Century Extrusions Ltd Management Discussions.

Global economic overview

The global growth story continued to decelerate in 2019, marked by a weakness in trade and investments. This trend was visible in advanced and emerging markets. Ongoing tariff negotiations between China and USA resulted in an initial agreement on the withdrawal of a few tariffs imposed by each country on the other that came after a prolonged period of rising trade disputes, increasing uncertainty in international trade, business confidence and investments. The result is that global economic growth weakened to an estimated 2.4% as per World Bank compared with 3% in the previous year.

The coronavirus (COVID-19) outbreak at the start of 2020 unleashed a health and economic crises, unprecedented in scope and magnitude, with lockdowns and border closures paralyzing economic activity and laying off millions of workers across the world. With extensive restrictions on economic activities, the global economy was at a virtual standstill through the second quarter of 2020. To minimize the impact of this economic catastrophe, governments across the world rolled our economic stimulus measures.

As per World Bank report, global economy is estimated to contract by 5.2% in 2020 but gradually recover in 2021 based on the assumption that a second infection wave does not emerge. Even as various economic contraction estimates have been offered, GDP growth in advanced economies is expected to plunge to -7% as per World Bank estimate while the emerging and developing economies are expected to shrink by 2.5% during the current calendar year.

China appears to be the only silver lining with a head start in the resumption of economic activities. India went into a complete initial lockdown from March 24th to April 14th to contain the spread of the virus. Thereafter the lockdown was extended multiple times by the Government of India with increasing relaxations for economic activities to resume in safe zones. By the time this report was written, the total COVID-19 cases had crossed 800,000 in India. As a result of the upheaval, India encountered demand challenges, labor shortages owing to reverse migration of migrant labor and therefore compelled the industries to operate at less than rated capacity.

In line with economic stimulus measures announced by governments across the world, the Indian government have announced stimulus and reform measures to revive the national economy.

Globally, there is no visibility of the development of an effective vaccine to counter the pandemic across the foreseeable future.

As per reports, scientists across the world are working on vaccine development. However, observers believe that humankind would need to learn to live with the virus, expected to inspire a change in consumer behavior, lifestyles and discretionary spending. The immediate impact of the pandemic was perceived on the aviation, hospitality, tourism and automotive sectors.

The success of global efforts to fight the pandemic and economic recovery would largely depend on how well public health and fiscal measures collaborate to counter the virus, minimizing reinfection, safeguarding employment and restoring consumer confidence.

Global Real GDP growth trend# (%)

Particulars 2018 2019 2020 (P)
World Output 3.0 2.4 -5.2
Advanced Economies 2.1 1.6 -7.0
United States 2.9 2.3 -6.1
Euro Area 1.9 1.2 -9.1
Emerging and Developing economies 4.3 3.5 -2.5
Russia 2.5 1.3 -6.0
China 6.6 6.1 1.0
India 6.1 4.2 -3.2
Brazil 1.3 1.1 -8.0
South Africa 0.8 0.2 -7.1

#Source: World Bank, Analyst Reports GLOBAL ALUMINUM MARKET OUTLOOK

The global demand for aluminum will contract by 5.4 per cent in 2020, followed by a prolonged period of slow and staggered recovery, the impact of the COVID-19 pandemic on global economic activity is set to be profound and a deep and potentially extended recession appears inevitable. Global aluminum demand has been hit already, with the automotive and aerospace sectors in particular feeling the full force of the downturn.

The rapid and overwhelming nature of the demand shock caused by COVID-19 is most likely to be followed by a slow and staged staircase shaped recovery, where global aluminum demand recovers on a staggered, sector-by-sector, region-by-region basis. The impact on Chinas aluminum demand outlook is likely to be severe over the short-term, although a strong recovery in demand growth through 2021 is forecast, followed by and a return to pre- COVID-19 growth rates beyond 2022.

The Rest-Of-World (ROW) markets will experience a contraction in demand growth across all regions, with previously strong demand forecasts for South-East Asian countries replaced by significantly lower short-term figures.

Aluminum is used mostly in building and construction and transportation sectors apart from its use in manufacturing of electrical cables.

Amid the ongoing slowdown, COVID-19 has pushed the world towards negative growth. This will adversely impact the entire metal industry, especially the worlds second most important metal, aluminum.

Even pre-COVID-19, the London Metal Exchange selling price of the metal was stressed ($1,750/tonne); this has now fallen to a low of $1,440/tonne, making 90% of the worlds smelters unviable. Without any support from the government, aluminum producers will have to shut shop.

