Annual Report - Bharat Forge - 2008-2009

BHARAT FORGE LIMITED

ANNUAL REPORT 2008-2009

DIRECTORS' REPORT

To,
The Members,

Your Directors have pleasure in presenting the Forty-Eighth Annual Report
on the business and operations of the Company and the accounts for the
Financial Year ended March 31, 2009.



1. PERFORMANCE OF THE COMPANY

a) Total Income (on stand-alone basis):

2008-09 2007-08 % Decrease

Rs. 21064 Million Rs. 22849 Million 8%

During the year under review, the total income of the Company touched
Rs.21064 Million (Rs. 22 849 Million) representing decrease of 8%.

b) Exports Revenue (on stand-alone basis):

2008-09 2007-08 2006-07 2005-06

Rs.10014 Rs.9610 Rs.7513 Rs. 6555
Million Million Million Million

During the year under review, exports turnover of the Company crossed Rs.10
billion mark for the first time Rs. 10 014 Million, an increase of 4% over
previous year (Rs. 9 610 Million).

Over the review period, the global economy has started to witness perhaps
the most tumultuous economic challenges ever. Almost every country in the
world and all industrial sectors are exposed to adverse effects of the
slow-down. The Company witnessed enormous challenges due to the sudden and
severe slow-down in the auto sector. Most OEMs' globally have witnessed
acute contraction of their order-book ranging from 40% to 70% as compared
to previous year. Inventory adjustment both for vehicles and components
further accentuated the effect of lower demand on component suppliers.

However, the Company has continued its relentless focus on the strategy to
enhance its presence in NonAutomotive sectors like Energy (conventional and
renewable), Infrastructure, Aerospace, Rail & Marine. The Company is in
advanced stages of finalizing new business agreements, for supply of
critical forgings for Oil & Gas industry, and rotor turbines for wind &
steam energy industry.

The Company is strongly focusing on enhancing opportunities for value
addition for existing as well as new customers. Growing revenue from non-
automotive business as also aggressive measures for cost control have
helped the Company in posting reasonable results despite the difficult
market conditions.

c) Financials (on stand-alone basis):

(Rs. in Million)
Current Previous
Year Year

Profit for the year before 1576.65 3666.32
Taxation & Exceptional item

Exceptional item - 303.47

Provision for Taxation:

Current including Wealth Tax & FBT 55.20 1050.00

Deferred 488.60 183.90

Net Profit 1032.85 2735.89

Balance of Profit from Previous Year 5 570.29 4134.47

6603.14 6870.36

Add/(Less): Tax Refunds and
Excess Provisions net of prior year items (29.04) -

Profit available for appropriation 6574.10 6870.36

APPROPRIATIONS:

Proposed dividend on Preference Shares - 7.14

Tax on above dividend - 1.21

Proposed dividend on Equity Shares 222.65 779.28

Tax on above dividend 37.84 132.44

Capital Redemption Reserve - 100.00

Debenture Redemption Reserve 26.10 -

Transfer to General Reserve 120.00 280.00

Surplus retained in Profit & Loss Account 6167.51 5570.29

2. DIVIDEND:

Your Directors recommend a Dividend of Re. 1/- per Equity Share of Rs. 2/-
each (50%) for the year ended March 31, 2009.

3. CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Financial Statements in accordance with Accounting Standard-21
issued by The Institute of Chartered Accountants of India have been
provided in the Annual Report. These Consolidated Financial Reports provide
financial information about your Company and its Subsidiaries as a single
economic entity. The Consolidated Financial Statements form part of this
Annual Report.

4. OVERSEAS SUBSIDIARIES OPERATIONS:

The Company has 13 Subsidiaries of which 12 are overseas and 1 is in India.
A summary of their performance is given elsewhere in the Annual Report.

In view of the unprecedented downturn in the automotive sectors across the
globe, the auditors of Bharat Forge Scottish Stampings Limited (BFSSL) and
Bharat Forge America Inc. (BFA), two subsidiaries of the Company, active in
the European and North American markets respectively, have, without
qualifying their reports, expressed a possibility about these subsidiaries
inability to continue as going concerns including the potential closure of
BFSSL. These companies have implemented various measures to adapt
themselves to lowervolumes, which include a significant headcount
reduction, a very tight control on costs, development of new products and
an efficient working capital management. It is expected that these steps,
along with the support provided by the Company would enable these
subsidiaries to survive the present downturn and report good performance
when the markets recover. Hence, the accounts of these subsidiaries have
been prepared on the 'going concern' basis.

A significant portion of the consolidated revenues is generated by the
subsidiary companies. Detailed analysis of the working of the subsidiary
companies appears in the Management Discussion & Analysis.

5. SUBSIDIARY COMPANIES ACCOUNTS:

The Company has received an approval of the Central Government under
Section 212(8) of the Companies Act, 1956, vide their letter No.
47/176/2009-CL-III dated 31st March, 2009 which exempts the Company from
attaching to the Balance Sheet, the copies of the Balance Sheets, Profit
and LossAccounts, Directors' Reports and Auditors' Reports and other
documents required to be attached under section 212(1) of the Act of its
subsidiary companies, namely:

i) CDP Bharat Forge GmbH, Germany.
ii) Bharat Forge Holding GmbH, Germany.
iii) Bharat Forge Aluminiumtechnik GmbH & Co. K.G., Germany.
iv) Bharat Forge Aluminiumtechnik Verwaltungs GmbH, Germany.
v) Bharat Forge Daun GmbH, Germany.
vi) Bharat Forge America Inc., U.S.A.
vii) Bharat Forge Beteiligungs, GmbH, Germany.
viii) Bharat Forge Kilsta AB, Sweden.
ix) Bharat Forge Scottish Stampings Ltd., Scotland.
x) Bharat Forge Hong Kong Limited (Formerly, Lucrest Limited), Hongkong.
xi) FAW Bharat Forge (Changchun) Company Limited, China.
xii) BF New Technologies GmbH, Germany and;
xiii) BF NTPC Energy Systems Ltd., India.

Accordingly, the said documents are not being attached to the Financial
Statements of the Company. A gist of the financial performance of the
subsidiaries is given in this Annual Report. The annual accounts of the
subsidiary companies are open for inspection by any member/investor and the
Company will make available these documents/details upon request by any
Member/Investor of the Company/subsidiaries of the Company interested in
obtaining the same.

6. CAPACITY EXPANSION AND NON-AUTO BUSINESS:

Members are aware of the Expansion Plans underway at Company's factories at
Mundhwa, Baramati and Satara. Current status of implementation is as under:

A. BARAMATI:

The new state-of-art 80 Mtr-T counterblow hammer for production of heavy
forgings for large diesel engines and aerospace applications as well as
Machining line for heavy duty and medium duty crankshafts both started
operations from March, 2009.

The Company has completed installation of a ring rolling mill capable of
rolling rings upto 4.5 meter diameter and 500 mm height, along with its
Blanking Press. This facility will be operational by the end of June, 2009.
The Company has already secured orders from wind turbine and large gear box
manufacturers from global OEMs.

