HPL Electric & Power Ltd Management Discussions.

Global Economic Overview

The year 2019 is marked by the slowest global Gross Domestic Product (GDP) growth attributed to the slowing down of economic activities in a few emerging market economies, geopolitical tension, and international trade disruptions, caused by the US-China trade clash. The International Monetary Fund, in its World Economic Outlook (WEO) for June, calculated a global growth of 2.9% in 2019 from 3.6% in 2018. Further, the outbreak of COVID-19 (coronavirus) pandemic in the first quarter of 2020 across the globe literally pushed the world economy to depression. It had a much higher impact on economic activities during H1 2020 than earlier anticipated, and the recovery is projected to be slower than the previous forecast.

IMF revised its earlier forecast of – 3.0% for 2020 and projected a deeper negative growth of 4.9%. The revised outlook of global growth is driven by the intensi_cation of the pandemic in a number of emerging markets and the developing economies, and the impact brought about by the containment measures like quarantines, lockdown and ban on travel. Consumption, services output and investment have dropped markedly leading to severe demand shock, supply disruptions and labour market drop.

Global trade contracted by close to 3.5% in Q1 2020. According to World Trade Organisations (WTO) latest forecast, considering the large degree of uncertainty around the pandemic and its economic impact, the volume of world trade in 2020 may contract by 13% to 32%, under an optimistic to pessimistic scenario. However, policy countermeasures have limited economic damage and lifted financial sentiments, keeping the hope of a rebound in the long run. A number of European countries have passed the peak contamination stage and are slowly getting into normalisation of economic activities. Based on optimistic assumptions, global GDP growth for 2021 is projected at 5.4%.

Indian Economic Overview

Global cyclical slowdown and country specific factors led Indias economy to a downturn in FY 2019-20, primarily manifested in a liquidity crunch, lower GST collections and a strain on fiscal deficit. The stable GDP growth, which put the country among the fastest growing economies in the world, lost momentum in FY 2019-20. According to National Statistical Office (NSO) and IMF, Indias GDP grew by 4.2% in FY 2019-20, much lower than 6.1% in the previous fiscal year.

India significantly eased its monetary policy and offered extensive credit support to the Non-Banking Financial Companies (NBFCs) sector during the year to keep the economy moving. The growth roadmap for next fiscals was also streamlined by the amendment of Insolvency and Bankruptcy Code (IBC), launch of the Rs 102 lakh crore National Infrastructure Pipeline (NIP) and the Union Budget 2020-21 with targeted allocations. However, the already dwindling state of affairs hit the worst in Q4 FY 2019-20, when the three growth parameters of consumption, investment and trade plunged to an all-time low with the outbreak of the pandemic. The monetary losses incurred by the economy due to the extended nationwide lockdown sealed any chance of an economic recovery in the next fiscal. IMF revised its forecast for India in its June WEO, and projected a negative growth of 4.5% for FY 2020-21. It however, projects the Indian economy to grow by 6% in FY 2021-22, backed by Governments policy support.

Relief measures during COVID_19

Despite the serious growth challenges, the Government continued with its crisis management measures and recalibrated fiscal and monetary stimulus. The Centre announced a Rs 20 lakh crore stimulus package called "Aatmanirbhar Bharat" as a socio economic support to the country, keeping localisation and a self-reliant economy as its final goal. The package announced policy and liquidity support to cottage industries and MSMEs, NBFCs, labourers, farmers, middle class, and the urban and rural poor. It offered tax breaks and collateral-free loans for businesses and MSMEs and incentives for domestic manufacturing.

As a breather to the salaried middle-class, it announced deferment of income tax returns by three months and reduction of EPF contribution to 10% from 12%. The biggest support came from RBI, which cut the repo rate to 4% and reverse repo rate to 3.75%, in order to make loans easily available to banks and discourage parking of cash with RBI. Further, to inject liquidity into the economy, it allowed loan repayment moratorium for six months.

The Government implemented a phased reopening of the economy with strict SOPs, starting in June 2020, in order to provide relief to the economy whose unemployment rate had increased to a record high of 27.1% in May. Despite all the support, resurrection of the economy in the current scenario depends on the duration of the pandemic outbreak and its impact on key sectors.

