apar industries ltd Management discussions

ECONOMIC OVERVIEW

Global Economy & Outlook

The global economy contracted by an estimated 3.3% in 2020 due to the impact of the COVID-19 pandemic. Many countries faced multi-layered crises comprising domestic economic disruptions, plummeting of external demand, capital flow reversals and commodity price collapse.

The IMF has projected the global economy to grow at 6% in 2021, before moderating to 4.4% in 2022. The growth is, however, subject to high uncertainty. Future growth will depend on the path the health crisis takes, including whether the new COVID-19 strains prove susceptible to vaccines or they prolong the pandemic, the effectiveness of policy actions to limit the persistent economic damage, the evolution of financial conditions and commodity prices and the adjustment capacity of the economy.

Indian Economy & Outlook

Indias GDP contracted by 7.3% in FY21. The COVID-19 pandemic significantly affected the Indian economy with the national lockdown in April 2020, followed by phased unlocking and localized lockdowns in March 2021, as the second wave of the pandemic hit the country. Despite such unprecedented circumstances, Q3 & Q4 FY21 saw GDP growth led by agriculture, construction, electricity, gas, water supply and other utility services.

RBI has forecasted Indias FY22 GDP to grow at 9.5%. The forecast of a normal monsoon, the resilience of agriculture and the farm economy, the adoption of COVID-19-compatible operational models by businesses, and the gathering momentum of global recovery are forces that can provide tailwinds to revival of domestic economic activity when the second wave abates.

INDUSTRY OVERVIEW

APAR Industries is a leading global manufacturer of conductors, cables, speciality oils, polymers and lubricants. Your Company has identified six major growth drivers:

Growth Drivers	APAR Products	APAR Advantage
Rising Global ESG	Conductors, Cables and	• Largest conductor manufacturer.
Investments	Transformer oils (T-oils)	• 3rd largest manufacturer of transformer oils.
		• Largest in India for special application cables.
Accelerating Indian Railways Industry	Copper Conductors, XLPE & Elastomeric Cables & Harnesses	• Largest in India for special application cables and harnesses.
Strong pullback for	Auto Lubes, Automotive	• 10th largest domestic player in lubricants.
Automotive Sector	Cables	• OEM relationships with leading Tier 1 tractor players.
Telecom Industry	Optical Fiber Cables (OFC), Optical Ground Wire (OPGW)	• Significant player in both these segments.
Defense Sector Infra Spending	Elastomeric Cables & Speciality Cables	• Major supplier of speciality elastomeric cables to the Indian Navy manufacturing establishments and to DRDO.
Exports	41% of revenue contribution in FY21	• Exports to over 125 countries.
		• Al-Hamriyah, Sharjah plant.

T&D Industry

Rising global Environmental, Social and Governance (ESG) investments:

All major economies of the world are increasingly becoming more cognisant of the impact of global warming and are trying to reduce environmental impact by shifting to nonconventional energy that includes wind and solar. The Biden government in the US is also in the process of passing a $500-bn plus infrastructure-spending bill, which includes numerous ESG proposals.

Renewable Energy

Globally, efforts continued towards transition to a low- carbon-energy regime. Global renewable generation capacity reached 2,799 GW in 2020, with capacity increase of 261 GW. Solar energy was up 127 GW (22% YoY), followed by wind energy at 111 GW (18% YoY). Asia accounted for 64% of new capacity in 2020, increasing its capacity by 167.6 GW to reach 1.29 TW. Capacity in Europe and North America expanded by 34 GW and 32 GW, respectively. Oceania remained the fastest growing region (18.4% YoY).

Renewable Energy Outlook

IEA estimates global energy demand to increase by 4.6% in 2021, more than offsetting the 4% contraction in 2020. Renewables dominate investment in new power generation, and are expected to account for 70% of 2021s total of $530bn spend on all new generation capacity.

India aims at 450 GW of renewable energy generation capacity by 2030. Against its renewable energy target of 175 gW by 2022, India is at 94.5 GW and is on track to achieve 65-69% of the target. Solar is expected to add capacity additions in the range of 15-20 GW and wind is expected to add between 6-8 GW in FY22.

T&D progress as targeted in 13th Plan

16,462 ckms of transmission lines were added in FY21, 6.1% more than targeted and up 41% YoY. 33,120 MVA of substation transformation capacity was added in FY21, down 46% YoY.

Other T&D

• Electricity consumption contracted by 0.8% YoY in FY21 due to lower demand from the industrial and commercial sector impacting DISCOM revenues. ICRA estimates a revenue gap of Rs.30,000 crore for DISCOMs in FY21 due to lockdown restrictions and absence of tariff revisions.