B. MUNDHWA/SATARA

The new state-of-art 4 OOOT Open Die Forging press was commissioned in
August, 2008 and now is fully operational.

7. JOINT VENTURES:

A. JOINT VENTURE WITH NTPC

Following signing of a Memorandum of understanding with NTPC Limited, the
largest power utility in India, your Company has set up a Joint Venture
Company, as its subsidiary, by the name BF-NTPC Energy Systems Limited with
51:49 stake. This venture is aimed at availing enormous opportunities in
power sector in India, especially in the Balance of Plant (BoP) space. The
Company has preliminarily identified high pressure piping, pumps, valves,
related forgings and castings, etc. as potential items of manufacturing. A
Joint Business Development Group (JBDG) is now finalizing appointment of
consultant to develop a comprehensive business plan of this venture.

B. JOINT VENTURE WITH ALSTOM

To sustain an economic growth of 7-8%+, India's power generation capacity
has to reach 800 GW by the year 2030 from the current level of 148 GW as
per estimates by the GovernmentofIndia.Thiscallsforannual capacity addition
in the range of 30-32 thousand MW per year. Existing power equipment
capacity in the country is only around 8-10 thousand MW. Anticipating this
growing shortfall of equipment, Government of India is encouraging major
investments in this area with accent on cleaner technologies.

Your Company has accordingly decided to forge a joint venture with Alstom,
the global power and transport major, to manufacture sub-critical and
supercritical turbines and generators ata port based location in
India.Ashareholders agreement was accordingly signed between Bharat Forge
and Alstom in November, 2008 for setting up of two joint venture companies.
The first Company with 51% stake of Alstom and the rest with Bharat Forge
will manufacture 5 000 MW of turbines and generators of 300-800 MW+ range
annually for coal-based power plants. The second JV Company with majority
stake of Bharat Forge will manufacture range of heat exchangers,
condensers, deaeraters and other auxiliaries for these power plants. The
partnership aims at further exploring possibilities of manufacturing
turbines and generators for gas and nuclear based plants.

Investments and business plan for both the companies have been finalized
and the joint venture companies are to be incorporated in the current
financial year. The plants of these companies are expected to be ready by
the year 2012.

This joint venture will mark a significant capacity creation in growing
powersector of India and is expected to richly contribute to the national
objectives of 'energy sufficiency' and 'Power for All'.

C. JOINT VENTURE WITH AREVA

The Company has entered into Memorandum of Understanding with AREVA NP,
France, to set up a joint venture (JV) to build a manufacturing facility
for heavy forgings in India. AREVA is a Worldwide leader in the nuclear
power activities, including the design, manufacture and supply of nuclear
power plants, components and fuel to customers all over the World.

Manufacture of non-automotive forgings, including for power sector
applications, is a major growth area for the Company. In order to meet the
strong energy needs in India and given the exciting opportunities emerging
in the country's nuclear power sector, Bharat Forge and AREVA are
partnering in the JV Availability of heavy forgings is a major constraint
for global manufacturers of equipment in the energy sector. The JV would
secure supply of heavy forgings, especially stainless steel forgings to the
customers. Heavy forgings manufactured by the JV would primarily meet
indigenous requirements of power generation sector, including manufacture
of turbines, generator rotors, steel plant rolls etc. and also of new
nuclear power plants in the country.

Bharat Forge and AREVA are presently evaluating various locations in the
Country to set up the new facility. The JV will have a state-of-the-art
14000 Ton open die forging press with associated equipment and an
integrated steel making facility.

8. TERM DEPOSITS:

As on March 31, 2009, 45 Depositors having deposits aggregating Rs.573000/-
did not collect the amounts due. However, deposits amounting to Rs. 26000/-
(4 Depositors) has been subsequently transferred to Investor Education &
Protection Fund.

9. PARTICULARS OF EMPLOYEES:

Information as per Section 217(2A) of the Companies Act, 1956 (the Act),
read with the Companies (Particulars of Employees) Rules, 1975), forms part
of this Report. As per the provisions of Section 219(1)(b)(iv) of the Act,
the Directors' Report and Accounts are being sent to the shareholders
excluding the statement giving particulars of employees under Section
217(2A) of the Act.

Any shareholder interested in obtaining a copy of the statement, may write
to the Company Secretary at the registered office of the Company.

10. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE
EARNINGS AND OUTGO:

The additional information required under the provisions of Section
217(1)(e) of the Companies Act, 1956 read with Companies (Disclosure of
Particulars in the Report of Board of Directors) Rules, 1988, and forming
part of the Report is also annexed hereto.

11. DIRECTORS:

Mr. S.S. Marathe, Director expired on September 28, 2008 and vacancy caused
by his sad demise has not been filled up by the Board. The Directors place
on record their sincere appreciation of the very useful contributions made
by him during his long association with the Company.

Mr. P.H. Ravikumar, Nominee Director of ICICI Bank Limited, resigned and
ceased to be Director, with effect from March 26, 2009; his nomination
having been withdrawn by ICICI Bank Limited and was subsequently appointed
as Independent Director with effect from May 20, 2009.

In accordance with the provisions of the Companies Act, 1956 and the
Articles of Association of the Company, Mr. B.P. Kalyani, Mr. S.E. Tandale,
Mr. P.K. Maheshwari and Mr. S.M. Thakore, Directors of the Company, retire
by rotation and being eligible, they offer themselves for re-appointment.

12. DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to the requirement under Section 217(2AA) of the Companies Act,
1956, with respect to Directors' Responsibility Statement, your Directors
confirm that

(i) In the preparation of the accounts for the financial year ended March
31, 2009; the applicable accounting standards have been followed along with
proper explanation relating to material departures, if any;

(ii) Accounting policies selected had been applied consistently and made
judgments and estimates that were reasonable and prudent so as to give a
true and fair view of the state of affairs of the Company at the end of the
financial year and of the profit of the Company for the year under review.

(iii) Proper and sufficient care had been taken for the maintenance of
adequate accounting records in accordance with the provisions ofthe
Companies Act, 1956 for safeguarding the assets of the Company and for
preventing and detecting fraud and other irregularities and;

(iv) The annual accounts had been prepared on a 'going concern' basis.

13. AUDITORS:

You are requested to re-appoint Auditors for the current year to hold the
office from the conclusion of the ensuing Annual General Meeting until the
conclusion of the next Annual General Meeting.

Your Directors wish to place on record their appreciation of the positive
co-operation received from the Central Government and the Government of
Maharashtra, Financial Institutions and the Bankers. The Directors also
wish to place on record their thanks to all employees of the Company
fortheir unstinted efforts during the year.

The Directors express their special thanks to MR. B.N. KALYANI, Chairman
and Managing Director, for his untiring efforts for the progress of the
Company.

