nitco ltd Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

GLoBAL ecoNomY

The world ceramic tile market is projected to grow by more than 3 billion square metres in the five-year period 2022-2026, climbing from 18.2 billion sqm in 2021 to 21.3 billion sqm in 2026, equivalent to a compound annual growth rate (CAGR) of 3.2%. Production volumes will see a corresponding increase to reach 21.5 billion sqm (CAGR +3.3%). These projections are contained in the second edition of the report entitled "Ceramic Tile Market Forecast Analysis - Trend 2022-2026" published by MECS-Acimac, a research centre that combines 30 years of specialist knowledge of the world ceramic industry with a forecasting calculation model that has been finetuned over the last ten years of analyses. The ceramic tile market forecasting survey conducted by MECS involves analysing and cross-referencing a broad set of determining variables in order to predict future trends in production and consumption for each of the 91 countries studied: from macroeconomic trends to the impact of energy and raw materials prices, from changes in consumer purchasing power to population growth and urbanisation, from investment in construction and residential building to variables affecting international trade. The report analysed seven geographical macro-regions along with their constituent countries: 21 countries in the European Union, 6 in non-EU Europe, 3 in North and Central America, 7 in South America, 10 in the Middle East, 16 in the Far East and 26 in Africa, as well as Australia. For each of these countries, the report provides five-year ceramic tile production and consumption values along with macroeconomic indicators to offer a better understanding of the individual market context. This makes it a useful tool for measuring the most attractive and dynamic markets and offering a quantitative analysis of business opportunities. Spotlight on Asia and Africa In 2026, the final year of the five-year forecast period, the fastest-growing region will be Africa, where tile consumption will grow at a CAGR of +6.6% and production +7.3%. At the other end of the scale, non-EU Europe will be the only area to show a slight decline, largely due to the impact of the Russia-Ukraine.

However, Asia will continue to account for almost 70% of world tile production and consumption. Excluding the Middle East, the broader Asian region (referred to as the Far East in the study) will see a more than 2 billion square metre increase in both production (CAGR +3.4%) and consumption (CAGR +3.2%) over the five year period. This is five times higher than the increase that will be recorded in Africa, where tile consumption will be just 451 million square metres higher in 2026 than in 2021. As mentioned, world tile production will reach 21.5 billion sqm in 2026, an increase of 3.2 billion sqm compared to 2021. Some 80% of this will be produced by just seven countries, four of which are in Asia: India, China, Vietnam and Bangladesh. While we are unlikely to see any changes amongst the major global players, a number of new countries are emerging on the world stage, several of them in Africa. In terms of production, countries such as Senegal and Nigeria will continue to record double-digit growth rates in response to a corresponding increase in domestic demand, while Cameroon, Uganda and Kenya are expected to see similar growth in consumption.

