modison ltd share price Management discussions

Global Economic Outlook

The global pandemic caused an economic shock led by almost two years of shutting down of borders and businesses. The multiple lockdowns resulted in unusual economic volatility.

Two years later, several countries across the world are seeing a revision in their numbers as the world economy is showing a robust post-recession recovery in 80 years. There was an upward growth of 5.9% in 2021 from the contraction of 3.3% in 2020. However, continued Covid-19 flare-ups in the form of the Delta and Omicron variants, weakened fiscal support, supply bottlenecks, waning of long-term growth drivers, climate disasters, etc have resulted in deceleration of growth estimates to 4.1% in 2022.

As the world expected to recover steadily from the pandemic shock, another tremor struck in the form of the Russia-Ukraine conflict since late February 2022. This has altered geopolitics and now requires businesses to navigate an altered map given the several global and economic implications, especially when these two countries account for a large share of global energy and metal exports.

The outlook for the next two years will depend on how this geopolitical conflict evolves. According to research reports, global GDP growth could range between 3.3%-4% in 2022 and between 2.5%-3.2% in 2023, depending on how the scenario unfolds.

Source: KPMG Global Economic Outlook Report, April 2022

Predicting our economic future: Nariman Behravesh, World Economic Forum

Indian Economic Review and Outlook

The Indian economy witnessed a muted first half in FY22 due to the COVID induced lockdown. However, it staged a strong rebound in the latter half of FY22 from the Delta variant-induced sharp contraction. Banking on strong government support and rapid vaccination roll-out, the third-wave impact of Covid-19 was fundamentally contained as India began to focus on its economic recovery. India is expected to be among one of the fastest growing major economies, with the Reserve Bank of India (RBI) projecting GDP growth to be around 9.2% in FY22 and 7.8% in FY23.

The Indian Governments focus on driving Public Private Partnership (PPP) projects and extension of

Production Linked Incentive (PLI) schemes to new sectors is expected to drive growth in domestic manufacturing and create more jobs. Initiatives such as reducing import duty and excise tax on fuel are some of the steps taken to reduce input costs and ease inflationary pressure on industry. However, rising inflation and supply chain delays created higher input costs for the industry which were then exacerbated by the recent geopolitical developments including the evolving Russia-Ukraine situation. However, given that Government is looking to support growth and further RBI also has an accommodative monetary stance, it is expected that the overall industrial situation will gradually improve.

Source: KPMG Global Economic Outlook Report, April 2022 Fitch Ratings Special Report, December 2021

Global Electrical Equipment Industry

The global general electrical equipment and components market consists of electric lighting equipment, household appliances, power generation, transmission and control equipment, batteries and wires, and cables. The sub components of the said market comprise power converters (i.e., AC to DC and DC to AC), power supplies, surge suppressors among others.

The Covid-19 outbreak continued to act as a hindrance through the last two years on the electrical equipment manufacturing market due to supply-chain disruptions, periodic lockdowns, and the scare of impending waves.

The global electrical equipment market size is expected to grow from $1,384.97 billion in 2021 to $1,540.25 billion in 2022 at a compound annual growth rate (CAGR) of 11.2%. This is largely influenced by businesses having rearranged their operations to avert the pandemic impact that gave rise to containment measures such as closure of commercial activities, remote working, etc that resulted in operational challenges. The market is expected to reach $2,273.74 billion in 2026 at a CAGR of 10.2%.

Asia Pacific was the largest region in the general electrical equipment and components market in 2021 followed by North America.

Source: The Business Research Company

The Indian Electrical Equipment Industry

Indias electrical equipment industry is divided into two broad segments Generation equipment (boilers, turbines, generators) and Transmission & Distribution (T&D) and allied equipment like transformers, cables, transmission lines, etc.

The countrys electrical equipment market production is estimated to touch $100 billion in 2022. The sector is known to contribute about 8% to manufacturing in terms of value, and 1.5% to overall GDP. As per reports, by 2022, it is projected to provide employment, both directly and indirectly, to 3.5 million people.

Engineering Goods sector constitutes more than 27%, the largest share of Indias total exports. The growth in engineering goods exports in recent years has largely been due to the zero duty Export Promotion Capital Goods (EPCG) scheme.

The sector has received a boost from the Union Budgets Production-linked Incentive (PLI) Scheme and under Atmanirbhar Bharat for Large Scale Electronics Manufacturing and IT Hardware for

Enhancing Indias Manufacturing Capabilities and Enhancing Exports respectively. Besides, further policy initiatives such as delicencing of the electrical machinery industry along with 100% FDI allowed in this sector.

