Eastern Treads Ltd Management Discussions.

Industry Structure and Developments

As an integral part of the automobile industry, tyre and related segments contributes ~0.5% of the GDP of India. While the entire year was affected by Covid-19 pandemic, a slight growth in GDP was reported in fourth quarter, driven mainly by manufacturing sector. Even with the growth at 1.6% in the 4th quarter, GDP reported a contraction of 7.3% for the entire fiscal year. As the second wave of Covid-19 pandemic hit the country drastically, it may affect the growth in the coming months also.

The recovery and growth which remains highly uncertain at present, will depend on the removal of localised lockdowns, accelerated pace of vaccination and other measures to prevent a third Covid-19 surge. Theres a direct correlation between the GDP and automotive industry which directly impacts the tyre and tyre retreading industries. In tyre related industry, the heavy vehicle tyres like truck and bus generates approximate 55% of total revenue in India whereas globally passenger car contributes a major portion. Whereas in tyre replacement segment the demand was more from truck and bus tyres, contributes ~61 % and the balance by PVs and 2/3 wheelers and in case of OEMs truck and bus tyres gives ~35%. Hence, replacement segment is important both for tyre industries and for retreading industries as it contributes ~70% of total revenues and on a tonnage basis, the replacement segment contributes ~60% which indicates its prominence than OEMs market.

Replacement demand for tyres depends various factors like vehicle population, road conditions, overloading norms, retreading intensity etc. Retreading industry in India estimated to be worth more than Rs.5,000 Crore with more than 20,000 retreaders scattered in organised and unorganized sector. Now tyre retreading is widely accepted as a cost effective, environment friendly re-manufacturing process, which rebuild a worn out tyre with similar tyre life and performance of a new tyre. Tyre related industry is the major consumer of rubber as it consumes around 80% natural rubber and 20% synthetic rubber. The sector is raw-material intensive, with raw material accounting for 70% of the total costs of production and the raw material price fluctuations keep the industry profitability under pressure.

As Covid-19 continues its disruption, all business sectors, especially MSME sector has affected badly and is handling the situation. Due to the uncertainty around the situation and as Covid is spreading on a daily basis, the Company is facing many challenges and is reorienting its operations wherever possible to manage cash and liquidity issues as well as to ensure its growth and profitability. Even at this challenging situation, our branded products are regaining its demand in the markets and we are expecting good orders from customers including various RTC and other major customers.

The future depends mainly on measures taken to contain spread of the Covid-19 pandemic as well as mitigation of its second and third wave. Early attainment of herd immunity will be the key to regain economic growth. This will be possible by massive vaccinations, and the Government took right directions in this regard. We expect that the rapid vaccination and fiscal measures will equip the business for quicker pace than the last year. Further the revival measures taken by the Government will support the economy to regain its traction in the current year. While keeping this in mind aggressive marketing activities are undertaken to ensure our growth. With the expectation of normal monsoon, we are anticipating good orders from agriculture sector, as the tyre retreading will be the solution to reduce tyre cost in all segments.

Opportunities and Threats

During the past few years the tyre and tyre retreading industry has faced many challenges such as demonetisation, GST, less quality imported tyres, radialisation of tyres etc. However, on a positive note these challenges helped to consolidate the market. Now the customers prefer quality products, which is safe to use in their operations and ETL stands to benefit from this trend.

India has the second largest road network in the world bridging a total of 5.89 million kilometres and has 151,019 km of National Highways as of March 2021. 64.5% of goods transport and 90% of passenger traffic uses road network in the country and the road transportation has gradually increased over the years with improvement in connectivity. Highway construction in India increased at 17.00% CAGR between FY16-FY21 and despite pandemic and lockdown, 13,298 km of highways were constructed in FY21 and a total of 200,000 km of national highways is expected to be completed by 2022. Indias vast geography with this improving networks and connectivity will further improve the road transportation and is important for tyre and related industries to grow further. This will result increased demand for tyres both for OEM and replacements, which is vital for tyre retreading.

In addition to longer life and better riding comfort, with strong casings radial tyres can be successfully retreaded multiple times compared to bias-ply tyres and the vehicle industry is on its move with radial tyres. Retreading such tyres requires greater degree of sophistication, which is positive for organized players like ETL. Thus, growth of radial tyre usage will have a positive impact on the overall market, and also on the Companys performance. Retreading industry has faced heavy competition in the domestic market by introduction of low-quality imported truck tyres which are sold at lesser prices. To mitigate these risks, ETL continue to undertake various initiatives to increase plant efficiency, lower production costs and eventually drive sales up.

