Lokesh Machines Ltd 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 2019-20 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 2019-20 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 other factors beyond control.

Industry Structure and Developments:

The Indian machine tools sector has been witnessing a slowdown and FY 2019-20 was a challenging year for the Company in terms of Sales as well as Profit. The Indian automobile sector and allied industries witnessed several headwinds in the financial year 2019-20 due to slowdown in the economy and regulatory changes such as emission norms, axle load and other norms, which hindered the Industrys performance. During the year Medium and Heavy Commercial Vehicle Industry and Tractor industry registered a negative growth which has severely impacted the Auto Component Industry. Due to delayed monsoon and flooding, the Tractor industry witnessed a negative growth during the FY 2019-20.

With the advent of BS6 from April 2020, the industry was praying for a change in sentiment and fortunes. But much to everybodys dismay, a totally unforeseen event in the form of a pandemic COVID-19 has disrupted the entire world and our country was no exception. Due to on-going Covid-19 Pandemic, a lockdown was imposed by the Central Government in March 2020 and the Company has to shut down its manufacturing operations and partially resumed operations subsequently on second week of May, 2020 with minimum workforce as per the guidelines issued by the Ministry of Health and Family Welfare. The Company has taken necessary steps to build in all the safety and precautionary measures across all its facilities and plants. The Impact of Covid-19 shall be felt in the Financial Year 2020-21 as it is expected to further drag the slowness in the auto industry and the revival is bound to slow.

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.

Besides Auto component manufacturers, a host of Engineering, Medical, Defense 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. The main threat to which the Industry is exposed to is volatility of commodity prices affecting input costs structure. Volatility and seasonality have a significant impact on capacity utilizations in the Industry which would result in stiff price competition in lean periods. However the Company strives to create sustainable profitable growth by continuing focus on technology developments/ up gradation and quality of its products to its diversified customer base which will lead the Company towards a competitive edge in the market.

Segment –wise Performance

Machine Tool Division: In line with the Industry performance as mentioned above, your company also is adding significant capacities in the coming years both in 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. With an efficient 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 36 years in automobile sector and in manufacturing of auto components such as Cylinder Blocks, Cylinder Heads and Connecting Rods. With significant demand from M&M, the company is adding capacities to meet the demands.

Outlook

The Long term outlook for the industry is optimistic based upon the product innovation as most major global players having a base in India for manufacturing, global sourcing and engineering. The domestic demand will continue to grow due to a pent up demand on account of a prolonged slow down. The Tractor Industry expects a strong growth in the Year 2020-21 due to good amount of rainfall, increase of Minimum Support Prices, credit availability and a, positive farm sentiment.

Risks and Concerns

The Companys 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.

Our margin and cost effectiveness 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 of the above cost 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. 12,584.07 lakhs as against Rs. 19,044.07 lakhs in the FY 2018-19, a decrease of about 34% in sales value. During the year Company has suffered a loss of Rs. 468.42 lakhs, whereas previous year 2018-19 Company has registered a profit of Rs. 676.54 lakhs.

KEY FINANCIAL RATIOS

Sl.No. Particulars 2019-20 2018-19
1 Debtors Turnover 5.14 5.86
2 Inventory Turnover 1.27 1.99
3 Interest Coverage Ratios 1.07 2.50
4 Current Ratio 1.20 1.17
5 Debt Equity Ratio 0.57 0.54
6 Operating Profit Margin (%) 2.87 12.06
7 Net Profit Margin (%) (3.71) 3.53
8 Return on Net Worth( %) (3.37) 4.69

1. The change in Inventory Turnover Ratio is due to reduction in sales. The sales have been impacted due to slowdown in the auto industry.

2. Interest coverage ratio is at 1.07 as compared to 2.50 of previous year. This is because EBITDA (Earnings before Interest, taxes, depreciation and amortization) has come down due to decrease in sales.

3. The change in Operating Profit margin, Net Profit Margin and Return on Net Worth is due to drastic fall down of sales and the slowness of the Automobile market.

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, 2020 was 957 (including trainees, employees on contract).

Cautionary Statement:

Statements in the Managements Discussions and Analysis report describing the Companys 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.