emkay taps cutting tools ltd Management discussions

A return of the world economy to the pace of economic growth that prevailed before the bevy of shocks in 2022 and the recent financial sector turmoil is increasingly elusive. More than a year after Russias invasion of Ukraine and the outbreak of more contagious COVID-19 variants, many economies are still absorbing the shocks. The recent tightening in global financial conditions is also hampering the recovery.

As a result, many economies are likely to experience slower growth in incomes in 2023, amid rising joblessness. Moreover, even with central banks having driven up interest rates to reduce inflation, the road back to price stability could be long. Over the medium term, the prospects for growth now seem dimmer than in decades.

Global Growth - The global recovery from the COVID-19 pandemic and Russias invasion of Ukraine is slowing amid widening divergences among economic sectors and regions. The World Health Organization (WHO) announced in May that it no longer considers COVID-19 to be a "global health emergency." Supply chains have largely recovered, and shipping costs and suppliers delivery times are back to pre-pandemic levels. But forces that hindered growth in 2022 persist. Inflation remains high and continues to erode household purchasing power. Policy tightening by central banks in response to inflation has raised the cost of borrowing, constraining economic activity. Immediate concerns about the health of the banking sector have subsided, but high interest rates are filtering through the financial system, and banks in advanced economies have significantly tightened lending standards, curtailing the supply of credit. The impact of higher interest rates extends to public finances, especially in poorer countries grappling with elevated debt costs, constraining room for priority investments. As a result, output losses compared with pre-pandemic forecasts remain large, especially for the worlds poorest nations.

Scarring effects are expected to be much larger in emerging market and developing economies than in advanced economies-reflecting more limited policy support and generally slower vaccination-with output expected to remain below the pre-pandemic trend throughout the forecast horizon.

Global growth is projected to fall from 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024 on an annual average basis. Compared with projections in the April 2023 WEO, growth has been upgraded by 0.2 percentage point for 2023, with no change for 2024. The forecast for 2023-24 remains well below the historical (2000-19) annual average of 3.8 percent. It is also below the historical average across broad income groups, in overall GDP as well as per capita GDP terms. Advanced economies continue to drive the decline in growth from 2022 to 2023, with weaker manufacturing, as well as idiosyncratic factors, offsetting stronger services activity. In emerging market and developing economies, the growth outlook is broadly stable for 2023 and 2024, although with notable shifts across regions. On a year-over-year basis, global growth bottomed out in the fourth quarter of 2022. However, in some major economies, it is not expected to bottom out before the second half of 2023.

World trade growth is expected to decline from 5.2 percent in 2022 to 2.0 percent in 2023, before rising to 3.7 percent in 2024, well below the 2000-19 average of 4.9 percent. The decline in 2023 reflects not only the path of global demand, but also shifts in its composition toward domestic services, lagged effects of US dollar appreciation-which slows trade owing to the widespread invoicing of products in US dollars-and rising trade barriers.

The fight against inflation continues. Inflation is easing in most countries but remains high, with divergences across economies and inflation measures. Following the build-up of gas inventories in Europe and weaker-than-expected demand in China, energy and food prices have dropped substantially from their 2022 peaks, although food prices remain elevated. Together with the normalization of supply chains, these developments have contributed to a rapid decline in headline inflation in most countries. Core inflation, however, has on average declined more gradually and remains well above most central banks targets. Its persistence reflects, depending on the particular economy considered, pass-through of past shocks to headline inflation into core inflation, corporate profits remaining high, and tight labor markets with strong wage growth, especially in the context of weak productivity growth that lifts unit labor costs. However, to date, wage-price spirals-wherein prices and wages accelerate together for a sustained period-do not appear to have taken hold in the average advanced economy, and longer-term inflation expectations remain anchored. In response to the persistence of core inflation, major central banks have communicated that they will need to tighten monetary policy further. The Federal Reserve paused rate hikes at its June meeting but signalled further ones ahead, and the Reserve Bank of Australia, Bank of Canada, Bank of England, and European Central Bank have continued to raise rates. At the same time, in some other economies, particularly in East Asia, where mobility curbs during the pandemic restricted demand for services longer than elsewhere, core inflation has remained low. In China, where inflation is well below target, the central bank recently cut policy interest rates. The Bank of Japan has kept interest rates near zero under the quantitative and qualitative monetary easing with yield curve control policy.

