Eastern Treads Ltd Management Discussions.
Industry Structure and Developments
FY 2018-19 saw the normalisations and stabilisation of the disrupted supply chain efficiencies which had been caused by introduction of GST. Indian economy is expected to grow at 7.2 per cent in 2018-19, a tad higher from 6.7 per cent in the previous fiscal, mainly due to improvement in the performance of agriculture and manufacturing sectors. The growth of the manufacturing sector is expected to accelerate to 8.3 per cent this fiscal, up from 5.7 per cent in 2017-18. India moved up by 23 places in the World Banks Ease of Doing Business Index 2018 and got 77th rank. According to Department for Promotion of Industry and Internal Trade (DPIIT), the total FDI investments in India April-December 2018 stood at US$ 33.49 billion and as of February 2019, the Government of India is working on a road map to achieve its goal of US$ illion worth of FDI inflows. The Make in India campaign launched by the Government of India in100 b September 2014 permitted 100% FDI in 25 sectors of the economy. Despite the uncertainties in global scenario such as trade war between different countries, rising oil prices, India continued to remain on its strong growth trajectory.
Infrastructure sector is of profound importance in the Indian economy. The sector is highly responsible for propelling Indias overall development and enjoys intense focus from Government for initiating policies that would ensure time -bound creation of world class infrastructure in the country. Infrastructure as a sector is also crucial for employment generation. India has the largest road network of 5.5 million km in the world. In India sales of automobiles and movement of freight by roads is growing at a rapid rate. The construction of highways reached 9,829 km during FY18 which was constructed at an average of 26.93 km per day. The Government of India has set a target for construction of 10,000 km national highway in FY19. The Government, through a series of initiatives, is working on policies to attract significant investor interest. A total of 200,000 km national highways are expected to be completed by 2022. Eastern Treads Limited (ETL), operating in the emerging tyre retreading industry, is well placed to capitalise on this opportunity as it allows expansion in road freight volumes and demand for the Companys products.
India is likely to get normal southwest monsoon in 2019, as per Skymet. A normal monsoon will augur well for the countrys agriculture sector and boost crop yields thus providing an impetus to the rural economy. Government spending will support near-term growth and also give more thrust to the rural economy. The announcement in Interim Budget 2019-20 on direct cash transfer programme for farmers and the tax relief measures will contribute a fiscal stimulus of about 0.45 per cent of GDP. Recently RBI has also cut its Repo rate to 6.25%. Further in February 2019, the Government provided additional capital infusions to public sector banks. This combined with the application of the Prompt Corrective Action framework, through the Insolvency and Bankruptcy Code, are helping to address solvency and asset quality challenges. All these measures will support growth through consumption over the near term.
2018 was a watershed year for the economy with introduction of GST as one of the major reforms. However this statutory reform came as a positive welcome as it brought about more consolidation in the unorganised retreaded Indian market. With the recent slash in the GST rates on retreaded tyres from 28% to 18%, ETL expects benefit from this trend and, in addition, is also engaging with unorganized players to integrate them with its nationwide network.
With Kerala battling its worst floods in nearly 100 years, tyre and related manufacturers having exposure to the State have been among those who have been hit hard. Despite this challenging environment, we exhibited resilience and continued to deliver a steady performance. During the year we also continued our growth momentum with expansions across our sales channels. We have recently entered into strategic contracts with Maharashtra State Ro ad Transport Corporation, West Bengal Transport Corporation and Gujarat State Road Transport Corporation to supply Tyre retreading materials. This augurs well for us as it will drive increased utilisation of the production facilities which will be conducive to deliver strong volumes.
Exports are also seeing an accelerated performance with increased sales from South America, Africa and Nepal. During the year, we have also made an equity investment of 55% in Shipnext Solutions Private Limited, a company engaged in managing fleet management aggregation in IT platform.
The Global Tyre and Retreading industry has been witnessing a shift in the manufacturing activity, with Asia carving a much larger piece of the pie. Almost 60% of the global units are located in Asia. India represents the fourth largest market for tyres in the world after China, Europe and the United States. The Indian Tyre and Retreading Industry is an integral part of the Auto Sector. It contributes greater than 3% of the manufacturing GDP of India and ~0.5% of the total GDP directly.
As rubber and crude oil prices are key variable to tyre companys profitability, Indian tyre and tyre retreading industry has been under raw material pressure for last two years due to volatility in rubber and crude oil prices. The Indian tyre and retreading industry could have a 7-9% growth over the next five year on account of growing domestic automotive industry as per ICRA. Radialisation of T&B & LCV tyres has improved over last two years and is expected to improve further as commercial vehicle OEMs have started using radials which will also help the organized retreading industry.