Source: Make in India Website (Electrical Machinery Sector)

Indian Power Transmission & Distribution Industry

The Indian power market had a total installed capacity of 399,497 MW as on March 2022 and is expected to register a CAGR of more than 3% during the forecast period of 2022-2027. Currently, in India, the power market is undergoing a significant transformation phase owing to the efforts taken by the government to improve electricity access in the country, along with its plans to increase the share of renewables in the countrys power generation mix. The Indian power market was reasonably unaffected by the COVID-19 pandemic, as electricity has been categorized as an essential service. However, the lockdown measures imposed by the government in the country caused a reduction in immediate electricity demand in commercial and industrial categories in Q1 of 2020. Factors, such as population growth in India which is expected to overtake China as the worlds most populous country by 2025, are a strong propeller for the power market. The degree of urbanization in the country will also have significant implications on the trend of energy consumption because of the increase in demand from industries that use energy for construction and manufacturing. However, huge investment is required to set up and modernize power generation, transmission, or distribution networks, and weak private sector investment is holding back the power market in India.

Source: Mordor Intelligence

Switchgear (LV/MV/HV) Industry

Electrical switch and switchgear are two important segments in the electrical goods industry. While switches are segmented in traditional and modular categories, the switchgear market is segmented as per the voltage requirements, such as low voltage (LV) and medium/high voltage (MV/HV).

The global switchgear market is expected to register a CAGR of 7% during the forecast period (2021 - 2026). The rising energy demand to encourage rapid urbanization and the new generation mix is expected to propel the switchgear market. Switchgear equipment is fundamentally used in the complex electrical substations to withstand fluctuating operating voltage in highly volatile environmental conditions. The development of new industrial structures, including powerplants for safe and reliable operations, is further estimated to stimulate the growth of the market.

The size of domestic switchgear industry was Rs183bn in FY18 and is growing at a steady pace of 9.3%. Hence it is expected to reach INR 286bn in FY23E. The low-voltage (LV) switchgear market (MCBs, DBs and RCCBs) derives demand from both residential and industrial sectors (unlike medium/high voltage segments which are used in industry and power utilities only). Retail sales (residential sector) constitutes more than 50% of the LV switchgear market. The electronics & electrical sector recovered by 27% to 14.9 Million ounces (Moz) (464 tons) last year and, importantly, surpassed 2019 levels. Within the electrical segment, notable growth was seen in both the high voltage and low voltage (LV) switchgear markets. The former outpaced the latter due to higher demand from state utilities and Central Public Sector Undertakings (CPSUs), which related to expanding their sub-station network after a slowdown last year amid nationwide lockdowns. The easing of the pandemic also meant that LV switchgear installations benefited from rising demand from the real estate and manufacturing sectors.

Industrial offtake in India rebounded by 28% last year to 34.2Moz (1,065 tons) from 2020s low base as economic activity improved. That said, demand was still 9% lower than in 2019 and still nearly

30% below 2011s record high. Demand is gradually expected to recover in FY23. Source: The Silver Institute

About Modison Metals Limited

Founded in 1965, Modison Metals Limited ("MML", or "Modison") is a brand to reckon with in the manufacturing of electrical contacts for switchgear in India and globally. Modison stands amongst a handful of companies around the world that manufactures electrical contact materials and finished contacts for all the areas of the switchgear industry including Low, Medium, High and Extra High Voltage. It also produces goods for dominant sectors such as automotive, engineering, aerospace and railways. The company is certified for ISO9001:2015, ISO14001:2015, and OHSAS18001:2007, and its lab is qualified by the National Accreditation Board for Laboratories (NABL) for chemical and mechanical research, demonstrating its standards of excellence.

The Modison group has plants at two locations in Western India namely Vapi and Silvassa, employing more than 500 people. Modison also has a robust in-house R&D department that is dedicated to developing and manufacturing products using best-in-class technology and equipment for ensuring continual improvements in productivity, cost reduction and development of defect-free products.

Modison has the advantage of developing a wide range of silver contacts for diverse industries. Its plant is amongst the largest single site for High Voltage electrical contact manufacturing globally, thereby enjoying a low-cost advantage.

Business Review

During the year FY2021-22, Modison Metals continued its growth momentum in terms of volume and value that was built in the previous year (FY2020-21). Despite the pandemic impact of 2nd wave & Omicron on manufacturing operations, higher inventory costs, unfavourable silver process movement and the volatile geopolitical situation, the company continued its growth trajectory. The company streamlined its operations and recorded increased market presence amongst its customers. Adverse input cost movement including silver impacted profitability in short terms. Given Modisons organisational efficiency, we remain optimistic that this growth will continue in the coming year.