The ongoing climate emergency: Despite some steps on the path toward a green transition, global emissions are-on current trends-very likely to overshoot the Paris Agreement temperature goals by the end of the century and lead to catastrophic climate change (with low-likelihood outcomes such as the ice sheet collapse, abrupt ocean circulation changes, and some extreme events and warming that cannot be ruled out). Indeed, the effects of warming are already starting to show: droughts, forest fires, floods, and major hurricanes have become more frequent and more severe. And it is often those least able to cushion the blows of such events who are also most exposed to them. Depending on their implementation, policies to speed the green transition could have near-term inflationary effects which could weaken support for the vital climate policy agenda.

Risks to the Outlook

The balance of risks to global growth remains tilted downward, but adverse risks have receded since the publication of the April 2023 WEO. The resolution of US debt ceiling tensions has reduced the risk of disruptive rises in interest rates for sovereign debt, which would have increased pressure on countries already struggling with increased borrowing costs. The quick and strong action authorities took to contain banking sector turbulence in the United States and Switzerland succeeded in reducing the risk of an immediate and broader crisis.

Upside risks

More favourable outcomes for global growth than in the baseline forecast have become increasingly plausible. Core inflation could fall faster than expected-from greater-than-expected pass-through of lower energy prices and a compression of profit margins to absorb cost increases, among other possible causes--and declining job vacancies could play a strong role in easing labor markets, which would reduce the likelihood of unemployment having to rise to curb inflation. Developments along these lines would then reduce the need for monetary policy tightening and allow a softer landing. Scope exists for more favorable surprises to domestic demand around the world, as in the first quarter of 2023. In numerous economies, consumers have not yet drained the stock of excess savings they accumulated during the pandemic; this could further sustain the recent strength in consumption. Stronger policy support in China than currently envisaged--particularly through means-tested transfers to households--could further sustain recovery and generate positive global spillovers. Such developments, however, would increase inflation pressure and necessitate a tighter monetary policy stance.

Downside risks

Despite the recent positive growth surprises, plausible risks continue to be skewed to the downside:

Inflation persists: Tight labor markets and pass-through from past exchange rate depreciation could push up inflation and risk de-anchoring longer-term inflation expectations in a number of economies. The institutional setup of wage setting in some countries could amplify inflation pressures on wages. Moreover, El Ni?o (warming of the ocean surfaces)could bring more extreme temperature increases than expected, exacerbate drought conditions, and raise commodity prices. The war in Ukraine could intensify, further raising food, fuel, and fertilizer prices. The recent suspension of the Black Sea Grain Initiative is a concern in this regard. Such adverse supply shocks might affect countries asymmetrically, implying different dynamics for core inflation and inflation expectations, a divergence in policy responses, and further currency movements.

Financial markets reprice: Financial markets have adjusted their expectations of monetary policy tightening upward since April 2023 but still expect less tightening than policymakers have signalled, raising the risk that unfavourable inflation data releases could-as in the first quarter of 2023-trigger a sudden rise in expectations regarding interest rates and falling asset prices. Such movements could further tighten financial conditions and put stress on banks and nonbank financial institutions whose balance sheets remain vulnerable to interest rate risk, especially those highly exposed to commercial real estate. Contagion effects are possible, and a flight to safety, with an attendant appreciation of reserve currencies, would trigger negative ripple effects for global trade and growth.

Rebuild fiscal buffers while protecting the vulnerable - With fiscal deficits and government debt above pre-pandemic levels, credible medium-term fiscal consolidation is in many cases needed to restore budgetary room for maneuver and ensure debt sustainability. Sovereign spreads remain historically elevated, impeding market access for many economies reliant on short-term borrowing. Faster and more efficient coordination on debt resolution, including through the Group of Twenty (G20) Common Framework and the Global Sovereign Debt Roundtable, is needed to provide a positive signal that lowers short-term borrowing costs and to avoid the risk of debt crises spreading. The recent agreement between Zambia and its official creditor committee is a welcome step in that direction.

