lokesh machines ltd Management discussions


ECONOMY OVERVIEW

Indian

The Indian economy has battled the four Cs – Covid-19 pandemic, Conflict (geopolitical), Climate change, and Central bank actions. Notwithstanding these headwinds, the economy has demonstrated a fair degree of resilience. It is poised to register a growth rate of 7% in Gross Domestic Product (GDP) in 2023. However, despite several macroeconomic indicators directing towards sustained growth for the country, the economy is still vulnerable to global developments. Factors like geopolitical unrest in Ukraine, growing tensions between China and the West, supply chain disruptions, and rising commodity prices may dampen the outlook. The impact of these factors on the economy is evident from the increasing level of inflation. Indias inflation rate moderated to 5.7% in December 2022, after reaching its peak of 7.8% in April 2022. India is anticipated to maintain its trajectory of economic expansion and become a USD 5 trillion economy by 2027. Structural improvements in the financial system, the ongoing pace of reforms, and policies that support a revival of the private sector pave the way for an improved medium-term growth outlook.

(Source:https://assets.kpmg.com/content/dam/kpmg/uk/pdf/2022/09/global-economic-outlook.pdf)

Global

The global economy is expected to experience a slight downturn in 2023, resulting in a 2.9% downfall, according to the latest report of the International Monetary Fund (IMF). However, the outlook for 2024 is more positive, with a projected rise of 3.1%. This is an increase of 0.2 percentage points compared to the prediction, forecasted in the October 2022 World Economic Outlook (WEO). IMF projects the global growth to remain in the range of 2.6%-3.3% year-on-year for the next 5 years. Furthermore, energy and food prices have significantly dropped from their previous peaks. However, inflationary pressures are impacting households and businesses, alike. By tightening monetary policy more aggressively, central banks are increasing the likelihood of a recession in many economies. The earlier impacts on the labor supply and healthcare services are expected to persist, leading to a more constrained labor market. This is expected to impose further strain on public finances in the medium-term.

(Source: IMF World Economic Outlook Update January 2023)

1) Product: Milling Machines, Drilling Machines, Turning Machines, Grinding Machines, Electrical Discharge Machines, and Other Product Types

2) Automation: Computer Numerical Control (CNC)

Machine Tools, Conventional Machine Tools

3) Sales Channel: Direct, Indirect

4) Industry: Automotive, Aerospace and Defense, Construction Equipment, Power and Energy, Industrial, and Other Industries

5) Geography: North America, Europe, Asia- Pacific, Latin America, Middle East, and Africa.

The machine tools industry plays a vital role in producing fundamental machineries for a wide range of sectors such as automobiles, heavy electrical equipment, and defense. Its performance determines the competitiveness of these industries. However, the machine tools industry, along with other industries, is being disrupted by several factors. These include recent technological advancements including the integration of 3D-printing technology, the automation boom, coupled with innovations in machine tools, hardware and software, among others.

Advanced countries are currently transitioning from digitalisation and automation to collaborative and smart manufacturing in the machine tools industry. According to a report by Fact.MR (Source), the global market value for machine tools was USD 66.15 Bn in 2022. Going forward, it is projected to reach USD 107.75 Bn by 2032, registering a Compound Annual Growth Rate (CAGR) of 5% between 2022 and 2032.

(Source: https://www.factmr.com/report/4348/machine-tools-market)

Outlook

The future of the machine tools industry looks bright as there is a growing demand for high-quality products that depend on precise machining. This demand for precision is fuelling the growth of the machine tools industry and is expected to continue in the coming years. Besides, the need for enhanced mass production capabilities in end-user sectors, such as automobiles has prompted the automation of machines. The expansion of the manufacturing industry is also expected to drive the growth of the machine tools market in the future. A key trend, gaining traction in this market, is the emergence of new product innovations. To remain competitive in the machine tools industry, major companies have made it a top priority to invest in the development of cutting-edge products. (Source: https://www.thebusinessresearchcompany.com/ report/machine-tools-global-market-report)

