Mallcom (India) Ltd Management Discussions

Personal protective equipment industry overview

Global: The global market size for personal protective equipment (PPE) reached US$ 69.3 Billion in 2022 and is projected to reach US$115.0 Billion by 2028, with a compound annual growth rate (CAGR) of 8.7% during the period from 2023 to 2028. The growth is driven by government safety regulations, rising workplace safety awareness, increasing demand for high-tech and comfortable PPE products, growing instances of occupational accidents, expanding construction activities and the introduction of smart PPEs. Stringent guidelines by organizations such as the Occupational Safety and Health Administration (OSHA) and the International Labour Organization (ILO) will further contribute to the market expansion.

The personal protective equipment (PPE) market is divided into key regions, namely North America, Europe, Asia- Pacific, Middle East and Africa and South and Central America. In 2022, Asia-Pacific emerged as the dominant region in terms of PPE market share. The Asia- Pacific market is expected to sustain its growth trajectory due to the increasing demand for PPE across various industries, including healthcare, manufacturing and construction.

Sectorial growth drivers

Increasing safety awareness: The focus on worker safety has led to a significant rise in PPE adoption. Effective safety and health management systems have shown a 20% reduction in lost workdays and a return on investment of US$4 to US$6 for every dollar invested, as per OSHA statistics. The increasing workplace hazards have compelled workers to use PPE for personal safety.

Stringent standards: Governments and regulatory bodies implemented strict guidelines and standards for workplace safety, driving the global PPE market.

Key certifications include CE marking in Europe, NIOSH certification in the US, BIS certification in India and CDSCO license for face masks. These certifications ensure compliance with quality and safety standards, instilling confidence in the effectiveness of PPE products. Adhering to these guidelines contributes to the growth and credibility of the PPE industry.

Rising occupational hazards: The expansion of industries and technological advancements has increased the risks faced by workers, leading to significant growth in the global PPE market. In 2022, OSHA reported 39 deaths in trench and excavation incidents, which is more than double the number of deaths recorded in 2021. (Source: equipmentworld.com)

Growing healthcare sector: The healthcare industrys rapid growth, combined with post-pandemic awareness, has driven the demand for PPE. In India, the PPE market crossed the H7,000 Crore mark and continues to grow steadily.

Technological advancements: The PPE industry has experienced growth through innovative advancements, including the introduction of smart PPE with advanced features. The global smart PPE market is expected to reach a size of US$ 8.7 Billion by 2027, demonstrating a notable CAGR of 15.9%. This highlights the increasing importance of technology-driven solutions in ensuring enhanced protection and safety measures. (Source: Globe News wire)

Increasing focus on worker well-being:

The growing emphasis on employee wellbeing has resulted in a notable increase in the demand for PPE, driven by employers dedication to ensuring worker safety and morale. This substantial shift has had a positive impact on the market, solidifying PPE as a vital component of employee protection programs. In a recent survey conducted by Aon, it was found that the majority (83%) of global employers now have an employee well-being strategy, marking a significant rise from 55% in 2020.

Global events and emergencies:

Outbreaks and emergencies, including the COVID-19 pandemic, have significantly boosted the global demand for PPE. According to the 2020 Ecological Threat Register, the number of natural disasters increased by tenfold since the 1960s and data from the Institute for Economics and Peace shows a rise from 39 incidents in 1960 to 396 incidents in 2019.

Company strengths

Operating in sector agnostic product segment with high demand outlook

MIL (Mallcom India Ltd) is positioned for growth as the demand for industrial safety products continues to rise globally. With a substantial order book position of approximately H125 Crore as of 31 March, 2023, we are experiencing favourable market conditions. The company expects further revenue growth, supported by a healthy order book and strong demand for safety products. Additionally, the company foresees more than 10% increase in operating income for FY 23-24, driven by both domestic and export sales.

Strong promoter support and established track record of operations

The company has been involved in the manufacturing, export and distribution of industrial safety products for four decades. The products are sold in the domestic and export markets. The companys established track record of operations and rich experience as the promoter mitigate operational risk to a significant extent.

Strong client relationships and diversified product portfolio

The company holds a prominent position as a major manufacturer and distributor of PPE products in India. With a remarkable customer retention rate of over 80%, the company receives a significant majority of its orders from repeat customers. Its diverse product portfolio ensures comprehensive protection for individuals across various industries and work environments.

Diversified customer base and global presence

Mallcom maintains a diversified customer base and global presence. The Company has established a strong reputation and client base across various industries, resulting in repeat orders that signify its reliable product quality and low counterparty risk. While the top ten customers account for 40% of total revenue, indicating a moderately diversified customer base, supply products to approximately 50+ countries across six continents.