With a gloomy global forecast and Chinese smelters continuing operations, there will be an inventory glut. End-users are cancelling contracts for primary aluminum in Europe and North America, contracting demand by 5 mn tonnes.

INDIAN ALUMINUM & ALUMINUM EXTRUSION MARKET OUTLOOK

Indias GDP forecast falling will impact aluminum demand in the construction, transport, and electrical sectors. Aluminum demand will decelerate by 40-50% unless enough stimulus is given—an extreme distress call of the aluminum industry.

Global recession, dumping from China, shrinking markets in the western hemisphere, and semi-finished products through FTA countries like Malaysia and Thailand spell trouble for Indian aluminum exports.

Indias own aluminum consumption will recover slowly post FY22, to reach ~6-7 mn tonnes by 2025.

Revival plan for Indian aluminum industry:

The aluminum industry has a high multiplier for job creation. Every job in primary production creates two more in the downstream and upstream industries. The industry provides livelihood to over 8 lakh people and every 1 mn tonne addition creates an additional 2 lakh livelihood opportunities. Aluminum is the most apt industry for creating livelihoods to achieve the coveted V-shaped recovery from ~2% to ~7% by next year.

Tariff support recommendations for aluminum MSMEs:

Immediately impose minimum import price and/or quantitative restriction on imports

Safeguard our MSMEs from cheap imports by increasing import duty in the series 7603 to 76016 to 10-15% (existing duties ~7.5- 10%).

To be globally competitive, enhance the MEIS scheme from 2% to 5% for all aluminum products under Chapter 76, and implement the RoDTEP (remission of duties or taxes on export products) scheme expeditiously.

With all ingredients of competitive raw material availability (bauxite and coal), best-in-class manpower, and value addition through MSMEs, India has the potential to be self-sufficient and become a global manufacturing hub of aluminum, and can be a strong substitute to China.

OPPORTUNITIES AND THREATS

We are constantly on the lookout for opportunities that knock on our doors, while keeping tab on the likely threats to our business.

Opportunities-

Low penetration of motor vehicles in developing economies and growing industrialization in emerging economies provide wider opportunities for the growth of the Aluminum sector.

Threats-

Competition from low cost manufacturers is likely to continue.

MAJOR EXPANSION

A new production line was commissioned at the existing plant in 2019, located at (WBIIDC Industrial Growth Centre Plot No. 7A, Sector B Nimpura, P.O. Rakhajungle, Dist-Paschim Medinipur, Kharagpur-721301, West Bengal), by installing a new Powder Coating Facility, with the installed capacity of unit is 6000 MT per annum.

COMPANY OVERVIEW AND GROWTH STRATEGY

Improved service, prompt response and wider reach to dealers, distributors and the satisfaction of customers have been our continued endeavour for business development.

Success Drivers

Our Legacy: With an experience spanning a rich 29 years, our Company enjoys a number of first mover advantages comprising a comprehensive understanding of the aluminum and aluminum extrusions market, reputed brand and a strong customer base. Integration: We possess in-house facilities for -

- Melting, casting and homogenization of billets,

- Extrusions manufacturing with three press lines

- Die manufacturing,

- Manufacturing various value added products of extrusions for engineering applications, and

- Manufacturing Power Transmission & Distribution Hardware

With 3 extrusion press lines, the Company has a capacity to produce 15000MT of Aluminum Extrusions, which as per the information available with the Company.

Die Library: The Company possesses an inventory of more than 5000 dies to manufacture over 3500 profiles. The Company maintains back-up dies for meeting the requirements of fast moving profiles.

Availability of raw material: The Company accesses raw material (aluminum ingots and billets) from two renowned and proximate primary metal manufacturers- Vedanta Aluminum, and NALCO, The Company is one of Indias largest institutional aluminum ingots/billets consumers with corresponding purchase economies.

Quality assurance: The Companys manufacturing facility is accredited with the prestigious ISO-9001:2015 certification endorsing its strong quality systems. Our Company continues to emphasize on maintaining the utmost quality and safety standards in its factory. Our Company is also ISO 14001:2004 and OHSAS 18001:2007 certified.

