Economy Overview Global Economy
The COVID-19 pandemic impacted businesses globally and disrupted
economic growth since 2020. Businesses across the world suffered supply chain
interruptions even as demand for products and services declined a situation that worsened
with government mandated closures. By 2021, just when most of these effects were
significantly reduced and the world economy was struggling to recover from the pandemic,
the Russia-Ukraine crisis emerged. Before the war, supply-demand imbalances and government
aid during the pandemic had led to inflation across nations and necessitated tightening of
the monetary policy. Recent lockdowns in China are expected to cause new bottlenecks in
global supply networks. In 2022 and 2023, the IMF forecasts a worldwide economic expansion
to stabilise at 3.6%, down from 6.1% in 2021. The future of the global economy remains
uncertain as geopolitical tensions persist, commodities prices stay elevated, and
withdrawal of monetary accommodation gains momentum. Both capital outflows and rising
commodity prices exacerbate inflationary pressures in emerging nations.
Indian Economy
The Indian economy was poised for a recovery following the second wave
of the pandemic, with steady resurgence in both industry and services sectors. Repeated
COVID-19 variant breakouts, however, led to disruptions in the supply chain, and, more
lately, a high inflation rate has created challenges for policymaking. A major increase in
infrastructure spending was undertaken to restore medium-term demand, and substantial
supply-side reforms were enacted to position the economy for long-term growth. In FY
2021-22, the NSO?s second advance estimates reported that the GDP had increased by
8.7%.
A survey conducted by the Reserve Bank of India (RBI) expects growth
rate to decline to 7.2% in FY 2022-23 and to 6.5% in FY 2023-24. Although international
impediments too are contributory factors in slowing India?s economic progress, the
country has remained resilient in the face of multiple obstacles. The RBI has projected
the headline Consumer Price Index (CPI) inflation rate at 5.7% in FY 2021-22 and
5.5% in FY 2022-23 (new base 2012=100). To combat inflation, the RBI raised the policy
repo rate by 50 basis points to 4.90%. Additionally, the Union Budget for FY
2022-23 included growth-oriented features with an emphasis on building long-term strength
by leveraging private investment, while ensuring policy stability and inclusivity.
Significant positives include the 35% rise in capital expenditure, large infrastructure
projects such as construction of 25,000 kilometres of roads and highways; 100 cargo
terminals; Project GatiShakti, the 5G network; laying of bre optic cables; and the latest
PLI programmes. Moreover, reduction in steel prices is expected to cheer the entire
manufacturing sector just as government assistance for research and development in the
fields of renewable energy, green transportation, and semiconductors will benefit the
automotive industry.
Source: SIAM press release, Steel prices set to bend on weak season
after a two-year rally (crisil.com)
Industry Overview
Global Auto Vehicle Market
Building on a resilient economic recovery, globally, the automobile
manufacturing industry is accelerating into a reimagined future. While original equipment
manufacturers (OEMs), component suppliers, and consumers have responded effectively to
major concerns such as supply chain restrictions following the pandemic and geopolitical
tensions, a robust end-user demand has translated into production growth. Consumer
confidence, lower interest rates, and positive employment statistics have contributed to a
robust market for durable goods, especially vehicles. World auto production grew by 3.1%
to 80.14 million units in 2021 as compared with 77.71 million units produced in 2020. In
Europe, political pressure for compliance with environmental, social, and governance (ESG)
norms and the race to a low-carbon economy have strained business models, but presented
opportunities to test out new mobility services. In 2021, Europe registered a negative
year over year (YoY) production growth of about 3.6%, while regions like South America,
Africa, and Brazil recorded double digit growth of about 17.5%, 16.4% and 11.6%,
respectively.
Global auto sales increased to 82.68 million units in 2021 as compared
with 78,774,320 units sold in 2020. The demand for passenger vehicles grew from 53.92
million to 56.4 million units in 2021, while orders for commercial vehicles grew from
24.86 million to 26.29 million units during this period. The outlook for 2022 appears more
positive than the previous year, but does not indicate a risk-free future. The global auto
sector is accustomed to being demand-driven, but despite the gradual improvement,
supply-side issues may continue to affect the market in 2022. Market forecasts for 2022
remain cautiously positive, with sales of light vehicles expected to increase moderately.