Robust capacity expansion alongside sustained operational efficiency

Your company continues to pursue aggressive capacity addition plans driven by the strong demand outlook for PPE products in domestic and export markets. The Ghatakpukur expansion project in West Bengal is approaching the completion of its first phase, while the newly installed, Ahmedabad unit is targeting turnovers of H30 Crore this year. All the while, the company has been able to maintain a commendable operational efficiency of 80%.

Steady operating margin growth and robust profitability

Over the past five years, your company has consistently experienced profitable performance, with healthy profits and cash accruals. The RoCE has remained at a satisfactory level of 25%.

Due to the increasing sales of high-margin products, the companys margins in FY 2223 were at par with the previous years. Cash accruals remained strong, reflecting a positive outlook

Risk management

Competition risk: The international safety wear market faces fierce competition from organized and unorganized players, which has the potential to impact profit margins.

Mitigation: The Company has established a strong brand reputation for itself, delivering high-quality safety wear products consistently. We fostered reliable supplier relationships with 80% of the revenues from repeat customers.

Working capital risk: The elevated working capital intensity stems from the substantial inventory requirements resulting from a diverse product range, coupled with an extended receivables cycle, which may potentially lead to liquidity challenges and inventory turnover issues.

Mitigation: The Company has a robust inventory and supply chain management system to minimize the risk of obsolescence. The Net Working Capital to Operating Income ratio (NWC/ OI) of the company improved to 23.4% in FY 22-23 from 28.84% in FY 21-22. The companys significant cash/bank balance and liquid investments offer reassurance regarding its liquidity position.

Supply chain risk: The company relies on suppliers and manufacturers to source raw materials and produce their products. Disruptions in the supply chain, such as delays, quality issues or the inability to secure necessary materials, can impact production and delivery.

Mitigation: The Company strengthens resilience and reliability by diversifying suppliers, establishing contingency plans, and enhancing supply chain visibility. It maintains strong supplier relationships, conducts risk assessments and optimizes inventory management, ensuring operational stability while mitigating supply chain risks.

Forex risk: A considerable percentage (64% in FY 22-23) of the companys revenue is derived from export sales, which may expose MIL to the risk of foreign exchange rate fluctuations.

Mitigation: The company has implemented a formal hedging mechanism to hedge all of its foreign currency receivables. Furthermore, the import of certain raw materials acts as a partial natural hedge, effectively mitigating the companys exposure to foreign exchange rate fluctuations.

Regulatory risk: MIL is subject to regulatory risks, as it benefits from export incentives and interest subvention provided by the Government of India (GoI). Consequently, changes in duty structure and the rate of export incentives may pose a potential risk to the companys revenues.

Mitigation: The company installed measures for regulatory risks including diversifying the product portfolio and actively monitoring duty structures, export incentives and regulations through engagement with industry associations and government authorities.

Product liability risk: The companies may face product liability claims if their products are defective or fail to provide the intended protection. These claims can result in legal costs, settlements, or damage to the companys reputation.

Mitigation: The company addresses this risk by implementing rigorous quality control measures, ensuring clear documentation and instructions, and securing sufficient product liability insurance coverage.

Environmental and sustainability risks: Failure to meet sustainability standards and address environmental concerns can damage the companys reputation and result in potential business losses.

Mitigation: The company embraces sustainable manufacturing practices, complies with environmental regulations, and prioritizes supply chain sustainability. It emphasizes product design, transparency and collaboration with stakeholders to enhance environmental performance and mitigate reputational risks.

Internal control systems and their adequacy

Your Company is having adequate systems of internal control commensurate with its size and nature of its business. These internal controls have been designed to provide reasonable assurance that all company operational and financial processes are adequate to safeguard and protect against any loss from unauthorized use or disposition and that all transactions are authorized, recorded and reported correctly.

Internal control system is highly important in the light of current economic downturn. Monitoring, review and assessment of internal controls across various functions is performed at regular intervals by the Audit Committee and corrective actions are initiated whenever deemed necessary. Continuous evaluations is necessary to ensure whether the implemented internal control system is effective as intended by the Board of Directors. The Audit

Committee also meets the Companys Internal Auditors as well as Statutory Auditors to ascertain for their views on the adequacy of internal control systems of the Company and keeps the management informed of its major observations.

Human resources management and industrial relations

The Company considers the quality and commitment of its human resources to be its most important asset and places great emphasis on the training and development of human resources at all levels and providing conducive working environment. The management firmly believes that business cannot grow without utilising the potential of its human resources.

