Aaron Industries Ltd Management Discussions

[A] Industry Structure and Developments:

Global Economic Overview

According to IMF World economic Outlook (Apr-2023), The global economy is yet again at a highly uncertain moment, with the cumulative effects of the past three years of adverse shocks—most notably, the COVID-19 pandemic and Russias invasion of Ukraine—manifesting in unforeseen ways. Spurred by pent-up demand, lingering supply disruptions, and commodity price spikes, inflation reached multidecade highs last year in many economies, leading central banks to tighten aggressively to bring it back toward their targets and keep inflation expectations anchored.

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.

Indian Economic Review:

According to ADB (Asian Development Bank), despite the global slowdown, Indias economic growth rate is stronger than in many peer economies and reflects relatively robust domestic consumption and lesser dependence on global demand. The Government of Indias strong infrastructure push under the Prime Ministers Gati Shakti (National Master Plan for Multimodal Connectivity) initiative, logistics development, and industrial corridor development will contribute significantly to raising industrial competitiveness and boosting future growth

Improving labor market conditions and consumer confidence will drive growth in private consumption. The central governments commitment to significantly increase capital expenditure in FY2023, despite targeting a lower fiscal deficit of 5.9% of GDP, will also spur demand. Helped by recovery in tourism and other contact services, the services sector will grow strongly in FY2023 and FY2024 as the impact of COVID-19 wanes. However, manufacturing growth in FY2023 is expected to be tamped down by a weak global demand, but it will likely improve in FY2024.

Elevator Market:

The Company is engaged in the business of manufacturing Elevator and Elevator parts. India is the second-largest market for elevators and escalators in the world according to independent analysts. Elevator and Escalator Market size in India to grow by USD 784.24 Million from 2022 to 2027; Growing number of high-speed metro projects is expected to drive the market growth. Moreover, with the growing number of high-rise commercial and residential buildings across the country, the need for high-speed traction elevators is increasing tremendously, which in turn is pushing product demand over the coming years.

The building & construction segment is set to capture more than 80% of the market share by 2028 on account of the increasing construction of private homes, apartments, and high-rises across the globe. Developing regions have been witnessing a growth in the number of people living in cities & urban centers. The rising construction of commercial buildings, such as shopping malls, restaurants, hotels, hypermarkets, etc., impelled by growing tourist traffic will be a major growth enabler.

The elevator segment will contribute significantly to market growth. In the past, commercial buildings in India would install a typical set of elevators. However, a number of vendors, has started to offer cutting-edge elevator designs that are not only more affordable but also more energy-efficient. The amount of vertical housing has increased in India as a result of the countrys expanding population. In many Indian cities, population densities are rising as a result of rapid urbanization, which also contributed to this development. These skyscrapers need elevators to allow occupants to travel between floors. It is challenging for people to use stairs to travel between floors in structures with four or more stories. The movement of people and goods is made easier in these structures by the use of elevators. During the anticipated period, these factors will hasten market expansion.

Steel Polishing and Finishing Market:

One of the primary forces behind industrialization has been the use of metals. Steel has traditionally occupied a top spot among metals. Steel production and consumption are frequently seen as measures of a countrys economic development because it is both a raw material and an intermediary product. Therefore, it would not be an exaggeration to argue that the steel sector has always been at the forefront of industrial progress and that it is the foundation of any economy. The Indian steel industry is classified into three categories - major producers, main producers and secondary producers.

As of December 2022, India was the worlds second-largest producer of crude steel. In FY22, the production of crude steel and finished steel stood at 133.596 MT and 120.01 MT, respectively. In April-November 2022, the production of crude steel and finished steel stood at 81.96 MT and 78.09 MT respectively. The growth in the Indian steel sector has been driven by the domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to Indias manufacturing output.

The Indian steel industry is modern, with state-of-the-art steel mills. It has always strived for continuous modernization of older plants and up-gradation to higher energy efficiency levels.

In FY23 (until January 2023), the exports of finished steel stood at 5.33 MT, while the imports stood at 5 MT. In FY22, exports and imports of finished steel stood at 13.49 MT and 4.67 MT, respectively. In FY22, Indias export rose by 25.1% YoY, compared with 2021. In FY21, India exported 9.49 MT of finished steel. In December 2022 exports of finished steel stood at 4.42 lakh tonnes.

The annual production of steel is anticipated to exceed 300 million tonnes by 2030-2031. By 2030-31, crude steel production is projected to reach 255 million tonnes at 85% capacity utilization achieving 230 million tonnes of finished steel production, assuming a 10% yield loss or a 90% conversion ratio for the conversion of raw steel to finished steel. With net exports of 24 million tonnes, consumption is expected to reach 206 million tonnes by the years 2030-2031. As a result, it is anticipated that per-person steel consumption will grow to 160 kg. (Source:IBEF)

[B] Opportunity:

• Increasing the focus of manufacturers on offering products with improved safety is expected to result in market growth.

• The high demand for high-speed lifts due to the increasing sky scrapers is resulting in market growth.

• Rapid urbanization and the consequential proliferation of multi-storey buildings will continue to intensify the demand for Elevators.

