ECONOMIC REVIEW
FY 2022-23 (FY 2023) began on a mixed note. The key positive was signs
of the pandemic receding. However, the flip side was the impact of inflationary trends,
supply chain disruptions emanating from China, and the start of the Russia-Ukraine
conflict impacting commodity prices. Persistent inflationary trends prompted several
central banks to adopt stringent monetary policies. Impacted by the multiple challenges
and the cautionary stance, global economic growth stood at 3.4% in CY 2022. In CY 2023, it
is expected to decline slightly to 2.8%, then recovering to 3% in CY 2024. Advanced
economies grew 2.7% in 2022 and are expected to grow 1.3% in 2023 and then 1.4% in 2024.
Emerging markets and developing economies which grew 4% in CY 2022 are expected to perform
in a more resilient manner and continue to grow at 3.9% in CY 2023 and 4.2% in CY 2024.
India too faced multiple challenges. Rising international crude prices
coupled with domestic weather conditions like excessive heat and unseasonal rains kept
food prices high, fuelling retail inflation. Consumer price Inflation (CPI) remained above
the Reserve Bank of Indias (RBI) tolerance levels for the better part of the year.
The RBI, like other Central banks across the world raised the monetary policy rates and
reduced excess systemic liquidity. The cumulative increase in policy rates in FY 2023 was
250 bps. Despite these challenges, India emerged as the fastest growing major economy in
the world. The Indian economy is poised to grow at 7.2% in FY 2022-23, as per the
Provisional estimates of National Income 2022-23.
With the easing of retail inflation, the RBI finally paused increasing
policy rates at its Monetary Policy Committee (MPC) meeting held in April 2023 with a
strong caveat that the pause was only for this meeting and the MPC would not hesitate to
take further action as may be required in future.
The Government of India announced a growth-oriented and expansionary
budget for FY 2024. It has tried to strike balance between fiscal consolidation and growth
by continuing its focus on capital expenditure and creating fiscal space for that by
curtailing revenue expenditure. It has set a target of reducing the Central
Governments fiscal deficit to 5.9% of the GDP in FY 2024 from 6.4% (revised
Despite challenges, India emerged as the fastest growing major economy
in the world. The Indian economy is poised to grow at 7.2% in FY 2022-23, as per the
Provisional estimates of National Income 2022-23. estimate or RE) in FY 2023, while using
the infrastructure capex tool to support the economy.
The Indian economy has weathered the external shocks reasonably well.
The proof of it is that the country has emerged as the fastest growing major economy in
the world.
It is expected that the Indias GDP would continue on its growth
path and remain the largest growing economy in the world. The only concern is the grey
clouds around the risk of monsoon falling below normal levels after four consecutive years
of normal rainfall.
Source: IMF-WEO April 2023, NSO provisional estimates
INDUSTRY OVERVIEW
According to the 56th World casting Census published by Modern Castings
USA, the total global casting production increased 6.6% in CY 2021 to 112.5 million metric
tonnes, up from 105.5 million metric tonnes in CY 2020. Most countries reported two years
of muted performance due to the pandemic. The top three positions in terms of casting
producers continue to be dominated by China, India and the US. China reported 54.05
million metric tonnes of casting followed by India as the second largest producer at 12.49
million metric tonnes. According to the IMARC, the global metal casting market was valued
at US$ 139 billion in CY 2021. The market is expected to grow at 7.8% CAGR to US$ 221.3
billion by 2027.
TheIndianfoundryindustryhasaturnoverofapproximately US$ 19 billion with
export of US$ 3.1 billion. Nearly 68% of the casting market is dominated by grey iron
castings. The industry manufactures metal cast components for applications in auto,
tractor, railways, machine tools, sanitary, pipe fittings, defence, aerospace, earth
moving, textile, cement, electrical, power machinery, pumps / valves, wind turbine
generators etc. The sector currently provides direct employment to about five lakh people
and indirect employment to 15 lakh people. The sector has the potential to create 20 lakh
additional jobs in next 10 years.
Export Data of Major Casting (Fig in Million US$)
India has nearly 4,500 units out of which 90% can be classified as
MSMEs. One third of these units have International Quality Accreditation making them
globally competitive. Several large foundries are modern and technologically-advanced.