There are indications that the semiconductor supply chain will show signs of stability in
the second half of 2022, with brighter times ahead for the industry.
Source: Global economy and automotive industry outlook 2022 - Wallenius
Wilhelmsen, KPMG report, 2022 and the global sales picture - Just Auto (just-auto.com)
Indian Automobile Industry
According to the Society of Indian Automobile Manufacturers (SIAM), the
automobile industry manufactured 22.93 million vehicles in FY 2021-22, compared with 22.65
million vehicles in FY 2020-21, recording a YoY growth rate of 1.23%. The two-wheeler
vehicles segment dominated the market in terms of volume due to India?s young
population and an expanding middle class. An increased interest by firms to explore rural
markets contributed to the expansion of the sector. India is a major exporter of
automobiles, and exports are anticipated to rise rapidly in the near future. In FY
2021-22, India exported 5.62 million vehicles as compared with 4.13 million vehicles in
the previous year, registering a YoY growth of 36%.
Additionally, various initiatives by the Indian government and major
automotive manufacturers like the production linked incentive (PLI) scheme for the
automobile and auto component industries with a budget of 26,000 crore over the
five-year period beginning in FY 2022-23, are expected to propel India as a global leader
in the two-wheeler and four-wheeler markets by 2022. About 20 original equipment
manufacturers (OEMs) have already been granted incentive approval in February 2022. The
scheme will offer an incentive of up to 18% to promote new investments in the local supply
chain of AAT products. This scheme will also serve to bolster the Make in India initiative
for the automobile industry.
Rising commodity prices exerted substantial pricing pressure on the
industry in 2021, resulting in several price rises across vehicle classes. In FY 2021-22,
the Indian automobile sector sold 17.51 million vehicles, compared with 18.62 million
vehicles in FY 2020-21, registering a YoY growth rate of 6.32%. The Indian automobile
sector, having built a solid foundation in FY 2021-22 despite a semiconductor shortage
that hampered output, is optimistic about reaching pre-crisis sales volume levels in FY
2022-23.
India?s Two-Wheeler industry
More than half of the country?s total fuel sales is consumed by
the two-wheeler segment, that has a direct correlation with the price of petrol.
Additionally, factors such as the shortage of semiconductors and high container fees have
hampered manufacturing by OEMs. Production in the two-wheelers segment declined to 17.71
million in FY 2021-22 from 18.35 million in FY 2020-21. Demand for motorcycles and
scooters was also impacted throughout the year by rural distress and rising ownership
costs due to rising petrol prices. Even over the holiday season, sales of two-wheelers,
particularly motorbikes, failed to gain momentum, leaving companies with a huge pile of
unsold inventory. During FY 2021-22, sales of two-wheeler vehicles that represent the
least expensive means of private transportation, declined by 11% annually, falling from
15.12 million in FY 2020-21 to 13.47 million vehicles.
India?s Three-Wheeler industry
The three-wheeler industrial segment is intimately associated with
India?s robustly growing economy. In comparison with the previous year, three-wheeler
sales grew from 219,446 in FY 2020-21 to 260,995 units in FY 2021-22, growing at an
annual rate of 18.9%. Due to increased demand and need for conveyance of commodities to
rural and semi-urban areas, sales by goods carriers are soon expected to return to
pre-COVID levels. The cargo segment is expected to recover rapidly, especially in CNG
(Compressed Natural Gas) and EV (Electric Vehicle) variants.
