Hilton Metal Forging Ltd Management Discussions.

Industry structure and developments

The global metal forging market size was valued at USD 83.9 billion in 2019 and is expected to witness a CAGR of 7.6% from

2020 to 2027. The rising passenger traffic is propelling the worldwide production of aircraft, which is anticipated to be one of the key factors driving the demand for metal forging.

The growing passenger traffic from highly populated countries such as China and India are compelling airlines to increase their number of flights. For instance, India is projected to be the third-largest aviation market with around 478 million passengers by

2036 and the country would need around 2,400 aircraft by 2036 considering its growing travel demands. Therefore, the development of the aerospace sector would lead to a subsequent rise in demand for metal forging.

Strict regulations pertaining to the use of high-performance lightweight components in the aerospace and automotive industries drive the demand for metal forging, particularly for aluminum and titanium materials. For instance, the density of aluminum is merely 34.0% of steel and 30.0% of copper forging, which compels manufacturers to switch to aluminum forged products for their vehicle components.

The automotive industry is a major end user for metal forging. The durability, strength, and reliability of forged components have made them a preferred choice in the automotive sector for applications where stress, load, tension, and human safety are key considerations. Therefore, the growth in automotive production such as electric vehicles is anticipated to drive the demand for metal forging over the forecast period.

On the other hand, alternative component manufacturing processes, particularly casting, is expected to hinder the demand for metal forging. Factors such as advancements in technology and low cost characteristics drive manufacturers to opt for casting as a preferable method over forging for producing components such as transmission parts and crankshafts.

Forging is traditionally considered as the back bone of manufacturing industry. It is a major input to the sectors which support economic growth of the nation, such as, Automobile, Industrial Machinery, Power, Construction & Mining Equipment, Railways and General Engineering.

The Indian forging industry is well recognised globally for its technical capabilities. With an installed capacity of around 38.5 lakh MT, Indian forging industry has a capability to forge variety of raw materials like Carbon steel, alloy steel, stainless steel, super alloy, titanium, aluminium and so forth, as per the requirements of user industry.

Over the years, the Indian forging industry has evolved from being a labour-intensive industry to capital-intensive manufacturing sector. The current investment in the plant and machinery by Indian forging companies is worth of INR 27,833 Crore.

Based on their installed capacity, the forging units may be classified as very large (capacity above 75,000 MT), large (capacity above 30,000 to 75,000 MT), medium (capacity above 12,500 to 30,000 MT), small (capacity above 5,000 to 12,500 MT) and very small (capacity up to 5,000 MT). Based on this classification it is seen that about 83% of the total number of units are small and very small, while only about 8% can be classified as very large and large units; the balance of about 9% constitute the medium sized units.

The forging industry of India provides direct employment to about 95,000 people. The small and very small units are mainly dependant on manual labour, however medium and large units are more mechanized. Quality standards in the industry have improved significantly and the sector is now well known globally for its high quality.

Current share of auto sector is about 58% of total forging production while the rest is with the non-auto sector. Changes in Indian automobile industry directly impact Indian forging industry, because the forging components form the backbone of the Indian automobile industry.

Since the automobile industry is the main customer for forgings the industrys continuous efforts in upgrading technologies and diversifying product range has enabled it to expand its base of customers to foreign markets.

The Indian forgings industry has made rapid strides and currently, not only meets almost all the domestic demand, but has also emerged as a large exporter of forgings.

The industry is increasingly addressing opportunities arising out of the growing trend among global automotive OEMs (Original Equipment Manufacturers) to outsource components from manufacturers in low-cost countries. As a result, the industry has been making significant contributions to countrys growing exports.

In order to reduce the impact of cyclicality and dependence on auto sector, the industry plans to diversify into non-automotive sectors.

Impact of COVID-19 pandemic

Work activity is stopped, but in "the new normal" research and development, and analysis, continues — even if much of that analysis is focused on getting back to something like the old normal.

"COVID-19 is a clear point of demarcation in the (manufacturing) industry, accelerating the transition from traditional supply chains and manufacturing to a digitally enabled future Among these manufacturers, Fictivs research showed 89% of manufacturing businesses were directly impacted by the COVID-19 pandemic, including lower sales, increased costs of materials and production, and canceled or delayed product launches. Among the unexpected problems resulting from the shutdowns, 41% of manufacturers noted costs of materials and components increased and another 41% reported production lead-times have lengthened.

Manufacturers strategic planning also felt the effect, again with 41% revealing that new-product launches have been delayed or cancelled; 36% have had to lay off "good employees"; and 29% have had difficulty securing financing;while 27% have reduced their budgets for R&D and product or service innovation.