The Russia-Ukraine war has exacerbated the long-term trend of rising raw material and energy prices that began back in 2019. Energy prices have been seeing unprecedented growth since the first quarter of 2022, in turn following the post-pandemic recovery of 2021. The TTF natural gas price, which for years ranged between €10 and €12/MWh, peaked at over €340/MWh before falling back below €40/MWh in early 2023. Crude oil showed a similar trend, although the scenario is steadily improving thanks to the perception of lower geopolitical risk, the slowdown in GDP growth and the reduced reliance of many European countries on Russian oil imports. In addition, the increase in raw materials and energy prices has contributed to the natural cyclical impact of growth in demand on consumer price inflation (+8.8% in 2022 worldwide). This has also impacted core (i.e. non-energy) inflation, which has exceeded its monetary policy target value. Many central banks (particularly the Federal Reserve System and the ECB) have been required by their statutes to shift their orientation towards restrictive rather than expansionary monetary policies. And although the problem of coreinflationis now improving, the combination of low growth and monetary tightening is continuing to propel the world economy towards a high risk of recession. Amid continuing uncertainty surrounding the war in Ukraine, this situation would prove particularly severe if a new financial crisis were to emerge driven by the collapse of some banks, resulting in a contagion scenario similar to that of 2008. Back in October, the IMF revised down its outlook for global economic growth in 2023 to +2.7% (mainly due to the very poor levels of performance estimated for many European countries) and then raised it to +2.9% in January 2023. Following the sharp slowdown in 2022 to +3%, Chinas GDP growth is expected to accelerate again this year to between +5% and +5.2%. China and India will account for half of the growth in the global economy in 2023 (with India expected to see 6.1% growth), while the US and the Euro area together will make up just 10% Over the past decade, ceramic tile consumption has grown most rapidly in countries with the strongest population growth and in those with high urbanisation rates, although there are several exceptions to this trend. In several countries (e.g. Lithuania and Croatia) tile consumption is increasing most rapidly outside large urban areas, whereas in others (e.g. Germany and France) consumption is declining despite higher levels of urbanisation. Over the past 20 years, the global rate of urbanisation has outstripped that of population growth (urbanisation of +2.1% on average per annum compared to a population growth of +1.2%). Urbanisation rates are highest in Africa (+3.7%) and Asia (+2.6%) and are expected to remain at these levels for the next few years. In China, and even more so in Bangladesh and Vietnam, the proportion of urban population is still far below the levels of western countries, whereas in Brazil 87% of the population lives in cities, more than in Italy or Germany. However, the urban population growth forecasts for the period 2022-2026 point to a slowdown compared to the previous two decades.

Source: Global Ceramic Industry Report

	TAB. 2: URBAN POPULATION BY CONTINENT (MILLIONS)
	Popolasione urbana per continente (milioni di abitani)
	2000	2022	CAGR 2000/2022	2026	CAGR 2022/2026
Asia	1,401	2,487	2.64%	2,641	1.51%
Africa	286	634	3.68%	726	3.43%
Europe	517	563	0.39%	566	0.15%
North America	385	501	1.21%	516	0.75%
South America	278	373	1.34%	385	0.79%
World	2,868	4,553	2.12%	4,834	1.51%
World total population	6,118	7,959	1.20%	8,217	0.80%

INDIAN ECONOMY & INDIAN CERAMIC TILES INDUSTRY

Kajaria Ceramics, Indias largest tile manufacturer and one of the top ten groups in the world, reported exceptional results in the fiscal year to 31 March 2022. Total sales in volume grew 21% year-on-year to 92 million sqm, while revenues were up 33% to Rs. 37.05 billion (approximately US $490 million). The excellent performance continued in the first quarter of the new fiscal year (ended 30 June) with 80% year-on-year revenue growth to Rs. 10.08 billion (around $133 million), representing the seventh straight quarter delivering double-digit revenue growth. EBITDA margin for the quarter remained stable at 15% despite escalating inflation across all inputs and rising gas costs. Moreover, the group continues to maintain its focus on the domestic market (exports account for just 2% of volumes). Kajaria Ceramics has a tile production capacity of 82.8 million sqm/year, consisting of 32.3 million sqm of ceramic tiles produced in 2 factories in Rajasthan, North India and Andhra Pradesh, South India 24.2 million sqm of polished vitrified produced in 2 factories in Gujarat , West India and Rajasthan, North India and 26.3 million sqm of glazed vitrified tiles produced in 3 facilities in Rajasthan & Uttar Pradesh, North India, and Andhra Pradesh (South India). Kajaria Ceramics distributes its products throughout India via a network of more than 1,700 dealers.

Somany Ceramics is currently in a capacity expansion mode. In May this year, the Indian Group completed the most important capacity expansion project in its recent history. The three new lines increased the groups access to annual production capacity from 63 to 74 million sqm, strengthening its position as Indias second largest manufacturer and a top global player.