EV Market
At the United Nations climate change conference (COP21), India had
agreed to cut its carbon footprint by 33-35% below 2005 levels by 2030. It also pledged to
boost the proportion of electricity derived from non-fossil fuels to 40% by 2030. To reach
its goal, India needs to transition its power generation to renewable energy sources and
move away from fossil fuel-based transportation. The move toward greener transportation
mobility technologies can play a vital role in achieving the Nationally Determined
Contribution (NDC) committed greenhouse gas (GHG) emission target. Government subsidies
will certainly continue to favour low-emission vehicles, to boost electric vehicle
production. Truly, India?s EV industry has experienced remarkable growth in the past
few years. According to the Society of Manufacturers of Electric Vehicles (SMEV), High
Speed Sales reached 231,378 units (Excluding Low Speed and 3 States - Madhya Pradesh,
Telangana & Andhra Pradesh). In FY 2020-21, registration of EV sales touched 236,802
units, with the e-2W segment comprising more than 60% of the market. Remarkably, the
low-speed segment represented 71% of e-2W sales. In FY 2021-22, the high-speed sector
accounted for 61% of e-2W sales, thus reversing the previous trend. With the expansion of
e-commerce, the e-3W (Cargo) segment accounted for 12% of the e-3W market, up from 4% in
FY 2019-20. The e-bus and e-4W segments have also shown triple-digit growth from a low
foundation.
Increasing fuel costs are causing a shift towards EVs, particularly in
the lighter car categories, but this needs to be backed by an adequate charging
infrastructure to sustain the ecosystem. As of March 2022, India has a total of 1,742
functioning public EV chargers, with 9 cities accounting for more than 50 percent: Surat,
Pune, Ahmedabad, Bengaluru, Hyderabad, Delhi, Kolkata, Mumbai, and Chennai. The limited
number of viable models, particularly in the bigger vehicle classes, has hampered EV
adoption in several markets, among other considerations. The robust pipeline of future EV
model launches over the next two years (2022 and 2023) will provide consumers with more
options. Supportive policies, drop in battery prices, availability of charging
infrastructure, and supply chain localisation are essential aspects that need to be
addressed besides adoption of market-specific solutions to fuel the rise of electric
vehicles in India.
Source: Global economy and automotive industry outlook 2022 - Wallenius
Wilhelmsen, KPMG report
Indian Auto Component Industry
The burgeoning presence of global Original Equipment Manufacturers
(OEMs) in the Indian auto components business has led to growth in the localisation of the
components. Even though the performance of the automotive industry was below expectations,
there are signs that vehicle demand will rebound in the coming months. This, along with
the auto industry?s increased emphasis on deep-localisation and the government?s
recent announcements of PLI schemes on Advanced Chemistry Cell (ACC) batteries and auto
and auto components, will facilitate the creation of a cutting-edge automotive value chain
and the development of India into an attractive alternative source of high-end auto
components. For the period April 2021 to September 2021, the automotive component
industry?s revenue was 1.96 Lac Crore (USD 26.6 billion), representing a 65%
increase over the first half of the previous year. Despite slow vehicle sales due to
supply side challenges, particularly in the first quarter, the auto component business
experienced a stunning turnaround in FY 2021-22.
Exports of auto components increased from USD 9 billion as recorded for
the nine months period in FY 2020-21 to USD 13.9 billion until December 2022. This growth
of 54% was mostly attributable to a low base effect, coupled with the ongoing growth
momentum in advanced nations and the consequent increase in the global demand for imports
besides favourable commodity prices. In the total exports from India, Europe accounted for
31%, North America for 32%, Asia for 25%, Latin America for 5%, Africa for 5% and the rest
of the world for 1% as of December 2022. In line with exports, imports increased by about
51% YoY from USD 9 billion recorded in December 2021 to an all-time high of USD 13.5
billion in December 2022. The increase in exports was, however, marginally more than the
increase in imports due to higher growth rates in advanced economies, that served to
improve the trade balance. Asia accounted for 64%, Europe for 27%, North America for 7%,
and the rest of the world for 2% of the total imports recorded until December FY
2021-22. Most auto component makers have now recovered, and the investment cycle has
begun. Despite concerns of another pandemic wave, the industry is cautiously optimistic
about the Indian economy and automotive sector.
