Enkei Wheels India Ltd Management Discussions

INDUSTRY STRUCTURE AND DEVELOPMENTS

Amid a challenging global economic landscape and deteriorating geopolitical conditions, the Indian economy achieved remarkable growth. It is the fifth-largest economy in the world and is expected to retain its position as the fastest- growing major economy in the world. As per the first advance estimates released by the National Statistical Office (NSO), real GDP is expected to grow by 7.3% in FY 2024 as against 7.2% in FY 2023, driven by strong domestic consumption, a stable interest rate environment, strong investment activity and robust performance of the service sector. The Indian economy has weathered recent geopolitical upheavals, such as the prolonged Russia-Ukraine war and conflicts in the Middle East and the Red Sea route. These events have triggered ripple effects on global supply chains, leading to heightened logistical costs, inflation, and economic pressures in India.

The Company has made its mark in the favourable economic landscape in India and remains committed to contributing its efforts towards the economic growth of the nation, striving to shape a more self-sufficient and prosperous India in the future. We aim to strengthen our local supply chains, invest in homegrown research and development and enhance our manufacturing capabilities to effectively cater to domestic demands.

Despite the supply-side challenges, total automobile despatches during the last financial year witnessed substantial growth across all segments. The demand for two-wheelers and passenger vehicles has surged, amid rising vehicle and fuel costs. According to data released by SIAM, two-wheeler sales reached 20,318,836 units and total passenger vehicle sales reached 4,634,023 units in 2023. Scooter sales increased by 2.24% to 6,065,602 units and other two-wheelers such as motorcycles and mopeds sales are at the same level as in the previous year.

4W Market Sales for CY 2023

The passenger vehicle (PV) segment witnessed a surge in domestic sales in CY 2023. As per SIAM, about 3.96 million passenger vehicles were sold in the domestic market in CY 2023, an increase of around 4.43% compared with sales of 3.79 million units in PY 2022. The export of passenger vehicles grew by 3.82% to 669,524 units in CY 2023 from 644,915 units in PY 2022. The strong performance of the PV segment was fuelled by positive consumer sentiments, new model launches and product upgrades from OEMs, greater availability, effective marketing, enticing offers and schemes, favourable wedding season and recovery in the rural market.

2W Market Sales for CY 2023

As per SIAM, the domestic sale of two-wheelers (2W) increased by 9.12% y-o-y to 17.07 million units in CY 2023. The growth of the 2W segment is attributed to strong rural demand, supported by a good harvest and strong consumer sentiment, a positive marriage and festive season, new model launches and a shift towards premium options. The exports of two-wheelers dropped to 3.24 million units in CY 2023 from 4.05 million units in PY 2022.

OUTLOOK

The Automobile sector anticipates robust growth in FY 2024, leveraging a weaker baseline and robust consumer demand across all segments. Post-pandemic, there is a strong pent- up demand in all segments and we expect the industry to maintain substantial volume growth.

Despite concerns about high inventory levels, the passenger vehicle segment is expected to witness growth in FY 2024, bolstered by new product launches and positive market sentiments. We expect the PV segment to achieve more than 10% growth in FY 2024 with order backlog supporting the demand. However, supply chain bottlenecks are expected to persist as critical factors affecting manufacturing.

The commercial vehicle segment is expected to grow over 15% in FY 2024, supported by higher spending on infrastructure, various government schemes for the automobile sector and the return of baseline capex for the sector.

We expect the 2 and 4-wheeler vehicles industries to strive for stabilisation around the current output levels and foresee an optimistic turn in FY 2024. We anticipate the industry to register a volume growth of 5-7% in FY 2024. The industry is expected to benefit from the governments continued support for the rural economy and emphasis on the growth of the agriculture sector in the Interim Budget 2024-25, aiming to elevate farmers income , which will stimulate rural demand.

EXPANSION PROJECT

Factory 2 of the Company is fully equipped after the installation of a painting line at the site. This addition has increased the

manufacturing capacity to approximately 40,000 four-wheelers and around 170,000 painted wheels per month. The Company started utilising the paint line at Factory 2 in July 2023. This development is expected to improve the production volume and revenue of the Company. The Company is continuously striving to improve the production process, aiming to reduce production time, minimise wastage and increase overall productivity.