As on 31 March 2023, the total strength of permanent employees is 330 as compared to 289 in the previous year as on 31 March, 2022. Your Company maintains a cordial relationship with its employees and values the safety of its employees ensuring safe work practices. Despite the pandemic bringing new challenges, your Company continued to evolve its people practices in supporting its employees through the challenging times. The Company pursued vaccination of its workforce and their family members and achieved the vaccination coverage of over 99% of employees across all location and businesses. Your Company has a culture of working together through joint consultation between senior management and employees and a very strong commitment towards mutual development. Your Company believes in developing long term relationships with all our employees on an ongoing basis. Industrial relations at all the manufacturing units of your Company have been harmonious and peaceful with active involvement of the employees in the collective bargaining process.

Financial overview

The Company recorded a profit after tax of H3,693.71 Lakh during the financial year ended 31 March, 2023 as against H3,155.63 Lakh during the financial year ended 31 March, 2022. The basic & diluted earnings per share were H59.19 for the financial year FY 22-23 as against that H52.28 for the financial year FY 21-22.

Highlights of our financial performance

(Rs in Lakh)

Particulars	Standalone	Standalone	Consolidated	Consolidated
	FY23	FY22	FY23	FY22
Net sales/ Income from operations	40,443.16	36,387.84	41,055.39	35,722.85
Other income from operations	299.00	309.86	314.69	313.81
Total income from operations (1 + 2)	40,742.16	36,697.70	41,370.08	36,036.66
Total expenditure	35,831.39	32,577.04	36,279.68	31,787.65
EBITDA	5,505.11	4,620.65	5,848.31	4,968.36
EBITDA Margin (%)	13.61	12.70	14.25	13.91
Depreciation	665.84	625.28	826.81	828.84
Finance Cost	227.60	184.57	245.79	204.32
Profit Before Tax (PBT)	4,910.67	4,120.66	5,090.40	4,249.01
Provision for tax	1,244.98	1,031.74	1,396.69	1,093.38
Profit/loss after tax (PAT)	3,665.69	3,089.26	3,693.70	3,155.63
PAT Margins (%)	9.00	8.42	8.93	8.76

Cash flow analysis

(Rs in Lakh)

Particulars	Standalone	Standalone	Consolidated	Consolidated
	FY23	FY22	FY23	FY22
Source of cash
Cash flow from operations	7,104.05	1,387.57	6,589.63	1,330.96
Increase in Borrowings	3,876.13	-	3,736.27	250.81
Sale of Investment	-	1,878.58	-	1,878.58
Cash Flow from Investing Activities	172.69	304.15	188.31	306.04
Decrease in cash & cash equivalent	-	242.74	-	212.01
Total	11,152.87	3,813.04	10,514.21	3,978.40
Use of cash
Net capital expenditure	4,452.41	1,532.67	4,584.40	2,380.52
Financial expenses	227.60	184.57	245.79	204.32
Dividend (Including dividend tax)	187.20	187.20	187.20	187.20
Direct taxes paid	1,201.27	1,119.88	1,244.38	1,206.36
Purchase of Investment	-	-	2,698.63	-
Increase/(Decrease) in Non-current investments/ Acquisitions	3,948.10	-	409.48	-
Repayment of borrowings	-	788.72	-	-
Increase/(Decrease) in cash & Cash Equivalent	1,136.29		1,144.33
Total	11,152.87	3,813.04	10,514.21	3,978.40

Key financial Indicators

Particulars	Standalone	Standalone	Consolidated	Consolidated
	FY23	FY22	FY23	FY22
Debtor Turnover Ratio (Times)	6.01	6.10	6.07	6.40
Inventory Turnover Ratio (Times)	7.21	6.56	5.55	5.22
Interest coverage Ratio (Times)	22.58	23.33	21.71	21.80
Current Ratio (Times)	2.15	1.59	2.14	1.69
Debt/equity Ratio (Times)	0.29	0.44	0.43	0.28
PAT (%)	8.42	9.00	8.76	8.93
EBITDA (%)	12.70	13.61	13.91	14.25
Return on Net Worth (%)	19.03	19.66	18.18	18.33

Cautionary statement

Statements in the Management Discussion and Analysis describing the Companys objectives, expectations or forecast may be forward-looking within the meaning of applicable laws and regulations.

Actual results may differ materially from those expressed in the statement. Important factors that could influence the Companys operations include global and domestic supply and demand conditions affecting selling prices of finished goods, input availability and prices, changes in government regulations, tax laws, economic developments within the country and other factors such as litigation and industrial relations.