For and on behalf of the
Board of Directors

B.N. KALYANI
Chairman and Managing Director

Pune: May 20, 2009

ANNEXURE TO THE DIRECTOR'S REPORT

INFORMATION AS PER SECTION 217 (1) (e) OF THE COMPANIES ACT, 1956, READ
WITH THE COMPANIES (DISCLOSURE OF PARTICULARS IN THE REPORT OF BOARD OF
DIRECTORS) RULES, 1988 AND FORMING PART OF THE DIRECTORS' REPORT FOR THE
YEAR ENDED MARCH 31,2009:

I. CONSERVATION OF ENERGY

(a) Energy conservation measures taken:

i) Increasing use of furnace oil.

ii) Electric load management to restrict maximum demand of power supply.

iii) Increasing usage of micro alloyed steel to save on heat treatment
energy cost.

iv) Optimum utilization of furnaces.

v) Power factor improvement.

vi) Regenerative Burner technology and;

vii) Energy management and monitoring software installation.

(b) Additional investments and proposals, if any, being implemented for
reduction of consumption of energy:

i) Improving thermal efficiency of furnaces.

ii) Change to more energy efficient motors.

iii) Variable frequency drive application for motors.

iv) High velocity burners technology.

v) Internal energy audits and;

vi) Energy conservation awareness training programs.

(c) Impact of measures at (a) and (b) above for reduction of energy
consumption and consequent impact on the cost of production of goods:

Lower energy consumption.

(d) Total energy consumption and energy consumption per unit of production
as Form-A of the Annexure to the Rules in respect of Industries specified
in the schedule thereto:

(A) Power & Fuel consumption for the period:

2008-09 2007-08

1. Electricity:

(a) Purchased:

Units (KWH in thousand) 146847 187737
Total Amount (Rs. in Million) 753.00 883.17
Rate / KWH (Rs.) 5.13 4.70

(b) Own Generation:

Through Diesel Generator NIL NIL
Through Steam Turbine / Generator NIL NIL

2. Coal: NIL NIL
3. Furnace Oil: (included in Fuel Oil) NIL NIL

4. Others:

i) Fuel Oil:

Qty. (KL) 24624 30447
Total cost (Rs. in Million) 746.91 694.70
Rate (Rs./KL) 30333 22817

ii) LPG:

Qty. (Kgs. in thousand) 5047 5621
Total Cost (Rs. in Million) 208.99 196.12
Rate (Rs./Kg.) 41.41 34.89

(B) Consumption per unit of production:

Current Year Previous Year

1. Steel Forgings (Unit: MT):

Electricity (Unit- KWH) 802 743
Fuel Oil (KL) 0.183 0.159
LPG (Kgs.) 38 29

2. Crankshafts and others (Unit: Nos.)

Electricity (Unit- KWH) 62 48

3. General Engineering and Material:

Handling Equipments (Unit - Nos)
Electricity (Unit - KWH) 510974 92974

II. TECHNOLOGY ABSORPTION

Efforts made in technology absorption as per Form-A of the Annexure to the
rules:

1. Research & Development (R&D):

a) Specific areas in which R&D carried out by the Company:

i) Development of high-speed processing cluster for compressing computing
calculation time required for metal flow simulation.

ii) Establishment of combined trim-cum-piercing process for Front Axle
Beam.

iii) Establishment of non-destructive (ultrasonic) method of evaluation of
induction hardened case depths for crankshafts.

iv) Re-engineered crankshaft to improve rotating balance and to avoid
cranks in the ladder frame at high speed.

v) Development of software for prediction of properties on heat treatment
and controlled cooling for steels.

vi) Optimization of Front Axle Beam by using CAE & Fatigue Testing.

vii) Re-engineered control arm design using topology optimization.

viii) Stress distribution study on crankshafts pin diameter and fillet for
torsional loading for improvement of torsional strength.

ix) Development of Rear Axle Tube with micro alloy steel and;

x) Investigation of effect of crankshaft specimen orientation on strain
distribution in torsional fatigue test.

b) Benefits derived as a result of the above R & D:

Customers' satisfaction and new business opportunities because of cost,
quality and speed.

c) Future Plan of Action:

i) Development of simulation capability for Aerospace parts.

ii) Manufacturing and fatigue testing of Aerospace forgings.

iii) Optical measurement of dies.

iv) Study the effect of crankshaft test specimen orientation on strain.

v) Study on bending rigidity of crankshaft based on geometry.

vi) Cutting tool life improvement through machinability studies.

vii) Development of hot working steel with high thermal strength with
significantly high toughness for hot forging dies and;

viii) Micro structural characterization of nitride layer on wear life of
hot forging dies.

d) Expenditure on R & D:

Particulars (Rs. in
Million)
i) Capital -
ii) Recurring 36.38
iii) Total R&D expenditure 36.38
iv) TOTAL TURNOVER 21063.54
v) Total R&D expenditure as a percentage of total turnover 0.17%

2. Technology absorption, adaptation and innovation:

a) Efforts, in brief, made towards technology absorption, adaptation and
innovation:

i) Metal flow simulation and design optimization to improve yield.

ii) Reduction of forces on dies to improve die life and productivity.

iii) 'First time right' for new part development and;

iv) Reduction of machining allowance by optimizing the process.

b) Benefits derived as a result of the above efforts e.g. product
improvement, cost reduction, product development, import substitution, etc.

i) 'First time Quality' with reduced development cycle time for new part
development.

ii) Improved yield and die life and;

iii) Customer satisfaction and new business opportunities.

c) In case of imported technology (imported during the last 5 years from
the beginning of the financial year):

Technology Year of Has technology If not fully absorbed, areas
Imported import been fully where this has not taken
(product) absorbed place, reasons therefore
and future plan of action

Technical 2004 Absorbed -
know-how and
Assistance from
Metal Art
Corporation,
Japan for the
manufacture
of Forged
Products for
Toyota's Joint
Venture in India

III. FOREIGN EXCHANGE EARNINGS AND OUTGO:

a) Activities relating to exports, initiatives taken to increase exports,
development of new export markets for products and services and export
plans:

During the year under review, the Company witnessed enormous challenges due
to the sudden and severe slow-down in the auto sector world-wide. Most
OEMs' globally witnessed acute contraction of their order-book ranging from
40% to 70% as compared to previous year.

The Company has continued its relentless focus on the strategy to enhance
its presence in Non-Automotive sectors like Energy (conventional and
renewable), Infrastructure, Aerospace, Rail & Marine etc. The Company's
strategy to de-risk its business by expanding in other geographies such as
Europe & towards Non-Automotive business has helped to mitigate the adverse
impact.

The Company is strongly focusing on enhancing opportunities for value
addition for existing as well as new customers.

b) Total foreign exchange used and earned:

USED : Rs. 3273.93 Million.
EARNED : Rs. 10595.88 Million.

For and on behalf of the Board of Directors

B.N. KALYANI
Pune: May 20, 2009 Chairman & Managing Director

MANAGEMENT DISCUSSION AND ANALYSIS

OVERVIEW

A decade ago, Bharat Forge (referred to as BFL' or the company') embarked
on an aggressive growth journey with focus on expanding its global
footprint in the forging industry. The emphasis was on aggressive growth
with a derisked business model. While the vision was ambitious, the company
relied on its ability to analyse evolving business environments and
strategically position itself to best leverage the opportunities.