Furthermore, after the initiation of the MAC5 operation, the next planned project involves the conversion of the existing MAP3 line to MAT. The Company is planning to facilitate additional expansion of production capacity.

SWOT ANALYSIS Strength

The strength of the Company lies in the upgradation of the production process with an adequate mix of newly implemented technologies, installation of machinery and expertise of the Companys personnel.

Weakness

High energy costs, labour costs and the increased price of raw materials, which may lead to higher carrying costs and working capital interest costs, are major constraints for the Company.

Opportunities

Consistent support through various government policies and interventions, coupled with the growing interest in electric vehicles and an increasing demand for design elements like alloy wheels in vehicles, highlights the positive trends. The governments strong focus on the manufacturing industry

and MSMEs, with initiatives such as the PLI scheme, Make in India, Ease of Doing Business, Atmanirbhar Bharat, etc. further contributes to the favourable environment.

Threats

A steep rise in raw material and energy costs and economic slowdown in domestic and international markets could potentially impede the Companys growth.

FINANCIAL OVERVIEW

Key financial ratios applicable to the Company

Particulars	FY 2022 FY 2023		% Change
Debtor Turnover	10.41	10.10	(3.00)
Inventory Turnover	11.54	10.44	(9.50)
Interest Coverage Ratio	0.94	1.85	97.40
Current Ratio	1.03	1.05	3.60
Debt Equity Ratio	0.60	0.61	0.80
Operating Profit Margin Ratio	6.76%	8.41%	24.41
Net Profit Margin Ratio	0.56%	1.63%	192
Return on Net Worth	1.73%	5.31%	206.6

Significant changes, i.e. change of 25% or more compared to FY 2023, are observed in:

Interest Coverage Ratio: In FY 2023, total interest cost decreased compared to the previous year, due to foreign

exchange gain against foreign exchange loss incurred in the previous year. The Operating Profit before Interest and Depreciation (EBID) has increased in line with the revenue growth. The Company continuously strives to increase the Operating revenue and profit while reducing interest costs through the repayment of long-term loans, aiming to improve the interest coverage ratio.

Net Profit Margin Ratio: In FY 2023, the Company achieved a good Net Profit in comparison to last Year. The Net profit has increased in line with the increased revenue, consequently, the net profit margin has increased compared to last year. The Company is consistently striving to increase Operating revenue and profit and reduce fixed costs through the repayment of long-term loans, aiming to further enhance the Net profit margin.

Return on Net Worth: In FY 2023, the Company achieved a good Net Profit in comparison to last year due to increased revenue from operations. Hence, the return on net worth has increased.

RISKS AND CONCERNS

The Companys business is exposed to various internal and external risks. Consequently, it has put in place robust systems and processes, along with appropriate review mechanisms to actively monitor, manage and mitigate these risks. Some of the key existing and emerging risks affecting the Company are as follows:

Risks Type	Key Risks	Impact on EWIL	Mitigation
Strategic Risk	Long-term growth dependent on capacity expansion	Capacity utilisation across the plants is gradually increasing, and with the business environment turning favourable, long-term growth will be dependent on capacity addition.	The Company has installed a new production unit i.e. MAC5 or Factory 2 and also installed a paint line at the Factory 2 location and the Company is in process to convert the MAP3 to MAT facility. This has resulted in an increased production capacity and an increased wheel painting capacity, aligning with the increased demand from the customers.
Operational Risk	Supply chain disruption	The raw material (Alloy) accounts for 55-60% of the cost, posing a significant risk as it may be susceptible to supply disruptions and market price volatility.	The Company maintains significant integration of raw materials for its operations. To achieve greater raw material security, the Company enters into an arrangement with its supplier. The Company is in the process of developing domestic suppliers to ensure uninterrupted production.
	Employee productivity and retention	Employee involvement and productivity are key factors for competitiveness in the industry. In a labour-intensive sector, employee welfare holds significance as it enhances employee retention and reduces the employee turnover ratio.	The Company is strongly committed to creating and providing a safe working environment for its employees and stakeholders. Focussed on retaining key talent, the Company employs various initiatives, including a heightened emphasis on employee engagement and an increased focus on providing learning opportunities, with allocated funds for training requirements.