Company Overview
India Nippon Electricals Limited (hereafter referred to as ‘INEL,
or ‘the Company?) is a major manufacturer of electronic ignition systems for the
automobile sector, with a particular emphasis on two-wheeler (2Ws), three-wheeler (3Ws),
small gasoline engines and portable gensets. INEL, founded in 1984, provides its products
to India?s foremost automobile manufacturers. INEL enjoys a market leadership
position in the electronic ignition system products. The Company continues to expand its
product portfolio and capabilities with future technologies such as sensors, controllers,
converters and engine control units etc., in addition to its offerings for internal
combustion engines, the Company has recently entered the market for electric vehicles.
Over the years, the Company has developed a range of high-quality, differentiated
products, which has allowed it to establish a solid customer base in India and an
expanding clientele abroad. The Company remains committed to increasing its aftermarket
and export operations. INEL has built a presence in the international market, especially
in North America, Japan, and Europe.
Expanding Product Offerings
INEL has proved to the two-wheeler industry its capacity to adapt to
changing business practices and technology besides respond to customer needs in the areas
of quality and service over the years. The Company?s product portfolio includes the
following: Electronic Ignition System INEL is focusing on expanding the ignition
system products globally and increasing its market share in domestic market.
INEL Controller Portfolio
Various types of controllers such as EGR Controller, Governor Control
Unit, Immobiliser, DC-DC Controller, Radiator Fan Controller, ISG Controller and Body
Control Module form INEL?s Controller Portfolio.
INEL Sensors Portfolio
Throttle Position Sensor, Speed Sponsor, Oil Level Sensor, TBAP Sensor,
TMAP
Sensor, Coolant Temperature Sensor, Differential Pressure Sensor, RPAS
Ultrasonic Sensor, Side Stand Sensor etc. are other products covered in the Company?s
Sensors Portfolio.
E-Mobility Product Portfolio
The Company is continually developing its product line, which will
facilitate INEL?s growth in the e-Mobility space. INEL will continue to prioritise
the development of new products for segments of the electric vehicle market and grow the
worldwide presence of existing goods to advance in tandem with the industry and be future
prepared. Various e-Mobility components such as Immobiliser, HMI, Side Stand Sensor, TPMS,
VCU/BCM, Motor Controller, DC-DC Converter are included in the e-mobility portfolio of the
Company.
World-Class Manufacturing Facilities Assisted by an Internal R&D
Centre
Three production plants of the Company are located in India, one each
in Tamil Nadu (Hosur), Puducherry, and Haryana (Rewari District). INEL has a technological
collaboration with Mahle Electric Drives Japan Corporation, Japan. The Company also has a
Research and Development Centre recognised by the Government of India?s Department of
Scientific and Industrial Research. All manufacturing facilities are accredited with ISO
14001:2015 (Environmental Management Systems) and ISO 45001:2018 (Occupational Health and
Safety Management Systems) certification.
Financial Overview
Standalone Financial Snapshot (In Lacs)
| Particulars |
FY |
FY |
YoY |
|
2020-21 |
2021-22 |
Change |
| Gross Sales |
48,030 |
56,303 |
17.22% |
| Net Sales |
47,770 |
55,727 |
16.66% |
| Operating |
3,604 |
3,799 |
5.41% |
| Profit |
|
|
|
| Depreciation |
1,035 |
1,285 |
24.15% |
| Profit After Tax |
4,070 |
4,026 |
-1.08% |
| (PAT) |
|
|
|
The growth in car sales during FY 2021-22 had a positive influence on
the Company?s financial performance. INEL recorded net sales worth 55,727 Lacs with
17% increase in FY 2021-22 as compared with 47,770 Lacs in FY 2020-21.
Operating profit decreased by 5.41% from 3,604 Lacs in FY 2020-21 to
3,799 Lacs in FY 2021-22. The Company continues to incur required
costs and assist employees and their families. Other expenses also increased due to
implementation of social distance norms.
The net profit decreased by 1.08% to 4,026 Lacs in FY 2021-22 due to
reduced operating profit and greater depreciation and profit on sale of land. The profit
of 137.99 Lacs recognised in FY 2021-22 was somewhat offset by reduced income tax
expenditures, as the Company choose to follow the lower income tax rate under the Income
Tax Act.
The Company has declared an interim dividend of 6.25 per share on
face value of 5 per share which will be the final dividend for the year ended 31st
March, 2022.