FY 2022-23 ended on a positive note, due to higher-than-expected agriculture output and strong government spending. However, high inflation, in particular for energy and food, and the ensuing monetary tightening to anchor expectations are weighing on purchasing power and household consumption, particularly in urban areas. Tighter financial market conditions are reflected in weakening credit-supported demand for capital goods, a good proxy for business investment. The merchandise trade deficit was 40% larger in FY 2022-23 than in FY 2021-22, with trade in petroleum accounting for over two-fifths of the deterioration. Although services export growth remains brisk and the sectoral surplus rose by 35%, it is insufficient to offset the imbalance in goods trade. Low labour productivity is affecting the competitiveness of "Made in India" goods and participation in global value chains. The current account deficit narrowed in the October-December quarter to 2.2% of GDP, from 2.7% in the same period in FY 2021-22. Headline inflation has fallen below 6% (the central banks upper bound of the tolerance band) since March 2023, mostly due to lower food prices, as well as base effects. Employment and wage estimates suggest improving labour market conditions in rural areas, while export-oriented service firms report increasing difficulties filling vacancies.

Source: https://www.imf.org

The economy will not escape the global slowdown

After reaching 7.2% in FY 2022-23, real GDP growth is expected to slow to 6% in FY 2023-24, before rising to 7% in FY 2024-25. While indicators suggest that Indias growth is stable for now, headwinds from the impact of rapid monetary policy tightening in the advanced economies, heightened global uncertainty and the lagged impact of domestic policy tightening will progressively take effect. With slower growth, inflation expectations, housing prices and wages will progressively moderate, helping headline inflation converge towards 4.5%. This will allow interest rates to be lowered from mid-2024. The trade restrictions (including export bans on various rice varieties) imposed in 2022 to fight inflation are assumed to bewithdrawn. The current account deficit will narrow, reflecting abating import price pressures. Most risks to the projections are tilted to the downside. While banks solvency ratios and financial results have improved and the authorities have enhanced loan-loss provisioning and established a bad bank, any deterioration of banks asset quality could threaten macro-financial stability. In the run-up to the 2024 elections, fiscal consolidation may be delayed, and the conclusion of trade agreements may become more difficult. A potentially below-normal monsoon season could also impact growth. Declining geopolitical uncertainty, on the other hand, would boost confidence and benefit all sectors, as would a faster-than-expected conclusion of free-trade agreements with key partners and the incorporation therein of services. Climate change and gender gaps require targeted policies More than half of the Indian population lives in the Indo-Gangetic Plain and is exposed to the increasingly frequent and extreme heatwaves caused by climate change. It is estimated that almost 100 000 extra lives are lost every year due to hot weather and the flooding that can follow. The economic costs are also large, including labour losses, a meagre wheat harvest, greater livestock mortality and power outages. Reducing global greenhouse gas emissions, including in India, will help limit such losses in the long term. However, measures that can immediately reduce the impact of extreme weather events are also needed, such as improved infrastructure to prevent flooding. Sustainable development also requires further progress in gender equality across many dimensions, including access to health, education and capital. Impressive results have been attained, for instance in financial inclusion, but substantial gaps remain. Policy formulation and execution should fully incorporate gender considerations and specific indicators. Enhanced policy efforts to increase childcare assistance, vocational training and life-long education for working women would also be welcome. Better enforcement of the land rights of women would strengthen their economic position and, by making it possible to use this asset as collateral, may also facilitate investments in climate mitigation and adaptation.

Source: OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE

The government is expected to focus on a three-pronged strategy:

A well-balanced monetary policy: Amidst inflation concerns, the RBI is unlikely to let its guard down and will keep the monetary policy tight. The downside of the move is that higher policy rates will raise borrowing costs, which will in turn moderate credit growth (although it is very strong relative to the past five years).

While prioritizing stability is the need of the hour, the government cannot afford to overlook growth. India needs investments to remove supply bottlenecks and meet the rising demand. Low credit availability will impact capacity-building. In short, too much tightening will result in a vicious circle of low credit availability, investment, and supply, thereby causing further inflation. The RBIs latest move to halt the rate-hike cycle is an indication that the RBI also wants to keep economic growth into consideration as it aligns inflation with the target.

Amplify efforts in spending on infrastructure while consolidating expenses: Over the last year, investment flows from abroad have remained modest. The drying up of global liquidity due to tighter monetary policies in central banks across industrial countries resulted in low gross inward FDI to US$61.5 billion during2022-23 (April 2022-January 2023) from US$70.5 billion a year ago.

The investment gap caused by low private and foreign investment has to be filled by the government through higher spending on infrastructure and improving the logistics ecosystem. Initiatives such as the National Infrastructure Pipeline, PM Gati Shakti, and National Logistics Policy (NLP), among others, are efforts in that direction. These will also improve logistics costs and efficiency and crowd in private investment. Thankfully, a study by the State Bank of India suggests that capital productivity has improved significantly over the last decade, and hence, any incremental investment spending will generate much larger output than it did in the past.