The business ethos focused on implementation excellence that created value
over a sustained period of time. Consequently, the company adopted a well
structured strategic growth plan that selectively chose markets, product
portfolios & customer profiles with clearly distinguishable phases of
development. These phases can be broadly summarised as below:

First, the company focused on expanding its customer base with a specific
focus on growing exports. In the process, it developed world-class
facilities, incorporated 'best in class' practices and adopted technology
to produce quality products at costs that were good value propositions.

Second, on realising the need to be closer to international OEM customers
and to widen the company's reach with global automotive companies, BFL
embarked on a series of acquisitions across geographies. This established
Bharat Forge as a truly international entity and cemented long term
relationships with an even larger number of customers while offering the
company greater access to technology.

Third, during this period, the company has been focusing on effectively
integrating its global operations and actively focussed on:

a. Sharing 'best practices' across its facilities.

b. Leveraging different customer relationships and offering them a wider
portfolio of products.

c. Integrating research and development activities to enhance product
development scope and reduce product development time.

d. Cross-fertilising different plants with enhanced products & production
capabilities.

By 2007-08, BFL had clearly achieved its mission of extending its global
position across several domains with significant presence in engine and
chassis components with a customer base comprising several of the world's
marquee OEMs. During this period of growth, the company primarily focused
on automotive forgings.

After establishing itself in this market, BFL decided to diversify by
focusing on non-automotive forgings. While, on one hand this move further
de-risked the business, on the other hand it opened up several
opportunities of growth in a large global market segment. Consequently,
large investments were made and capacity creation plans were rolled out for
non-automotive forging operations at Baramati (Maharashtra-India) and at
Mundhwa (Maharashtra-India).

This had been supplemented by an aggressive marketing drive to promote
BFL's non-auto forging operations especially in the transportation, oil &
gas, power generation and wind energy sectors. The new non-auto facilities
have come on line and have initiated commercial production. The two new
facilities will start contributing to the top line in FY 2010.

While it has made an aggressive foray into the non-auto segment, this
business is at a development phase for BFL. The major part of the company's
revenues continue to come from the automobile industry across the globe.
Both these business segments were adversely affected by the macro-economic
conditions prevailing across different geographies during 2008-09. It is
therefore important, at this stage, to look at the key economic
developments and their repercussions on BFL's markets.

THE EMPHASIS IN THE GLOBAL FINANCIAL SYSTEM WAS ON DELEVERAGING. AND, THIS
SYSTEMIC REDUCTION IN CREDIT IN THE SYSTEM LED TO A COMPLETE COLLAPSE IN
LIQUIDITY IN SEPTEMBER 2008.

GLOBAL BUSINESS ENVIRONMENT

On the back of the sub-prime led financial crisis, the US economy had
slowed down in 2007. The financial crisis deepened further in 2008 with
several leading financial institutions (FIs) having to write-off asset
losses in their books. As a result, some of the FIs went bankrupt, others
were bailed out by national governments and the remaining ones needed to go
through restructuring. The emphasis in the global financial system was on
deleveraging. And, this systemic reduction in credit in the system led to a
complete collapse in liquidity in September 2008. The liquidity crunch
further increased the existing negative sentiments in global economies and
the global real economy took a turn for the worse.

Chart A shows that global output growth declined from 5.2% in 2007 to 3.2%
in 2008 and is estimated to be negative 1.3% in 2009. Much of the slowdown
has been in the advanced economies of USA and EU. USA growth reduced to
1.1% in 2008 and is estimated to be negative 2.8% in 2009. EU growth became
almost stagnant at 0.9% in 2008 and in 2009 it is expected to be negative
4.2%. Such real sector contractions of major economic blocks translated
into a significant contraction in aggregate demand globally.

CHART A- WORLD OUTPUT GROWTH (%):

2007 2008 2009

WORLD 5.2 3.2 -1.3
UNITED STATES 2.0 1.1 -2.8
EURO AREA 2.7 0.9 -4.2
JAPAN 2.4 -0.6 -6.2
OTHER ADVANCED ECONOMIES 4.0 1.2 -3.9
EMERGING AND DEVELOPING ECONOMIES 8.3 6.1 1.6

Source: IMF (April 2009)

Even emerging economies witnessed reduction in growth to 6.1% in 2008 and
is expected to grow at an even lower rate of 1.6% in 2009. Naturally, the
Indian economy has also slowed down. After growing by 9% in 2007-08, India
continued to grow by over 7.5% in the first half of 2008-09. However, as
chart B shows, there has been a significant reduction in growth from the
third quarter of 2008-09. And, Central Statistical Organisation (CSO)
advance estimates suggest that GDP growth for India in 2008-09 will be
6.7%. While compared to the global economy this is much better growth,
however compared to the last four years of over 9% growth, this is a
slowdown.

CHART B - REAL GDP GROWTH (%) - INDIA:

07-08 08-09 08-09 08-09 08-09
9.0 7.8 7.7 5.8 5.8

Source: CSO

Being a part of a long supply-chain, BFL relies primarily on its customers
for demand estimates. Many of these customers also misread the market
developments. They built up stocks in expectations of continued growth
throughout the year. Consequently, BFL witnessed good demand in the first
half and had to operate in an environment where focus was on fulfilling
demand from end customers.

The situation became diametrically opposite in the second half. Within a
few days, in line with the economic developments of severe liquidity crunch
and indications of severe recession in the US and EU, automotive components
demand came to a standstill and orders virtually evaporated.

The non-automotive segment too was affected by issues like credit crunch
and negative sentiments amongst promoters of the large projects that these
forgings cater to.

Clearly, BFL faced a very challenging business environment during 2008-09.
And, the developments and performance of the company have to be evaluated
in light of the prevailing business environment.

BHARAT FORGE'S PERFORMANCE HIGHLIGHTS

In the beginning of 2008-09, BFL had geared for a slowdown in the
automotive industry but it was very difficult to have anticipated the
scale, size and impact of the slowdown. The sheer systemic slowdown across
sectors from the financial to the automotive sector and to the real economy
happened over a short span of few weeks in October & November 2008.

In prior years, slowdowns generally happened in a phased manner across
various geographies. Usually, it started in the United States and over a
period of time spread to Europe, South America, Japan and other parts of
Asia and the recovery was also in this order. This time, slow down in these
sectors happened in an unprecedented manner - almost simultaneously across
the globe.

Due to widespread globally depressed sentiment and the liquidity crisis,
the non-automotive sectors i.e. mining, construction, marine, power
generation etc, also dipped significantly. These sectors were actually
poised for quantum growth on a global scale. Like the automotive sector,
these sectors too went into a severe depression with hardly any notice.
This is perhaps the first time ever, when almost every industrial sector
globally has gone into a near simultaneous serious depression.

BFL has a manufacturing presence in three major continents, North America,
Europe and Asia. BFL's Indian operations cater to the domestic market as
well as global market through significant exports into USA, EU & other
parts of the world. As Chart C shows over 68% of BFL's consolidated product
market is in Europe and the US. In earlier years since all market segments
were never impacted simultaneously, BFL's de-risked business model
protected the company to a large extent. However, in 2008-09 recessionary
conditions prevailed globally, consequently BFL faced significant pressures
on the business front.