INEL is a zero-debt company with cash and liquid investments of around
634 Lacs as on 31st March, 2022.
Details of Key Standalone Financial Ratios that registered more than
25% change during FY 2021-22
| Ratios |
FY |
FY |
YoY |
|
2020-21 |
2021-22 |
Change |
| Debtors Turnover |
4.84 |
4.90 |
1.24% |
| Inventory Turnover |
7.88 |
8.47 |
7.49% |
| Interest Coverage Ratio |
- |
- |
|
| Current Ratio (x) |
2.64 |
3.04 |
15% |
| Debt Equity Ratio |
- |
- |
|
| Operating Profit Margin (%) |
7.54% |
6.82% |
-0.72% |
| Net Profit Margin (%) |
8.52% |
7.22% |
-1.30% |
| Return on Net Worth – RoNW |
9.04% |
8.16% |
-0.88% |
As of 31st March, 2022, the Company?s Balance Sheet
shows no debt. Thus, the Interest Coverage Ratio and the Debt-to-Equity Ratio are not
relevant.
In fiscal year 2021-22, the operating profit margin decreased from
7.54% to 6.82%. In fiscal year 2021-22, the net profit margin decreased from 8.52% to
7.22%. The drop in operating profit margin was primarily attributable to a shift in the
sales product mix, a sharp increase in the price of steel and copper, and certain
unabsorbed charges resulting from the COVID-19 lockout. Therefore, return on net worth
decreased to 8.16% in fiscal year 2021-22 from 9.04% in fiscal year 2020-21.
COVID-19 Impact
The second wave of COVID-19 was expected to have a negative impact on
demand for the Company?s products. The management has analysed the potential impact
of the pandemic on the Company?s business operations and financial position and
identified no significant negative impact on sustainability. Moreover, the Company is
debt-free and has sufficient liquid assets to honour its payments and obligations as they
become due. The administration will continue to monitor any major modifications to its
COVID-19 effect assessment due to future economic conditions and future unpredictability.
Business Outlook
In terms of productivity, cost positioning, market positioning, and
technological positioning, INEL has taken remarkable strides. Consequent to the timely
introduction of numerous BS-VI goods with short lead times, cost management measures, and
investment in state-of-the-art equipment, the Company?s performance has improved,
resulting in more efficient manufacturing processes. The Company with a solid, debt-free
balance sheet will benefit from the improving economic climate and investments in
cutting-edge technologies. INEL will continue to capitalise on expansion of its factories
and a diversified product range, investment in new line opportunities such as electric
vehicles, besides capitalising on its expanding exports and aftermarket segments, with
enhanced research and development capacities.
Risk and Mitigation
Industry Risk: Automobiles are a vital element of the
Company?s operations, and their demand is determined by the state of the national
economy. Consequently, any decline in vehicle demand or production will have a substantial
effect on the Company?s operations.
Mitigation: The Company continually aims to expand
organic revenue and broaden its customer base across vehicle segments. Even in a
challenging climate, the Company is well positioned to surpass the industry?s growth
due to its improved product mix, geographic presence in overseas markets, superior
technology, comprehensive cost reduction system, and liquidity build-up.
Raw Material Risk: The Company is subject to price fluctuations
in raw materials, which comprise a large portion of its total costs. Any disruption in
availability or significant increase in the price of raw materials will diminish margins.
Mitigation: To protect its margins against price
volatility, the Company has cost compensation agreements with all its main clients, that
allow it to pass on price increases.
Peer Risk: Lucrative development possibilities of the automobile
and auto components industries continue to attract new competitors to the market, whereby
the Company could experience heightened competition from its rivals.
Mitigation: The Company has strong and long-standing
direct relationships with a multitude of worldwide OEMs. It has continued to invest in
novel goods and improved quality control to maintain its competitive advantage.
Consequently, INEL?s market share has increased despite the extraordinary COVID-19
pandemic.
Customer Concentration Risk: The Company provides and sells
vehicle components to original equipment manufacturers in the Indian automobile sector.
