FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may contain
certain statements describing the Companys objectives, expectations or forecasts that
appear to be forward-looking within the meaning of applicable securities laws and
regulations while actual outcomes may differ materially from what is expressed herein. The
Company assumes no responsibility to publicly amend, modify or revise forward looking
statements, on the basis of any subsequent developments, information or events. Actual
results may differ materially from those expressed in the statement. Some important
factors that could influence the Companys operations comprise pricing and demand &
supply conditions in global and domestic markets, changes in government regulations, tax
laws, litigation, industrial relations, economic & geo-political developments,
conditions such as COVID-19 pandemic and such other factors.
ECONOMIC AND INDUSTRIAL HIGHLIGHTS
The Global Economy
The world economy continues to suffer from a series of destabilizing
shocks. After more than two years of pandemic, the Russian Federations invasion of
Ukraine and its global effects on commodity markets, supply chains, inflation, and
financial conditions have steepened the slowdown in global growth. In particular, the war
in Ukraine is leading to soaring prices and volatility in energy markets, with
improvements in activity in energy exporters more than offset by headwinds in most other
economies. The invasion of Ukraine has also led to a significant increase in agricultural
commodity prices, which is exacerbating food insecurity and extreme poverty in many
emerging market and developing economies (EMDEs). - Global Economic Prospects Report 2022
by World Bank.
The report also states that Growth in emerging market and developing
economies (EMDEs) this year has been downgraded to 3.4 percent, as negative spillovers
from the invasion of Ukraine more than offset any near-term boost to some commodity
exporters from higher energy prices. Despite the negative shock to global activity in
2022, there is essentially no rebound projected next year: global growth is forecast to
edge up only slightly to a still-subdued 3 percent in 2023, as many headwinds—in
particular, high commodity prices and continued monetary tightening—are expected to
persist.
The way the global power sector evolves, it is evident that the future
of the industry sits on cusp of massive change. The broader energy industry has started to
converge, as many players seek to serve a growing clean power industry in an economy
increasingly moving toward electrification. With an increasing number of nations
responding to the challenge of climate change, the energy landscape is undergoing change
wherein more than 100 countries have pledged carbon neutrality by 2050 and many more such
commitments are on the horizon. Similar announcements on the corporate front have gathered
pace worldwide. Be it energy companies or those in the IT/ technology space, both utility
and non-utility companies are undertaking 100% carbon free initiatives.
While the threat from the COVID-19 pandemic is still looming, the
continuation of Russia-Ukraine conflict is posing a significant challenge to global
recovery. The effects of the Ukraine crisis on developed and developing countries are
substantial, as these economies are just beginning to recover from the COVID-19 crisis.
Most of the countries, especially members of the Eurasian Economic Union are strongly
exposed to the Russian economy through trade and finance flows. The conflict has
accelerated the upward trend in oil and natural gas prices, along with the prices of
metals and other commodities. Prices of agricultural commodities and base metals, such as
aluminium, copper, crgo, steel, cobalt, nickel, palladium, and titanium, have also spiked.
If those prices increase remains elevated, industrial sectors, in particular, heavy
engineering, automotive and electronics, will be hit hard across the globe.
INDUSTRY
The global renewable power generation is set to be the fastest- growing
source of electricity supply in 2022, up 10%, while low-carbon generation is seen up 7%,
which is expected to exceed demand growth and lead to a 1% drop in total fossil fuel
generation. The energy transition gained momentum last year, as countries continued to
deliver on the decade of action through increased renewables deployment; but the rate of
growth is still not sufficient to guarantee a net zero future. Renewables need to reach
around 40 per cent in total energy generation across all sectors by 2030 from present
level of 14%.