• The government sanctioned a liquidity package of Rs.1.35 lakh crore in FY21 to help the stressed DISCOMS. This resulted in a 3.4% YoY reduction in outstanding dues owed by DISCOMs to power generators to Rs.74,510 crore as on 31st March 2021.

• Power transmission projects, structured on the tariff- based competitive bidding (TBCB) mechanism and associated with large-scale evacuation of renewable energy, gained traction in FY21. Four new LOIs were issued in FY21 for these projects.

Other T&D Outlook

Global power sector investment is set to increase by ~5% in 2021 to over $820 bn. The projected requirement for new T&D lines is 80% greater over the next decade than in the last 10 years (IEA WEO 2020). The global market for power transmission and distribution conductors is expected to reach $6.6 bn and $26.9 bn, respectively, in 2024. Global transformer oil market is set to expand from $2.2 bn in 2020 to $3 bn by 2025 — or, 6.9% CAGR - by power grid updates in developing countries.

Budget 2021-22 allocation for the Indian Power Sector

• Rs.15,322 crore to Power Ministry, up 40% YoY over FY21 Revised Estimate (R.E.):

• IPDS at Rs.5,300 crore, up 33% YoY.

• DDUGJY at Rs.3,600 crore, up 80% YoY.

• Rs.575 crore outlay to Ministry of New and Renewable Energy, up 60% YoY over FY21 R.E.:

• Green energy corridors at Rs.300 crore, up 88% YoY.

• Wind Power (grid interactive + off-grid) at Rs.1,100 crore, up 4% YoY.

• Solar power (total) at Rs.2,606 crore, up 66% YoY.

Revamped reforms-based result-linked power distribution sector scheme:

The scheme is to be launched with an outlay of Rs.3,05,984 crore over 5 years providing assistance to DISCOMS. It targets:

• Reduction of AT&C losses to 12-15% by FY25.

• 1,005 metering booths for consumers and agriculture.

• Reduce ACS and ARR losses to 0 by FY25.

• Capital Expenditure outlay for metering and infrastructure work is Rs.1.5 lakh crore each for a period of 5 years.

Indian Railways Industry

The Indian Railways is also accelerating its addition of locomotives and coaches that require specialised cables and harnesses. In FY21, there was a great slowdown in production across government units, but planning to accelerate the catch up in FY22 and FY23. Indian Railways has set a target to achieve 100% Made in India production of rail coaches by the end of 2022. Indian Railways achieved highest ever electrification of sections in FY21, covering 6,015 rkms in a single year. It has now electrified 45,881 rkms or 71% of total broad-gauge network. It also commissioned a record 56 Traction Sub Stations in FY21, up 33% YoY. 706 locomotives and 7,276 coaches were added in FY21.

Indian Railways Industry Outlook: The entire Indian Railways network, in order to reduce its carbon footprint, will be electrified by 2023. Further, they are targeting to install 20GW of solar power by 2030 to support the electrification process.

Automotive Industry

There has been a substantial expansion in the demand for agriculture equipment such as tractors. We expect this trend to continue for the next few years. Recovery in domestic automobile sales is expected from Q2 FY22 onwards, contingent on a faster vaccination drive and no new waves of Covid-19.

Overall domestic automobile sales volumes declined 13% YoY in FY21. However, tractor sales, the segment your Company focuses on, recorded a boom of 26.9% YoY with strong rural demand, enabled by healthy farm cash flows, and stable crop prices supported by the governments focus on procurement, and support programmes.

Automotive Industry Outlook: CRISIL estimates tractor sales to grow at 3-5% in FY22. Budget FY22 allocated Rs.757 crore (up 138% compared to FY21 R.E.) to the Faster Adoption and Manufacturing of Hybrid and Electric Vehicle (FAME India) scheme to provide clean mobility solutions.

Telecom Industry

India is currently implementing BharatNet — the worlds largest rural broadband access network. As the telecom industry matures with increased data traffic and speed, the demand for optical fibre networks is poised to grow. 5,21,322 Km of Optical Fibre Cables (OFC) was laid as on 14th May, 2021 under the Bharat Net program. Number of Gram Panchayats for which agencies decided to install Wi- Fi/FTTH stood at 1,32,600.

Telecom Industry Outlook: FY22 Budget allocation to Bharat Net was Rs.7,000 crore, up 27% YoY.

Defence Industry

Under the Atmanirbhar Bharat campaign, the defence sector has been identified as one of the core areas to boost Make in India. The governments push to promote indigenous defence equipment is evident in the Defence Acquisition Procedure 2020, which prioritises capital acquisitions from domestic players over foreign ones.