Any reduction in demand from original equipment manufacturers due to decline in demand
from end users could impact the Company?s business.
Mitigation: The Company has continually built new
clientele by delivering innovative items with the assistance of cutting-edge tools and a
design centre. Additionally, INEL strives to boost its business with existing customers.
In addition to satisfying domestic demand, the Company capitalises on the lucrative
aftermarket and export markets.
Technology Obsolescence Risk: Failure or delay in obtaining the
requisite level of technological sophistication or accurately gauging market needs could
have a negative effect on the Company?s performance and financial condition.
Mitigation: With expanded R&D capabilities, the
Company has continually supplied cutting-edge technology products. The Company engages in
research and development to meet the market?s demand for new technologies and
products, based on a precise grasp of market requirements. It has an in-house research and
development centre to keep up with worldwide trends.
Human Resource
The Company believes that a committed talent pool is key to achieving
outstanding business success. Human resources are the most important factor in the
Company?s expansion plan, and the Company recognises and prioritises their
contribution. Its HR policies are constantly geared toward attracting, retaining, and
cultivating the best talent necessary for business?s expansion. The Company focuses
on providing opportunities for growth and improvement of its employees? skill sets at
all organisational levels. Regular trainings are provided for personnel at all
organisational levels to ensure skill growth and self-growth. As part of the Employees
Engagement Initiative, 25 people undertook the People Manager Workshop conducted by the
Great Place to Work? (GPTW) Institute. During the year, we had 56 teams participating in
23 external competitions and winning 51 awards. INEL was awarded the prestigious
‘Great Place to Work? rating on its first application attempt. As of 31st
March, 2022, the total number of employees on the Company?s payroll was 561.
Corporate Social Responsibility
INEL is committed to actively contribute to the development of a
sustainable society and provide economic value. Multiple projects are conducted with
improved governance and commercial ethics. A Corporate Social Responsibility (CSR)
Committee has been established to create and recommend a comprehensive CSR Policy to the
Board. The objective is to positively impact the communities in which the Company operates
and build its reputation as a dependable, credible, and responsible business partner.
During the period under review, the Company spent 122.07 Lacs on CSR initiatives as
against a CSR budget of 116.15 Lacs with a primary focus on skill development, promoting
education in rural regions, conserving natural resources through tree planting around the
factory, besides supporting measures for promotion of health care and sanitation,
protection of heritage monuments etc. The Company has identified community-supporting
projects and deepened its partnerships with them. Due to the friendly ties between
employees and their families, the Company has never experienced any labour disputes.
During the COVID-19 pandemic, the Company supported the families of village mechanics
whose shops were shuttered.
Internal Control Systems and Adequacy
The Company?s system of internal controls for business processes,
operations, financial reporting, fraud prevention, and compliance with applicable laws and
regulations is sufficient. The audit function of INEL provides reasonable assurance on the
effectiveness and efficiency of operations, protection of assets, accuracy of financial
records and reports, and the observance of applicable laws and regulations. The Company
increases its internal control systems and information accuracy on a real-time basis by
employing an ERP system that enables improved analysis and control. Regular internal
audits and inspections guarantee that responsibilities are carried out successfully. The
Audit Committee, in conjunction with management, conducts periodic reviews of the
performance of statutory/internal auditors, the adequacy and effectiveness of internal
control systems, and suggests improvements for strengthening the existing control system
in the light of changing business requirements.
Cautionary Statement
Statements in this Management Discussion and Analysis section that
describe the Company?s objectives, expectations, or make predictions may be
forward-looking within the meaning of applicable laws and regulations. These
forward-looking statements by the Company are based on certain assumptions and
expectations of future events. The Company cannot guarantee that these assumptions and
expectations are accurate or will be realised. The Company assumes no responsibility to
publicly amend, modify or revise forward-looking statements based on any subsequent
developments, information, or events. Thus, the Company?s actual performance/ results
could differ from projected estimates made in the forward-looking statements. Discussion
on the Company?s operation outcomes and financial condition should be read together
with the audited, consolidated financial statements and notes to these statements as
included in the Annual Report.
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