Many foundries use cupolas using LAM Coke. However, these are gradually shifting to
induction melting / cokeless cupolas due to the growing awareness about environment
protection. The foundries are focussing on upgrading and increasing the level of
automation with various technologies like 3D printing, robotics / IT application, foundry
simulation software, reclamation / recycling of waste raw material, common facility
centre, etc. To enhance efficiency and productivity, the foundries are looking for value
addition and up-scaling of the operations.
Since the growth of the sector is linked to several other
manufacturing-based sectors, Governments push for manufacturing bodes well for the
foundry sector. The new manufacturing policy envisages the increase in the share of
manufacturing in the GDP to 25% from current 15% in the next 10 years. Most engineering
and other sectors make heavy use of metal castings in their manufacturing, amplifying the
role of foundry industry to support manufacturing. Other economic reforms like ‘Make
in India, ‘Ease of doing business, Vocal for Local, easing FDI norms to
promote investments in manufacturing and new initiatives in skill development are aiding
in increasing demand of manufacturing. Since all engineering and other sectors use metal
castings in their manufacturing, the role of foundry industry to support manufacturing is
very vital.
The growth of the foundry sector is being driven by sectors like auto
& auto components, tractors, construction equipment, machine tools, capital goods,
defence and railways. However, the automobile sector continues to be the dominant consumer
of castings. Alicon primarily caters to the automobile sector while constantly
endeavouring to increase supply of aluminium castings to non-automobile sectors. To meet
the growing demand for metal castings in India, foundries are investing in new technology
and equipment. Additionally, given the strong government impetus on manufacturing, clearly
visible in the Union Budget 2023-24, the Companys business is expected to witness
robust growth in the future.
The Auto industry has the pre-dominant share in terms of end use for
casting products in the country. As a result, Alicon primarily serves the Auto industry
across various types of vehicles. Alicon has also developed offerings for other segments
such as defence, healthcare, telecom, railways and power.
The domestic auto industry has witnessed a recovery in sales volumes
after witnessing a disruption in the prior year. This has supported growth for Alicon due
to higher demand from its customers. While the Auto Industry witnessed an increase of 13%
y-o-y, Alicon has seen revenues increase by 30% y-o-y. This is due to improving product
mix, higher share of contribution to passenger vehicles and commercial vehicles in the
incremental sales and the addition of new products.
Alicon has been able to capitalise on the trend of lightweighting
witnessed across the Auto Industry. A study estimates around 6-8% fuel savings for every
10% reduction in weight of the vehicle. The vehicles manufactured in developed geographies
have an aluminium content of 180 kg per vehicle compared to around 45 kg per vehicle, on
average, in India. This illustrates the scope for further growth of the Companys
products.
Source: Foundry Informatics Centre : About the Industry
(foundryinfo-india.org)
COMPANY OVERVIEW
With a rich experience of nearly five decades, Alicon Castalloy Limited
(hereafter referred to as Alicon or the
Company)isoneofIndiaslargestintegratedmanufacturers of aluminium castings. The
Company dominates the development of Pro-Cast and Magma space in India. A one-stop shop
for all engineering solutions for aluminium alloy casting needs across multiple user
industries, Alicon brings together the best attributes of three companies under its
umbrella, Alicon Castalloy, Atlas Castalloy and Illichmann Castalloy. This makes the
Company a unique blend of European engineering skills, Japanese quality and inherent
Indian ingenuity and frugality.
Headquartered at Pune, the Company caters to casting needs of a
diversified marquee customer base across sectors such as automobiles, infrastructure,
aerospace, energy, agriculture, defence and healthcare. The Company has four
state-of-the-art manufacturing facilities laden with high end machines. Its operations are
spread across the globe in 18 countries. It operates one of the largest aluminium
foundries in India and has developed a robust and innovative product pipeline. The
facilities are based at Shikrapur (Maharashtra), Chinchwad (Maharashtra), Binola (Haryana)
in India, and Slovakia in Europe. Such strategic locations enable shorter time-to-market
and enhancement of cost optimisation. To spread its global footprint in US and Europe, the
Company also has two marketing franchises in USA and France and an international marketing
office in Austria.
The Company offers the entire spectrum of world-class casting services
including design, engineering, casting, machining and assembly, painting and surface
treatment of aluminium components. Alicon is accredited with the honour of being the
pioneer for processes of Low Pressure Die Casting (LPDC) and Gravity Die Casting (GDC) in
India. Alicon is a preferred supplier for several domestic and international two and
four-wheeler Original Equipment Manufacturers (OEMs). In addition, it also caters to the
needs of several tier-I non-auto companies. The Companys Eight-Step process,
developed and perfected in-house, enables it to offer technologically-advanced
cost-effective solutions across product life cycle.