In the meantime, the Indian ceramic tile industry has further strengthened its position as a global tile player and as the worlds second largest manufacturer (above 1.3 billion sqm), consumer (almost 900 million sqm) and exporter behind China. In 2020, Indias tile producers chalked up another astonishing success with total exports of 437 million sqm (up 21% on 2019), an achievement that has helped the industry recover more rapidly from the impact of the Covid-19 pandemic. To talk of "double-digit" growth is a significant understatement. When in 2014 Indias exports passed the 100 million square metre mark for the first time, it was the result of an 85% upturn, followed by increases of 31% in 2015, 39% in 2016, 23% in 2017, 20% in 2018 and 31% in 2019. Exports also continued to grow in 2021. In the United States, for example, Indian tile exporters were able to increase their sales by 8.9% on 2020 to 20.2 million sqm, with a value (CIF) of US $164.6 million (+21.2% on the previous year). The largest Indian ceramic companies are making substantial new investments aimed at increasing production capacity and productivity.

According to IMF forecasts, the Indian economy is on course to grow by 6.1% this year and by 6.8% in 2024 and will outperform all other countries in terms of dynamism after overtaking China last year (by comparison, the IMF forecasts for the Chinese economy are for 5.2% GDP growth in 2023 and 5.2% in 2024).

In Morbi, companies are set up (and merged, demerged and shut down) at a very rapid pace, often by members of the same family. The business community exchanges orders on WhatsApp so that none are ever left unfulfilled, Morbi district (in Gujarat, Indias westernmost state), the tiles worlds second largest ceramic cluster and home to 95% of Indias ceramic tile producers. Questionnaires were sent to more than 800 Indian ceramic tile companies and over 500 responded, allowing the researchers to calculate the industrys total production capacity with an unprecedented level of accuracy as 3.3 billion square metres. Eight out of ten companies were founded after 2000, more than half (55%) were founded in the last ten years, and only six companies have more than 40 consecutive years of activity behind them. In terms of size, seven out of ten ceramic companies have an average annual turnover of less than €10 million and almost half (46.5%) have less than €5 million.

Source: Indian Ceramic Industry Report

FINANCIAL REVIEW

Analysis of Profit and Loss statement and Balance Sheet based on standalone results is given below: During FY 2022-23, your Company was able to achieve total revenue of Rs. 381.67 Crore. The Company is enjoying strong brand equity in the market. EBITDA loss was Rs. (48.65) Crore in FY 2022-23.

FINANCE COSTS

JMFARC has acquired 98% of the Companys debt from its lenders and sanctioned debt restructuring effective from Cut-Off date

28th February 2018. Interest on restructured loans has been provided in the books as per the Restructuring agreement with JMFARC. Further, the Company is negotiating a similar settlement agreement with LIC Pending negotiations no further adjustments have been made during the current financial year.

EQUITY SHARE CAPITAL

The Companys equity share capital is stated at Rs 7,185.90 Lakhs as on March 31, 2023.

BORROWINGS

The total debt of the Company is as under:

Particulars	2022-23	2021-22
Non-Current borrowings	20,000.00	20,002.63
Current borrowings	67,972.16	61,089.93
Total Debt	87,972.16	81,092.56

wORkING CAPITAL

a) Inventory has increased from Rs. 6,360.88 Lakhs in 2021-22 to Rs. 6,772.64 Lakhs in 2022-23;

b) Inventory –Real Estate has remained the same i.e. Rs. 15,000.00 Lakhs in 2021-22 and 2022-23;

c) Trade receivables have decreased from Rs. 9,655.00 Lakhs in 2021-22 to Rs. 7,391.54 Lakhs in 2022-23;

d) Trade payables have increased from Rs. 14,228.48 Lakhs in 2021-22 to Rs. 15,857.78 Lakhs in 2022-23.

PRODUCT WISE PERFORMANCE

MANAGING RISKS AT NITCO

At Nitco, risk management is a continuous process of identifying, assessing and evaluating risks and taking proactive measures to minimise or eradicate potential losses arising due to an exposure to particular risks. The consistent implementation of this framework is monitored through audits and reviews, resulting in an accurate understanding of the Companys competitive position. In doing so, the Company takes decisions that balance risks and rewards.

