jk lakshmi cement ltd share price Management discussions

OUTLOOK FOR INDIAN ECONOMY, INDUSTRY STRUCTURE & DEVELOPMENTS

The Financial Year 2022-23 started when global uncertainties were rife. Barely had the pandemic receded and the Russia- Ukraine war broke out in February 2022, that led to a sharp rose in the prices of food, fuel, and fertiliser. They remained at elevated levels for several months. The risk of another round of supply chain disruptions emerged, but they were not as severe as feared. Nonetheless, both the price and the availability of essential commodities had the potential to dent the industrys optimism on consolidating the recovery of FY22 and further accelerating it. Despite all the above challenges, it is fair to say that the Indian Economy recovered well and staged a broad-based come back across sectors to get back to the pre-pandemic growth path in FY23. Overall, Gross Value Added (GVA) by the Industrial Sector, based on data available for the first half of the FY23, rose 3.7%, which is higher than the average growth of 2.8% achieved in H1 of the last decade. While Indias retail inflation rate peaked at 7.8% in April 2022, above the RBIs upper tolerance limit of 6%, the overshoot of inflation above the upper end of the target range in India was however one of the lowest in the world.

With high allocation under the Union Budget 2022-23 for infrastructure, affordable housing government schemes such as MGNREGA, PM Garib Kalyan Rozgar Abhiyan and Road & Railway projects to fuel the economy, the domestic cement industry poised for a volume surge and boost the demand for cement. Under the housing for all segment, 8 million households were identified under Pradhan Mantri Awas Yojana (PMAY), both rural & urban and ~ 48,000 Crore was allocated for the purpose. The Government also approved an outlay of ~ 1,99,107 Crore for the Ministry of Road Transport and Highways and this step is likely to boost the demand for cement. In the FY 23, Indian Government built 5.28 million houses under the flagship rural housing scheme which was 25% higher than the houses built in the FY 22 and has proposed to build 5.73 million houses by FY 24, to achieve the target to build 29.5 million houses under PMAY

Indias cement production and consumption both grew by ~ 9% in FY23 on a y-o-y basis, driven by the Governments push for infrastructure development and increased real estate activity. EBITDA margins of cement players declined by almost 10% y-o-y in H1FY23 mostly due to an increase in power and fuel cost on the back of a sharp surge in coal prices. Limestone prices also escalated during H1FY23. There has been a 3% y-o-y increase on an average in wholesale cement prices in FY23. While the prices have remained flatfish in Q3, Q4 witnessed a further marginal decline in prices. As projected, industry was likely to add 30-35 million tons of capacity in

FY23 reaching 590-595 million tons of Pan India cement capacity. Lower double-digit demand should see a rise in capacity utilisation by about 2% to ~ 66% level.

Industry is likely to see ~9% to ~10% y-o-y volume growth in FY23, supported by sustained demand from infrastructure projects and recovery in individual housing demand. Long term growth expectations to be in the range of ~7% to 8% mainly based on higher projected growth coming from these two segments. The current global uncertainty and fear of global recession due to prolonged Russia-Ukraine war is likely to cast its shadow in the construction sector further. The industry which is already grappling with the impact of phenomenal rise in fuel and transportation costs would find it difficult to pass on the cost increase to the market when the off take is low.

Key energy items like Pet coke/Coal were marginally down vs FY 22 average, but owing to the higher cost inventory, benefits are unlikely to percolate fully. Additionally, after a gap of two years, busy season surcharge (@ 15%) was reintroduced by railways from October-22, which has impacted the freight costs. Diesel price trend has been sideways in past few months and is a relief. Due to divergent and volatile trends in major cost items, individual companies costs are likely to be influenced by inventory levels and rail mix of each company. Further, the acquisition by large cement players and competitive posture has brought some turbulence in the market. In an uncertain environment, most manufacturers have been focussing more on volumes than on prices to mitigate high costs. Industry is attempting to close the gap between billing and transactional prices for better transparency and working capital utilisation with the channel.