Indian Market

The Indian machine tools industry is one of the vital pillars of the industrial sector of Indian engineering. Machine tools are used to perform multiple operations like cutting, forming, drilling, grinding, and abrading. They are designed to reduce the manual efforts and increase the uniformity of the finished products. In India, there is a diverse range of machine tools available. This ranges from small workbench-mounted instruments to large devices, used across a wide range of industries, including automotive, aerospace, and electronics. Machine tools are extensively used in die moulding, part production, aerospace, shipbuilding, electricals and electronics, healthcare, and consumer durables. As per a report by the International Market Analysis Research and Consulting Group (IMARC Group), the size of Indian machine tools market has reached USD 1.4 Bn in 2022. It is expected to reach USD 2.5 Bn by 2028, exhibiting a CAGR of 9.4% during 2023-28.

The demand for machine tools in India is largely driven by the automobile and consumer durable industries. These industries are progressively embracing Computer Numerical Control (CNC) machines to improve their manufacturing processes. Given the importance of machine tools, the Indian Government has implemented several measures to foster its growth. These include upgrading technology and facilitating technological collaborations to manufacture high-end machine tools, among others. The ‘Make in India initiative introduced by the Government has identified automobile, auto component, biotechnology, defense, railways, and textile sectors for development. The machine tools industry is set to emerge as a key enabler in this journey as automobiles, auto-components, defence, and railways have been the primary users of machine tools. (Source: https://www.imarcgroup. com/india-machine-tools-market)

Outlook

The Indian machine tools industry is rapidly advancing and embracing innovative solutions. The surge in technology adoption in this industry is being driven by the user industries demand for automation and enhanced productivity. The demand for machine tools is increasingly focused on designs that are more flexible and adaptable in order to seamlessly accommodate new products. Additionally, there is a call for advanced CNC controllers that can operate with precision and sophistication. To accommodate this upliftment, companies need to encourage R&D activities to cultivate and process the ideas of machine tools manufacturing.(Source: https://www. theindustryoutlook.com/manufacturing/industry-experts/automation-in-machine-tool manufacturing-nwid-711. html)

OPPORTUNITIES

Growth Drivers

The Indian machine tools market is experiencing a boost from the growing emphasis on industrial automation, which is resulting in increased overall productivity and improved ergonomics. Additionally, the growth is being bolstered by an increase in the number of small and medium-sized enterprises (SMEs), along with stringent evaluation criteria for product quality. Machine tools manufacturers have a significant markets, which are expected to experience faster growth than developed markets and offer substantial untapped potential.

Government Initiatives

The Indian Government has launched various initiatives such as Make in India and Skill India to encourage domestic manufacturing and enhance the skill set of the workforce. In addition, the industry has benefitted from Governments incentives, subsidies, and investments in R&D.

Automotive and Aerospace Industry

Indias automotive and aerospace industries are experiencing rapid growth, leading to a surge in demand for machine tools. Opportunities have soared particularly in the field of high-precision and high-speed machining processes. Indias emergence as a hub for low-cost manufacturing has further stimulated the demand for machine tools.

Increasing Exports

The Indian machine tools industry has been successful in capturing a significant share of the global market. Its export turnover accounts for a major part of the industrys revenue. Its expertise in producing cost-effective machine tools has made it a sought-after supplier to several countries worldwide.

Rising Domestic Demand

The growth of Indias manufacturing sector has led to an increase in the domestic demand for machine tools. The demand is being driven by sectors such as defence, railways, and power generation, which require high-quality and advanced machine tools.

Technological Advancements

The industry has been adopting new technologies such as automation, IoT, and Industry 4.0 to enhance the efficiency and productivity of its processes. The adoption of these technologies has helped the industry to offer a wider range of products and services to customers.

