lokesh machines ltd share price Management discussions

Overview

The financial statements have been prepared in compliance with the requirements of the Companies Act, 2013 and in compliance with Companies (Indian Accounting Standard) Rules, 2015. The Company has adopted "IND AS" with effect from 1st April, 2017. Accordingly the financial statements for the year 2020-21 have been prepared in compliance with Companies (Indian Accounting Standards) Rules, 2015. The estimates and judgments relating to financial statements have been made on a prudent and reasonable basis, so that the financial statements reflect in a true and fair manner.

The management presents the analysis of performance of your Company for the year 2020-21 and its outlook for the future. This outlook is based on assessment of the current business environment and the expectations, estimates and projections of the management of the Company. It may vary due to future Economic, Pandemic and Political Developments, both in the Indian and international economies and due to factors beyond control of the Company.

Industry Structure and Developments:

In an unpredictable year that pushed the world and India into an economic recession, reporting de-growth would have been the norm. This is particularly relevant for an enterprise operating in the capital goods business space, because the general rule of thumb is that the capital goods sector features among the last to rise in an economic uptick and the first to fall in a downturn. In spite of that the machine tools industry reported a healthy growth during the year, the reason being the change in perception of the people in & outside India. This was largely owing to people choosing personal mobility over public transportation due to ongoing Covid-19 pandemic as well as there being an inherent pent up demand due to the slowdown in the earlier years. This trend is expected to continue during the current year as the average Indian gains confidence in India’s economic resilience. India is one of the few nations to have displayed commendable economic resurgence. Going forward, India is expected to register a double digit GDP growth in FY22 as per credible government estimates.

Opportunities and Threats:

The growth opportunity for the machine tool Industry is in proportion with growth of other industries. During the last few years, the phenomenal growth in Automobile industry has largely contributed to the growth of machine tool industry and opportunities lie in further growth in Automobile Industry as several multinational car manufacturers are shifting a part of their supply chain & sourcing base to India.

The global Machine Tool Market is estimated to surpass $94.42 billion marks by 2026 growing at an estimated CAGR of more than 3.7% during the forecast period 2021 to 2026. Increasing demand for high efficiency in complex machining products is expected to drive the machine tool market. Rise in demand for low operating cost and high precision, along with technological advancement in production processes, is further resulting in the popularity of CNC machines.

Besides Auto component manufacturers, a host of Engineering, Medical, Defense, Agro and Power sector based industries are also contemplating about moving their supply chain to India. This provides a huge opportunity for Indian manufacturers and this would provide a corresponding opportunity to Machine Tool Manufacturers. Indian Railways has also upped its target of manufacturing locomotives, coaches and wagons in FY22. This is expected to open significant opportunities for the Machine Tool Manufacturers.

As uncertainties prevail in the global economy, the industry continues to face a range of business risks related to supply chain and changing customer preferences. Delay in economic recovery, increase in commodity prices and forex volatility are some of the headwinds being confronted. Moreover, evolving regulatory and trade environment, technological changes and environmental regulation continue to pose challenges to the sector

Segment –wise Performance

Machine Tool Division: In line with the Industry performance as mentioned above, your company has also performed well. While the company had its share of problems with the disruption in supply chain as well as disruption in operations, but it has managed to wade successfully through these issues and posted a reasonable growth. The company could also counter to an extent the commodity price rise and supply chain disruptions; particularly the imported items through a focused supply chain management and stringent internal cost controls. The company has also been successful in promoting its machines in the non-automotive space and this would only improve further going forward.

With an efficient and innovative management team and vast experience in Development, Production, Supply of Machine Tools, Jigs, Fixtures and Accessories Improved and sustained efforts of the Company for enhancing the technological competencies, cost competitiveness and increased market reach are expected to yield good results in the near future.

Component Division: The Company has a rich experience of around 37 years in automobile sector and in manufacturing of auto components such as Cylinder Blocks, Cylinder Heads and Connecting Rods. Though the demand was subdued and the growth has been marginal, but due to a well-established practice of continuous improvements through Kaizens etc., the costs were very well reined in.