(Sources: IMF World Economic Outlook, April 2020, IMF World Economic Outlook, April 2020, http://www.mospi.gov.in/sites/default/files/press_ release/PRESS%20NOTE%20PE%20and%20Q4%20estimates%20of%20 GDP.pdf, https://www.bbc.com/news/world-asia-india-52559324)

Industry Overview

Power sector

As the worlds third largest producer and consumer of electricity and a population of 1.4 billion, India has the potential to be a big player in global energy markets. With its power demand set to double by 2040 and its electricity demand rising every year, the energy sector is on the verge of transformation. Based on data from the Central Electricity Authority (CEA), Indias power generation capacity is projected to be around 480.4 GW by the end of FY 2021-22 from 370.1 GW as of 31st March, 2020, with major addition coming from the renewable sector. Renewable energy contribution is targeted to increase to 175 GW in FY 2021-22, from 87 GW currently. Indias power demand is being driven by infrastructure development, industrial facilities, urbanisation, housing development, railways and metros, increase in customer base and changes in lifestyle and consumption pattern. The all-India demand for electricity is expected to grow from 1,290 BU in FY 2019-20 to 1,691 BU by FY 2021-22 and further to 3,175 BU by FY 2029-30. Rise in power demand and consumption is expected drive higher investment in the transmission and distribution sector.

Notably, India has developed into a power surplus nation from a power deficit one, but transmission and distribution remains the major issue plaguing the power sector. According to CEA, there was just 0.5% gap between energy demand and supply in FY 2019-20. CEAs data also indicates that about 46,000MW of installed power capacity in India is stranded because of poor last-mile connectivity and inadequate transmission and distribution infrastructure. Despite being the third-largest electricity consumer after China and the U.S., the per capita electricity consumption in India in FY 2018-19 was 1,181 kWh, considerably lower compared to China and the U.S.

The Government is, thus working towards the dual objective of boosting power generation capacity in India, with a key focus on renewable energy, strengthening the transmission network, and extension of National Grid to disperse power to regions lagging behind. This is an imperative to meet the rising power demand and to increase per capita consumption. To these objectives, the Government has introduced a series of power sector reforms. One of the key programmes is Power for All, under which the Government implemented Pradhan Mantri Sahaj Bijli Har Ghar Yojana - Saubhagya, the Integrated Power Development Scheme (IPDS), UDAY and UJALA. CEA published in its National Electricity Plan (NEP), a blueprint to develop the transmission systems to meet the growing power demand. As per the plan, an expenditure of Rs 2.69 trillion (US$39 billion) would be required to revamp the transmission system by FY 2017-22, which is opening up numerous opportunities in the electrical equipment sector.

(Source: http://www.cea.nic.in/reports.html, Report on ‘Transitions in India Electricity Sector 2017-2030 by TERI for projection)

I. Indian electrical equipment industry

Indian Electrical Equipment industry comprises two segments – generation equipment, such as boilers, turbines, generators, transmission and distribution (T&D) and allied equipment such as transformers, cables, transmission lines, switchgears, capacitors, energy meters, instrument transformers, insulators, insulating material, industrial electronics, indicating instruments, winding wires. According to Indian Electrical & Electronics

Manufacturers Association (IEEMA), the T&D equipment sector contributes 85% of the industry, whereas generation equipment sector is 15%. The industry contributes 8.1% of the manufacturing sector gross value added (GVA) and 1.35% of Indias GDP.

The Government has launched Indian Electrical Equipment Industry Mission Plan 2012-2022 in order to make India the countryofchoicefortheproductionofelectricalequipment and reach an output of US$ 100 billion by balancing exports and imports. This was also supplemented by Central Electricity Authoritys (CEA) National Electricity Plan (NEP) designed to improve the transmission and distribution network. These developments are expected to open up numerous opportunities in the power generation and the transmission and distribution equipment sector.

Indian Electrical Equipment industry has registered a negative revenue growth of –10.4% in FY 2019-20 (Up to December 2019) as compared to 11.2% growth in FY 2018-19. The decline was primarily attributed to a delay in order finalisation due to financial crunch/liquidity and a slowdown in a number of core sectors and the realty sector. Further, no significant capex in end-user sectors led to a drop in domestic demand. Exports supported growth in switchgear and insulator segment. The fourth quarter growth of the electrical equipment industry was further muted by the outbreak of Coronavirus and the resultant lockdown and a sudden halt to all economic activities.