According to the International Renewable Energy Agency (IRENA) report,
the cost of generating power from renewable energy sources has reached parity or dropped
below the cost of fossil fuels for many technologies. Biomass, hydropower, geothermal and
onshore wind are all competitive with, or cheaper than, coal, oil and gas-fired power
stations - cheaper even without financial support and despite falling oil prices. Solar
photovoltaic (PV) is the most competitive, with solar PV module costs falling 75 per cent
since 2009 and the cost of electricity from utility-scale solar PV dropping by 50 per cent
since 2010. Residential solar PV systems are now 70% cheaper than they were in 2008. As
per the Electricity Market Report by International Energy Agency (IEA) during 2022-2024,
it expects rapidly growing renewables to almost match moderate demand growth. It
anticipates average annual electricity demand growth of 2.7%, but the Covid-19 pandemic
and high energy prices add uncertainty to this.
Apparently, Decarbonization is becoming a higher priority. Over the
past decade, the costs of renewables have dropped substantially solar power by as much as
80 percent and wind power by about 40 percent making them economically competitive with
conventional fuels, such as coal and natural gas, in the vast majority of global markets.
Few utilities or governments have yet compiled a detailed, quantitative pathway to
decarbonizing the power sector substantially.
Indian Economy - Opportunities and Threats
The Indian Power Sector is going through defining times with
significant push given by the government under its various schemes such as Power for
All, One Nation-One Grid, and its climate change mission statement Panchamrit,
wherein the country realigns its power demand with more focus on alternate sources of
power and reduction of its dependence on coal as a raw material to derive electricity.
This is in addition to Indias ambitious target to achieve Net Zero Missions by 2070. As
part of its plan to move from fossil fuel to renewable energy source, the Government of
India (Gol) has been working towards rejigging its energy mix to focus on becoming a
gas-based economy.
By 2030, the government aims to increase non-fossil fuel- based energy
capacity to 500 GW, meeting 50% of its energy requirements by renewable energy sources,
and reduce carbon intensity of the economy to less than 45%. As per the latest figures on
the National Power Portal (as on March 2022), the total installed capacity stands at
3,95,805.86 MW (395.80 GW). In terms of the sector-wise division of installed capacity,
central sector holds 25.01%, state sector 26.49% and private sector 48.50%. By 2030, the
country aims to have 280 GW of installed solar power.
The government has also approved the Green Energy Corridor (GEC) -
Intra-State Transmission System Phase-II scheme. The scheme will facilitate grid
integration and power evacuation of approximately 20 GW of Renewable Energy (RE) power
projects in seven states namely, Gujarat, Himachal Pradesh, Karnataka, Kerala, Rajasthan,
Tamil Nadu and Uttar Pradesh. This scheme will enable the country to achieve its target of
450 MW of installed Renewable Energy (RE) power capacity by 2030. Moreover, it will
contribute towards long term energy security of the country and promote ecologically
sustainable growth by reducing carbon footprint. It will generate large direct and
indirect employment opportunities for both skilled and unskilled personnel in power and
other related sectors.
Under the Union Budget 2022-23, the government announced the issuance
of sovereign green bonds, as well as conferring infrastructure status to energy storage
systems, including grid- scale battery systems. The government also allocated Rs. 19,500
crore (US$ 2.57 billion) for a PLI scheme to boost manufacturing of high-efficiency solar
modules.
Concerns over high inflation and the rising risk of a deanchoring of
inflation expectations are expected to lead to further monetary policy tightening in many
EMDEs. Having already experienced a marked erosion of fiscal space during the pandemic,
commodity importing EMDEs will face a further deterioration in fiscal positions due to the
rise in borrowing costs.
OPPORTUNITIES AND THREATS Opportunities
The power sector is a key enabler of Indias economic development. The
sector with its three pillars: Generation, Transmission and Distribution, is crucial to
Indias infrastructure and economic growth. The global stature of the Indian Power Sector
is depicted well by its positioning in terms of generation capacity. India is ranked 3rd
in the world in terms of electricity generation, 4th in installed renewable energy
capacity, and 6th in installed Hydro capacity, as reported by international agencies like
IEA, Statista, IRENA etc.
India is the third-largest producer and second-largest consumer of
electricity worldwide, with an installed power capacity of 401.01 GW as of April 30, 2022.