OPERATIONAL AND FINANCIAL OVERVIEW
During FY 22-23, the recessionary conditions across the markets it
serves added to the Companys challenges which were renamed as ‘7Cs from the
previous years nomenclature of 6Cs. These are (i) COVID-pandemic related disruptions
and resultant fallout; (ii) chip (semiconductor) shortages; (iii) cost-based inflation;
(iv) cost of new product development; (v) conflict between Russia and Ukraine; (vi) supply
chain crisis in global auto industry; and (vii) recessionary conditions in key customer
markets.
While the health impact of the pandemic dissipated during the year, the
Company continued to keep vigil over these 7Cs through focus on (i) enriched product mix
and driving improved volumes of higher margin products, (ii) sustained cost reduction
initiatives using Kaizen principles that enabled cost reduction at a micro-level across
operations, (iii) collaboratively working with customers to undertake price hikes, and
(iv) driving higher operational efficiencies across its business model. Led by its 3R
motto of reflection, reimagine and resilience, the Company remains focussed on sustainable
cost optimisation and new business wins while remaining future-ready to tap emerging
opportunities and building more robust manufacturing processes.
During the year gone by, the Passenger Vehicle segment witnessed strong
growth due to normalisation of economic activity and new launches by OEMs. Commercial
Vehicles witnessed continued growth on the back of sustained infrastructure spend and
strong demand for buses due to resumption of school and office movement. The 2-wheeler
industrys demand remained sluggish due to regulations pertaining to onboard diagnostics
(OBD) causing OEMs to recalibrate their production schedules. This situation was further
aggravated by unseasonal rainfall in various parts of the country which impacted rural
demand.
The automobile sector has not been able to reach the level it achieved
in its best year of FY 2018-19. However, post the slowdown witnessed in the last two
years, FY 2022-23 saw improvement in performance of the industry. In FY 2022-23, the
domestic industry reached ~84% of the performance level set in FY 2018-19, while the
international auto industry is at about 88% of the level achieved in CY 2022. Alicon, on
the other hand, clocked 130% of the benchmark revenue target set in FY 2018-19, reflecting
its outperformance to the global and domestic auto industry. This outperformance compared
to the automobile industry performance has been driven by the addition of new parts as
well as new customers.
As a result, the Company witnessed its best-ever annual revenues of Rs
1,405 crore in FY 2022-23, up 30% on a year-on-year basis, significantly surpassing the
automobile industry growth. The revenue growth was driven by enhanced volumes compared to
the previous year and start of production in certain new products. This positive trend was
further supported by the improved contribution from its international subsidiary,
Illichmann Castalloy.
The Company also clocked highest-ever EBITDA of
Rs 157 crore, up 36% on a year-on-year basis. The EBITDA margin for FY
2022-23 stood at 11.2% as against 10.7% in FY 2021-22, an increase of 46 basis points. New
parts added with higher value addition have contributed to the structural improvement in
EBITDA margin. Profit after tax came in at Rs 51 crore, up 113%. The Company announced an
interim dividend of 50% equating to Rs 2.5 per share. The Companys ROCE increased to
12.7% for FY 2022-23 from 9.1% in FY 2021-22. The long-term rating by credit rating
agency, CRISIL, has improved a notch from ‘A stable to ‘A positive.
The Company deployed Rs 83 crore towards capex during FY 2022-23. Value
addition to net block has significantly increased from 130% in FY 2020-21 to 160% in FY
2022-23. In FY 2023-24, capex deployment is likely to be around Rs 90 crore.
BUSINESS OVERVIEW
Key Industry Highlights DOMESTIC AUTO MARKET
• Domestic business contributed 78% to overall business revenue
same as FY 2022
• The Indian automotive sector experienced volume growth of 13%
• This growth was not even during the year as in the latter half
of the year, there was some softness in growth, especially in case of 2-Wheelers as it was
affected by the regulations related to On-Board Diagnostics (OBD) and tepid rural demand
• Passenger vehicles industry segment saw better traction of 25%,
while the Companys growth in supplies to passenger vehicles was higher at 52%
• Commercial vehicles grew 29% while the Company growth in
supplies to commercial vehicles was higher at 59%
• In the auto ICE business, the Company is looking to increase the
portfolio of the critical parts
• The Company is pushing the sale of its cylinder head businesses
DOMESTIC NON-AUTO MARKET
• The prestigious telecom project under Atmanirbhar Bharat is
doing well
• The Company won a tender from the Department of Defence for
supply of wheels for the battle tanks and cylinder heads for the heavy-duty defence truck,
which will commence despatches in the coming quarters
INTERNATIONAL AUTO MARKET
• The global business contributed to 22% of the total revenue
during the year same as FY 2022
• The global business is gradually emerging from the challenging
situation witnessed in CY 2022
• Businesses in Europe are stably adapting on the challenging
circumstances and with some moderation in input prices, including gas, customers are now
starting to operate plants at higher utilisation levels. This has led to firmer
indications for products being supplied by Alicon with revenues from the European facility
growing 20%.