Defence Industry Outlook: Union Budget 2021-22 has given a historic push to defence modernisation by increasing the defence capital outlay by 18.8% to Rs.1,35,061 crore.

Exports

With the spread of COVID-19 through multiple waves hitting countries at different times, your Company is focusing on exports, to hedge geographic diversification and capture the ESG derived opportunities in the US, Europe, Australia and Latin America.

Exports Outlook: The Federation of Indian Export Organisations has set an export target of $ 400 bn in FY22. This is being buoyed by demand from western nations, where the impact of COVID-19 is waning.

OVERALL BUSINESS PERFORMANCE

In Rs.Cr	FY17	FY18	FY19	FY20	FY21
Revenue	4,832	5,819	7,964	7,443	6,410
EBITDA	433	419	483	484	438
PAT	177	145	136	135	161
Cash Profit	222	201	203	222	254
ROE	19%	13%	12%	11%	12%
D/E	0.1	0.2	0.1	0.1	0.1

Numbers are as per Ind AS.

The Company posted 19% YoY growth in PAT in FY21 despite the unprecedented disruptions caused by the pandemic. Consolidated revenue in FY21 was at Rs.6,410 crore, down 14% YoY, mainly due to lower domestic revenues as a result of the national lockdown in the initial months of the year coupled with persistent low demand. Export revenue increased 3% YoY, contributing 41% to revenues in FY21. Consolidated EBITDA was at Rs.438 crore and EBITDA margin improved to 6.8% in FY21 from 6.5% in FY20 with increasing share of higher-value products. Speciality Oils achieved a historically highest EBITDA of Rs.7,032 per KL in the year, up 135.2% YoY.

SEGMENT-WISE PERFORMANCE

Conductors - Largest manufacturer globally

Your Company is the largest global manufacturer of Conductors with 1,80,000 MTPA capacity. Rs.344 crore of strategic capex was undertaken over FY15-FY21 to launch several innovative solutions in the space:

• Pioneered turnkey solutions for re-conductoring with HEC, live line installation with OPGW.

• 1st to develop copper-magnesium conductors as per R.D.S.O. specifications.

Revenue for the conductors segment declined 19.2% YoY to Rs.2,908 crore as domestic revenues declined 37.0% YoY, mainly due to COVID-19-related headwinds.

In Rs.Crore	FY21	FY20	Growth (%)
Order Book	1,649	2,003	-18%
Turnover	2,908	3,600	-19%
Segment Profit/(Loss)	68	158	-57%
Volume (MT)	1,28,460	1,58,104	-19%

• Exports contribution was up to 52.1% versus 40.6% in FY20.

• Higher-value products (High-Efficiency Conductors (HEC) + Copper Conductors + OPGW + Copper Transpose Conductors (CTC)) contribution was at 32.6% vs. 39.4% in FY20.

• HEC: Revenue was down 36.9% YoY.

• Copper conductor for Railways: Revenue was down 45.9% YoY.

• CTC: Revenue up 286.4% YoY.

• OPGW: Revenue up 83.3% YoY.

• New order inflow of Rs.2,425 crore in FY21 was down 7.4% YoY.

EBITDA per MT after forex adjustment down 26.5% YoY at Rs.7,926: Unprecedented low profitability realized in Q4 FY21 due to steep increase in international freight costs, aluminum premium and steel prices for fixed-price orders. Global freight costs were up 3-4x due to scarcity of containers in this quarter. Additionally, there was delay in customers clearances due to COVID-19/travel restrictions. The MEIS benefit of 2% of FOB value of exports was withdrawn by the government in Q3, and the alternate scheme was not finalized. These factors were beyond the Companys control to manage.

Outlook

• Expect the ongoing 2nd COVID-19 wave to impact H1 FY22 operations and H2 FY22 to be closer to pre- COVID-19 times.

• Rs.500 crore+ worth orders already received in April 2021, though EPC players have delayed ordering due to steep rise in aluminum and steel prices.

• As COVID-19 gets in control, strong T&D demand is expected from the renewable projects under construction/ bidding, and the governments commitment to higher share of clean energy. Similarly, Railways electrification, and EV charging infrastructure will be key demand drivers.

• Focus on higher-value products such as HEC, Copper Conductors, CTC and OPGW to help profitability.