Risk	Mitigation
Perception risk
Inability to sustain historical growth rates could adversely impact brand perception.	Owing to a dynamic and sustainable business plan, continual innovation towards a prudent sales-mix and improving operational efficiencies, the Company will be able to better its sales in absolute terms.
Business slowdown risk
Indian economy could create a widening chasm between budgeted and actual ground realities.	The Company has emerged as a one-stop shop for tile solutions, providing floor as well as wall tiles and marble. Metros and urban cities are majorly hit by an economic deceleration while in recent times a majority of the demand for consumer products is emerging from Tier-II and Tier-III locations, which usually remains largely unaffected by economic slowdowns.
	Thus, as a precautionary measure, the Company strengthened its distribution network in new demand pockets.
Competition risk	Competition from the unorganised sector is expected to decline with rising consolidation, effected by organised players partnering with unbranded players (with low-cost manufacturing expertise) as a part of their cost- relationships with several low cost manufacturers for outsourcing its product requirements.
Increasing competition can have an impact on margins.
Technology or software obsolescence risk	The Company invested in SAP ERP module, scaling up its IT infrastructure across its sales, distribution and manufacturing divisions and upgraded it to SAP S4 HANA in the FY 2022-23.
Technology or software obsolescence may result in compromise of quality standards and losing out on the competitive advantage.	Design technology will further be enhanced to further strengthen NITCOs aspirational brand position in the minds of the architect, builder, dealer and community in large.
Client attrition risk	Providing post-sale services to retail and key account customers and offering guidance programs for institutional customers have been an integral part of Companys initiatives to reinforce relationships. The Company also customises products to cater to specific requirements.
A substantial portion of the Companys total sales comes from retail clients and large key accounts. Hence, client attrition can impact both revenues and prospective growth.	Some of its brand-enhancing customers include Tata Group, Reliance Group, Prestige, Rahejas, Godrej, Oberoi Construction, DLF, L&T, Shapoorji Pallonji Group, among others.

 

Risk	Mitigation
Human resource risk
Attrition of key executives and personnel could affect the Companys growth prospects.	Nitco has initiated various measures such as deploying strategic talent management system, training and integration of learning activities. Various HR initiatives were initiated to encourage staff towards enhancing productivity and building the spirit of team work.
Dealer attrition risk	The Company has introduced a fast-moving range of tiles new product launches, which has revitalised its distribution network and also has adopted franchisee model to expand its network of distribution partners.
Dealers represent the Companys face to customers. Reduction in the number of dealers could affect sales and negate brand image.

DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS, ALONG WITH DETAILED EXPLANATIONS THEREOF

Sr. No.	Ratio Analysis	March 31, 2023	March 31, 2022	Variance
1	Debtors Turnover Ratio	4.06	2.76	47.5%
2	Inventory Turnover Ratio	4.67	2.97	57.1%
3	Interest Coverage Ratio	(0.07)	(0.05)	38.5%
4	Debt Equity Ratio	(2.55)	(4.16)	-38.8%
5	Operating Profit Margin Ratio	6.12	4.87	25.5%
6	Net Profit Ratio	(39.63)	(30.80)	28.7%
7	Return on Net Worth Ratio	(43.75)	(47.21)	-7.3%

Debtors Turnover Ratio: Improvement on account improved realisation from trade receivables. Inventory Turnover Ratio: Improvement on account of inventory optimisation.

Interest Coverage Ratio: Deterioration on account of current year accrued interest in borrowings. Debt Equity Ratio: Deterioration on account of accumulation of current year net loss in equity.

Operating Profit Margin Ratio: Improvement on account of reduction in operating expenses. atio: Deterioration is on account of the current years exception item (Refer Note No. 32) R NetProfit

Return on Net Worth Ratio: Deterioration is on account of the current years loss.