CHART C - GEOGRAPHICAL DISTRIBUTION OF BFL'S CONSOLIDATED REVENUES, 2008-
09:

EUROPE 52%
INDIA 22%
USA 16%
ASIA PACIFIC 10%

In addition, the change in market sentiments was deep and sudden, so while
BFL re-aligned its business strategy, operation plans and adapted itself to
lower levels of capacity utilization; it could not totally negate the
impact that the external environment had on the company's business. Global
demand and business conditions are going to be difficult and growth will
not be robust for some time. The company clearly recognises that this is a
phase for introspection and consolidation of the global operations. The
emphasis is on devoting extra energies to restructure the company and
create even stronger fundamentals so that it can weather the tide and
accelerate growth once the global economy moves to the next phase of
business up-turn.

Keeping the above factors in mind, BFL formulated revised business strategy
by November 2008 to take the company through its next stage of development.
The focus during this phase is on the following areas:

Enhance/revamp the de-risking strategy.

Constantly explore new markets and new customers.

Address new business development from sectors not addressed till date.

Cost reduction, optimization and rightsizing of both Indian and global
operations to effectively operate at lower capacity utilisations given
demand conditions.

Institutionalize a process to reduce working capital in the system.

Freeze on capacity expansions and focus on cash and cash generation.

In adverse business conditions, it is often difficult to devise a business
strategy. While BFL has launched these new initiatives, they had moderate
effect on the financial performance of the company in 2008-09. The
highlights of the company's performance, as a consolidated entity in 2008-
09 is given in Table 1.

Table 1: Consolidated Performance Highlights (Figures in Million):

Net Sales & Operating Income increased by 2.6% from Rs. 46,522.77 in 2007-
08 to Rs. 47,740.37 in 2008-09. The increase in sales also includes pass
thru on account of raw material price increases.

Total income increased by 1.9% from Rs. 47,515.70 in 2007-08 to
Rs.48,427.47 in 2008-09.

EBIDTA margin in 2008-09 was 10.8%; and EBIDTA was Rs. 5,214.43.

Consolidated Cash Generation of Rs 4,102 in 2008-09.

Today, BFL focuses on two clear business segments - automotive forgings and
non-automotive forgings. The share of each product in the portfolio is
given in Chart D.

CHART D: PRODUCT-WISE DISTRIBUTION OF BFL'S CONSOLIDATED REVENUES, 2008-09
AND 2007-08:

2008-09 2007-08

PASSENGER VEHICLES 22% 22%
NON-AUTO 21% 18%
DIESEL ENGINES 30% 25%
CV CHASSIS 27% 35%

In the next section, we will analyse the developments in the two business
segments with focus on markets.

AUTOMOTIVE BUSINESS

The Global automotive industry was severely affected by the credit crunch
and the global recession in the latter part of 2008-09.

The unprecedented and simultaneous slowdown across segments & geographies
caught the entire industry off guard. In the October - December period of
2008, most of the markets witnessed a 40 - 60% YoY drop in volumes
especially in the commercial vehicles segment. This forced all major OEMs
to undertake a series of block closures to prevent inventory pile-up across
the supply chain.

Despite having a de-risked business model in place, BFL's automotive
business suffered due to simultaneous slowdown in all geographies &
segments. The extent and depth of the slowdown is better understood by
revisiting and studying the dynamics of the different markets where BFL
operates.

MARKETS: USA:

The US CV market has been in a downturn since CY 2007 when volumes dropped
by almost 40% on a YoY basis. In the beginning of 2008, there were high
expectations for a recovery of the commercial vehicles segment. Most of
this positive sentiment was built on the logic of the pre-buy' factor. A
new emission norm will become applicable in the US in January 2010.
Normally, the pre-buy' creates an environment of aggressive demand before
a new emission norm becomes applicable. This expectation also resulted in
an inventory build up in the early part of 2008. However, the market did
not witness any pre-buy phenomenon. It had in fact become more volatile.
Most OEMs have taken unprecedented shutdowns often at short notice due to
depressed demand. Expected recovery did not happen. Industry Sales
Forecasts as well as individual OEM plans were modified at an alarming rate
and frequency. Table 2 below gives the production data.

Table 2: US Automobile Production:

Market Segement Jan-Dec 08 Jan-Dec 07 YoY%

Passenger Vehicles 3,776,358 3,924,268 (3.8)
LCVs 4,679,925 6,548,925 (28.5)
M&HCVs 225,156 279,117 (19.3)
Total 8,681,439 10,752,310 (19.3)

Source: Wards Auto

In fact, two major US based automobile giants - General Motors and Chrysler
- went into crisis with the credit squeeze in the market. They have also
been affected due to shift in the market to more fuel efficient cars. Both
GM & Chrysler have already declared bankruptcy.

The US, was traditionally BFL's largest export market. However, given the
market dynamics, exports to US fell by 10.2% from Rs. 4,855 million in
2007-08 to Rs. 4,359 million in 2008-09. Consequently, now Europe has
overtaken US as the largest export destination for BFL. As was discussed in
last year's Annual Report, BFL has continued to explore opportunities
outside the CV chassis space with special emphasis on heavy duty engine
parts for commercial vehicles, non-automotive forgings and greater
penetration into the passenger vehicle segment.

The company is working closely with all its customers to strengthen its
relationships, enhance share of business wherever possible and of course,
ensure sustainability.

The company is also trying to expand its presence in new sectors like
renewable energy, subsea oil & gas, rail, power generation etc., as well as
develop new relationships in traditional business segments.

MARKETS: EUROPE

Production and commercial vehicle demand in Europe was largely robust till
September 2008 (9 months of CY 2008). There were strong projections for
sustained growth till CY 2010-11 timeframe. Almost every OEM in Europe was
working on aligning its internal capacity as well that of the supplier base
with the projected growth.

However, following the liquidity crisis starting September 2008, there was
a rapid and sudden drop in orders including incoming orders for future
demand. By end October 2008, the market went into a tail spin. As a result,
OEMs and suppliers were sitting on large inventories. The passenger car
segment also witnessed a reduction in demand. The drop in demand across
both sectors will be more pronounced in CY 2009 as the full effect will be
evident. There is a huge concern with the volatility and slow rate of
incoming orders. Table 3 below shows the European automobile market
conditions during CY 2007 and CY 2008.

Table 3: Automobile Production in Europe:

Market Segement Jan-Dec 08 Jan-Dec 07 YoY%

LCV 1,770,219 1,908,700 (7.2)
M&HCVs 711,847 704,298 1.1
Passenger Vehicles 15,942,428 17,103,687 (6.8)
Total 18,424,494 19,716,685 (6.6)

Source: ACEA

The above table does not bring out the extent of the real collapse in the
European CV market. As shown in chart E, OEMs were growing rapidly during
the 1st half of CY 2008, which came to a sudden standstill in Q4 CY 2008.
All the OEMs undertook prolonged block closures to correct the excess
inventory situation across the pipeline.