In terms of capacity, there has been a year-on-year increase of nearly 17 GW in installed
power generation capacity (399 GW in FY22 vis-a-vis 382 GW in FY21). There has been a
progressive shift towards renewable sources (mainly solar & wind).
As of April 2022, Indias installed renewable energy capacity stood at
158.12 GW, representing 39.43% of the overall installed power capacity. Solar energy is
estimated to contribute 55.34 GW, followed by 40.53 GW from wind power, 10.68 GW from
biomass, 4.85 GW from small hydropower, and 46.72 GW from hydropower.
Government of Indias Union Budget 2022-23 too has laid down a
comprehensive plan to provide boost to various sectors such as infrastructure, railways
and power, amid rising inflation and COVID-19 related uncertainties. Key highlights of
Union Budget 2022-23 emphasized Indias economic growth estimated at 9.2% to be the
highest among all large economies. Outlay for capital expenditure stepped up sharply by
35.4% to INR 7.50 lakh crore in 2022-23 from INR 5.54 lakh crore in the year 2021-22.
Off all the factors determining the outlook of the energy industry,
coupled with the need for affordable, sustainable and modern energy systems, is shaping
the power sector and opening business service opportunities for power utilities. This wave
of change is not just limited to the power companies but is also opening-up business
opportunities for other industry groups like automobile, power equipment manufacturers and
oil majors, which have been actively participating in this transition through business
diversification, acquisition and collaboration with power utilities.
To expand, improve profitability to competitive advantage and maintain
their commitment to high level of environmental performance, the companies will have to
make changes to their strategy and operational models related to at least the following
areas of focus such as energy demand, penetration of renewable energies, the degree of
commitment to CO2 emissions reductions, etc.,
In addition to this, your companys synergies with the parent company
SSEL paves way for favorable business opportunities with wide market reach.
Threats
The major risk factors affecting the Company are over capacity in
industry, non-lifting of ready materials due to constraints at customers end thereby
building inventory and creating liquidity issues. Increase in receivable positions due to
delay in payment by certain customers and uncertainty in execution of low fixed price
orders. Other notable concerns include:
1. Raw material price volatility
Copper and Electrical grade Steel (Technical Shortform CRGO) are the
major raw material which contributes more than 60% cost of total raw material. The supply
of CRGO is one of the major challenges in the industry as it needs to be imported and
there is less supply. CRGO which is one of the major raw materials for transformers is not
being manufactured in India thereby causing more FOREX outflow, further the importers levy
high service charge thus escalating the price. Adverse price movement of both commodities
can impact the margins of the Company. The Copper price is determined by the London Metal
Exchange (LME). The wide fluctuation of rupee against US Dollars also affects margin since
the key raw materials,viz. copper, transformer oil, special steels for lamination, etc.,
are of import origin.
2. Unorganized players
Indias transformer market is predominantly unorganised with many small
participants catering to the smaller distribution transformer markets. In addition to
severe competition with MNC players, domestic manufacturers, Chinese and Korean
manufacturers presence makes the market very competitive. Your company has to compete
with unorganized players for orders from sEBs, utilities and industrial clients, which
makes the market more price sensitive.
3. Overcapacity in industry
Due to the entry of large number of players during favorable time,
overcapacity continues to be a major negative factor in the industry as a result
aggressive pricing is undertaken by some of the Transformers manufacturers, which could
impact margins.
4. Slowdown in the manufacturing segment
The demand from the manufacturing segment is still a major concern for
the industry, the manufacturing sector is yet to see an investment uptick due to low
capacity utilisation and this has led to slowdown in new as well as expansion projects.
The slowdown in the manufacturing segment has a Domino effect on the overall transformer
industry - low power demand from the manufacturing segment is one of the major reasons for
reducing peak power deficit in the country, excess power from the manufacturing sector is
diverted to residential and agricultural sectors shortening power outages in these
sectors. Unless power demand from manufacturing segment increases the utilities will be
not be very enthusiastic to spend on improving power availability or expanding the
network. Hence, demand
expansion in the core manufacturing sectors is very critical for the
transformer industry.