(Source: https://ieema.org/industry-intelligence/industry-update/, https://ieema.org/wp-content/uploads/2020/03/Indian-Electrical-Equip-Ind-Overview_Dec-19.pdf)

II. Electricity energy meters

Electricity Energy Meter or Watt-Hour Meter is an electrical equipment that measures the amount of electrical energy used by the consumers. Electricity energy meters find applications in homes, industries, organisations and commercial buildings, where, they are installed by electrical departments to charge for the electricity consumption by loads. The energy meters are classified into Analogue Electric Meters and Digital Smart Meters. IEEMA members hold 85% of the total market share of the meter industry, which has a combined revenue of around Rs 3,000 crore. IEEMA Meter division produces more than 25 million meters annually, which are 100% made in India products end-to-end.

With the rising electricity demand, India is on a mission of transforming its energy mix with innovation, focussing on enhancing energy production and cutting Aggregate Technical and Commercial (AT&C) losses. This is likely to be implemented through the installation of smart grid and advanced metering infrastructure. Programmes like National Smart Grid Mission (NSGM) and Integrated Power Development Scheme (IPDS) required installations of transmission grid as well as smart metering system. With its significant role in Indias energy efficiency journey, Energy Efficiency Services Limiteds (EESL) Smart Meter National Programme (SMNP) is currently working towards replacing 25 crore conventional meters with smart meters across India. This is likely to augur well for smart meter manufacturers in the country.

(Source: https://ieema.org/division/energy-meters/, https://www.eeslindia.org/content/raj/eesl/en/Programmes/Smart-Meters/about-smart-meters.html)

III. Electrical wires and cables

The Wires and Cables sector is the direct beneficiary of development and revamping of power generation and distribution infrastructure, as the market comprises nearly 42% of the electrical equipment industry in India. According to the latest Crisil report, Indias wires and cable industry had a total size of 17 million km in FY 2018-19, which is likely to reach a volume of about 27 million km by FY 2023-24, growing by a CAGR of 10%. Accordingly, in value terms, the industry size stands at Rs 646 billion in FY 2018-19, and is projected to grow at a CAGR of about 11% to reach Rs 1,000-1,100 billion by FY 2023-24. India has also become a net exporter of cables and wires, propelled by rising production and double-digit annual growth of 12% between 2009 and 2019.

The wires and cables sector growth is primarily driven by the recent development push in power and infrastructure segments, supported by the Government policies, renewable energy push and Government schemes for electrification, housing development and smart cities and smart grid. The Wire and Cable industry comprises both branded players with domestic and export capabilities and a large number of fragmented manufacturers. Organised players share in the market is constantly growing and is expected to touch 79% by FY 2023-24, from 68% in FY 2018-19. Implementation of GST, improved efficiency and a balanced cost structure are some factors contributing to the growth of organised wire and cables sector in India. Further, growth of urbanisation, growing middle class incomes and customer involvement in electrical purchases and preference for quality and branded products supports growth of the organised sector.

(Source: Crisil Report: Assessment of cables and wires industry in India, January 2020)

IV. LV switchgear

Low Voltage (LV) switchgear industry covers high rupturing capacity (H.R.C.) fuses, low voltage circuit breakers, offoad electrical isolators, switches, earth leakage circuit breakers, moulded case circuit breakers (MCCB) and miniature circuit breakers (M.C.B.). Indias low voltage switchgear industry has been established well. As per IEEMA, the present size of the LV Switchgear industry including domestic modular switches is estimated at around Rs 11,050 crore. The share of LV switchgear industry in the entire electrical industry is about 15%. The competitive strength of Indian LV switchgear industry has been growing in a few products like miniature circuit breakers, earth leakage circuit breakers, HRC fuses and air circuit breakers, where exports are significantly higher than imports. While all product segments in the electrical equipment sector registered a negative revenue growth in FY 2019-20 (till December, 2019), LV switchgear is the only product segment to register a revenue growth of 4.6% in the same period, primarily driven by increasing export demand.

(Source: https://ieema.org/division/lv-switchgear/)

V. LED lighting

The LED (light-emitting diodes) is a revolutionary technology which is dominating the global and the India lighting industry. The country is all set to enter a revolutionary phase of lighting with innovative LED solutions. According to report from the Electric Lamp and Component Manufacturers Association (ELCOMA), the Indian LED market is expected to grow to Rs 261 billion by CY 2020, which is approximately 80% of the total lighting industry.