• A marquee customer, requested an increase in volumes for key
part supplies
• While the semiconductor availability remains a bit of a
challenge, better availability for high-end cars is expected
• There is significant improvement in demand from big customers
• In Europe, as the winter subsides, demand for 2-Wheelers is
expected to resume. This typically leads to increase in volumes for structural parts from
2-Wheeler customers during the spring season
• Easing energy costs have reduced inflationary pressures, which
is expected to improve consumer demand
• Reduction in aluminium prices, and the reduced cost baskets
should help customers in reducing prices of the final products
• Alicon has increased its customer interactions and is seeking to
work with customers on products as well as various solutions for adjacent products as
several customers across OEMs and Tier 1 are working aggressively on new technology
developments
• The Company is working on multiple initiatives to reduce costs
• Alicon has received approval for the investment in solar panel
which will help to reduce energy costs and remain more competitive
Strategic Growth Pillars
Alicon has been able to outperform industry growth amidst challenging
times. The envisioned business transformation involves a strategic focus on multiple
avenues for growth, categorised into five pillars as described below:
• Continuing to scale strategic products in the ICE business
• Addressing the opportunities from carbon-neutral technology,
including battery electric vehicles, hybrid electric vehicles, fuel cell and hydrogen cell
technologies
• Opportunities from structural parts or technology-agnostic
parts, demand for and application of which remains consistent, no matter which fuel
technology is used to power the vehicle
• Non-auto business encompassing opportunities from sectors such
as defence, energy, telecom, etc., where competencies can be leveraged
• Enhanced customer wallet share through value-added and combining
products to offer customers a one-stop solution
Alicons steady progress is attributable to the execution of its
growth strategy.The Company has dedicated substantial resources to reshape the business
model, and emerged as a more flexible and diversified organisation that capitalises on a
wider set of opportunities. The international team has been actively engaging with
customers, fostering deeper discussions to leverage its expertise in design, research and
development and value engineering. This proven track record validates the effectiveness of
its processes and reliability as a supplier. The continuous increase in order book and the
acquisition of new and renowned clients has added to the progress.
The Company is progressing well on all key pillars. The value addition
mix has improved with the share of carbon-neutral business at 9%, structural products at
8% and non-auto business at 8%. The Company delivered balanced growth with improvement in
all segments despite a volatile market environment. The Company continues to focus to
increase the value addition mix from products for four-wheeler and CV segments. In FY
2022-23, dependence on 2-Wheelers was reduced from 41% to 38% with increase in share of
4-Wheeler business from 49% to 53%. In Carbon-neutral technology, the focus is on
Passenger Vehicles, Commercial Vehicles and export opportunities where there is a greater
scope for value addition.
There is good traction with motor housing products with the dominant
player in the Passenger EV market in India. Similarly, Commercial Vehicle segment is also
witnessing robust growth as parts developed for a big client are facing promising demand
with continuous government support to develop cleaner public transport options. The supply
parts for 3-Wheeler products are again showing favourable demand trends.
In the EV space, strong client engagements, robust research &
development, design excellence and value engineering, have demonstrated to customers the
deep value that Alicon can provide them as a supplier of repute. The Company continues to
remain focussed on enhancing its technological prowess. The Company has automated certain
processes of operations and has been highly proactive by working on advanced technologies
especially for thermal cooling solutions for the EV segment. The Company strives to
provide innovative solutions to customers in the area of complex parts pertaining to
cooling solutions for motor and e-axle over traditional methods. Significant progress was
achieved in developing a 3D printing solution for sand mould enabling customers the
ability to quickly convert design into prototypes thereby compressing the product
development lead time.