The tyre and related industry in the country has witnessed large capacity additions in the last decade. Going forward, this industry is expected to see significant capacity expansion in the upcoming two to three years as all major players in the industry have announced their plans. As per ICRA, tyre exports have been steadily increasing in the last one year with recovery in tyre demand from overseas markets and rising competitiveness of Indian tyre makers, both in terms of quality and pricing. The passenger vehicle and commercial vehicle sales are also expected to grow with an increasing vehicle penetration due to improvement of per capita income in the country, which will leads to increased demand for retreading in tyre replacement market.
Despite contending with a combination of headwinds such as revised axel norms and NBFC crisis, climatic issues like floods, poor festive demand, and high fuel and insurance costs, the overall commercial vehicle sales showed a healthy growth in domestic market. During the year the CV segment also crossed one million sales mark.
The retreading industry in India has a good future especially post the GST implementation. Better roads, improving infrastructure network, increased economic activity along with increased used of radial tyres by commercial vehicles are harbingers of further encouraging growth of this industry and ETL is in an upbeat position to capitalise on this opportunity. ETL aims to be the leading retreading player in India. We have taken steps to integrate production and enhance efficiencies we have recently equipped for production onventional tread rubber and bonding gum to ourof c own facility. The Company targets growth from several segments, including higher share of open market sales, expansion of branded franchisee network, road transport corporation business and opening up lucrative export markets.
Opportunities and Threats
The past has seen many changes in the Tyre and tyre retreading Industry, such as demonetisation, GST, antidumping duty on Chinese tyres, radialisation etc. which have helped consolidate the market along with improvement in the countrys economic scenario. The recent reduction in GST rates from 28 per cent to 18 per cent on retreaded tyres bodes well for the organised players. Quality and safety preferences are already moving customers to industry leaders and ETL stands to benefit from this. India has the largest road network of 5.5 million km in the world and carries over 60% of all goods and 85% passenger traffic in the country. National Highways Authority of India (NHAI) plans to expand the national highway network by 84,000 kms, investing approx. र 700,000 crore.
The Indian Commercial vehicle (CV) industry is often referred to as the backbone of the countrys economy. In India, 2018 had started at a high note on the back of excitement around Auto Expo 2018 and new launches. But the euphoria eventually faded away in the latter part of the year due neven monsoon, Kerala floods, high fuel and insuranceto u costs. In the period between June and October, the prices of petrol and diesel notched up by 14 per cent and 17 per cent respectively. This further led to weak festive season sales which ended early November with Diwali which led to muted consumer sentiments.
India has experienced more radialisation of tyres in recent times, including in the truck tyre segment which is on the rise and likely to reach 50% in the next couple of years. Radial tyres have 20% longer life, provide better riding comfort and can be successfully retreaded multiple times compared to bias-ply tyres. Retreading these tyres requires a greater degree of sophistication, which is a positive for organized players like ETL. Thus pansion of radial tyre usage will, ex have a positive impact on the overall market, and also on the companys performance. In recent times retreaded tyres have come into heavy competition due to low-quality imports from countries like China where truck tyres are sold for less than the raw material costs. To mitigate these risks, we at ETL continue to undertake various initiatives to increase plant efficiency, lower production costs and eventually drive sales up.
Branded tyre majors have also entered the retreading industry. This has led to higher competition and at the same time improved awareness about retreading and its benefits, helping grow the overall market. ETL is the pioneer in manufacturing and marketing of tread rubber used for retreading tyres. The company has developed several distinct strengths such as a robust brand image, best-in-class services capability and a wide portfolio of products. ETL is the proud winner of numerous awards and accolades which are a testament of its capabilities. Given these attributes, we are confident of maintaining a strong position in the market.
Segment-wise or product-wise performance
The Company manufactures quality tread rubber, Rubber compounds, cushion/bonding gum and black vulcanizing cement. The contribution of these products to the current years turnover is 82%, 1%, 8% and 8% respectively.
The retreading industry is gaining prominence in the domestic market whereas it is an established business in key global markets. Improving road network, increased economic activity, higher radialisation and implementation of GST are all positives for long term growth of the sector. Also monetary advantages and environmental considerations are aiding popularity of retreaded tyres, ETL aims to be the leading retreading player in India and also exports to key markets worldwide. We are at the forefront of building a comprehensive ecosystem across the entire retreading value chain, having transformed from a tread rubber manufacturer. We are on the path to build comprehensive and industry leading capabilities that would generate long term opportunities in India and globally. With an increasing distribution presence, high quality products and services, ETL is hopeful of enhancing its share of the various markets it addresses. Our main objective is to become a one-stop shop for our customers requirements and deliver substantial economic returns to their businesses.