THREATS

Despite achieving strong growth in recent years, Indias machine tools industry faces multiple challenges. The industry is experiencing a ripple effect from changing market dynamics and technological advancements. This is necessitating the manufacturers to adapt to the new environment.

Competition from Foreign Manufacturers

The Indian machine tools industry faces stiff competition from foreign manufacturers, particularly from China, Japan, and Germany. These countries have a long history of machine tools manufacturing and a strong technological edge over India.

Limited Access to Financing

The machine tools industry demands significant in R&D, manufacturing, and marketing. However, one of the major challenges faced by the Indian manufacturers in the machine tools industry is limited access to financing, which can hinder their ability to innovate and expand.

Lack of Skilled Labor

The machine tools industry requires skilled labor for design, development, and production. However, a significant challenge for the industry in India has emerged in the form of shortage of skilled labor, which is impeding the growth of the industry.

Dependence on Imported Components

The Indian machine tools industry relies heavily on imported components, particularly precision tools, and cutting-edge technologies. This dependence exposes the industry to supply chain disruptions and price volatility.

Regulatory Challenges

The Indian machine tools industry faces regulatory challenges, particularly in terms of import regulations and taxes. These stringent regulations make it difficult for Indian manufacturers to compete with foreign manufacturers.

COMPANY OVERVIEW

Incorporated in 1983, Lokesh Machines Limited (‘LML) started its commercial operations in 1985 in Hyderabad. The Companys forte lies in manufacturing machine tools and auto components. It specialises in the production of Finish Cam & Crank Boring, Finish Barrel Boring, and Finish Joint Faces Milling machines. Additionally, it offers niche products for the non-automotive sectors including the Agriculture and Farm Sector, Gas Turbine, Aerospace Sector, and Railways.

Lokesh Machines is a leading exporter of CNC machines from India and has established a strong presence in the global market. Its machines are exported to a number of countries including Russia, the Middle East, Italy, and Turkey. It has a well-established dealer network in South Africa, Russia, Italy, Turkey, and Bahrain to have close contact with its esteemed customers.

The Company has entered into a Memorandum of Understanding (MoU) with Advanced Manufacturing Technology Development Centre, IIT Madras. The objective is to develop new technologies and products that are currently being imported, thereby offering the latest technological features to customers, at an affordable cost.

During the financial year 2022-23, the Company has set up a new division for the manufacturing of Defence and Aerospace components in response to the Government of Indias call for an ‘Aatma Nirbhar Bharat. The Company is owning more than 200 machines at their single or multiple locations, both in the automotive and non-automotive sectors.

Segment wise Performance

Machine Tools Division

The Company has effectively managed the impact of rising commodity prices and supply chain disruptions. It has subdued the impact on imported items, through a focused supply chain management approach and strict cost controls. Additionally, it has successfully expanded the promotion of its machines in the non-automotive sector. The Company expects this trend to be sustained in the future. Lokesh Machines is making consistent efforts to enhance its technological competencies, increase cost competitiveness, and expand its market reach.

Component Division

The Company possesses extensive experience in the automobile sector. It specialises in the production of auto components such as cylinder blocks, cylinder heads, and connecting rods. Despite experiencing a significant surge in demand, the Company effectively controlled costs and minimised investments by implementing well-established continuous improvement practices such as Kaizens.

Outlook

Machine Tools Division

Following a prolonged period of sluggish growth, the automotive industry is currently experiencing a substantial upswing. This is likely to be driven by an overall economic resurgence, the improvement of rural cash flows, and a growing demand for personal mobility. The introduction of schemes such as ‘Production-Linked Incentives and ‘Vehicle Scrappage Policy is expected to enhance the global competitiveness of the Indian automotive industry. To cater to the potential demand, the Company is expanding its manufacturing and marketing capabilities significantly. Also, the Company aims to tap into new opportunities, emerging from non-automotive industries. To fulfil this, the Company is upgrading its technology to global standards through strategic partnerships with leading European and South Asian firms.