Capitalize on services as manufacturing ramps up: Emphasis on manufacturing and initiatives such as production-linked incentives will attract investment and those efforts must continue. At the same time, the government must take advantage of the rising demand for services worldwide. The services sector has shown promising growth in exports lately, thanks to global digitization efforts and greater acceptance among multinationals (MNCs) to run operations remotely. India must reap benefits where it has a comparative advantage and build a robust and efficient ecosystem to bring more MNCs to its shore. This will have a spill over on investments in the manufacturing space as well.

India Celebrating 75 years of Independence: Azadi Ka Amrit Mahotsav

Like the history of the freedom movement, the journey of 75 years after independence is a reflection of the hard work, innovation, enterprise of ordinary Indians. Whether in the country or abroad, we Indians have proved ourselves with our hard work. We are proud of our Constitution. We are proud of our democratic traditions. The mother of democracy, India is still moving forward by strengthening democracy. India, rich in knowledge and science, is leaving its mark from Mars to the moon. The Azadi Amrit Mahotsav means elixir of energy of independence; elixir of inspirations of the warriors of freedom struggle; elixir of new ideas and pledges; and elixir of Aatmanirbharta. Therefore, this Mahotsav is a festival of awakening of the nation; festival of fulfilling the dream of good governance; and the festival of global peace and development.

Source:https://amritmahotsav.nic.in/

Our industry is mainly dependent on automobile and auto ancillary industries and other engineering industries however due to privatisation of defence and addition of new customer base to our existing customer base our growth is consequently linked to the future of these industries which is bright as of now. Brief outlook of automobile industry and Auto component industry,Electrical and fittings, Defence and aerospace industry (Engineering and Capital Goods Industry)together representing as "Our Industry" forms part of this report under "Outlook of Industry".

Outlook of Industry

The Indian automotive industry is expected to reach US$ 300 billion by 2026. Strong policy support from the Government will ensure growth in this sector. A study by CEEW Centre for Energy Finance recognised a US$ 206 billion opportunity for electric vehicles in India by 2030. This will necessitate a US$ 180 billion investment in vehicle manufacturing and charging infrastructure.

The automotive manufacturing industry comprises the production of commercial vehicles, passenger vehicles, three-wheelers, and two-wheelers. The Indian auto industry is expected to record strong growth in FY23, post recovering from the effects of the COVID-19 pandemic. Electric vehicles, especially two-wheelers, are likely to witness positive sales in FY23. A report by India Energy Storage Alliance estimated that the EV market in India is likely to increase at a CAGR of 36% until 2026. In addition, a projection for the EV battery market is forecast to expand at a CAGR of 30% during the same period.

Focus shifting on electric cars to reduce emissions. The Government aims to transform India into an R&D hub. India could be a leader in shared mobility by 2030, providing opportunities for electric and autonomous vehicles.The electric vehicles industry is likely to create five crore jobs by 2030.

Automotive Mission Plan 2016-26 is a mutual initiative by the Government of India and the Indian automotive industry to lay down the roadmap for the development of the industry. The Government aims to develop India as a global manufacturing centre. In Union Budget 2022-23, the government announced an increased allocation of capex, a high target for national highways, and proposed an EV battery policy.

The Indian auto-components industry has experienced healthy growth over the last few years. The Indian auto components industry is expected to grow to US$ 200 billion by FY2026. This growth will be backed by strong export demand which is expected to rise at an annual rate of 23.9% to reach US$ 80 billion by 2026. The turnover of the automotive component industry grew 34.8% to Rs. 2.65 lakh crore (US$ 33.8 billion) during April-September 2022 compared to the first half of the previous year.

The growth of global original equipment manufacturers (OEM) sourcing from India & the increased indigenisation of global OEMs is turning the country into a preferable designing and manufacturing base. Due to a shift in supply chains, India can possibly increase its share in the global auto component trade to 4-5% by 2026. The auto components industry accounted for 2.3% of Indias GDP and provided direct employment to 1.5 million people. The industry is estimated to be worth US$ 200 billion contributing 5-7% of Indias GDP by 2026. The global move towards electric vehicles will generate new opportunities for automotive suppliers.

The engineering sector, being closely associated with the manufacturing and infrastructure sectors, is of strategic importance to Indias economy.Demand in the engineering industry segment is driven by investments and capacity creation in core sectors like power, infrastructure developments, mining, oil and other sectors like the general manufacturing sector, automotive and process industries, and consumer goods industry. To enhance opportunities for private investment in infrastructure - Infrastructure Finance

Secretariat is being established who will assist all stakeholders for more private investment in infrastructure, including railways, roads, urban infrastructure and power.