The Company has dedicated substantial resources to reshape the business
model, and emerged as a more flexible and diversified organisation that capitalises on a
wider set of opportunities. The international team has been actively engaging with
customers, fostering deeper discussions to leverage its expertise in design, research and
development and value engineering.
The Company is exploring friction stir welding which is a highly
recommended application in the area of EV for strong and high-quality joints. This focus
on technology-based solutions aids in establishing differentiation across the global
landscape. The Company is also actively working towards increasing sustainability
footprint and has commissioned captive solar plant in India while installation of solar
panels at the facility in Europe will be completed this year. These initiatives will
meaningfully transform the energy mix.
The export business is doing well led by the focussed approach on
increasing wallet share on the back of development of parts for multiple customers. Apart
from Europe, international markets, including the USA, Japan, and South-east Asia, have
experienced improved growth rates. Energy costs in Europe have started to ease, which
could benefit the overall macro environment. The ongoing challenge of constrained chip
availability has begun to gradually ease, leading to better outlook for production by
OEMs.
WAY FORWARD
Led by the investment in growth strategy paying off, the Company
clocked the highest-ever revenue during the year gone by. Filled with renewed zest, the
Company is well poised to take the business to newer heights and aspires to deliver a
revenue of over Rs 2,000 crore by FY 2025-26. The growth is expected to be driven
by the new order book and the discussions with the customers on new technologies and
solutions.
The increase in EBITDA level in FY 2022-23 over FY 2021-22 demonstrates
the positive impact of enhanced value addition and the richer product mix. The Company is
confident of EBITDA margin improvement despite the ‘7C Framework of challenges
and recessionary pressure. The target over the next three to four years is to raise EBITDA
margin to 14% through a combination of growth initiatives and cost efficiency measures. In
FY 2022-23, Alicon has booked new orders aggregating Rs 1,700 crore taking the
total order booking to Rs 7,800 crore from new business, executable over a period of seven
years from FY 2022-23 to FY 2028-29. The commencement of supply for these orders, along
with the start of production across the aggregated orders booking will contribute to an
increase in the revenue momentum.
The Company remains focussed on sustaining the growth momentum and
endeavours to improve the financial and operational performance in the coming financial
years. The primary focus areas are enhancing margins, return ratios and optimising working
capital cycle. In FY 2023-24, Alicon is confident of delivering healthy revenue growth
with strong profitability growth.
RISKS, CONCERNS AND MITIGATION
There exist several business growth opportunities across segments and
geographies. However, given the ever changing external and internal environment, the
organisation is exposed to various risks in its daily conduct of business. It is
imperative for the organisation to be prepared to deal with these ever-evolving situations
by taking appropriate and adequate actions to minimise/mitigate the impact from these
risks.
GEOPOLITICAL RISK
India has not directly
participated in the ongoing geopolitical conflict but its economy continues to be impacted
due to disruption in global supply chain and inflationary pressures. Being a part of this
macro environment, the Company also faces the associated risks. |
Mitigation: The Company
has a diversified presence across the globe with presence in 18 different countries. |
|
This helps the Company to
reduce dependence on any one geography. In addition, the Company closely monitors all
global developments and their potential impact on the business operations to ensure smooth
functioning. |
DEMAND SLOWDOWN RISK |
|
Any slowdown in the
macro-economic environment may also impact the business of the Company as its revenue is
dependent on manufacturing growth in the country. |
Mitigation: The
Companys vast business spread across geographies and various sectors enables it to
minimise the impact of slowdown in a particular sector/geography. In addition, one of the
key strategic pillars of the Companys growth is expanding portfolio with innovative
products to further diversify business and mitigate the risks associated with demand
slowdown. |
COMMODITY RISK |
|
Unavailability or limited
availability of key raw materials may hamper the production process. Also, fluctuation in
price may increase cost burden. These events may impact the earnings of the Company. |
Mitigation: The
material requirements of the Company is limited, especially given the highly restricted
use of alloy variants to minimal post standardisation of the alloy policy. The Company has
pass-through clause in its sales agreements to mitigate the margin pressure arising from
fluctuation in raw material prices. |
COMPETITIVE RISK |
|
The ample growth
opportunities presented by the sector, makes it an attractive play for several players,
giving rise to risk from competition. |
Mitigation: The
Company offers a one-stop shop for all engineering solutions related to aluminium alloy
castings. It has created a strong moat given its vast experience, strong brand equity,
technical competence, expert in- house R&D team and robust business operations.
Further, government support to local manufacturers, help in containing competitive
pressure from foreign entities. |
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