The market for energy-e_cient LED lighting is being driven by the focus on energy savings, the Government initiatives that were launched to encourage the use of LED lighting, the focus on smart city projects, growing power distribution system and the customers involvement and awareness about energy saving products.

Unnat Jyoti by Affordable LEDs for All (UJALA)

Launched in 2015, the Unnat Jyoti by Affordable LEDs for All (UJALA) has emerged as the worlds largest domestic lighting programme, developed to address Indias high cost of electrification and achieving energy efficiency. Energy Efficiency Services Limited (EESL), in charge of implementing the scheme, is a Super Energy Service Company (ESCO) under the Ministry of Power. The Company enables consumers, industries and governments to effectively manage their energy needs by implementing energy efficient technologies across sectors like lighting, buildings, electric mobility, smart metering and agriculture. Till date, it has completed distribution of 36 crore LED bulbs across India at a subsidised rate, achieving over 47,095 million kWh of annual energy savings, amounting to Rs 18.8 billion. This led to total CO2 reduction of 381 lakh tonnes. The programme also pushed Indias LED lighting market manifold within four years, with the industry selling over 1.15 billion LEDs in CY 2019, far exceeding the UJALA programmes target of 700 million LED unit sales.

Street Light National Programme (SNLP)

Launched in 2015, EESLs Street Light National Programme (SNLP) has been instrumental in installing over 1.03 crore smart LED streetlights till January 2020, enabling an estimated energy savings of 6.97 billion kWh per year with an estimated greenhouse gas (GHG) emission reduction of 48 lakh tonnes CO2 annually. SLNP has a goal of replacing all the 1.34 crore conventional street lights in India.

According to International Energy Agency (IEA), India has the potential to become an in_uential trend setter in the global power sector as the worlds third largest producer and consumer of electricity and a population of 1.4 billion. The lighting sector currently accounts for about 18% of the total electricity consumption in India. The sector will remain in focus because of the role it plays in electricity consumption and LED lighting sector, with its enormous power saving capability playing a key role in changing the electricity consumption scenario in India.

(Source: http://www.ujala.gov.in/, https://www.eeslindia.org/ content/raj/eesl/en/Programmes/SLNP/about-slnp.html)

The COVID pandemic - and its impact on industry

The Coronavirus or COVID-19 pandemic has caused a radical slowdown of economic activities across India. With the nationwide lockdown, industries shut down production, commercial entities closed shutters and offices shut down while employees worked from home. This had a significant impact on the Indian energy sector, in the short-term as well as longer-term. During the lockdown period starting in March 2020, spot power demand fell 40% on closure of major consumers like industries, malls, markets and offices. Since the start of lockdown till May, total electricity demand dropped about 25% YoY.

This also impacted the electrical equipment sector as it affected demand, supply chain and manufacturing disruptions, order deferments and delaying of projects. The industry slowdown in the first three quarters of FY 2019-20 culminated in a worse situation in the fourth quarter. Despite the unlocking of the economy in a phased manner since June, economic activities are still not back to normal as the virus spread intensi_ed multiple times after the lockdown period. The severely impacted commercial and industrial electricity consumption also led to a loss of business for DISCOMS. Under the COVID_19 support package, the government has announced around Rs 90,000 crore low risk loans to DISCOMs, which will come with state guarantees. Power Finance Corp (PFC) and Rural Electrification Corporation (REC) have come forward to disburse 10-year loans to DISCOMs at 9.5% for the next 60 days under the

Rs 90,000 crore liquidity infusion package. Further, the government is considering relaxing working capital borrowing limits of power distribution companies. The industry representatives expect the Government support to MSMEs to lift end user demand in the long run. The Governments push for infrastructure developments in power, railways, roads, metro, housing and petrochemicals sectors will continue to spur demand for the electrical equipment sector.

Company Overview

HPL Electric & Power Limited (HPL or the Company) is a leading electrical equipment manufacturer in India operating for the past 40 years. The Company has significant presence across five key product verticals of electric equipment – metering solutions, modular switches, switchgears, LED lighting and wires and cables. It caters to a wide spectrum of customer segments, such as power utilities, government agencies, and retail and institutional customers, with a strong brand recall as a trusted electrical brand.