ETL aspires to deliver superior operational performance through value enhancement initiatives for its customers along with economies of scale that aid long-term volume growth. The manufacturing processes are supported by technically talented workforce. We have limited capex requirement for expansion over next 2-3 years, as sizeable production capacities are available currently. However, we will continue to invest in R&D initiatives for new product development to remain at the forefront of the industry.
Over the years, ETL has invested aggressively in educating and growing the market, benefits of which will be seen in the medium to long term. We have achieved pan -India presence an extensive network across 20 Indian states andwith are further expanding our distribution footprint. We also have presence in overseas markets such as the Middle East, Africa, South America and South Asia, catering to higher global demand for tread rubber. All these initiatives are expected to give ETL the platform from which we can achieve success in expanding our business.
Risks and Concerns
Risks and opportunities are inevitable and inseparable components of all businesses. The Companys Directors and management take proactive decisions to protect stakeholder interests. The Company has in place a Risk Management Policy covering risk, risk exposure, potential impact and risk mitigation process. Major risks identified by the business and functions are systematically addressed through mitigating actions on continuing basis. These are monitored and reviewed under the guidance of Audit committee and Risk Management Committee. Various departmental heads who meet regularly to identify processes exposed to risks. The Companys Risk Management Committee, periodically reviews the risks in the organization, identifies new risk areas, develops action plans and monitors and reports the compliance and effectiveness of the policy and procedure to the Audit Committee and Board.
The Companys performance primarily depends on the performance of the tyre replacement market. This market has several growth levers like growth of the economy, development of infrastructure, commercial vehicle sales and other trends relating to the transportation sector. The Companys Board of Directors perceives the following risks as current high risks areas:
In the course of our business activities, financial risks may arise from changes in interest rates, exchange rates, raw material prices, or share and fund prices and ETL is exposed to certain financial risks namely interest risk, currency risk and liquidity risk. The financial risks are managed in accordance with the risk management policy. We use cash and carry, advance payments and bank guarantees to mitigate credit risk on account of material supplied to customers and payments received. There is an ongoing follow-up which arrests any delay of payments from State Transport Corporations and other customers.
Fluctuation in Raw Material Price and Other Input Costs
Risks can arise due to unexpected changes in commodity prices which can impact margins. We purchase a variety of raw materials and products which we use in our production. Major risks could arise from a few raw materials which we use such as Natural Rubber, Synthetic Rubber and Carbon Black. The Company manages this by actively managing the sourcing and private purchases. As we import many categories of products we are also exposed to foreign currency fluctuation which could lead to a significant fluctuation in these raw material costs.
We have actively maintained higher raw material inventories to mitigate this risk which adversely impacted working capital and put pressure on interest costs. We generally factor in normal variations of raw material prices and input costs when fixing product prices with customer but any exceptional fluctuations in input costs may have an adverse impact on profitability.
Changes in Governments Policies
Unanticipated changes in Government policies may affect the companys financial position.
Preventive maintenance is carried out periodically to achieve increased machine availability. Adequate inventory of stocks at each stage of operation is maintained to run production schedules uninterrupted.
Research and development efforts are undertaken to continuously develop new products categories and expand the portfolio, along with improved service and value to our customers.
Internal Control System and their Adequacy
ETL has implemented suitable controls to ensure its operational, compliance and reporting objectives are achieved. The Company has adequate policies and procedures in place for its current size as well as the future growing needs. The Company has a well-defined and structured internal control mechanism, commensurate with the size and nature of the business and complexity of its operations. Internal audit is conducted periodically to provide comprehensive risk-based combined assurance plan.
These policies and procedures play a pivotal role in the deployment of the internal controls. They are regularly reviewed to ensure both relevance and comprehensiveness, and compliance is ingrained into the management review process. ETL follows stringent procedures to ensure accuracy in financial information recording, asset safeguarding from unauthorised use, and compliance with statutes and laws. All employees adhere to high standards of ethical conduct inspired by formally stated and regularly communicated policies.