The Company supplies extrusions as per tolerances laid down by the Bureau of Indian Standards in accordance with BIS: 26731979, BIS: 3965-1981 and BIS: 6477-1983, and with even stringent tolerances as per customer needs based on mutual agreement. The sharp focus on Quality in all its initiatives has enabled our Company to launch some specific value-added services Product applications: We manufacture extruded products for varied applications, viz.:

- Profiles for Architectural Applications such as Building Systems, Structural Glazing, Curtain Walls, Aluminum Rolling Shutters, Windows, Doors, Partitions, False Ceilings, Tower Bolts, Hand Rails, Door Handles, Hinges, Drapery Rods, Modular Furniture, etc.

- Profiles for Aluminum Form work

- Profiles for Road Transport Sections

- Profiles for Rail Coach Windows & Doors

- Profiles for manufacture of Automobile Components

- Profiles for Heat Transfer in Electronics & Electrical Gadgets

- Profiles for Electrical applications such as Tubes and Flats for Bus Bars, Transmission Line Hardware such as P.G. Clamps, H-Connectors, Repair Sleeves, Lugs, Solar Panels etc.

- Profiles for Engineering Applications such as Motor Housings, Gear Pump Casings, Ferrules, A.C.Louvres, Machinery Parts, Elevators, Pneumatic Actuators, Pneumatic Cylinders, Valve Bodies, etc.

- Profiles for various Defence Applications and many more.

The Company also has necessary set up to supply extruded & cold drawn round bars and hexagonal bars in straight lengths for various engineering applications. It also has a set up to supply extruded & cold drawn rods/wires in coil form to be used as armour rods, lamp pin stock, metallizing wire, rivet stock, welding filler wire (MIG & TIG), etc.

Customer profile: The Company possesses a portfolio of over 500 reputed customers. The Company has retained most of the customers over a period of 29 years.

Our Company has an installed capacity to produce 15000 MT of extrusions per annum. As against this, our production for the financial year 2019-20 was 12014 MT. We have a significant spare capacity to increase production and sales volume.

Our Company is planning to minimise the gap of installed capacity and actual production during the financial year 2020-21.

The segment-wise expected demand growth is given hereafter:

1. Power Sector - Power and infrastructure sectors in India are witnessing and would continue to witness strong growth in the coming years with the boost from policy measures and budgetary allocations. Our country faces continuing power shortage. More investments to plug the gap means more aluminum extrusions.

2. Engineering Applications- Aluminum Extrusions are increasingly being used to manufacture forged and forged & machined components for use as parts of machinery, fastners, rivets, wire rope ferrules, motor housings for domestic pumps, hydraulic gear pump casings, heat sinks, ladders, elevators, etc.

3. The Sustained Agriculture Emphasis in our Country - More investments in irrigation mean more aluminum extrusions.

4. Solar Energy Industry is an emerging opportunity, which implies significant consumption opportunities for aluminum extrusions from solar panels over the years to come. Century Extrusions Ltd.

5. Indian Defence Sector: Aluminum extrusions are consumed in a wide range of applications in this sector, comprising tail-end fuse connectors for detonator shells and grenades, frame-work for tents and as a roll-over mattress for tanks to navigate difficult terrains. Given the significant supply deficits, high growth potential and conducive government policies, a large opportunity.

Power T & D Hardware

India today stands at the threshold of being an economic superpower. Power is one of the key requirements to support and sustain our economic growth. Power is a key ingredient in driving growth in manufacturing & services. Aluminum finds growing use in this space as it is directly used in the overhead transmission and distribution lines.

Power Transmission and Distribution Hardware Fittings are required for use on Overhead Transmission and Distribution Lines for connecting Insulators with Tower/Pole Cross Arms and Insulators with conductors.

The Company has manufacturing facilities for casting of Aluminum Alloys, manufacturing of Extruded products in Aluminum & its Alloys, Wire Drawing, Helical Products, Fabrication of Ferrous & Non-Ferrous Components, Argon Welding, Electric Arc Welding, Machining, Bundle Spacer Assembly, Vibration Damper Assembly, Conductor Accessories, Clamp Connectors for Hardware Assembly, and manufacturing of Tools, Dies & Moulds. Aluminum is also used in insulated and underground cables laid in large populated urban areas and in reserved forests (to avoid deforestation), Round Tubes are used for corona control rings, grading rings, mid-span compression joints, dead-end clamps and jointing sleeves, among others, signifying huge opportunities for extrusions in the power sector.

The Company has successfully registered itself as a supplier of its products with a number of State Electricity Boards during the year and the process is continuing. The process will get further momentum as company achieves requirements of minimum years of supply track record and experience, with each passing year. The Company has received substantial orders from the said State Electricity Boards, Transmission and Distribution Line State based utilities and Erection Contractors.