Even though the entry of branded tyre companies into retreading industry led to higher competition, it gives improved awareness about retreading and its benefits, helping to grow the overall market and now tyre retreading is an integral part of fleet management. ETL is the pioneer in manufacturing and marketing of tyre retreading materials. The Company is confident of maintaining a strong position in the market as it has developed several distinct strengths such as robust brand image, best-in-class service capability and wide portfolio of quality products.

Recently proposed safer and stringent norms for tyres will require tyres to meet a certain benchmark, including rolling resistance, wet grip, and rolling sound emission. These norms will further align Indian standards with international and are in the right direction to improve road safety and fuel efficiency. As these norms improve the quality of tyre it may result tyre prices continue to escalate. New regulations may propose for tyre recycling which would further change the way tyre manufacturers work in a long run. This will further enlarge the scope of organized retreading like ours.

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 9% 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. 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. Having transformed from a tread rubber manufacturer, we are at the forefront of building a comprehensive ecosystem across the entire retreading value chain.

We are on the path to build comprehensive and industry leading capabilities that would generate long term opportunities in India and worldwide. 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 with an extensive network across 20 States and are further expanding our distribution footprint. We also have presence in overseas markets, 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:

• Financial Risk

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/practices. 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 customers.

• Fluctuation in Raw Material Price and Other Input Costs

Risks can arise due to unexpected changes in commodity prices, which are following the global move 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 maintained 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 combined with market pricing patterns may have an adverse impact on profitability.

• Changes in Governments Policies

Unanticipated changes in Government policies may affect the companys financial position.

• Operational Risk

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.

• Product Risk

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 the achievement of its operational, compliance and reporting objectives. 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 Covid-19 pandemic and related restrictions, ETL has delivered a better performance. Revenue was lower due to weakness in demand due to lock down and movement restrictions. We have tried to focus on limiting the financial impact of the operating environment by cutting operating costs, rationalizing working capital and outstanding debt.

Based on the directives issued by the authorities due to the nationwide lockdown, the operations of the Company at its offices and factories were temporarily suspended with effect from 25 March 2020. All facilities were closed between 25 March 2020 and 24 April 2020. The Company had near zero revenues during this period. After 24 April 2020 the Companys factory started functioning to limited capacity, in adherence to Government regulations and protocols. During the month of May, based on the relaxation in Lockdown Conditions announced, Company has resumed operations partially and started billing.

The operations at manufacturing locations have started with day-shift basis within the conditions as applicable. There was a considerable improvement in June and thereafter as compared to April and May. However, the second wave of the Covid-19 pandemic has interrupted the sales momentum during Q4 due to state wise and localized lockdowns and movement restrictions.

Profitability was lower due sagged market, absorption of fixed cost and pressure from raw material prices. We have tried to manage the impact from increased raw material prices by actively maintaining raw material inventories but the transitional increase in working capital has increased interest cost. Even though the Company took efforts to mitigate the increase in input cost and shifted some of this cost to its customers, it could not increase the price in line with the extensive escalation of costs due to resistance in accepting the hike, as the retreaders were under high pressure to transmit the increase to end customers.

Tight control over operating expenses has allowed consistent cash profit. 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 FY2020-21 are as follows;

• Revenue

Total Revenue reported Rs.6709 lakhs compared to the previous years figure of Rs.7,778 lakhs Revenues (net of indirect taxes) reported a dip by 13.74% YoY.

• Earnings Before interest, Tax, Depreciation and Amortisation (EBITDA)

During the fiscal 2020-21 EBIDTA has declined by 1.52%. Reported EBIDTA of Rs.454 lakhs when compared to the previous years figure of Rs.461 lakhs.

• Profit Before Tax (PBT)

PBT was at (-)Rs.89 lakhs in FY 2020-21, compared with previous years (-)Rs.110 lakhs.

• Profit After Tax (PAT)

PAT stood at (-)Rs.57 lakhs in FY 2020-21 as compared to (-)Rs.112 lakhs in FY 2019-20.

• Earnings Per Share (EPS)

EPS in FY 2020-21 stood at (-)Rs.1.10 compared to EPS of (-)Rs.2.15 in fiscal 2019-20.

Over the longer term, our cost efficient manufacturing capabilities may also open up new opportunities in developed markets where adoption of retreaded tyres is deeply entrenched. As a leading provider of tyre retreading services across the entire retreading value chain we are present across 20 States through 20 depots and 95 dealers servicing to 1,500 plus multi branded retreaders, 39 exclusive retreaders and 28 branded Infinity Zones and 1 tyre retreading center. 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 programme, 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 personnel, increasing their skill levels, and fostering ongoing employee engagement and recognition with a holistic development perspective. ETL had total employee strength of 337 employees as on 31st March 2021.

Cautionary Statement

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 statements within the 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.