Going forward, while FY24 appears to be a year full of opportunities as well as uncertainties and challenges; however, we remain optimistic for the outlook for the cement sector which according to us would firmly remain in longterm trajectory of sustainable annual growth ranging from 6% to 8%. As per CRISIL Ratings, the Indian cement industry is likely to add ~80 million tonnes (MT) capacity by FY24, the highest since the last 10 years, driven by increasing spending on housing and infrastructure activities. Overall, the Outlook for the cement industry is very positive. The increasing demand for infrastructure and green construction materials will help to drive significant growth in the coming years.

FINANCIAL PERFORMANCE

During the Financial Year 2022-23, the Companys Cement Production was higher by 9% at 93.82 lac tonnes as against 86.16 lac tonnes achieved during the last Financial Year. The Companys Sales during the Financial Year ended 31^st March

2023 were up by 7% at 107.58 lac tonnes against 100.94 lac tonnes logged in the last Financial Year.

The Turnover of the Company during the Financial Year 2022-23 increased by 20% from 5,108 Crore in Financial Year 2021-22 to 6,133 Crore in Financial Year 2022-23. The Company registered an EBIDTA of 767 Crore as against 869 Crore in the previous Financial Year, while the Net Profit is at 330 Crore as against 418 Crore in the previous Financial Year.

KEY CHANGES IN FINANCIAL INDICATORS

The various Financial Ratios for the year under review as compared to the same of the previous Financial Year are given hereunder:

Sl. No. Particulars	Unit	As at 31.3.2023	As at 31.3.2022	Comments
1 Operating Profit Margin	%	12%	16%	Reduction in Operating Profit primarily emanating from steep increase in the Fuel & Other Input costs.
2 Net Profit Margin	%	5.44%	8.28%	Reduction in Net Profit primarily emanating from steep increase in the Fuel & Other Input costs.
3 Return on Net-Worth	%	12.76%	18.43%	Reduction in Net Profit due to steep increase in Fuel & Other Input costs and higher Net Worth.
4 Interest Coverage Ratio	Times	8.38	9.02	Reduction in Operating Profit due to steep increase in Fuel & Other Input costs.
5 Debt Service Coverage Ratio	Times	2.72	2.01	Reduced Debt Repayment obligation during the Current Year.
6 Current Ratio	Times	1.39	1.34	Improved Liquidity position & better Working Capital Management
7 Debt Equity Ratio	Times	0.30	0.39	Reduced Leverage through Debt Repayment.
8 Net Debt Equity Ratio	Times	-0.03	0.03	Reduced Leverage & higher Liquidity
9 Net Debt to EBIDTA	Times	-0.10	0.08	Reduced Leverage & higher Liquidity
10 Inventory Turnover	Times	10	12	Better Working Capital Management
11 Debtors Turnover	Times	164	146	Increased in Turnover

OPPORTUNITIES AND THREATS

The cement industry has seen an uptrend in volume growth because of the economic recovery, urban housing demand, Governments thrust towards infrastructure and rural development considering the 2024 elections and fasttracking of infrastructure projects like metro, roads and highways.

While residential and commercial construction will continue to be pivotal in the growth of Cement demand, industrys real boost will come from an increase in the pace of Infrastructure creation and housing sectors. Higher allocation to infrastructure and expediting the tendering process in highway projects have the ability to generate a positive sentiment for cement industry.

The Government of India is strongly focused on infrastructure development to boost economic growth and is aiming for 100 smart cities. The Government also intends to expand the capacity of railways and the facilities for handling and storage to ease the transportation of cement and reduce transportation cost. These measures would lead to an increased construction activity, thereby boosting cement demand. The cement demand in India is estimated to cross 500 MT by FY 2027. As India has a high quantity and quality of limestone deposits throughout the country, the cement industry promises a high growth potential.

Increases in diesel prices have adversely impacted logistics cost of the industry. Companies have been trying new initiatives like CNG/LNG vehicles that will bring efficiency as well as cost relief for road transportation. This will also be a greener alternative thus reducing the carbon footprint.

Rising competition is limiting price increases, which have largely remained range bound despite good demand numbers in FY22-23. This is leading to a focus on volume push by the manufacturers coupled with efficiency improvement projects.

The Union Budget 2023-24 announced, 33% increase in allocation for key infrastructure sectors, 66% higher outlay for PMAY highest ever outlay for railways in the last decade, and plans for 50 new airports. Each of these are expected to further boost the already robust demand for cement. Cement demand is expected to ride on Infrastructure and housing push. Increased outlay for infrastructure, housing and logistics are all positive for the cement sector, as is the focus on green energy, which should help to reduce costs.

