indian forging industry is one of the key contributors to the manufacturing sector of the Indian economy. It is of strategic importance in the growth of the Indian automobile industry as well as other industries such as general engineering, construction equipment, oil & gas and power. With an installed capacity of 37.7 lacs MT, Indian forging industry has a capability to forge variety of raw materials like Carbon steel, Alloy steel, Stainless steel, Super Alloy, Titanium, Aluminium, etc. Automotive industry is the main user segment which commands the share of 60% of total production while the remaining 40% is the diversified non-auto segment.

The Governments impetus on manufacturing sector with initiatives like ‘Make in India and ‘Skill India has generated strong long-term positive economic sentiments amongst the business community. Many global OEMs and Tier-I players are setting up purchasing offices in India and looking at procuring high standard quality products, which will open many avenues to the Forging Industry. Indian forging industry was initially labour intensive but is rapidly adapting itself to the changes in requirement of the end user industries. It has invested in capital intensive manufacturing technologies, consequent to which quality standards in the industry have improved significantly and the sector is now well known globally for its high quality.

Today the industry is a source of employment to large number of people at around one lac in the country. It has made rapid strides and currently meets almost all the domestic demand and emerged as a large exporter of forgings. The Indian forging industry is projected to grow at CAGR of 9.5% by 2018, vs the global CAGR of 8% and expected to reach at 2.97 mn MT in FY 2017-18 from 2.25 mn MT during FY 2014-15. according to Association of Indian Forging Industry (AIFI). The overall capacity utilisation of industry is also improved and stood at around 65% in FY 2015-16.

Steadily Growing End Markets

Indian Governments renewed thrust on manufacturing sector with initiatives like ‘Make in India and ‘Skill India has definitely created positive economic sentiments amongst the Indian as well as global business community, which will be a major fillip to the non-automotive forging markets like Defence, Oil & Gas, Railways, Power Shipbuilding, etc. With the automotive industry reaching a mature stage in the forging market, it is expected that other non-automotive sectors will mostly contribute to the growth of the global forging market in the coming years. Sanghvi Forging has been a preferred supplier of critical components with its clients in Power, Oil & Gas and Defence sector.


• Contractual offset obligations worth approximately $4.5 billion

• 60% of defence related equipment are met by imports which offer a huge opportunity for import substitution

• Defence allocation in the Union budget is approx $35 billion , 1/3rd of which would be spent on capital acquisitions.

Oil & Gas

• 60% of the prognosticated reserves of 28,000 MMT are yet to be harnessed

• Investment opportunities are in upstream , gas pipeline , City Gas Distribution Network, LNG Terminal , Petrochemical and Refinery

• Completion of national gas grid by construction of another 15,000 km of gas pipeline network.

• Euro IV to Euro VI conversion


• Indian Govt. has a target of adding 175 GW of renewable energy by 2022

• Small Hydro has installed capacity of 8.062 GW with potential of 22.5 GW

• Govt. of India has taken initiatives to set up Ultra Mega Power Projects of 4000 MW capacity

• 10 new nuclear reactors have been sanctioned


Indian power sector is undergoing a significant change that has redefined the industry outlook over the long term. Sustained economic growth continues to drive electricity demand in India. The Government of Indias focus on attaining ‘Power for all has accelerated capacity addition in the country. The Ministry of Power has set an ambitious target of 1,229.4 billion units (BU) of electricity to be generated in the financial year 2017-18, which is 50 BUs higher than the target for 2016-17.

Around 293 global and domestic companies will generate 266 GW of solar, wind, hydel and biomass-based power in India over the next 10 years. Share of renewable in Indias electricity demand to rise from 4% currently to 13% by 2022. India is expected to double its nuclear power generation capacity to more than 10,000 MW over the next five years. Nuclear Power Plant and Advanced Ultra Super Critical Power Projects will require Large number of critical forgings.


India has been rapidly augmenting its spending on defence year on year. India stands as the third largest defence spender in the world after US and China. Equipment spending by Ministry of Defence has increased 15-20% over the last five years and is projected grow at a much higher pace in the future. With importing nearly USD 5.5 billion worth of military hardware, India has emerged as the largest arms importer in the globe accounting nearly 15% of such imports internationally. This has created an urgent need to achieve self-reliance to sustain the needs of Indian defence sector for strategic and economic reasons.