 

Risks Type	Key Risks	Impact on EWIL	Mitigation
Financial Risk	Currency Volatility	Volatility in currency exchange movements resulting in transaction and translation exposure.	Quarterly assessment of foreign exchange exposure and strategies to mitigate any risk related to such exposure are conducted by the Audit Committee during the review of the Financial results of the Company.
	Debt Burden	The Companys outstanding indebtedness in an adverse environment can have a significant impact on financial flexibility and the business as a whole.	Close monitoring of debt profile and continuous effort to align costs with industry standards. The Company continuously endeavours to maintain an impeccable credit history, with quarterly reviews of financial leverage, striving to align with industry benchmarks.
	Credit Risk	Customer Default can pose a significant challenge and impact the bottom line of the Company.	Systems are in place to assess the creditworthiness of new as well as existing customers.
	Social Costs	The Companys assumptions in estimating social costs, like gratuity funding, are subject to capital market and actuarial risks. Any shortfall in these estimates could exert pressure on financial performance.	A framework has been implemented to manage social cost risks, ensuring that obligations remain affordable and sustainable while safeguarding assets against market exposure.
Legal Risk	Regulatory Environment and Compliance	The Company is subject to numerous laws, regulations and contractual commitments. Failure to adhere to them may adversely impact the Company.	The Company has policies, systems and procedures in place, with a strong commitment from the Board and the Executive Committee towards compliance.
Health and Safety Risk	Health and safety of the workforce	Managing safety and health is a top priority for the Company. A continuous Risk Assessment process is implemented, followed by measures to effectively control them, ensuring the safety and well-being of the employees at work. A safe workplace and good health of employees contribute to enhanced productivity.	The Company strictly follows the rules and procedures outlined by its robust health and safety management systems. Regular training sessions are conducted to raise awareness of safe working conditions and instil confidence in the employees. Furthermore, the Company conducts regular health checkups and maintains internal health centres to monitor the well-being of its employees.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Your Company has a robust internal control system in place, adequate for the size and complexity of the organisation. A comprehensive review of all internal control systems has been conducted to monitor the Companys expanding size, corresponding needs, compliance with legal obligations and adherence to the Companys policies and procedures. This ensures a high degree of system-based checks and control, with continuous monitoring of the effectiveness of these controls.

An independent agency has been appointed to audit the internal control system in consultation with statutory auditors. The audit committee considers suggestions, improvements and concerns raised by internal auditors and ensures their implementation in accordance with the committees instructions.

The audit findings and managements resolution plans are reported to the Audit Committee of the Board on a quarterly basis. The committee is headed by a Non-executive Independent Director.

Based on its evaluation, the Audit Committee has concluded that the internal financial controls were adequate and operating effectively as of December 31, 2023.

HUMAN RESOURCES

Operating in a people-intensive sector, the Company highly values its human capital and recognises the pivotal role it plays in its daily operations. The Companys core belief is Prepare for the next To Prepare for the next, the Company implements various measures to recruit, train and retain the best talent. Embracing the principle of inclusive growth for its employees, the Company undertakes extensive learning and development measures. Furthermore, a dedicated management team ensures that the system provides adequate space, freedom and guidance to unleash the full potential of employees, along with ample opportunities for their personal growth within the organisation. Continuous monitoring and periodic reviews keep the system updated and reward policy ensures the smooth functioning of the system.

As on December 31, 2023, there were 616 permanent employees on the payroll of the Company.

CAUTIONARY STATEMENT

The Management Discussion and Analysis Report containing your Companys objectives, projections, estimates and expectations may incorporate certain statements, which are forward-looking within the meaning of applicable laws and regulations. The statements in this Report could differ materially from those expressed or implied elsewhere. Important factors that could make a difference to the Companys operations include raw material availability and prices, cyclical demand and pricing in the Companys principal markets, changes in governmental regulations, tax regimes, forex markets, economic developments within India and the countries within which the Company conducts business besides other incidental factors.