CHART E: COMMERCIAL VEHICLE PRODUCTION IN EUROPE:

% CHANGE 08/07

Q1 6%
Q2 10%
Q3 -2%
Q4 -33%

Source: ACEA

As with the US market, BFL serves the European market through exports from
India as well as through local facilities. Bharat Forge Kilsta (BFK) and
its subsidiary Bharat Forge Scottish Stampings Limited (BFSSL) were the
worst affected as they are predominantly in the CV segment where the
European market has crashed. CDP-BF, the German subsidiary has also been
affected but to a lesser extent due to presence across CV, Passenger
vehicles and Non-Auto. CDP-BF has augmented its product profile by
developing new products. In terms of exports from India, BFL managed to
record moderate growth of 14.7% from Rs. 4,299 million in FY 2007-08 to Rs.
4,933 million in FY 2008-09.

In the European market, BFL continues to try to convert some of the
adversities into opportunities. The focus is on augmenting business share
and developing relationships with customers to offer a wider product
portfolio. BFL is working closely with key customers on long term programs
as development & technology partner. There have also been some inroads made
into developing new businesses with new customers. The Company has made
considerable progress in addressing new sectors like renewable energy,
subsea oil & gas, power generation etc from its Indian operations.

MARKETS: INDIA:

Like the global economy, the Indian automobile industry also witnessed a
significant slowdown in the second half of 2008-09. In fact, after a 10.2%
growth in passenger cars and commercial vehicle (CV) production in the
first half of 2008-09, demand reduced significantly to end the year with a
decline of 3%. The 2nd half of the year was characterized by OEMs taking
block closures to align production with lower demand levels. The slowdown
was mainly in the CV segment, which is BFL's primary market. M&HCV
production witnessed a dramatic decline of 61.3% in the 2nd half, as
against the same period last year. Table 4 below gives the data for the
full year.

Table 4: Vehicle production in India:

Market Segment Apr-Mar 09 Apr-Mar 08 YoY%

LCV 224,589 254,049 (11.6)
M&HCVs 192,537 294,957 (34.7)
Total Commercial Vehicles 417,126 549,006 (24.0)
Passenger Vehicles 1,838,697 1,777,583 3.4
Total 2,255,823 2,326,589 (3.0)

Source: SIAM

MARKETS: CHINA:

BFL caters to the Chinese market through exports from India to a small
extent and through its joint venture with First Auto Works (FAW)
Corporation. FAW Corporation is the largest automotive group in China -
churning out more than 1 million vehicles annually, apart from engines and
auto parts - in international cooperation with Volkswagen, Toyota and
Mazda. BFL holds a 52% stake in this JV.

China is a large market for automobiles. The total automobile sales volumes
reached 9.36 million in 2008, rising by 6.6% over 2007. It has already
surpassed Japan and is poised to overtake USA to become the largest
automobile market in the world. However, even though there has been growth,
the market has been volatile.

The international financial crisis and its fallout have also affected
China. With early estimates suggesting that the real GDP growth will be in
single digit for the first time in many years, the automobile industry also
witnessed a slowdown. In fact, for 2008 the growth rate is down by 16
percentage points. Having said that, the sheer size and opportunities in
the market warrants a global automotive forgings manufacturer like BFL to
have a firm presence in this market. So while in these initial development
years, BFL's Chinese JV continues to incur losses, its development is
critical for the company's long term strategy. BFL has taken steps to
revitalize the operations in China through a series of measures aimed at
improving operational efficiency, reducing cost and diversifying product
portfolio and customer base.

NON-AUTOMOTIVE BUSINESS:

The company has been addressing the non-automotive segment for a long time.
However, the company's presence was largely limited to Indian markets. In
2005-06, the company decided to enter the global non-automotive forgings
market in a focused manner with an aim to tap global and domestic potential
in various non-automotive segments that were poised for quantum growth.

For this purpose, the company had embarked on building dedicated capacities
for non-auto forgings. This included the 4,000T open die press at Mundhwa,
80 Mtr Ton Hammer at the Centre for Advanced Manufacturing (CAM) in
Baramati and the Ring Rolling facility at Baramati. The installation of
these facilities, except the Ring Rolling facility, with its ancillary
machining lines was completed in 2008-09. The facilities at CAM went into
commercial production in Q4 2008-09 and serial production is expected to
start in 2009-10.

With the global economic slowdown and the financial tightness of banks and
FIs, new investments in the non-automotive sector have also showed signs of
slowing down. And, given market pressures, companies are holding back on
replacement investment. Consequently, even the non-auto forging sector is
affected by the global slowdown.

As such, BFL's ramp up in this segment is progressing at a slower pace. All
the endcustomer industries be it shipping, power generation, construction,
mining and oil & gas are witnessing some slowdown. BFL currently has a
negligible presence in these segments, so gaining even a small market share
will help raise significant revenues.

The company is trying to penetrate every major sector and there have been
several positive developments in both conventional & renewable energy
sector. BFL has already created some alignment with several customers -
domestic and global.

Some of the focus areas include the following sectors:

Critical components such as rotors and shafts for gas and steam turbines.

Engine and structural components for off-highway, diesel and gas engines.

Products for high pressure applications in oil and gas sector -
particularly sub-sea, including in fully machined condition.

High technology components such as gearbox components and main shafts for
wind turbines.

Engine and Structural components for the aerospace sector. Critical
components such as crankshafts and connecting rods for marine and railways.

NEW FORAYS:

As part of its strategy to migrate from a component manufacturer to a
supplier of components & systems for the capital goods sector, BFL has
identified the Energy Sector (Wind, Thermal, Hydro & Nuclear) as a huge
opportunity.

BFL will address this sector through proposed Joint Ventures with market
leaders like NTPC, Alstom & Areva.

A brief of the various JVs is given below:

NTPC: The JV with NTPC will manufacture Balance of Plant (BoP) for the
power sector.

ALSTOM: The proposed JV with Alstom will manufacture Turbines & Generators
for sub & super critical power plants. It will also manufacture the
auxiliaries required for these plants.

AREVA: The proposed JV with Areva will involve the manufacture of heavy
forgings required for both nuclear & conventional power plants and other
capital goods sectors.

OPERATIONS:

At present, Bharat Forge has manufacturing operations with four plants in
India, three plants in Germany, two plants in China and one plant each in
Sweden, Scotland and USA.

In earlier years, the challenge was of getting right skilled manpower.
Today, subsequent to the slowdown, the primary task has been to right-size
manpower at the facilities while retaining skilled personnel. This included
revisiting machine layouts and processes. There have been efforts at
reducing crew sizes and undertaking effective shift management to improve
productivity. Particular focus has been laid on effectively managing
indirect manpower and increase productivity of white collared employees.

The entire exercise has laid emphasis on effective utilisation including
increased application of multi-tasking. In order to improve labour
productivity and adaptability to working on different machines, BFL has
focussed on improving the visualization on the shop floor. This has created
much better understanding of processes and improved quality.

During periods of high growth, the focus is primarily on production and
increasing productivity, while during such market depressions as today, all
efforts are towards removing operational bottlenecks and focusing on
streamlining processes. There is also significant emphasis on improving
material yields and reduction in variable costs such as energy,
subcontracting, stores, spares and consumables.