The government has been assiduously working upon building the defence manufacturing capabilities over the years. “Make in India” has triggered the positive sentiments for making India to stand at par with its global counterparts with respect to its in house defence manufacturing competencies. The licensing for most of the components and raw materials used in defence production has been scrapped which means such components or raw materials required in castings, forgings, production machinery, testing equipment have been taken out of the purview of industrial licensing. The Indian private sector has also been allowed to receive maintenance transfer of technology in ‘Buy (Global) cases. Overseas defence companies are required to discharge offsets of at least a minimum of 30% of the total value of the defence contract. These obligations can be fulfilled either through transfer of technology, direct purchase of components and systems from the defence industry, or by creating specific manufacturing facilities and investing in skill development and training.

At present, about 50% of the defence manufacturing in India is dominated by the international players (via imports). With higher participation of domestic players in the defence space, the share of imports is projected to drip down by 20-25% in next four to five 4-5 years.

Oil & Gas

The Oil & Gas sector is among the six core industries in India. The Government of India has adopted several policies to fulfil the increasing demand for oil and gas.

It has allowed 100 per cent Foreign Direct Investment in many segments of the sector, including natural gas, petroleum products, and refineries, among others. The Government of India plans to merge state oil companies to create an integrated oil major that could compete globally, and utilise the synergy between various state entities for achieving efficiency and cost competitiveness to create more value for all shareholders. It also plans to unveil a new policy for renewing and extending the lease of 28 oil and gas blocks in the country, with a view to attract more investments into these fields.

The countrys gas production is expected to touch 90 Billion Cubic Metres (BCM) in 2040 from 23.09 BCM in FY 2016-17 (till December 2016). Gas pipeline infrastructure in the country stood at 15,808 km in December 2015 and another 15,000 km at expected to be added. 22% of the countrys sedimentary basins have been explored, series of large deep water blocks untouched. Government has awarded 247 total blocks over the last 13 years, only 16 of the blocks have been developed. New projects are also expected in Middle East region. State-owned Oil and Natural Gas Corporations upstream Investments in Indias Oil & Gas sector will likely touch 2.5-3 trillion


One of the key challenges faced by the Indian forging industry is price disparity of raw materials as compared with Chinese and European markets. Prices of major input materials like steel scrap, coke and iron ore have dropped by more than 30% globally over a year. Internationally, prices for plain carbon steel used for the forging industry has come down to new lows after which, steel mills across the globe have adjusted their selling prices. It is not only China that is offering competitive prices but also South Korea, Japan followed by others. While on the other hand, the Indian steel prices have not been reduced to that extent which is making the manufacturing of forging and export to global destinations unviable for companies.

The other major challenge is inadequate supply of power and increasing power price. Since forging is power intensive, the availability of good quality power consistently at competitive tariff is paramount for competitive operations and global competitiveness of the sector and for supporting manufacturing.


The future of the Indian forging industry looks promising and optimistic, driven primarily by the lucrative export prospects and backed by a unique mix of cost arbitrage offered by Indias lower labour costs and its technical capabilities. Forging is becoming increasingly uneconomical and unviable in the West because of imposition of prohibitive labour and environmental compliances which has led to sharp rise in costs, characterised by slowing capacity additions. India has a significant cost edge whereby average labour costs in India are ~25% of the labour costs in the West and countries like Korea, enabling Indian companies to gain a strong cost arbitrage and also excellent engineering skills.

There lies a significant opportunity for domestic forging companies, who have taken far sighted decision of bringing on-stream additional capacities, through significant investment in capex over give years through FY 2016; the commissioning of which is expected to coincide with the revival in demand in key domestic and overseas markets. While execution will remain a crucial success factor, higher capacity presses would improve product mix, value add potential and new customer acquisitions.

Operational Overview

Unutilised plant capacities and low order book are two major stumbling blocks in achieving our true potential and the Company is unabatedly working towards on improving the capacity utilisations at its new plant through timely and successful execution of orders. It is also trying to augment and diversify order book across different sectors, which will further improve and optimise the plant operations.

The upsurge in the manufacturing activity will accentuate forging activities and therefore the Company is focusing on strengthening the core of its business through innovation, market development and operational excellence.

Discussion on Financial Performance with respect to Operational Performance

The Company has achieved net revenue income of 555.3 mn, which is a reduction in sales revenue of 19.8% as compared to last year. Due to non-availability of raw material, the Company was not able to process the orders in hand Net loss was in FY 2017. Lower capacity utilisation (below 25%), higher fixed costs and interest burden were the main reasons for the loss. Low capacity utilisations at the new plant adversely impacted operations and the resulting lower sales led to acute cash deficit.