5. Financial Health of State Discoms
Years of populist tariff schemes, mounting Aggregate Technical &
Commercial losses and operational inefficiencies have adversely affected the financial
health of State Discoms which are currently plagued with humongous out-standing debts.
6. Delay in payment to IPPs by EBs
There is considerable delay in payment to Independent Power Producers
(IPPs) by Electricity Boards (EBs). This delay affects financial health of IPPs and in
turn affects cash cycle of Original Equipment Manufacturers. OEMs have to be choosy in
accepting orders from such IPPs and this affects year to year growth.
7. Renegotiation of wind and solar power purchase contracts by state
utilities
Industry witnessing a trend of State utilities reviewing and
renegotiating the signed power purchase agreements (PPAs) with wind and solar power
developers. This impairs the cash flows of projects and may impact investor sentiments in
the sector. PPA renegotiation or cancellation to be an event risk and a deviation from
normal business proceedings, as these are not embedded in the contracts
8. Utility Orders
The transformer industry largely depends on the spending from
transmission and distribution utilities and recent tenders/ ordering activity by utilities
clearly demonstrate the downward trend. Lack of funds is one of the key reason behind it.
All Contracts awarding by the utilities are based on low price (L1) bidder which resulting
in price war with unorganized players without compromise on the quality is the challenge
for the organized quality driven Companies. The payment terms of utilities are generally
high credit period compared to private parties which impact the Companys cash flow.
9. Increase in working capital borrowings and high working capital
intensity
Lower cash accruals, delayed payments from clients including state
power utilities and private players and delays in project execution results in tightening
of liquidity. Further, the operations of manufacturers in India are more working capital
intensive mainly due to relatively higher inventory holding and receivable period, lack of
adequate mobilization advances. This is mainly due to lack of product standardization,
delays in processes of testing and issuance of completion certificates and delays in
receipt of payments.
OUTLOOK
Growing population along with increasing electrification and per capita
usage will further provide impetus to the rising demand for electricity. Many power sector
reforms are being introduced by the Government to bring efficiency, promote
decarbonization and ensure (24X7) reliable and affordable power supply.
With the industrial and commercial sector together accounting for
nearly 50% of the countrys electricity consumption, resumption of economic activity post
relaxation of pandemic restrictions has made a positive impact on the overall demand.
Gradual and calibrated resumption of economic activity will further support the growth of
electricity demand.
In the backdrop of a challenging operating environment in this fiscal,
we dynamically managed our business to deliver strong bottom line performance whilst
growing our market share and sustaining our product quality. We will continue to take this
approach in financial year 2022-23 where operating environment is expected to remain
challenging with further input cost inflation and competitive market conditions.
Our balanced approach, brand value, our execution prowess and
adaptability to market conditions continue to hold us in good position. We remain
confident of sustaining the market share and maintaining margins at healthy levels.
Notwithstanding these near-term challenges, Indian power sector offers significant
potential for growth. In the mid-long term, we will continue to create value for all our
stakeholders by growing ahead of the market, delivering quality product and continual
upgradation of technologies.
RISKS AND CONCERNS
The key risks are underutilized manufacturing capacities across our
industry, an unprecedented spiraling of raw material prices, lack of adequate sources of
finance and fresh uncertainties caused by the COVID-19 pandemic. The Company does not
apprehend any inherent risk in the long run with exception to above mentions. Apart from
this the Industry is highly labour intensive and is subject to stringent labour laws.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company believes in systematic working and placing of proper
checks. The Company has proper and adequate system of internal controls commensurate with
its size and nature of operations to provide reasonable assurance that all assets are
safeguarded, transactions are authorised, recorded and reported properly. These have been
designed to provide reasonable assurance with regard to recording and providing reliable
financial and operational information, complying with applicable statutes, safeguarding
assets from unauthorized use, executing transactions with proper authorization and
ensuring compliance with corporate policies. The company has a well- defined delegation of
power with authority limits for approving contracts as well as expenditure. Processes for
formulating and reviewing annual and long-term business plans have been laid down.