The cement industry outlook is mixed with near-term challenges weighing on the mind of cement companys executives. The rise in energy and transportation costs, along with continued pressures from environment regulations, are top concerns. Additionally, overcapacity in China has led to increased exports of cement to other countries, which further

complicates the global market landscape. Despite these challenges, there are also opportunities for growth in the coming years as demand for cement is projected to grow faster than the announced capacity additions. Organisations which are able to capitalize on these trends will be well positioned for success in the future.

RISKS AND CONCERNS

Risks are unavoidable aspect of doing business. In fact, fructification of certain risks also sometimes presents tactical opportunities. However, with a view to manage its risks appropriately in the long term, the Company actively identify, analyse and address key risks through a robust risk management programme. The Company has a strong risk management framework that enables regular and active monitoring of business activities for identification, assessment and mitigation of potential internal or external risks. Our commitment to strong ethical values and high levels of personal and organisational integrity adds a further layer of risk mitigation to our operations.

Increase in the costs of raw material, power and fuel due to inflation or global price trends may impact profitability. The Company is employing various means to reduce the impact of rising costs through better fuel sourcing, dynamic fuel mix capabilities to capitalise on changing trends in price and the use of alternative fuels. A focus on achieving better operating efficiencies and reducing coal and power consumption continues as a way of life. The Company continues to evaluate and assess long term strategic solutions from waste heat recovery systems to solar energy, from alternate fuel to alternate sources, etc. to manage costs in the medium and long term.

One of the concern and the expectations in Industry has is when each time, the GST council meets, the Industry eagerly hopes that the cement will be put under lower tax slabs than the sin slab of 28%. In the 49^th GST Council meeting held on 18^th February 2023, it was hoped that the Council may lower the GST rate, however, it did not come up with the fitment committee. Ever since the introduction of GST, the council is periodically reviewing the tax rates and is consistently bringing more and more commodities under lower tax slabs. Cement is now one of the very few commodities that is in highest tax slab and understandably because it is not easy for the Government of the day to let lose the tax cow. Like always, the Industry prefers to be positive and keep its hope alive for a favourable outcome.

Your Company has made various efforts to increase its market presence and market share in its natural markets and in the markets that are more economically beneficial. It is putting all efforts to considerably shrink the lead distances to optimise logistics cost further and increase the share of blended cement in its product portfolio. These measures would provide the Company cushion to absorb the impact of increase in various costs.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

The Company believes that a strong Internal Control framework is an important pillar of Corporate Governance. The Company has a well-defined Internal Control System commensurate with the size, scale and complexities of the operations to support the Business Operations and also to ensure Statutory Compliances. These Internal Control Systems are periodically tested for their effectiveness by the Management and by the Statutory & Internal Auditors of the Company. These Internal Control Systems were found to be operating effectively during the year.

The Company has retained the services of our past Statutory Auditors to conduct internal audit for its all-integrated plants and also some of the split location Grinding Units. In addition, the Company also has an Independent In-house Internal Audit Department which is manned by Experienced Professionals. This Internal Audit Department carries out the Internal Audit based on a Systematic Audit Plan covering all key functions and aspects of the Business. This Audit Plan is approved by the Audit Committee at the start of the Financial Year. The Company has also engaged services of certain External Audit Firms for conducting Audit of its key Regional Offices & Depots. The Internal Audit Reports, of the external as well as In-house Audit Teams, are reviewed by the Top Management and are placed before the Audit Committee of Directors. The Audit Committee undertakes a total review of the audit observations and the actions taken by the Management on all the findings of the Internal Auditors. The implementation of the recommendations of the Internal Auditors is regularly reviewed and monitored by the Senior Management and the Action Taken Report is placed periodically before the Audit Committee. The Company also has an Internal Risk Management Committee comprising of Functional Heads. This Committee meets on a quarterly basis to evaluate the risk as also the mitigation plan put in place to minimise the impact of various internal and external risks to the Companys business. In addition, there is a Risk Management Committee at the Board Level to review the various risks which impact the Companys operations and the management plan to meet those risks.