This resulted in default in servicing various interest, installments and LC commitments. The Company faced liquidity constraints rendering its account as NPA in November 2016.

Sanghvi Forging is quite confident of a turnaround in the long run, and has submitted a restructuring proposal to banks in January 2017. The Company is also pro-actively managing its cash flow to the optimum level.

Sanghvi Forging is taking various steps to reduce cost of production. Few major steps taken are as follows.

a) Reduction in total contract demand for electricity from 3000 KVA to 2000 KVA

b) New GAS contract with Gail with lower prices.

c) Optimisation of production process to improve the yields.

The Companys old plant is working efficiently with higher capacity utilisations while the new unit is running at low capacity utilisation. The facilities created therein are world class and with steadily improving market conditions, higher demand along with above mentioned initiatives taken by the Company will improve productivity of the new unit. This will contribute to significant improvement in its EBITDA margins in coming period.

Financial Performance (Standalone)

Mn 2016-17 2015-16
Revenue 555.3 692.86
EBITDA 30.59 146.48
PAT -225.2 -99.87
EPS -15.12 -7.1

Revenue Break-up (Operational)

2016-17 2015-16
Domestic 412.1 493.6
Exports 143.2 199.3

Human Resource Capital

Human Capital is the most crucial asset of any company.

A organisation cannot sustain without wholehearted participation of its people. The Company has continued to invest in developing its teams to enhance their efficiency and with strong focus on developing skills and capabilities of its employees. Employee motivation is one of the Companys key HR focus areas, where regular workshops and training sessions are conducted for the overall holistic development of its employees.

The Companys headcount stood at 238 as on March 31, 2017 and the average age of employees was 30 indicating a young and dynamic pool capable of adapting itself in the ever-changing environment. The Company is focused on creating a competitive but cordial working environment for the development of a talented and loyal workforce

Risk and Mitigation

The Companys risk management policies are dynamic and proactive and are designed in such a manner that the Company can respond swiftly to the risks and implement necessary mitigation activities. A prudent risk management framework has been developed, which helps us identify and analyse internal and external risks and minimize its impact on operations and financials. The Board of Director has formulated Risk Management policy, which puts in place Risk Management structures with a clear definition of roles and responsibilities, as well as risk portfolio involving a continuous process of Risk identification, risk assessment, control assessment and risk monitoring, review and communication.

The following are key risks in business

Industry and Market Risk

Forging activities are ancillary to manufacturing industry and any downturn in the manufacturing activity directly affects the demand in the forging industry. Any downturn in the industry thus affects our order book position and leads to unutilised plant capacities and shutdowns

Mitigation Strategy: The Company is trying to diversify our product portfolio across different sectors in the manufacturing sector to derisk. Product approvals are presently well diversified across various sectors.

Raw Material Price Volatility Risk

It is the risk associated with regards to the volatility in the price of raw material costs steel, energy and freight, which has direct impact on its production costs and profitability.

Mitigation Strategy: The Company books the raw material only after it receives the order from customer with the forward delivery to minimise risk to profit margin.

Technological Risk

Forging is a complex process which relies heavily on technology heavy industry. Forging of critical components in key sectors requires massive investment in new technologies, which is sourced from international markets at significant costs. Use of obsolete technologies can lead to compromise in the quality of products and loss of productivity

Mitigation Strategy: The Company gas invested more than 150 crores in last five years in setting up and modernising its technology and its new open-die plant is state of the art.

Internal Control Systems and their Adequacy

“The Company has, since inception, laid down a system of internal control which is commensurate with the size and nature of the business. Adequate and effective checks are in place to ensure that financial data is accurate and reliable. The internal control systems also ensures that the assets and interest of the Company are well protected. The internal audit is carried out throughout the year based on a systematic procedure covering all functions and aspects of the business. The internal audit reports are reviewed by the senior management and are placed before the audit committee of the Board of Directors along with actions taken. The audit committee undertakes a detailed review of the audit observations and actions to ensure that the internal audit system is effectively functioning.

The recommended actions by audit are monitored and improvements are implemented which are regularly reviewed by the senior management. The IT system of the Company is based on a robust ERP system SAP ECC 6.00 which was implemented in 2008 for ensuring seamless connectivity of plants, sales offices and head office for better control facilitating faster and more reliable processing of transactions as well as generating accurate reports for faster decision-making. The Company also has a strong control system and management reporting system which serve as the backbone of the monitoring system of operations to ensure that business results are achieved and continuous improvement projects are undertaken”.