FINANCIAL PERFORMANCE

The Company reported a sales turnover in the financial year 2019-20 of Rs.23,056 lacs as against Rs. 25,513 lacs in the previous financial year, recording decrease of about 9.63%. in the sales turnover of the Company.

The Profit after Tax (PAT) for the financial year 2019-20 is Rs.370 lacs as against profit of Rs. 403 lacs reflecting of about 8.19% decrease in the financial performance of the Company.

The Decrease in turnover as well as consequently in Profit after Tax (PAT) from previous year to this year in the backdrop of the continued global recession in the automobile industry further aggravated by the COVID-19 pandemic.

RISKS AND AREAS OF CONCERN

The Companys capability to assess and manage business risks is crucial in achieving targets. In the current economic scenario, the Company perceives the following risks and concerns.

a) Market Competition: The Company is operating in a highly competitive market as market dynamics are forever changing with entry of new players in the field of extrusion manufacturing. New players are targeting resellers consequently old players who were earlier in reseller markets are turning towards end users creating competition for the Company. With free market economy now prevailing in India, high quality imported extrusions are freely available in the local market. Hence unless Indian Extrusion Industry, particularly in the unorganized sector undertakes technological up-gradation in the foreseeable future, over next five years, this sector may be wiped out of the market by availability of cheaper and superior quality imported products.

b) Delay in clearances/approval by Govt. agencies: There are delays in obtaining lease renewals for land mortgaged with financial insfitufions and banks. This adversely affects the financial facilities obtained from the Banks.

c) Competition from local manufacturers: Some of the customers prefer local suppliers for faster deliveries. Further to compete with local suppliers, we have to sacrifice our margin to neutralize the effect of higher Freight and Central Sales Tax. We are located in a comparatively under-developed part of the country and the demand in this part is not good enough to account for our capacity. We have to sell a substantial quantity (over 70%) in other parts of India where our realization is lower compared to local supplies due to impact of the high freight and Central Sales Tax.

d) Retention of experienced manpower: Company faces a challenge in retaining the trained work force. The Company has created employee friendly policies and a conducive environment for work life balance.

e) Price Inflation Risk: Fluctuating raw material prices have been witnessed too often over the past few years. Continuous monitoring of aluminum metal inventory in order to get maximum benefit or alternatively to minimize loss by keeping ideal inventory levels in each circumstance is a major challenge, and this is regularly monitored at the highest level in the Company.

RISK MANAGEMENT

Your Company has a system based approach to business risk management. Backed by a strong internal control system, the current risk management framework consists of the following elements:

A strong and independent Internal Audit Function carries out risk focused audits enabling identification of areas where risk management processes may need to be improved. The Audit Committee of the Board reviews Internal Audit findings and provides strategic guidance on internal controls. The Audit Committee closely monitors the internal control environment within the Company and ensures that Internal Audit recommendations are effectively implemented.

The Senior Management of the Company periodically reviews the risk management framework to effectively address the emerging challenges in a dynamic business environment.

The Company strives to identify opportunities that enhance Organizational values while managing & mitigating risks that can adversely impact its future performance.

SEGMENT-WISE / PRODUCT-WISE PERFORMANCE

The Company has two business segments i.e. manufacturing of Aluminum Extruded Products and manufacturing of Power Transmission and Distribution Line Hardware. However, the Company does not fall under any of the criteria laid down under AS- 17 and hence Segment Reporting is not applicable.

INTERNAL CONTROL SYSTEM

The internal control systems and procedure are continuously monitored to enhance its effectiveness and to be commensurate with the scale and nature of its operations. M/s Agarwal Tandon & Co., Chartered Accountants, Room No. 7, 1st Floor, 59 Bentinck Street Kolkata-700069 continue as the Companys internal auditors, directly reporting to the Audit Committee. During the year the Audit Committee of the Board regularly met to discharge its functions. The Audit Committee reviews compliance to the Revenue Recognition of the Company. Internal audit activities are undertaken as per the Annual Audit Plan as approved by the Audit Committee and the committee reviews compliance with the plan.

The Audit Committee regularly meets with the statutory auditors to review their observations on the financial reports. CAUTIONARY STATEMENT

Statements forming part of the Management Discussion and Analysis covered in this report may be forward-looking within the meaning of applicable securities laws and regulations. Actual results may differ materially from those expressed in the statement. The Company takes no responsibility to publicly amend, modify or revise any forward looking statements on the basis of any subsequent developments, information or events.