Outlook

Machine Tool Division: The industry which is seeing a meaningful upturn after a long period of sluggish growth is likely to witness a positive momentum on the back of revival in overall economy, improving rural cash flows, and an increasing need for personal mobility. Introduction of schemes like production-linked incentive and vehicle scrappage policy is likely to increase the competitiveness of the Indian automotive industry globally. Also, with the Global Supply Chains in Engineering and Automotive space starting to source from India as a China De-risking strategy, the future augurs well for India.

To meet this potential demand, your company is adding significant capacities in both manufacturing as well as marketing. Further, to cater to the new opportunities emerging from Non- Automotive industries, the technology will be upgraded on par with the Global levels by entering into strategic tie ups with leading European and South Asian companies.

Component Division: There is a significant demand forecast from M&M due to their new product launches as well as growth in the existing products. The company is very quickly adding capacities to meet the demands. The company is also venturing into non-automotive space, given its engineering strengths, infrastructure, well laid out processes and is therefore confident of making significant inroads in the years to come.

Risks and Concerns

An increase in cases of Corona virus infection and the consequent restrictive measures imposed by the Government could derail growth prospects. On the other hand, widespread vaccination campaigns being run by the Government are likely to control the pandemic resulting in expanded economic activity.

The Company’s growth is linked to growth of the Automobile Sector which is cyclical in nature. This cyclical nature might affect the demand ultimately has an effect on the order book of the Company. However the Company is focusing towards export orders and non-automotive business to counter the risk. There have been very good results so far and the company is confident of posting significant success in these areas.

The profit margin and cost competitiveness may be affected due to change in the prices of raw materials, power and other input costs which can significantly impact the profitability. Careful monitoring and being frugal and innovative can be very encouraging.

Discussion on Financial Performance with respect to operational performance

During the year the Company recorded Revenue from operations by way of Sales of Rs. 15,021.45 lakhs as against Rs. 12,584.07 lakhs in the FY 2019-20, a increase of about 19% in sales value. During the year the Net profit after tax was Rs. 396.15 lakhs as compared to loss of Rs. 468.42 lakhs in the previous financial year.

KEY FINANCIAL RATIOS

Sl.No. Particulars	2020-21	2019-20
1 Debtors Turnover	4.37	5.14
2 Inventory Turnover	1.51	1.27
3 Interest Coverage Ratios	2.1	1.07
4 Current Ratio	1.41	1.20
5 Debt Equity Ratio	0.56	0.57
6 Operating Profit Margin (%)	11.91	2.87
7 Net Profit Margin (%)	2.64	(3.71)
8 Return on Net Worth (%)	2.77	(3.37)

1. The change in debtor’s turnover is due to increase in sales at year end and change in inventory turnover is also due to increase in sales.

2. The change in interest coverage ratio is due to increase in EBITDA (Earnings before interest, taxes, depreciation and amortization) because of increase in sales.

3. The change in Operating margin, Net profit margin and Return on Net Worth is due to increase in sales.

Internal Control Systems and their adequacy

Your Company has effective internal control systems commensurate with the size of the Company. This is further supplemented by an internal audit being carried out by an external firm of Chartered Accountants. The internal auditors conduct audits of the performance of various departments, functions and locations and also statutory compliances based on an annual audit plan chalked out in consultation with the Audit Committee. They report their observations/ recommendations to the Audit Committee of the Board of Directors, which comprises two non-executive Independent Directors. The Audit Committee reviews the Audit observations and follows up on the implementation of the suggestions and remedial measures and also recommends increased scope of coverage, wherever necessary.

Human Resources and Industrial Relations

Employees are the main resource for the Company. The Company has done its best to retain the best employees and create a favorable work environment that encourages the young credible employees to perform innovatively and train them in a sophisticated manner with implementation of new technologies.

During the year under review all employees worked innovatively and supported productivity in an encouraging manner and high technological changes have been initiated in the process of production resulting in to cost effective quality production.

The staff strength of the Company as on 31st March, 2021 was 878 including trainees, employees on contract.

Cautionary Statement:

Statements in the Management’s Discussions and Analysis report describing the Company’s objectives, projections or predictions may be ‘forward-looking statements’ within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied.