Indag Rubber Ltd Management Discussions

<dhhead>MANAGEMENT DISCUSSION AND ANALYSIS REPORT</dhhead>

INDUSTRY STRUCTURE AND DEVELOPMENTS

Indian Economy

Despite intensifying challenges in the Middle East and persistent global supply chain disruptions throughout the latter half of FY 2024, the Indian economy demonstrated remarkable resilience. The IMF estimates India’s GDP growth for FY24 at a robust 6.8%, significantly exceeding the global average. This impressive performance can be attributed to factors like growing domestic demand, the government’s focus on increased capital expenditure, strong manufacturing growth, moderate inflation,a stable interest rate regime and healthy foreign exchange reserves. Even though India’s pace of growth is likely to slow down, it is still considered the fastest-growing economy in the coming years.

 

Road Infrastructure: The government remains committed to enhancing and investing in the nation’s overall infrastructure, including roads, railways, airports, ports, and power infrastructure. Highway construction surged by 20% in FY24, resulting in 12,349 kms of new roads compared to 10,331 kms in FY23. This emphasis on infrastructure development continues in the Union Budget for FY25, which has allocated 2.78 Trillion for roads and highway development, marking a 12% increase compared to the previous budget. According to ICRA, road execution is expected to grow by approximately 5-8% to 12,500-13,000 km in FY25, following the robust 20% expansion recorded in FY24. The projected pace of execution will be supported by a healthy pipeline of projects, an increased capital outlay by the Government focus on completing ongoing projects.

 

Indian Road Logistics industry: Road is the dominant mode of transport, accounting for more than 70% of freight movement in India. The India Road Freight Transport Market size is estimated at 140.3 billion USD in 2024. It is expected to reach 236.3 billion USD by 2030, growing at a CAGR of 9.1% during the forecast period 2024-2030 (Source: Mordor Intelligence). MHCVs and LCVs are India’s most widely used freight movement mode. At present, around 4 million MHCVs operate on Indian roads. Government infrastructure initiatives like the development of dedicated freight corridors are streamlining logistics operations across state lines. The outlook for the sector continues to be stable, fuelled by sustained momentum in economic activity, enhanced traction of organised trade, and continued support from varied segments like e-commerce, FMCG, retail, pharmaceuticals and industrial goods.

 

MHCV Industry: Growth in road logistics increases the usage of MHCVs. In the last 3 years, MHCVs Industry registered a sales volume growth of 49%, 28% and 9%, respectively. The growth in respective years were aided by pent-up demand post covid-19, an increase in replacement demand, improvement in the macro-economic environment and healthy traction in the e-commerce, construction, mining FMCG, retail, pharmaceuticals and industrial goods sectors. As per ICRA, MHCVs volumes are expected to grow at CAGR for 4% for the next 2 years.

 

Indian Tyre Industry

ATMA estimate the Indian tyre industry to increase its revenue to USD 22 billion by FY32 from USD 9 billion in FY2022. The growth in Indian Tyre Industry will be majorly led by commercial vehicle and passenger vehicle segment attributable to healthy demand from domestics OEMs and Replacement market, which would be amply supported by increased government spending on infrastructure, increased consumer demand as well as increased mining and construction activities. Furthermore, the tyre industry in India has the potential to become a global leader in Indian manufacturing, especially with the current search for alternatives to China due to geo-political tensions. The industry exemplifies the Make in India initiative, having achieved self-reliance and emerging as a major exporter of tyres to over 170 countries, including the US and Europe as evidenced by the rising demand for Indian-made tyres.

The top 5 domestic tyre manufacturers have incurred capital expenditure of around Rs 30,000 crores over last 4-5 years. As a result, the capacity utilization currently has reduced. Despite the same, the tyre industry is expected to incur a capital expenditure of more than Rs 20,000 crores over next 4-5 years. The planned spending is aimed primarily at adding manufacturing capacity, debottlenecking of factories, upgrading technology and research and development.

 

Radialisation in Indian Tyre Industry

In last 10 years, radialisation in the tyre industry have increased from 21% in MHCV segment in FY13 to around 60-62% in FY23, while in LCVs it grew from 25% in FY13 to 40-42% in FY23. In the long run, penetration of radial tyres expected to hit ~68-72% in the MHCV segment and 42-44% in the LCV segment by FY26, aided by higher penetration of radial tyres and narrowing the price differential between bias and radial tyres and increasing awareness among medium and small freight operators about the merits of radial tyres.

 

Introduction of Extended Producer Responsibility in Tyre Industry

The Ministry of Environment in India published Extended Producer Responsibility ("EPR") for Waste Tyre Policy in July 22. India’s EPR program targets the tyre industry to promote eco-friendly disposal of used tyres and promote circular economy.

 

Key Aspects:

• Mandatory Recycling Targets: Producers are required to meet escalating recycling targets: i.e. of 70% of the weight of new tyres manufactured or imported in FY2022 for FY24. This target increases to 100% in FY25 and subsequent years..

• EPR Certificates: Compliance is achieved through purchasing EPR certificates from authorized recyclers or retreaders. This system financially incentivizes the development of a robust tyre recycling infrastructure in India.

• Transparency and Accountability: An online portal facilitates registration and reporting for producers, recyclers and retreaders, ensuring transparency and accountability throughout the process.

 

Indian Tyre Retreading Industry

The retreading of tyres is a well-established practice within the commercial vehicle and aircraft sectors, driven by considerations of environmental sustainability, economic benefits and safety in usage. This process is particularly widespread in the aviation industry, where over 90% of globally operational aircraft tyres are retreads. In the commercial vehicle segment, the retreading rate is also significant, hovering around 50%-60%.

In India, the retreading industry is highly fragmented, with over 10,000 active retreaders. While approximately 45-50% of the market remains unorganized, the presence of established players drives advancements in technology and quality. Research and development investments have led to improved tread compounds and bonding materials, enhancing the durability and performance of retreaded tyres. Key Drivers fueling growth in the Indian retreading industry:

 

Enhanced Road Infrastructure: Improved roads promote smoother, longer journeys. This extends tyre lifespan, reduces damage to both tyres and vehicles, and increases the supply of tyres suitable for retreading. Key benefits include: o Increased distance traveled in less time o Accommodation of higher tonnage vehicles with more tyres o Reduced vehicle downtime and extended tyre life

 

• Growth in Vehicle Sales: The recent surge in Medium and Heavy Commercial Vehicle (MHCV) sales directly translates to a future increase in tyres available for retreading.

 

• Favorable Regulatory Guidelines: Policies including GST implementation, E-way bills, Extended

Producer Responsibility (EPR), and anti-overloading regulations have benefited the industry. These policies: o Formalize the industry and reduce unorganized operators o Drive the creation of structured value chains o Reduce tyre damage and promote sustainability

 

• Growing Environmental Consciousness: Retreading supports sustainability by reducing waste and lowering carbon emissions, aligning with increasing environmental awareness.

 

• Increasing Radialisation Trend: Radial tyres, with their superior structural strength and suitability for multiple retreads, now hold approximately 60% market share in the truck and bus segment and are growing steadily.

 

• Inclination to Electric Vehicles: While internal combustion engines may decline, tyres remain critical. New tyre designs for Electric Vehicles present a future opportunity for the retreading industry.

Our growth in FY24 aligns with then above factors and positive trends observed in key economic indicators, including GDP growth, improvements in tyre radialisation, MHCV Sales, increase in volumes in E-way bill and toll transactions indicating higher fleet utlisations, construction and mining activities, expanding road infrastructure and favourable government guidelines.

 

OPPORTUNITIES AND THREATS

Tyres companies are embracing a holistic approach to tyre management, recognizing the value of retreading. However, the surge in demand for new tyre in both domestic and international market necessitates higher capital investments, potentially diverting focus from retreading. To balance these demands, new tyre companies are partnering with retreading specialists. This promotes sustainability and optimizes tyre lifecycles within a circular economy.

Furthermore, tyre retreading industry benefits from a confluence of positive factors. Rising industrial and construction activity, buoyed by supportive government initiatives, is driving demand for tyres. Furthermore, growth in key sectors like infrastructure, real estate, transportation and logistics is exerting additional upward pressure on tyre demand. Additionally, the increasing adoption of radial tyres, the formalization of industry value chains and a sizable replacement market for used tyres are expected to contribute to the industry’s momentum.

However, the current scenario of increasing commodity prices, inflation and supply chain disruptions could have a negative impact on the Industry. Indag is optimistic for robust near-term growth based on the stabilisation of commodity prices and improvements in supply chains, which will translate to stronger profit margins.

In addition, we must acknowledge that the aforementioned factors are not the only potential disruptors. Several other developments could create a more challenging business environment. These include:

• The ongoing Red Sea crisis, which continues to disrupt global supply chains.

• China’s economic reopening, which could intensify competition for critical resources.

The uncertain resolution of geopolitical tensions, particularly the Russia-Ukraine conflict,which could have unforeseen economic consequences.

• Potential production cuts by OPEC, leading to a rise in global oil prices.

Close monitoring of these evolving trends is essential. By proactively developing strategies to mitigate their impact, we can safeguard operational efficiency and maintain healthy profit margins.

 

OUTLOOK

Retreading is a sustainable, safe and cost-effective alternative to purchasing new tyres. It saves vast amounts of raw materials (oil, natural rubber, steel), reduces carbon emissions and decreases landfill waste. With sustainability a top priority, the demand for high-quality retreading solutions remains strong. Additionally, the growth of the retreading industry is fueled by several factors: the demand for sustainable and cost-effective tyre options, the expansion of the logistics industry, improved road infrastructure, increasing radialisation, higher capacity trucks and regulations against overloading. Additionally, policy changes such as on account of demonetization and the implementation of GST are formalizing the industry. This shift towards formalization presents significant opportunities for growth, leading to the adoption of advanced technologies that will further enhance the quality and appeal of branded retreaded tyres.

Over the past year, our company has executed a multifaceted strategy to strengthen our presence within the tyre retreading industry. This strategy centers on continuous quality enhancements and proactive outreach initiatives. We’ve forged deeper connections with established retreaders and developed partnerships directly with fleet owners. These efforts create tangible value for fleet owners and operators by reducing tyre costs and optimizing cost per kilometer, bolstering our market share and increasing our wallet share with existing customers. Indag targets growth across multiple avenues, including: increased open market sales, expansion of our branded franchise network, a larger share of state road transport corporation business and strategic entry into promising export markets. As India’s sole comprehensive retreading ecosystem provider, Indag offers an unmatched value proposition. Our dedication to quality products, our vast distribution network and our skilled workforce fuel our ongoing expansion. With sufficientexisting production capacity, we strategically invest in R&D to maintain our technological edge. Indag’s focus on market education drives long-term sustainable growth for the entire industry. Our pan-India footprint – encompassing over 200 dealers, more than 1400 retreaders, 50+ dedicated sales and service teams and 15 strategically positioned depots – grants us nationwide accessibility. Furthermore, international expansion into promising markets such as the Middle East, Africa and Eastern Europe strategically positions Indag for continued success.

 

RISK AND CONCERNS

The company has laid down a well-defined risk management mechanism covering the risk mapping and trend analysis, risk exposure, potential impact and risk mitigation process. An ongoing and regular excercise is being carried out to identify, evaluate, manage and monitor various risks. The Audit Committee and the Board periodically review the risks and suggest steps to be taken to manage/ mitigate the same through a properly defined framework. During the year, no major risks were noticed, which may threaten the existence of the company.

 

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has adequate internal control systems and procedures designed to effectively control the operations at its Head Office, Plants and Depots. The internal control systems are designed to ensure that the financial and other records are reliable for the preparation of financial statements and for maintaining assets. The Company has well designed Standard Operating Procedures.