Risks and Concerns: Additional shutdowns due to higher COVID-19 spread, and additional waves in India and other major markets may impact operations and demand. International freight prices remain high and container availability remains a major issue. In the larger TBCB projects, where your Company is a vendor, profitability may be impacted because of the fixed-price nature of the contracts and the lag between the pre-bidding stage and actual ordering. Increase in steel prices and no hedgeable mechanism for the same may affect future profitability. Increasing competition in the domestic market, with fixed- price contracts, may put pressure on the profitability of the Company. Delays in orders from state DISCOMS may impact performance. The cyclical nature of the power business has an obvious impact on our performance. Project delays from customers side may have an impact. Regional political instability and changes in the external environment in certain export markets may affect execution.

Speciality Oils - Highest EBITDA per KL

The Company is the 3rd largest global manufacturer of transformer oils. In FY 21, your Company became the 10th largest lubricant marketer in India. This puts the Company at an advantage in terms of economies of scale for manufacture and distribution, adding to the premiumization of the oil division business. Rs.208 crore was invested in FY15-21 on higher-value products:

Introduced the best performing Premium Natural Ester- based transformer oil in the world:

• This oil provides a high degree of safety, is 99% biodegradable, has the lowest carbon footprint in its manufacture and offers the best viscosity and oxidation stability (parameters to determine the life of the oil) in its class globally.

• NE Premium has been showcased to various global OEMs and is under field trials.

FY21 became the best performing year for the division:

Revenue grew 2% YoY to Rs.2,364 crore, driven by 11.4% YoY growth in exports. This was spread across industry sub-verticals.

In Rs.Crore	FY21	FY20	Growth (%)
Turnover	2,364	2,311	2%
Segment	266	121	121%
Profit/(Loss)
Volume (MT)	3,99,214	4,03,626	-1.1%

• Exports contribution up to 41% versus 37% in FY20.

• White oil sales volumes up 16.1% YoY, driven by strong growth in exports.

• Transformer oil volumes down 16.4% as domestic volumes declined due to both demand and cash flow issues.

• Revenue from automotive oils and industrial oils up 14.6% YoY in FY21.

Recorded highest-ever profitability:

EBITDA per KL after forex adjustment in FY21 was at Rs.7,032, up 135.2% YoY, with improved premiumization of product- mix, supported by stable base oil prices and strict focus on working capital management.

Reached Capacity Utilization target ahead of its time:

The new state-of-the-art Hamriyah (Sharjah) plant operated at 79% utilization in FY21, up from 69% in FY20.

Outlook

• The Company expects FY22 to be tougher with both offtake and margins affected due to the 2nd wave of COVID-19, especially with rural areas also being affected this time.

• The domestic T&D equipment market is expected to continue to benefit from various regulatory initiatives, leading to both new and replacement demand for transformer oils.

• Another growth year expected for tractor sales in FY22.

• Rising ESG Investments will support the innovative NE Premium product.

Risks and Concerns: Your Company is exposed to volatility in the prices of raw materials and foreign exchange rates. Competition in both the transformer oils and auto lubricants sub-segments may impact performance. However, in order to mitigate risks, your Company continues to exercise prudence in inventory control and hedging strategies. Also, additional global refining capacities have resulted in a mismatch in demand and supply, which has had an effect on base oil prices. The prices of long-term buy contracts take time to correct in case of fluctuations in crude prices as formula prices are always backward looking. Your Company had to implement strict credit controls to limit exposure to customers facing cash-flow issues. Rapid commoditization taking place at the lower end, especially at technical grade white oils, may have an impact on margins. Geopolitical uncertainties may impact global oil supply, causing volatility in base oil prices and may impact your Companys performance.

b^>— Cables segment — Largest domestic player in renewables

The Company is the largest domestic player in renewables with one of the widest ranges of medium-voltage and low- voltage XLPE cables, elastomeric cables, fibre optic cables and speciality cables. The Company boasts of 60% share in

domestic wind sector. Rs.265 crore has been invested over FY15-21 developing new-age solutions:

• Launched Indias most advanced E-beam facility and now has 3 operating machines.

• High-voltage power cables using the latest CCV technology.

• Introduced Medium Voltage Covered Conductor (MVCC) for increased safety and uninterrupted power distribution in high population density and forested areas.

Focus on exports during low domestic demand:

Revenues from the Cables segment declined 21% YoY to reach Rs.1,270 crore as Elasto/E-beam cable business was affected due to reduced offtake in solar, wind, railways and defence business.

In Rs.Crore	FY21	FY20	Growth (%)
Turnover	1,270	1,600	-21%
Segment Profit/(Loss)	33	155	-79%
Segment Profit margin	2.6%	9.7%	-73%

• Exports contribution at 20% versus 17% in FY20.

• Power cable continues to be highly competitive.