In an environment focussed on cost reduction, the technology department at
BFL continues to stress on its VAVE (Value Added Value Engineering)
activities.

HUMAN RESOURCES

Over the years, BFL has always stressed on developing and nurturing its
people pool. In 2008-09, given the changes in the external environment
there was a significantly different challenge on the human resource
management front.

On the shop-floor, focus was laid on rightsizing personnel at all levels
and there has been a freeze on recruitments and vacancies are being filled
up through internal transfers. Using dual responsibility methodology, scope
of existing employee roles is being widened. During the year, all the
company's management staff undertook salary cuts in a graded manner in
their fixed pay as well as substantial reduction in the variable component.

While some measures had to be taken to improve work productivity in the BFL
system, the company remained resolute in its resolve to continue with
developing the human resource pool. The major engineering programmes in
collaboration with leading global institutes and universities for BFL's
employees are continuing. A new course has been set up with IIT Mumbai
offering M. Tech (Materials, Manufacturing and Modelling) that focuses on
creating intellectual pool in Metallurgy in the company. 25 degree holders
will be selected for this programme. Clearly, the company is focusing on
utilising the available time to develop potential of the employees for the
future in a much focused way.

CORPORATE SOCIAL RESPONSIBILITY (CSR):

In addition to focusing on maximising long term shareholder value, BFL has
always been a responsible corporate citizen and continues to work for other
stakeholders and the community at large. BFL's corporate social
responsibility initiatives are focussed on employees, the community around
its facilities and the environment.

In 2008-09, there was increased energy in the CSR activities with wider
participation of BFL employees. In a structured way, every department at
Mundhwa has taken up a specified activity. This way the CSR activities have
become integral to the work profile of employees at Mundhwa.

Some of the activities include:

Running of 3 community centers which employ the wives of BFL employees,
where they are provided vocational training to make them self sufficient.
For example, BFL factory at Mundhwa purchases uniforms and hand gloves
stitched by them.

CSR activities conducted by the employees of BFL focus on three groups:
women, senior citizens & underprivileged children wherein each department
in the company has adopted an institution around Pune. The employees visit
the institutions regularly. Various institutions adopted include schools,
old age homes & remand homes.

BFL continues to actively support the efforts of Pratham Pune Education
Foundation' (PPEF), which imparts primary education to the children of
economically weaker sections of society. The foundation has delivered
education programmes to a large number of children during its existence.

On the environment front there have been active drives at tree plantation
across Pune and training and lectures were delivered by the company's in-
house environment specialists at different forums.

Measures taken by BFL to reduce fossil fuel consumption include improving
efficiency of furnaces and recuperation of waste heat. BFL continues to
procure significant portion of its energy requirement by way of power
generated from wind energy.

INFORMATION TECHNOLOGY:

Information Technology (IT) has been an integral part of BFL's business
strategy and development. Having undertaken several initiatives in earlier
years, the focus during 2008-09 was on adding value added services to the
existing infrastructure.

An effective employee management tool called 'Kronos' was successfully
implemented during the year. This tool has helped:

Increase productivity through better employee tracking.

Improve scheduling and managing of shop-floor shifts.

Upgrade the level of security.

Easier compliance to labour laws.

Create workforce visibility on the shop floor.

In addition a portal has been developed and is being rolled out for
information sharing between employees. This portal based on the Microsoft
SharePoint tool will act like a virtual office notice board with continuous
online access.

Going forward in 2009-10 the company is working on the following
activities:

Storage consolidation, which will compress storage points for the IT data
centre and IT design centre.

Implement archiving policies including information and emails.

Focus on complete information lifecycle management.

Stress on server consolidation.

In addition to these, BFL will focus on completely enhancing the physical
security infrastructure at Mundhwa, which will include enhanced
surveillance tools, access control and visitor management.

FINANCIAL REVIEW:

We first analyse the financial performance for the year ended 31 March 2009
for BFL as a stand-alone entity, then proceed to the key numbers of BFL and
its wholly owned subsidiaries (WOS) and finally take a look at the
consolidated Profit and Loss Statement and key ratios.

Table 5 enumerates the stand-alone financial performance of Bharat Forge
(which encompasses its Indian operations); Table 6 reflects the consequent
key ratios of the stand-alone entity.

Table 5: Abridged Stand-alone Profit & Loss Statement:

(Rs. Millions)
2008-09 2007-08

1. Sales and Operating Income 21,777.84 23,691.04
2. Excise Duty 1,202.33 1,726.08
3. Net Sales (1-2) 20,575.51 21,964.96
4. Other Income 488.03 884.04
5. Total Revenue (3+4) 21,063.54 22,849.00
6. Raw Materials and Components 9,804.81 9,913.11
7. Manufacturing Expenses 3,377.00 3,781.56
8. Employee Costs 1,391.57 1,448.83
9. Other Expenses 2,415.40 1,599.87
10. Total Expenses (6+7+8+9) 16,988.78 16,743.37
11. PBDIT (5-10) 4,074.76 6,105.63
12. Depreciation and Amortisation 1,494.44 1,389.40
13. PBIT (11-12) 2,580.32 4,716.23
14. Interest 1,003.67 1,049.91
15. PBT before exceptional items (13-14) 1,576.65 3,666.32
16. Exceptional Items 0.00 303.47
17. PBT after exceptional items (15+16) 1,576.65 3,969.79
18. Current Tax 159.60 982.00
19. Deferred Tax 488.60 183.90
20. Less: MAT Credit (157.40) 0.00
21. Fringe Benefit Tax 53.00 68.00
22. PAT (17-18-19-20-21) 1,032.85 2,735.89
23. Basic Earnings per Share in Rs. 4.51 12.25
24. Diluted Earnings per Share in Rs. 4.51 12.25

Foreign Exchange gain/(loss) are shown in other income / other expenses
respectively.

Total revenues declined by 7.8% from Rs. 22,849 million in 2007-08 to
Rs.21,064 million in 2008-09.

PBDIT decreased from Rs. 6,106 million in 2007-08 to Rs. 4,075 million in
2008-09. The PBDIT margins dropped from 26.7% to 19.3% essentially due to
substantial volume drop during the year.

Table 6: Key Ratios (Stand-alone):

2008-09 2007-08

PBDIT / Total Revenue 19.3 26.7
PBIT / Total Revenue 12.3 20.6
PBT / Total Revenue 7.5 17.4
PAT / Total Revenue 4.9 12.0

2008-09 saw an unprecedented movement in USD-Rupee exchange rate. Rupee
depreciated against the USD by 27%. BFL has currency exposure on the export
side as well as on the liability side by way of FCCBs and Foreign Currency
Term Loans. Over longer time frame, exposure on both sides offer 'natural
hedge' but due to substantial depreciation of rupee in a relatively short
span of 12 months, there was a significant foreign exchange loss which
could not be fully compensated by the gain on exports since large portions
of exports were covered by pre-shipment packing credit and simple forward
covers. Accordingly the company has accounted for the exchange loss in
first 3 quarters.

In Q4 2008-09, AS-11 was amended by National Advisory Committee on
Accounting Standards (NACAS). The company has opted to adopt the revised
AS-11 amendment. Accordingly the effect of such amendment was accounted for
in the last quarter.