Independent Internal Auditors conduct audit covering a wide range of operational matters and ensure compliance with specified standards. Planned periodic reviews are carried out by Internal Auditors. The findingsof Internal Audit are reviewed by the top management and by the Audit Committee of the Board of Directors.

Based on the deliberations with Statutory Auditors to ascertain their views on the financial statements including the Financial Reporting System and Compliance to Accounting Policies and Procedures, the

Audit Committee was satisfied with the adequacy and effectiveness of the Internal Controls and Systems followed by the company.

 

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The financial statements have been prepared in accordance with the requirements of the Companies Act, 2013 and applicable Accounting Standards issued by the Institute of Chartered Accountants of India.

Sl. No. Particulars	Year ended		Year ended
	March 31, 2024	March 31, 2023	March 31, 2024	March 31, 2023
	Standalone		Consolidated
1. Revenue from operations	25,118.46	24,385.53	25,118.46
Other income	1,004.34	838.79	988.20
2. Total income	26,122.80	25,224.32	26,106.66
3. Expenses
Cost of materials consumed	16,252.93	17,475.95	16,337.74
Purchases of stock in trade and services	407.93	67.55	407.93
Changes in inventories of finished goods, stock-in-trade and work in progress	275.12	(132.25)	187.80
Employee benefits expense	2,480.47	2,211.55	2499.95
Depreciation and amortisation expense	526.96	445.71	529.98
Finance costs	62.73	32.89	70.65
Other expenses	3,933.20	3,398.87	4,027.87
4. Total expenses	23,939.34	23,500.27	24,061.92
5. Profit before Share of Profit/ (loss) of Joint Venture and tax	2,183.46	1,724.05	2,044,74	Not applicable
6. Share of loss of Joint Venture	-	-	-
7. Profit before exceptional items	2,183.46	1,724.05	2,044,74
8. Exceptional Items	-	-	-
9. Profit/(loss) before tax	2,183.46	1,724.05	2,044,74
10. Tax expense
Current tax	487.82	404.06	487.82
Deferred tax	20.74	(2.47)	(1.40)
Income tax adjustment for earlier years	-	(1.20)	-
11. Total tax expense	508.56	400.39	486.42
12. Profit after tax	1,674.90	1,323.66	1,558.32
13. Profit / (loss) after tax from discontinued operations	-	-	-
14. Profit/(loss) for the year	1,674.90	1,323.66	1,558.32
15. Other Comprehensive Income (net of tax)	456.74	(166.91)	456.74
16. Total Comprehensive Income	2,131.64	1,156.75	2,015.06

 

HUMAN RESOURCE DEVELOPMENT AND INDUSTRIAL RELATIONS

During the year, the Company had cordial relations with workers, staff and officers. The shop floor management is done through personal touch, using various motivational tools and meeting their training needs. The company has taken steps for safety of employees and implemented regular safety audit, imparted machine safety training, wearing protective equipment etc.

The Company believes in empowering its employees through greater knowledge, team spirit and developing greater sense of responsibility. On the job training as well as classroom training by way of seminars, conventions, functional and managerial programs for capability development and building technical expertise were attended by respective functions such as Sales & Marketing, Finance & Accounts, Procurement, Supply Chain, HR etc. There were 309 regular employees as at March 31, 2024.

 

SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

The significant changes in the key financial ratio of the Company, which are more to the previous year are as given below-

Sl.No. Particulars	FY 2023-24	FY 2022-23	Change (%)	Explanations
(i) Debt service Coverage Ratio	44.21	66.97	-34%	Higher profit before tax, finance cost and depreciation but increase in finance cost due to interest on lease liabilities
(ii) Return on Equity/Net Worth Ratio	10.06%	5.60%	79.70%	Increase in other comprehensive income due to better income from investments and profit operating
(iii) Return on Investment	8.95%	1.42%	528.65%	Due to improvement in market situation

 

	For and on behalf of the Board of Directors
	Nand Lal Khemka
Place : New Delhi	Chairman & Managing Director
Date : May 14, 2024	DIN: 00211084