Engineering Industry comprises of two major segments viz., Heavy engineering and light engineering. Machine tools forms vital part of heavy engineering segment. The Indian machine tool market size reached US$ 1.4 billion in 2022. The market is expected to reach US$ 2.5 billion by 2028, exhibiting a growth rate (CAGR) of 9.4% during 2023-28. The manufacturers of machine tools are mostly SMEs, few of them are mid-sized manufacturers which have an annual turnover varying between US$ 36-60 million (Rs. 300-500 crore). The types of machine tools currently manufactured are general/special purpose machines, standard Computer Numerical Control (CNC) machines, gear cutting, grinding, medium size machines, electrical discharge machining (EDM), presses, press brakes, pipe bending, rolling, bending machines, etc.

Engineering accounts for about 25% of Indias total global exports in the goods sector and is one of the largest foreign exchange earners. In FY22, India exported engineering goods worth US$ 111.63 billion, a 45.51% YoY growth. Cumulative engineering exports for April-December 2022-23 stood at US$ 79.83 billion. In December 2022, exports of engineering goods from India stood at US$ 9.08 billion. Indias engineering goods are exported to key markets such as the US, Europe, and China.

Growth drivers for the Indian engineering sector- POLICIES- New export policy in Uttar Pradesh, a policy aimed at promoting export growth and competitiveness and Voluntary Vehicle-Fleet Modernisation Programme (VVMP) launched by Prime Minister Mr. Narendra Modi in August 2021, also known as the Vehicle Scrapping Policy; INVESTMENT- With 100% FDI allowed through the automatic route, major international players such as Cummins, GE, ABB and Alfa Laval have entered the Indian engineering sector due to growth opportunities.

The company has sufficient capacity and is looking out for export orders from USA, Turkey etc.; Other than export orders we are also concentrating on local markets. Overall growth depends on how the economy progress in the scenario explained above.

Nevertheless, the Company is now more focused on getting customers who are looking for application taps with special geometries, where the prices are good. Towards this objective, the Company participated in ACMEE Chennai Trade Centre, Chennai from December 09-13,2021 and IMTEX 2023 at Bangalore city from January 19-21, 2023.

The growth of global OEM sourcing from India and the increased indigenization of global OEMs is turning the country into a preferable designing and manufacturing base. India is expected to become the fourth largest automobiles producer globally by 2020 after China, US and Japan. Growing working population, rapid urbanization, boost in rural economy and rising middle class income are expected to remain key demand drivers. Other areas of opportunities explained above like electrical fittings, defense sector, aerospace, etc., are all growing very fast in India and we expect full benefits of growth from these sectors also.

Since auto sector is still our main market any down fall in the auto sector is likely to affect our industry. Also imports of cutting tools from China may pose a threat in some segments of our industry. The threat is medium, given the concentration of Industry clusters in specific strategic centers. However, now the Automobile industry wants proper services at local levels and materials are required just in time. We therefore have to keep specific inventories for different customers and have to supply to them immediately on the same day when we get the order. Because of superior quality and prompt services we shall be able to overcome threats from imported tools in the years to come. However, it is likely that adverse after effects of COVID-19 on overall economy may pose certain threats and challenges to the business.

Considering the size and nature of the business, presently adequate internal control systems are in place. However, as and when company achieves further growth and higher level of operations, company will review the internal control system to match with changed requirement.

The company has proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against unauthorized use or disposition and that transaction are authorized and recorded correctly.

Gross Revenue from operations was INR 8861.57 lakh as recorded in the previous financial year 2022-23 with an increase of 25.15% reinforcing the business growth. This has been possible because of low base in previous year. We feel that business is yet to pick-up and if overall economy progress is well we will see further progress in the years to come.

The company believes that human resources will play a key role in its future growth. Planned efforts are made to develop and retain talent. Learning and development initiatives focus on developing the professional capabilities. The company continues to provide growth opportunities to internal talent by assigning them higher responsibilities with suitable exposure and training. The company continues to maintain positive work environment and constructive relationship with its employees with a continuing focus on productivity and efficiency.

Cautionary statement

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations may be forward looking statements. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, amongst others, economic conditions affecting demand/supply and price conditions in the markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.