Table 7: Financial performance (BFL and wholly-owned subsidiaries):

Rs. Million
2008-09 2007-08

Total Revenue 45,054 44,610
PBDIT 5,354 8,044
PBT 1,405 4,675
PAT 709 3,086

Key Ratios:

PBDIT/Total Revenues 11.9% 18.0%
PBT/Total Revenues 3.1% 10.5%
PAT/Total Revenues 1.6% 6.9%

BFL and its wholly owned subsidiaries have managed to grow moderately,
however margins have declined.

Tables 8 and 9 highlight the complete consolidated performance of the
company, including the Chinese joint venture.

Table 8: Abridged Consolidated Profit & Loss Statement:

(Rs. Millions)
2008-09 2007-08

1. Sales and Operating Income 48,942.70 48,248.85
2. Excise Duty 1,202.33 1,726.08
3. Net Sales (1-2) 47,740.37 46,522.77
4. Other Income 687.10 992.93
5. Total Revenue (3+4) 48,427.47 47,515.70
6. Raw Materials and Components 24,067.85 22,038.99
7. Manufacturing Expenses 7,723.47 7,742.15
8. Employee Costs 7,091.59 6,780.35
9. Other Expenses 4,330.13 2,916.73
10. Total Expenses (6+7+8+9) 43,213.04 39,478.22
11. PBDIT (5-10) 5,214.43 8,037.48
12. Depreciation and Amortisation 2,517.32 2,270.55
13. PBIT (11-12) 2,697.11 5,766.93
14. Interest 1,291.36 1,269.38
15. PBT before exceptional items (13-14) 1,405.75 4,497.55
16. Exceptional Items (298.92) 0.00
17. PBT after exceptional items (15+16) 1,106.83 4,497.55
18. Share of Profit in Associate Companies (4.58) 1.22
19. Current Tax 311.67 1,369.08
20. Less: MAT Credit (157.40) 0.00
21. Deferred Tax 488.47 152.33
22. Fringe Benefit Tax 53.00 68.00
23. PAT (17+18-19-20-21-22) 406.51 2,909.36
24. Less: Minority Interest (176.14) (105.87)
25. PAT after Minority Interest (23-24) 582.65 3,015.23
26. Basic Earnings per Share in Rs. 2.62 13.44
27. Diluted Earnings per Share in Rs. 2.62 13.44

Table 9: Key Ratios (Consolidated):

2008-09 2007-08

PBDIT / Total Revenue 10.8% 16.9%
PBIT / Total Revenue 5.6% 12.1%
PBT / Total Revenue 2.3% 9.5%
PAT / Total Revenue 1.2% 6.3%

Total revenue has grown by 1.9% to Rs. 48,427 million on the back of growth
in export business from the Indian operations. Key ratios have shown a drop
compared to previous year due to the global auto sector collapse which has
affected BFL & its subsidiaries.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

Bharat Forge has a proper and adequate system of internal controls to
ensure that all assets are safeguarded and protected against loss from
unauthorised use or disposition and that transactions are authorised,
recorded and reported quickly.

The company's internal controls are supplemented by an extensive programme
of internal audits, review by management and documented policies,
guidelines and procedures. The internal control is designed to ensure that
financial and other records are reliable for preparing financial
information and other data, and for maintaining accountability of assets.

RISK & CONCERNS:

In addition to the regular process related risks inherent in global
manufacturing companies there are some specific risks facing the company,
which are to do with its business model. These risks include

MARKET RISK:

As already discussed, BFL's operations and markets are spread across Asia
Pacific, Europe and US. With over 68% of this being in the depressed
economies of US and Europe, clearly BFL had to operate under tough market
conditions. The markets have also become less predictable. The company
continues to take proactive steps to de-risk the business from market
vagaries by spreading across geographies and products but there are limits
to spreading this risk. Already, a concerted effort has been laid on making
internal changes to streamline the company to operate in a depressed market
at lower capacity utilisation levels.

CURRENCY RISK:

With a large amount of exports and international business, BFL is always
exposed to global currency fluctuations. In addition, the company also has
a high exposure to foreign currency debt. Over the years, the company has
been successfully following a strategy of 'natural' hedging, where the
impact of foreign currency rate movements on export collections is balanced
out by the opposite movement of the effect on interest and principal
paybacks of these loans.

INTEREST RATE RISK:

Since the last few years, the company has been in an expansion mode and has
used borrowings to fund its expansion cum acquisition needs. At the same
time, BFL has judiciously managed its debt-equity ratio, increasing equity
in line with increase in debt levels. The company has been using a mix of
loans, GDRs, FCCBs, ECBs, domestic rights issue and internal cash accruals
to fund this expansion program. With any increase in interest rates the
corresponding interest outgo on such loans increases. The company has put a
freeze on further capital outlays and has focused on working capital
management to reduce interest cost.

DEFAULT RISK:

In today's business environment, several automobile majors are in financial
distress and are close to filing for bankruptcy. The receivables from these
companies are then under risk. However, BFL has fairly low direct exposure
to these companies and foreign vendors may have a degree of protection
towards their receivables from the US majors.

INSOLVENCY RISKS:

BFL operates through several global subsidiaries. While the Indian
operations remain strong, some of the foreign subsidiaries may come under
severe financial stress and there may even be risks of insolvency in the
current environment. BFL's strategy would be guided by a long term view
based on market realities. One advantage is that most of the global
subsidiaries have low debt leverage. However, on a case to case basis if
the situation arises, some asset and investment restructuring may need to
be undertaken.

OUTLOOK:

The year 2008-09 has been very challenging and BFL has had to revise
business plans accordingly. It is clear that 2009-10 will be even more
challenging and the markets are going to be much more volatile. BFL will
focus on internal improvements and objectives set out in the new business
strategy. By entering new markets and driving non-automotive sales, BFL
expects to maintain its significant position and grow its business.
However, growth may not match the levels seen in the earlier years. That is
the market reality.

In light of the slowdown, focussed restructuring and optimal utilization at
the subsidiaries have been undertaken in such a manner that the capacity
and business is protected from shifting outside the group. There will be
focus on the manpower rationalisation and other cost reduction measures
being implemented at all the subsidiaries. The company also expects a
turbulent time in the industry and consolidation seems inevitable. The
Company will seek further opportunities to improve its position, product
offering and alignment with key global customers.

BFL as a company is structurally better equipped to tackle the downturn
even if it continues for a prolonged period. When the revival comes, strong
companies like BFL, which have technology, scale, global reach, capability
and cost structure, will have opportunities to cement its market position.

CAUTIONARY STATEMENT:

Statements in this Management Discussion and Analysis describing the
company's objectives, projections, estimates and expectations may be
forward looking statements' within the meaning of applicable laws and
regulations. Actual results might differ substantially or materially from
those expressed or implied. Important developments that could affect the
company's operations include a downtrend in the forging industry - global
or domestic or both, significant changes in political and economic
environment in India or key markets abroad, tax laws, litigation, labour
relations, exchange rate fluctuations, interest and other costs.