Share in the
Domestic On- load
50% Change-over
Switches Market
20% Share in Domestic Electric
Meters Market
Share in the
5% Low-voltage
Switchgear Market
5th Largest LED Lighting Products
Manufacturer

Manufacturing capabilities

The Company has seven state-of-the-art manufacturing facilities at Gurugram, Jabli, Gharaunda and Kundli with end-to-end capabilities, covering product and component designing, product development, tool making and commercial production. Its well organised supply chain is supported by 21 warehouses across India.

The manufacturing process is supported by two Research and Development centres employing 100+ expert engineers, with rich experience in the electrical industry and a proven track record of product innovation. The Company also has a NABL-accredited and ISO/IEC 17025:2005 compliant testing facility at Gurugram.

Current capacities
Product Segments Capacity (per annum)
Electronic Meters 11 million units
Lighting Equipment 26 million units
Switchgear 16 million units
Wires and Cables 194 million meters
Current order book (Rs in Crore)
Product Segments FY 2019-20
Electronic Meters Rs 301.6 crore
Lighting Equipment Rs 56.7 crore
Switchgear Rs 6.6 crore
Wires and Cables Rs 2.7 crore
Total Rs 367.6 crore (net of GST)

HPL has established a pan-India distribution network with 900+ authorised dealers and 27,000+ retailers across India in order to reinforce its brand presence and leverage on the growing potential of Indias electrical equipment industry in metros and Tier I and II cities. The Company has been successfully serving its customers all over India and also to more than 40 countries across the globe. Backed by its highly experienced leadership team and R&D support, strong pre-qualification credentials, consistent product quality and long-standing customer relationships, it has built a niche for itself in the electrical equipment sector.

Key operational highlights

1. During the year, the Company launched: Four products in the Meters category 15+ products in Switchgear 14 products in Lighting

2. HPL developed a complete range of solar solutions across meters, switchgears, lighting and wires and cables to cater to new industry and market trends.

3. The Company also displayed a new innovative product range ‘Next Seven Wonders in the LED lighting segment at the ELECRAMA Exhibition in January 2020.

4. It provided turnkey "Retail Lighting Solutions" to major retail chains including "CCD, CD Essentials & Dmart covering more than 100 stores.

Financial overview

The Company delivered modest financial performance during FY 2019-20. Total consolidated revenue for HPL stood lower at Rs 976.5 crore in FY 2019-20 as compared to Rs 1,158.5 crore in FY 2018-19. Decline in revenue in FY 2019-20 was attributed to the COVID_19 induced disruption in the fourth quarter. The Company faced revenue losses amounting to about Rs 120 crore as March sales were severely hit due to be virus outbreak and lockdown. Notwithstanding the disruption caused by COVID_19, the Company was able to cushion the fall in operating profitability and register improved EBITDA margins backed by efficient raw material sourcing and rationalisation of overhead expenses. Net profit stood lower at Rs 59.7 crore impacted by the negative operating leverage, however, EBITDA margins improved by 117 bps to 12.8%. Adjusted for the revenue loss on account of COVID_19, FY 2019-20 revenues would have been marginally lower year over year and EBITDA and net profit would have been much higher compared to previous year.

Both B2B as well as B2C business were hit by the operation disruptions. On the B2B side, metering business was particularly impacted, while for the B2C business, the lighting & switchgear revenue growth was significantly impacted by the lockdown. The B2C business, comprising non-utility metering, switchgear, lighting and wire and cable segment revenues, contributed 49% to the total revenues. The remaining 51% was contributed by the B2B segment which included metering revenues from utilities and EESL.

During the financial year ended 31st March, 2020, there is no change of 25% or more in Key Financial Ratio and return on networth as compared to the immediately previous financial year:

Segment-wise performance

I. Metering business

Metering business revenues stood at Rs 511 crore in FY_ 2019-20 compared to Rs 610 crore in FY 2018-19 registering a degrowth of 16% YoY. EBIT margin stood at 14.9%. The decline in revenue was attributed to COVID_19 related business and supply chain disruptions. Metering segment was already impacted negatively due to the non-availability of some critical imported components from China because of COVID_19 outbreak in the country. Furthermore, inspections came to halt in March 2020, after the virus outbreak in India and the following lockdown. Both these factors led to a sharp decline in the despatches and consequent sales. However, the current metering order book of Rs 301.6 crore ensures a steady growth for the segment in near future.