The internal control is supplemented by an extensive audit by internal and external audit teams and periodic review by the top management, Audit Committee and Board of Directors. The Audit Committee reviews the adequacy and effectiveness of the Companys internal control environment and monitors the implementation of audit recommendations. During the year, the Company has taken steps to review and document the adequacy and operating effectiveness of internal controls. Nonetheless, your Company recognises that any internal control framework, no matter how well designed, has inherent limitations and accordingly, regular audits and review processes ensure that such systems are reinforced on an ongoing basis. The statutory auditors, as part of their audit process, carry out a systems and process audit to ensure that the ERP and other IT systems used for transaction processing have adequate internal controls embedded to ensure preventive and detective controls.
During the period external agencies were appointed as internal Auditors. The internal audit reports were reviewed quarterly by Audit Committee as well as by the Board. Internal audit evaluates legal and compliance issues and supports in assessment of Internal Control Systems and identification of other important issues as a powerful tool for risk control and governance. The system is designed to adequately ensure the reliability of financial and other records for preparing financial information and other data and for maintaining accountability of our assets. Further, the Board reviews the effectiveness of the Companys internal control system.
The Directors and Management confirm that the Internal Financial Controls (IFC) are adequate with respect to the operations of the Company. The external auditors have evaluated the system of internal controls in the Company and have reported that the same is adequate and commensurate with the size of the Company and the nature of its business. A report of Auditors pursuant to Section 143(3) (i) of the Companies Act, 2013 certifying the adequacy of Internal Financial Controls is annexed with the Auditors report.
Financial Performance and Operational Performance
Despite the disruptions faced due to Kerala floods, ETL has delivered a steady performance. The weakness in rubber prices both natural and synthetic have allowed us to retain higher margins. The gross margins for the year have remained fairly steady due to additional inventory at Kerala factory. ETL continues to undertake cost saving initiatives and is moving into more profitable areas of business, based on higher value-addition to customers. Significant financial highlights in FY2018-19 are as follows:-
Total Revenue reported र9793.51 lakhs compared to the previous years figure of र9561.68 lakhs. Revenues (net of indirect taxes) grew by 2.43% YoY.
Earnings Before interest, Tax, Depreciation and Amortisation (EBITDA)
During the fiscal 2018-19 EBIDTA has improved by 50.23%, ETL reported EBIDTA of र435.47 lakhs when compared to the previous years figure of र289.88 lakhs.
Profit Before Tax (PBT)
PBT was at र (-)189.18 lakhs in 2018-19, compared with previous years र(-)247.71 lakhs.
Profit After Tax (PAT)
PAT stood at र (-)170.77 lakhs in 2018-19 as compared to र(-)229.39 lakhs in 2017-18.
Earnings Per Share (EPS)
EPS in 2018-19 stood at र(-)3.26 per share compared to EPS of र(-)4.38 per share in fiscal 2017-18.
ETL is a leading provider of tyre retreading services across the entire retreading value chain. We are present across 20 states through 94 dealers servicing to 1,500 plus multi branded retreaders, 44 exclusive retreaders and 39 branded Infinity Zones. We are at the forefront of building a comprehensive ecosystem and have developed a robust distribution infrastructure to penetrate the market further and establish a pan India presence.
Human Resource Development and Industrial Relations
ETL recognises that a committed, empowered and thinking team is the most important asset to maintain the companys progress and to retain its leadership position in the industry. Development and retention of talent, providing employees with cross functional experiences, extending enriched learning, an array of awards and recognition programmes, and supporting personal and professional aspirations are some leading HR practices being followed at the Company. Hiring of apt talent and ensuring role optimisation to improve efficiencies has been a key focus area. The Company recognizes the need for change management and talent management throughout the business and their criticality to its future growth and success as any other element of its commercial strategy.
We pursue management practices designed to enrich the quality of life of our employees, developing their potential and maximizing their productivity. Cordial and harmonious relationship is maintained between the management and employees at every location. We continue to organize various training programs with experts engaged to interact with our employees at various levels. A significant emphasis is placed on training personne l, increasing their skill levels, and fostering ongoing employee engagement and recognition with a holistic development perspective. ETL had total employee strength of 433 employees as on 31st March 2019.
Statements in this Annual Report, particularly those that relate to Management Discussion and Analysis, describing the Companys objectives, projections, estimates and expectations, may constitute forward-looking statement hes within t meaning of applicable laws and regulations. Although the expectations are based on reasonable assumptions, the actual results might differ. Important factors that could influence the Companys operations include economic developments within the country, global and domestic demand and supply conditions in the industry, input prices, changes in Government regulations, tax laws and other factors such as litigation and industrial relations. The Company assumes no responsibility in respect of the forward-looking statements, which may undergo changes in future on the basis of subsequent developments, information or events.