4 Growing value of aesthetics in elevators

• Escalating demand for elevators from industrial units for seamless transportation of heavy loads to various floors will continue to boost market revenues.

• Consumption of steel by Indias infrastructure segment is expected to increase to 11% by FY26.

• Due to rising investment in infrastructure, the demand for steel products would increase in the years ahead.

• Increasing concept of Elevator in Bungalow.

[C] Segment-Wise / Product-Wise Performance:

Segment	FY2022-23	FY2021-22
• Elevator Division	4107.88	2731.44
• Steel Polishing Division	1447.24	900.33
• Unallocated	29.85	142.35
Total	5584.97	3774.12

[D] Outlook:

The Company is confident that it can utilize future opportunities and face future challenges with agility in order to meet the shareholders expectation of sustainable growth and profitability. The key focus areas are:

• Debt reduction and thereby savings in interest cost

• Increasing the Value Addition per product

• To Sustain the EBITDA levels

Your Company focuses on quality products and expects to get more orders in coming years. Adoption of global trends in the Elevator business which includes energy-efficient, safe, and reliable equipment manufacturing, and improved designs will help us to gain more in the coming years.

[E] Risks, Concerns and Threats:

The Company is exposed to a number of risks such as Economic Risk, Supply Demand Risk, Competition Risk, Input Risk, Regulatory Risk,Taxation, and Environmental Risks. Further, the following can be some of the risks and concerns the Company needs to be kept in mind:

1. Economic uncertainty: Based on the current and future market environment estimates, the base cost of material are expected to continue to be volatile.

2. The main challenges facing the steel industry today are overcapacity, high raw material/energy costs, and price volatility.

3. The constantly fluctuating price of raw materials and weak steel prices have put significant pressure on steel margins.

4. Delayed real estate projects have impacted the Elevator Industry.

5. Malpractices by some of the players in the industry may affect the overall per formance of the emerging players.

6. Strict government policies and regulations have been put in place to adminis ter safety and security in Elevators. Ensuring conformity to the above-men tioned policies and regulations will continue to exert high pressure on Compa nies.

7. Over-the-top demand for top-notch assistance and instant reverts to repairs, replacements, and queries is also posing considerable challenges for compa nies in terms of keeping up with ever-evolving customer expectations.

8. It is a challenge to recruit and hire technically sound manpower, who under stands the complexity and technicality of elevator products for installation, se rvicing & maintenance.

Some of the risks that may arise in the normal course of its business and impact its ability for future developments include inter-alia, Credit Risk, Liquidity Risk, Counterparty Risk, Regulatory Risk, Commodity Inflation Risk, Currency Fluctuation Risk, and Market Risk.

[F] Internal Control System and their adequacy:

The Company maintains adequate and effective internal control systems commensurate with its size and complexity. It also ensures that they are recorded in all material respects to permit the preparation of financial statements in conformity with established accounting principles, along with the assets of the Company being adequately safeguarded against significant misuse or loss.

In the opinion of the Management, the Company has adequate internal audit and control systems to ensure that all transactions are authorized, recorded, and reported correctly. An independent internal audit function is an important element of the Companys internal control systems. This is supplemented through an extensive internal audit programme and periodic review by the management and the Audit Committee. The internal control systems comprise extensive internal and statutory audits. The Corporate Governance practices instituted by the Company are discussed in detail in the chapter on Corporate Governance which forms part of the Annual Report.

[H] Material developments in Human Resources / Industrial Relations fronts, including the number of people employed:

Human Resource development continues to be our Top Focused area which will ensure intentions are converted to realities. The emphasis was on reskilling and upskilling to enable the teams in navigating change and remaining compliant with evolving processes. Industrial Relations with employees remained cordial throughout the year under review.

During the year ended March 31, 2023, the Company has employed 139 permanent workmen and staff.

[i] Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations, therefore, including::

Financial Ratio	FY 2022-23	FY 2021-22	% Change	Reasons For Change
Debt Turnover Ratio	22.38	18.07	23.82%	NA
Inventory Turnover Ratio	3.53	3.89	(9.26%)	NA
Interest Coverage Ratio	2.86	2.16	32.24%	Reduction in interest cost
Current Ratio	1.64	1.92	(14.61%)	NA
Debt to Equity Ratio	0.56	0.58	(3.60%)	NA
Operating Profit Margin %	27.58%	27.67%	(0.32%)	NA
Net Profit Margin %	9.66%	9.85%	(1.88%)	NA

p] Details of any change in Return on Net Worth as compared to the immediately previous financial year along with detailed explanations thereof:

Particulars	FY 2022-23	FY 2021-22	% Change	Reasons For Change
Return on Net Worth	26.34%	23.39%	12.61%	During FY 2023 the Company performed better in PAT by 45.70%.

[K] Cautionary Statement:

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates, and others may constitute forward-looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations, whether expressed or implied. Several factors could make a significant difference to the Companys Operations. These include climatic and economic conditions affecting demand and supply, government regulations and taxation, any epidemic or pandemic, and natural calamities over which the Company may not have any direct / indirect control