Also among Fictivs respondents, 24% of manufacturers were unable to fill their customers orders. The "supply chain" disruption will be felt keenly by forging producers, whose high-volume orders are components and systems destined for automakers and their Tier suppliers, aircraft manufacturers, and builders of heavy equipment; and whose lower-volume programs supply critical infrastructure projects, like oil drilling and power-generation projects. AIFI (Association of Indian Forging Industries.) says despite the industry witnessing growth in the recent past, there are few concerns which seems to hamper the overall growth in the long run including the rising steel prices and demand supply gap, high electricity tariff rates in Maharashtra region, rising fuel prices, governments thrust on electric vehicles and technology upgradation and modernisation. Steel prices and demand supply gap: The forging industry in India has been showing a growth trend since last one year. However, there seems to be a huge demand supply gap, which exists, which is not being met by the steel manufacturers in India. Some of the reasons that can be attributed to the demand supply gap include -major players reeling under high debts, lower coal production by Coal India, as compared to the demand and gap in the quality standards to meet the higher level of demand in the automobile and significant rise in prices of graphite electrodes, an immensely vital raw material for steel manufacturers.

Forging industry says it is also concerned over the continuous rise of steel prices in India and is living under constant fear that if this trend continues, then it will defeat the ‘Make in India project and China will get a competitive edge in the world steel market, which as of now is the biggest steel exporter. The steel prices have inflated by around 25.5 percent in the last one year. The price of steel has gone up to Rs 47,740 per tonne, compared to Rs 38,000 per tonne in November 2017. Even though the global steel prices also witnessed immense the quantum influences was not as high.

High electricity tariff rates in Maharashtra: On one hand manufacturing industries across India are extensively promoting the governments Make in India initiative and on the other hand the manufacturing industries in Maharashtra are grappling with serious concerns related to high electricity tariff rates. According to the figures released by Maha discom last year, the state has lost about 500 consumers, which includes some the big names. Though, last year, the Maharashtra government reduced the power tariff for industries however, it has still not made the state a competitive destination as compared to neighbouring states like Gujarat, Karnataka, Andhra Pradesh and others which offer electricity at cheaper rates.

Modernisation: Compared to the European, Japanese and American counterparts and companies from China, Korea and Taiwan the technology and automation levels is much lower (barring a few bigger forging companies)in India. According to a recent survey of the Indian forging industry, about 70 percent of the forging units in India are MSMEs who need to upgrade their technologies. For this, the industry needs huge government support in terms of further interred subvention and technology upgradation fund.

Electric vehicles: Another key issue concerning the future of the industry is the governments renewed focus on electric vehicles and a move to eliminate petrol/diesel cars by 2030. It says the situation seems to be fluid and will require the government to draw a clear road map for the same. The introduction of EVs will have an adverse impact on Indian forging industry as around 60 percent of the forging units are into manufacturing of auto components and a majority for engine and transmission related application.

AIFI suggests that the need of the hour is for a aggressive and assertive political action that will provide a level playing field to Indian manufacturers to become competitive in the global platform and other relevant policy reforms to foster ease of doing business.

India is the 3rd largest manufactures of forgings in the world, after China and the European nations (led by Germany).The forging industry is one of the major contributor to the Indian manufacturing industry. According to a recent survey conducted by the forging association, the installed capacity has increased from 38.5 lakh MT in 2016-17 to 39.4 lakh MT in 2017-18 with overall production of forgings increased from 23.98 lakh MT to 25.24 lakh MT.

Outlook

Recently an industry survey that is jointly conducted by industry body FICCI and tax consultancy Dhruva advisors and took responses from about 380 companies across the sectors. It is said that businesses are grappling with "tremendous uncertainty" about their future. According to the survey, COVID-19 is having a ‘deep impact on Indian businesses, over the coming months jobs are at high risk because firms are looking for some reduction in manpower. Further, it is added that already COVID-19 crisis has caused an unprecedented collapse in economic activities over the last few weeks. The present situation is having a "high to very high" level impact on their business according to almost 72 per cent respondents.

Further, 70 per cent of the surveyedfirms . are expecting a degrowth 21 salesinthe fiscal year 2020-

FICCI said in a statement, "The survey clearly highlights that unless a substantive economic package is announced by the government immediately, we could see a permanent impairment of a large section of the industry, which may lose the opportunity to come back to life again."

The survey found:

- In respect to the approved expansion plans, around 61 per cent of the respondents expect to postpone such expansions for a period of up to 6 or 12 months, while 33 per cent expect it to for more than 12 months.

- Surveyed firms of around 60 per cent have postponed their fund-raising plans for the next 6-12 months. Also, nearly 25 per cent of the firms have decided the same.

- Surveyed firms around 43 per cent have reported that they do not predict an impact on exports. Further, 34 per cent said that exports would take a hit by more than 10 per cent.

According to Dun & Bradstreet, COVID-19 no doubt disrupted human lives and global supply chain but the pandemic is a severe demand shock which has offset the green shoots of recovery of the Indian economy that was visible towards the end of 2019 and early 2020. The revised Gross Domestic Product (GDP) estimates for India downwards by 0.2 percentage points for the fiscal year 2020 to 4.8 per cent and by 0.5 per cent for the fiscal year 2021 to 6 per cent. Further, it is stated that the extent of the actual impact will depend upon the severity and duration of the outbreak.