The Company has an Internal Financial Control (IFC) process which aims
at providing reasonable assurance on - reliability of financial information, compliances
with laws and regulations in force and realization and optimization of operations. It
ensures documentation and evaluation of department and entity level controls through
existing policies and procedures, primarily to identify any significant gaps and define
key actions for improvement. Management assessed the effectiveness of internal financial
controls and based on this assessment, management has determined that the Companys
internal financial controls as of March 31,2022, were effective.
The Audit Committee and the Board of Directors reviewed internal
controls and the progress of implementation of the recommendations of internal audits. The
Whole-Time Director/ CFO certification provided in the report discusses the adequacy of
our internal control systems and procedures.
M/s. G Balu Associates LLP, the Internal Auditors independently
evaluate the adequacy of internal controls to ensure that internal controls, checks and
balances in the system are adequate, proper and up-to-date. M/s. ASA & Associated LLP,
the statutory auditors of the company have audited the financial statements included in
this annual report and have issued an attestation report on the companys internal control
over financial reporting (as defined in section 143 of Companies Act 2013).
DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL
PERFORMANCE
The financial performance of the Company has been discussed in
Directors Report under the heading Financial Results and the Operations Review. The
financial performance of your Company was affected by the combined impact of pricing
pressures in the marketplace, increases in input costs, delays in projects as well as
complying with stringent design specifications of the customers.
The Company is taking a balanced view on scaling up manufacturing
operations and timely delivery to enable the adequate cash flow for the operations.
Despite all challenges, the Company is fully focused on attaining sustainable growth with
the best practices at operations along with the expertise off and guidance of its parent
company.
MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT
Human Resources
The Company strongly believes that its employees are the most valuable
asset. In view of this, it is committed to equip them with skills, enabling them to evolve
with technological advancements. The focus on strengthening the processes of attracting,
developing, engaging and retaining the human asset was continued during the year.
With the robust systems and processes, an agile and responsive
approach, the Company continued its efforts on digitalization, process improvement,
employee engagement and improving the work life balance contributing its own share in
achieving the business goal and outcome for FY 2021-22. Your company recognizes the demand
for new technology and digitalization as a tool for sustainability. It continues to
undertake various digitalization initiatives for smooth transition towards a more
sustainable environment in future.
Your Company continued its approach to management development on the
belief that learning initiatives must remain synergistic and aligned to business outcomes.
Building skills and capabilities for the present and the future is on the top of our
learning agenda. This is achieved through periodical trainings that have enhanced
productivity and product performance on quality front. The company continues to identify
and recognize the performing employees through "Employee of the Month" scheme.
In view of the COVID-19 pandemic and keeping employee health and safety
paramount, your company has issued SOPs to all its employees in accordance with the
guidelines of the Central Government, State Government and local authorities. This
includes self-health declaration, allowing unwell employees to work from home, regular
sanitization of work-place and transport vehicles, providing masks and other protective
gears, thermal temperature monitoring, SpO2 checks, providing hand sanitizers, advising
regular hand washing, maintaining social distancing at works, in canteens and in the
offices, amongst others. The Company has also taken up steps to ensure 100% vaccination
for all employees.
The Company attaches utmost importance to the operational safety
standards. Necessary proactive and preventive measures are regularly undertaken to ensure
that the Health, Safety and
Environment standards are followed for the safety of employees and
equipment. The Confederation of Indian Industry (CII) has recognized your company with
Bronze Award for Environmental Health and Safety (EHS) Excellence (2021). This is result
of the companys consistent work to improve health and safety condition at our workplace.
The HR department continuously strives to maintain and promote harmony
and co-ordination among workers, staff and members of the senior management. The total
number of employees on the rolls of the company as on 31st March, 2022 was 286.
Cautionary Statement
This report is based on the experience and information available to the
Company in the transformer business and assumption in regard to domestic and global
economic conditions, government and regulation policies etc. The performance of the
Company is dependent on these factors. It may be materially influenced by the changes
therein beyond the Companys control, affecting the views expressed in or perceived from
this report.
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