The Company also has a robust MIS system and Budgetary Control System under which the operating and financial performances are reviewed on a monthly basis. The variations with the budget are analysed and corrective actions are taken to minimize the variations with the Budget wherever shortfalls are noticed. Further, the Company has also put in place Legal Compliance Monitoring Tool to ensure timely compliance of all the applicable Statutes at its different locations.

HUMAN RESOURCE - "OUR PEOPLE, OUR BIGGEST STRENGTH"

Our people are our biggest strength and the cornerstone of our business which we have always strived and believed to create a work environment of care, trust and respect.

Post COVID-19, we have endeavoured by leveraging the technology to create an environment of incessant communication with our employees at all levels, customers and stakeholders, in keeping them engaged and aligned with business requirements with health and safety on top priority all the time.

On the human resources front, our HR policies and guidelines are designed in a way that encourages teamwork and synergistic approach thereby strengthening agility, future readiness and enhancing employee experience. Our inclusive and progressive culture helps to motivate employees, strengthen the leadership pipeline, attract young talent, deliver results, grow market share and the operating profitability of the company.

Company is well prepared digitally to take on the challenges of the new world by enhancing latest digital capability building of our people through trainings and certification programmes. HR processes like Individual Development Plan, Recruitment & E-Joining, Performance Management System, Confirmation and Separation have been digitalized for enhanced productivity and employee experience.

On Employee Engagement front, key initiatives taken are Sharing of Success Stories - To boost up morale and motivation of the best performer and to motivate other Team Members, Har Ghar Tiranga (Tricolour in every household) Programme - On the occasion of Indias 75^th Independence Day, SANGAM - Interzone Quiz competition to create feeling of One Team One Family, Skip - Level meetings, BANDHAN - an employee connect initiative, UDAAN Competition, Virtual Family Engagement - "MANN KI BAAT", ensuring mental & psychological wellbeing of employees and their family members, Leadership & Personality Development, etc.

Innovations in information and communication technologies have changed the way of working like VC&MDs Communication Meeting across all locations with all levels and of Top Leaders with the team members and other work groups using virtual platform, transition towards a more digital working, etc.

Augmenting our human capital and investing in our people towards their all-round development has always been a passion at JK Lakshmi Cement Ltd. In line with the same, Outbound Skill Development & Customer Orientation Programme, Technical & Behavioral trainings (Internal & external), Physical & Mental Well Being sessions with Companys doctors, Safety & health and family-oriented subjects with employees as well as Dealers/ channel partners including their family members have created a win-win work environment.

Continuing with the Vision & Mission focused on Human Capital, Customers, Innovation, Technology, the Company has kept pace with competition and exceeded in specific domains. The journey of nurturing, grooming and preparing internal talents with the development opportunities, Company organized Development Centre in partnership with world leaders across the levels with post assessment support through world renowned assessment development centre agency for talent management to build a pipeline of young leaders for future readiness and strengthen its Grow Your Own Timber approach for leadership roles by rewarding and providing a well-defined growth path.

Millennials are encouraged, prepared, and enabled to manage bigger chunk of areas and markets. It is aligned with assessing expectations of young generation and incorporating in the culture/HR strategy especially career growth strategies, R&R strategy to keep up with ambitions of employees/new age workforce.

Tactfully ascertaining changing aspiration of nearby community through HR & CSR partnership to prepare effectively for future along with a tacit commitment for a prolonged mutually beneficial association, has resulted into its high level of retention of talents and harmonious industrial relations for last 25+ years. The details of Number of people employed are given in Annexure - E to Boards Report.

The results of sustained people practices have been instrumental in JK Lakshmi Cement Ltd. being emerged with Highest Engagement Level across JKO Businesses @89% in Employee Engagement Survey (March 2022) which is a reflection of high morale, motivation and loyalty amongst employees and exhibits the importance we have placed on our teammates and the way our employees are groomed, nurtured, developed and retained.

CAUTIONARY STATEMENT

The Management Discussion and Analysis contains forwardlooking statements, which may be identified by the use of words in that direction or connoting the same. All statements that address expectations or projections about the future including but not limited to statements about your Companys strategy for growth, product development, market positions, expenditures and financial results are forward looking statements.

Your Companys actual results, performance and achievements could thus differ materially from those projected in such forward looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent development, information or events.