• During the year, the Company installed the 3rd E-beam machine of 2.5 MeV class with in-house expertise.

• Telecom cables/OFC revenue was up by 21.2% YoY.

• EBITDA margin post forex adjustments down 66.4% YoY to Rs.60 crore in FY21.

Taking giant leaps to bolster exports revenue:

• Received various UL approvals which are mandatory for the sale of electrical cables to the US market.

• The Company received global supply approvals from some of the largest windmill producers in the world, including General Electric and Vestas.

Outlook

• In FY22, the Company will continue its focus on growing exports and premium products: MVCC, automotive cables and harnesses.

• Expecting increased sales in FY22 with our solar, wind, railways and defence customers starting up from June-July of 2021.

• The Company is planning Rs.95 crore capex over next 12 to 18 months to substantially increase cables for solar & wind segment as well as target the US market, as the Company sees an opportunity in the China plus One strategy.

Risks and Concerns: The excess capacity in the power cables segment impacts pricing. Collection periods can get extended and delivery schedules delayed due to lack of financial arrangements by key customers in the renewable energy sector and by EPC contractors. In optical fibre cables, low or zero ordering by major telecom companies may impact performance. The cyclical nature of their tendering, too, has a bearing on the order situation in the industry. Any volatility in fibre prices may impact performance.

General risks and concerns

Continued pandemic and additional shutdowns may impact performance. The Companys performance may be impacted by fluctuating commodity prices, technological changes, exchange rate fluctuations, and due to any impact in the general macro-economic outlook. Any geopolitical or economic upheavals at the local, regional or global levels may adversely impact demand or create input cost volatility that may impact performance. Your Company is exposed to risk of volatility in LIBOR rates that may increase our interest costs and impact performance. Debtors collection period can increase on account of the stressed financial condition of customers.

Internal Control Systems (ICS) and Their Adequacy

The Company has established adequate ICS in respect of all the divisions of the Company. The ICS aims to promote operational efficiencies and achieve savings in cost and overheads in all business operations. System Application and Product (SAP), a world-class business process integration software solution, which was implemented by the Company at all business units, has been operating successfully. The Company has appointed M/s. Deloitte Touche Tohmatsu India LLP as its Internal Auditors. The system-cum-internal audit reports of the Internal Auditors were discussed at the Audit Committee meetings and appropriate corrective steps have been taken. Further, all business segments prepare their annual budgets, which are reviewed along with performance at regular intervals.

Development of human resources

The Company promotes an open and transparent working environment to enhance teamwork and build business focus. The Company gives equal importance to development of human resources (HR). It updates its HR policy in line with the changing HR culture in the industry as a whole. In order to foster excellence and reward those employees who perform well, the Company has performance/production- linked incentive schemes and introduced the Employees Stock Option Scheme. The Company also takes adequate steps for in-house training of employees and maintaining a safe and healthy environment.

Key Financial Ratios with details of significant changes

The Company has identified the following as key financial ratios:

Consolidated Ratios	FY21	FY20	% Change
EBITDA Margin	6.9%	6.5%	5.1%
PAT Margin	2.5%	1.8%	38.0%
ROE	12.5%	11.4%	9.2%
Debtor Turnover	108	99	8.4%
Inventory Turnover	98	75	30.5%
Current Ratio	1.22	1.13	7.3%
Debt/Equity Ratio	0.17	0.19	-10.0%
Interest Coverage Ratio	2.5	1.7	45.1%
Net Fixed Asset Turnover	6.9	8.5	-18.4%

During the year, the Company strictly focused on working capital management, as domestic revenues were impacted by COVID-19-related issues. The reduction in interest rates and strict focus on working capital management were the main drivers behind the 42% YoY decrease in interest costs that reflected in improved Interest Coverage Ratio and PAT margin. PAT margin was also helped by 31 bps improvement in EBITDA margin, driven by improved Oils profitability and focus on per-order metrics. Towards the end of the year, the second wave of COVID-19 had started resulting in local-level lockdowns and travel restrictions at places, resulting in transient higher inventory as customers clearances to inspect and dispatch finished goods got delayed.

Cautionary statement:

The statements made in the Management Discussion & Analysis section, describing the Companys goals, expectations and predictions, among others, do contain some forward-looking views of the management. The actual performance of the Company is dependent on several external factors, many of which are beyond the control of the management, viz. growth of Indian economy, continuation of industrial reforms, fluctuations in value of Rupee in the foreign exchange market, volatility in commodity prices, applicable laws/regulations, tax structure, domestic/international industry scenario, movement in international prices of raw materials and economic developments within the country, among others.