II. Switchgear business

Revenue from Switchgear segment in FY 2019-20 was down 16% to Rs 190 crore in comparison to Rs 227 crore in last financial year with an EBIT margin of 18.6%. Switchgear segments witnessed healthy traction during January & February 2020 driven by network expansion. However, sales were disrupted in the fourth quarter of the fiscal because of the COVID_19 outbreak and the lockdown, which negatively impacted the Companys B2C business.

III. Lighting business

Lighting business continued to witness good growth momentum over the year despite the headwinds in the end user section. HPLs retail lighting solutions to major retail chains including CCD, CD Essentials and DMart contributed well to the segment business growth. Revenue for FY 2019-20 remained fiat at Rs 210 crore in comparison to Rs 211.7 crore in the previous fiscal year. EBIT margin stood at 11.0%. The revenue growth was negatively offset by the outbreak of COVID_19 in the fourth quarter. Adjusting for revenue lost due to COVID_19, lighting and switchgear segment revenues in Q4 would have been higher by about 15-20% on a YoY basis.

IV. Wires and Cables

Growth in Wire and Cables segment was impacted by the overall slowdown in the real estate, negative macroeconomic parameters and further impact of COVID_19 in the fourth quarter. Revenues declined 34% to Rs 66 crore, from Rs 109.8 crore last year, with an EBIT margin of 4.0%.

Management Outlook

As the industries and the organisations are slowly resuming operations, the short and medium term outlook for the Company is still dependent considerably on the trajectory of COVID_19 in India, containment of the virus and resumption of normal economic activities. Despite the current headwinds in the country, the Company is optimistic about its long-term prospects. The future growth of HPL will be led by the strong business prospect in the metering segment. This will be supported by the pickup of B2C business in the second half of the financial year.

Metering business

Growing energy sector demand, continuous investment in the infrastructure development and reforms towards revamping the transmission and distribution network will drive demand for organised players

Various State Electricity Boards (SEBs) have already begun replacing conventional meters with smart meters. Barring general hiccups during the transition period and the disruptions caused by COVID_19 outbreak, this renewed thrust by the Government will open a huge opportunity for prominent meter suppliers like HPL. The Governments focus on bringing down the AT&C losses of DISCOMs is expected to drive strong demand for smart meters over the medium-to-long term

In fact, in a major positive development, HPL received smart meter orders worth Rs 90 crore in May 2020. Increasing share of smart meter orders will further drive higher realisations and profitability in the meters segment

One-time liquidity injection of Rs 900 billion into "Power DISCOMs" is expected to improve their financial position and consequently support demand for new metering orders. This would ensure timely payment of dues to equipment suppliers over next one year

B2B Business

Assuming that the COVID_19 pandemic will be under control over the next few months, a demand recovery for HPLs B2C products (lighting, switchgear, wires & cables) is expected in the second half of the year. The pickup is likely to be driven by the macroeconomic revival with the receding of lockdown impact, further supported by the onset of the festival season and higher government spending Looking beyond these near-term challenges, on the B2C side, the Company expects to see healthy traction over the coming years, led by product development efforts, network expansion, and strong branding initiatives Currently, HPL has a robust order book of Rs 368 crore, which provides revenue visibility for the next 2-3 quarters. Further, Enquiry base for metering tenders stands at a healthy level as tenders amounting to Rs 2,000 crore have been floated or expected to be floated in the near-term HPL focusses on sustainable and profitable growth in future. To tide over the challenging period during the COVID_19 outbreak, the Company has strategised a very lean cost-structure focussing on reducing non-essential costs and improving operational and manufacturing efficiency. To implement this, it has re-adjusted employee costs and rationalised other overhead operating costs. Furthermore, advertising expenses have been reduced by about 80% in Q1 FY 2020-21

As most of the organisations are taking up work from home policy and enhancing their virtual presence during this period of social distancing, HPL also augmented their social media presence. This helped them stay connected with its customers and manage its brand visibility. HPL is confident of overcoming the short-and-medium term challenges and driving sustainable growth with the normalisation of economic activities.

Strong order book and cost rationalisation

HPL expects its robust order book and re-calibrated cost structure to support near-term performance during the pandemic.