There are three major channels of impact for Indian businesses according to the report namely linkages, supply chain and macroeconomic factors. The data of the Dun & Bradstreet shows that at least 6,606 Indian entities have legal linkages with companies in countries with a large number of confirmed COVID-19 cases. And business activity in the foreign markets is slow which implies a negative impact on the topline of these companies. Sectors that would be much affected includes logistics, auto, tourism, metals, drugs, pharmaceuticals, electronic goods, MSMEs and retail among others

Company overview:

Due to COVID 19, its impact and subsequent persistent lockdown, the HMFL were forced to closedown its plant and operations from 20th March onwards and almost 1st quarter of fiscal 2020-21

However during operational period HMFL has taken measures to:

Tooling--Increase die life by at least 2 times that of current levels. Reduce per-part die system costs by at least 50%. Produce tooling within 24 hours from time of order.

Energy--Reduce the total forging process energy input by 20% while cutting the per-piece energy cost by some amount. Material utilization--Achieve a minimum overall reduction in raw material consumption of 10 to15%. Reduce the scrap rate (increase material utilization). Productivity--Improve per-employee productivity by 20%. Reduce per-piece labor costs by 30%. Achieve average forging facility up-times at maximum.

Quality--Reduce rejected or returned work to less than 25 parts per million. Achieve 8 sigma process control.

Environment--Generate no harmful gas combustion products; completely eliminate aerosol emissions within forging plants; and recycle all fluids necessary to forging operations.

Segment wise performance:

The companys business activity falls within a single operating segment, namely manufacturing of steel forgings and flanges and forged fittings for Oil and Gas Industry, Petrochemicals and Refinery Industry, hence it is treated as only one segment

Internal Control Systems and their adequacy:

The Company has in place internal financial control systems, commensurate with the size and complexity of its operations to ensure proper recording of financial and operational information and compliance of various internal controls and other regulatory and statutory compliances. The internal auditor monitors and evaluates the efficacy and adequacy of internal control systems in the Company. Based on the report of the internal auditor, respective departments undertake corrective action in their respective audit observations and corrective actions thereon are presented to the areasandthereby strengthen thecontrols.Significant

Audit Committee of the Board for their perusal.

Financial Performance with respect to operational performance

Particulars Year Ended March 2020 Year Ended March 2019
Total revenue 10321.36 10133.36
Less: Operating Expenses & Provision 9551.10 9392.68
Profit before Interest, Depreciation & Taxes 770.26 740.68
Less: Depreciation 258.82 256.51
Less: Interest & finance Charges 340.66 335.89
Profit before Tax 170.77 148.28
Less: Provision for Taxation 15.78 -6.77
Profit After Tax 154.99 155.05
Other Comprehensive Income 0.13 0.13
Total Comprehensive Income for the Year 0.13 0.13
Balance Brought forward 954.75 799.59
Balance Available for Appropriation 1109.74 954.75
Surplus retained in Profit & Loss account 1109.74 954.75

During the year under review, the total revenue of the company was Rs 10321.56 Lacs as compared to Rs. 10133.36 Lacs during the previous year, the PAT was Rs. 154.99 as compared to last year of Rs.155.05 Lacs.

Significant changes in key financial ratios:

Ratios For FY 2019-20 For FY 2018-19
Debtors Turnover 1 : 0.37 1: 0.22
Inventory Turnover 1: 1.83 1: 1.85
Interest Coverage Ratio 1.50 1.44
Current Ratio 1.61 1.71
Debt Equity Ratio 71.04 68.47
Operating Profit Margin (%) 7.36 7.48
Net Profit Margin (%) 1.66 1.47
Return on Net worth (%) 2.47 2.53

There is no significant change in any of the ratios as well in net worth of the company as compared to immediate previous year.

Human Resource Management and Industrial Relations:

The Company believes that human resource is the most important assets of the organization. During the year under review, your company continued its efforts to imtprove HR related processes, practices and system to align these to the organizational objectives. Over the years, Company has maintained consistency in its efforts in training and developing its human recourses with a view to face competition.

There was satisfactory co-operation between the management and the workers in working towards the overall objectives of the company.

Women Centric Initiatives:

The Company is committed to provide healthy environment to all employees of HFML and does not tolerate any discrimination and/or harassment in any form. The Company has in place a stringent policy in place, to address issues pertaining to female employees and to provide a safe environment for them.

Cautionary Statements:

Statements made in the Management Discussion & Analysis describing the Companys objectives, projections, estimates, expectations may be "Forward-looking statements" within the meaning of applicable securities, laws & regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand supply and price conditions in the domestic & overseas markets in which the Company operates, changes in the government regulations, tax laws & other statutes & other incidental factors.

For and on behalf of the Board of Directors
Yuvraj Malhotra
Place: Mumbai Chairman & Managing Director
Dated: 31st August 2020 DIN: 00225156