Component Division

Lokesh Machines is rapidly increasing its production capacities to meet the rising demand. Additionally, the Company is leveraging its strong engineering capabilities, infrastructure, and well-established processes. It is also venturing into non-automotive sectors, as it is optimistic about making significant progress in the years to come.

FINANCIAL PERFORMANCE

In 2022-23, the Company achieved a significant increase in revenue from operations through sales, generating Rs. 24, 030.24 Lakhs compared to Rs. 20,183.76 Lakhs in 2021-22, resulting in a growth of approximately 19.05%. During 2022-23, the net profit after tax was Rs. 967.35 Lakhs as compared to a profit of Rs. 634.60 Lakhs in 2021-22.

Key Financial Ratios

Particulars Numerator Denominator 2022-23 2021-22 % Variance Reason variance for
(a) Current Ratio Current Assets Current Liabilities 1.31 1.44 9% Not significant
(b) Debt-Equity Ratio Debt Equity 0.55 0.58 5% Not significant
(c) Debt Service Coverage Ratio EBITDA Interest + Principal 2.75 1.44 91% Increase in EBITDA
(d) Return on Equity Ratio PAT Average equity 1.56% 1.08% 45% Increase in PAT & Sales
(e) Inventory turnover ratio Cost of goods sold Average Inventory 1.30 1.10 18% Increase in sales
(f) Trade Receivables turnover ratio Net sales Average trade receivable 5.68 4.81 18% Increase in sales
(g) Trade payables turnover ratio Net Purchases Average trade payable 5.25 3.96 33% Increase in purchases
(h) Net capital turnover ratio Net sales Working capital 5.86 4.18 40% Increase in sales
(i) Net profit ratio PAT Net sales 4.03% 3.14% 28% Increase in PAT & Sales
(j) Return on Capital employed EBIT Average capital employed 9.86% 8.87% 11% Increase in EBIT
(k) Return on investment PAT Average equity NA NA

RISKS AND CONCERNS

The machine tools industry is highly susceptible to fluctuations in global economic conditions. There is a direct correlation between machine tools sales and expenditures in the manufacturing industry. Hence, a downturn in the global economy is expected to result in a decrease in revenue for the machine tools industry. The industry is highly competitive, with numerous players vying for market share. The entry of new players, especially those from low-cost manufacturing regions, are set to intensify competition, putting pressure on prices and margins.

Furthermore, the machine tools sector is heavily influenced by trends in the automotive industry, as this sector is a major user and adopter of machinery. The cyclical nature of the automobile sector also influences the demand for machine tools, in turn, impacting the Companys order book. In addition, the machine tools industry relies on skilled labor for designing, manufacturing, and maintenance. A shortage of skilled labor can impact productivity and increase labor costs.

Lokesh Machines is focusing on export orders and non-automotive business to mitigate risks. This approach of the Company has yielded positive results so far. Furthermore, it has implemented effective risk management strategies by identifying and prioritising risks. The Company has streamlined measures to lighten risk, along with regularly monitoring and reviewing their effectiveness. Careful monitoring and judicious caution, along with cutting-edge innovation, is to help maintain its margins.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Lokesh Machines 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. This also includes statutory compliances - based on an annual audit plan - chalked out in consultation with the Audit Committee. They report their observations and recommendations to the Audit Committee of the Board of Directors, which includes two non-executive Independent Directors. The Audit Committee reviews the audit observations and follows up on the implementation of the suggestions and remedial measures. It also recommends increased scope of coverage, wherever necessary.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

Lokesh Machines places great importance on its employees and regards them as its most valuable resource. The Company strives to establish a positive work environment to foster innovation and professional growth. Additionally, the Company invests heavily in training its employees, equipping them with the latest technology to ensure they are proficient in their roles. Lokesh Machines has achieved efficient and cost-effective production by incorporating technological advancements into its production process, which is a key ingredient in its long-term success. The Company boasts a robust workforce of 526 as on March 31, 2023.

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.