SWOT analysis

Strengths Weaknesses Opportunities Threats
. Strong promoter support with more than 50 years of experience and senior management team with . Temporary decline in wires and cables segment . Governments huge investment plan on infrastructure development . Outbreak of coronavirus and its long-term impact on economy industry and the Company
20+ years of experience . Low market share in LV switchgears
. Strong R&D and manufacturing capabilities . Lower revenue growth in metering business . Transition to smart metering and smart grid . Challenge arising during transition from conventional to smart meter
. Established relationships with institutional customers . Growing urbanisation and universal electrification programmes like Power for All and Smart Cities
. Expertise in a technical end user sector like metering and switchgear with strict entry barriers . Raw material price fluctuation
. Focus on energy saving lighting and programmes like UJALA and SLNP . Macro-economic slowdown
. Strong pre-qualification credentials . Increasing competition

Risk management

Risks are an integral part of a business and every well organised Company will have established systems and reporting structures to manage their risk factors. HPL has a well-defined Enterprise-wide Risk Management (ERM) framework in place aimed at timely identification, evaluation and pre-emption of potential risks. Appropriate risk mitigation measures are followed up to overcome adverse situations, which may arise on account of the enterprise risks.

Macro-economic risk: An economic slowdown results in lower consumption and investment, which may slow down activities in various sectors including the power sector. This may directly impact the Companys performance.

Mitigation: The Company continues to focus on product diversification and exploring new geographies to be resilient to any economic slowdown. Strong focus on R&D and innovation enables the Company to keep launching products relevant to consumers.

Policy risk: Unfavourable or unforeseen changes in policy regulations and compliances may adversely impact the Companys business.

Mitigation: The Company has a well-diversified presence across different business segments and products, supported by strong R&D and fair and transparent practices. The Company closely monitors change in applicable statutes and new regulations and ensures readiness to compliance within stipulated timeframe.

Raw material risk: Disruption in supply of raw material or unforeseen fluctuation in prices may put at stake business profitability.

Mitigation: The Company enters into long-term favourable contracts backed by its strong leadership position, rich experience and long-standing relationships with suppliers, which protects against raw material risk.

Exchange rate risk: As HPL exports its products and imports some of its raw materials; volatility in the exchange rate might have an impact on its business.

Mitigation: The Company monitors the movements in currency exchange rate and modifies its order book correspondingly. Hedging mitigates the impact of short-term movements in currency on the businesses. Borrowing decisions are taken after currency sensitivity analysis.

Client concentration risk: Over dependence on few clients may pose risk to profitability if those clients change their supplier preference.

Mitigation: Well-diversified product portfolio, presence across business segments and end user segments, and widespread distribution of operations insulate the Company from client concentration risks. Steady cash flow is further ensured by catering to various Government bodies, institutional and retail consumers.

Geopolitical and global pandemic risk: Geopolitical tensions between different geographies can impact the Companys export business. Further, spread of pandemics such as the COVID_19 outbreak may impact its business negatively with unprecedented disruptions.

Mitigation: The Company undertakes lean cost structures policy to manage crisis. Additionally, it monitors cash flows, takes calculative decision on capex and implements cost cutting measures to survive critical time.

Internal Control Framework

The Company has a well-structured internal control mechanism, pertaining to the size and nature of the business. It follows stringent Standard Operating Procedures (SOPs), policies and guidelines to safeguard assets from unauthorised use and ensuring compliance with applicable statutes and laws. The Company undertakes regular monitoring procedure and self-assessment exercises to ensure strict adherence to compliance. The Company also safeguards its data with a Code of Conduct policy for employees. The Company promoted the highest standards of ethical code. The Company ensures that work culture in no way conflicts with business interests. Self-monitoring mechanisms are devised to maintain efficiency of business operations and to monitor fraudulent conduct. The Company has an Internal Audit team that regularly monitors the operations, business competitiveness and accuracy of accounting methods. The internal audit team independently reviews and strengthens the control measures and shares its observations and recommendations to the Management.

Human Resources

BeingamanufacturingandR&DbasedCompany,humancapital is one of the key resources to ensure business sustainability and growth. The Company believes in hiring talents and encouraging them to grow both at personal and professional levels through regular skill and personnel development training. The team of over 100 R&D professionals is the key factor driving innovation securing future growth prospects. The Company encourages a conducive work environment and aligns personal goals with Companys growth vision for a win-win situation. Ample recreational and reward and recognition activities are organised to keep the employees motivated. The total employee strength of the Company stood at 1,234 as on 31st March, 2020.

Cautionary Statement

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