We have started our capex plan for upgradation of our existing facilities by infra expansion , both green and brown field, procuring automated machinery and robots etc. This will augment efficiency and enable us to cater to the increasing product demand. We also plan to build a new factory at our existing premises for increasing the HV segment assembly line. The said capex involves an outlay of Rs. 25 crores, which will be funded through a mix of internal accruals and debt.

India is moving towards building a robust EV ecosystem with this years Union Budget announcing significant reforms. In line with our philosophy of contributing to Indias Make in India for the world mission, we have taken several steps towards strengthening our EV infrastructure offering. The Board approved the Companys business expansion plan in Battery Energy Storage System and EV charging Infrastructure. The Company has entered into an MoU with RENERA and LDrive (L-Charge), leaders in Battery Energy Storage System (BESS) and Electric Vehicle (EV) charging infrastructure segments respectively. These expansion plans are currently in the feasibility stage.

High Voltage (HV), Medium Voltage (MV) and Low Voltage (LV) segment:

This segment is our primary business and the largest revenue contributor, which has continued to add volume and revenue growth. In order to minimise COVID-19 pandemic and geopolitical disruptions, our key clients opted to consolidate their suppliers, which contributed significantly to our expansion. We anticipate that the aforementioned growth factor will sustain in the long run.

Salt, bullion & other segments:

We manufacture silver nitrate, silver sulphate, and silver oxide under this segment. These are high-grade precious metal compounds with diverse applications in industries such as silver plating, pharmaceutical catalysts, mirror manufacture, inedible inks, explosives, fine chemicals, performance chemicals, and silver oxide batteries. We booked first export order for Salt from Indonesia.

We also have a consumer bullion segment where we manufacture and sell silver bars and coins. These are promoted through partnership with the Post Office as well as via leading online websites and distributor network.

Our bullion and salt markets segment had a mixed year on account of the lockdowns and prevailing uncertainty. We expect to record growth in coming years on account of increased silver demand.


Our Strategy

We believe in a four-pronged strategy for growth which includes employee wellbeing, innovation and automation, financial stability & Lean implementation, and employee upskilling and development.

Our ‘Employee-first focusses on extending care and support to our employees and manage all our stakeholders as well. We have continued to extend our CARAE offering and ‘COVID-19 Employee

Benefit Scheme to match the medical, mental health, and financial needs of our workforce.

Another significant approach in FY2022-23 will be on innovation that include product development, automation, digitalisation, and new market development while keeping our operating costs in check. This will sharpen our focus on profit generation. Lean Six Sigma continue to be the bedrock of our strategy while Safety Integrity Quality remain integral, zero-tolerance values.

Todays dynamic world requires regular upskilling and enhancing employee-capabilities remains our top focus. Our recent lateral recruits in strategic roles of Operations, Finance, HR, R&D and Projects will start to yield results in the coming years. With a new and robust People Management System (PMS) is in place, we will aim at accelerating employee development. Our new flat organisation structure enables streamlined decision-making and lowers transactional costs. We have also implemented a new Reward & Recognition scheme to create an environment of Performance Excellence, which has started showing desired results and is expected to add significant value to our organisation.

We will continue with the "6C" (Care, Cost, Customer, Cash, Competency & Capacity) initiative that was launched in FY2019-20 as it becomes our business fundamental. We are on target to enhance our production capabilities through modernisation of our factories. This will enable us to meet dynamic market challenges.

Financial Review (Standalone)

Rs. In lakhs

Particulars FY22 FY21 Increase/ Decrease %
Total Income 34,118.85 29,363.76 (+)16.19%
EBITDA 2,843.79 3,792.93 (-)25.02_%
PAT 1,461.88 2,243.12 (-)34.83%
EPS (Rs.) 4.51 6.91 (-)34.73%

Financial Ratios

Particulars FY22 FY21 Remarks
EBITDA Margin % 8.33% 12.92%
Net Profit Margin % 4.28% 7.64%
Interest Coverage Ratio 10.66 15.55
Debtors Turnover Ratio 5.75 5.55
Current Ratio 4.12 4.00
Debt to Equity Ratio 0.10 0.07
Return on Net Worth % 8.60% 14.41%
Inventory Turnover Ratio 4.93 4.15

Threats, Risks and Concerns Commodity price risk

Given that copper and silver are the primary raw materials used by Modison, the Company is subject to the risk of price volatility.

Measures undertaken

The company is a net exporter, hence has a natural hedge. Further, the company has thoughtful hedging policy to cover the risk on commodity exchanges apart from varioable contract and commodity booking at the point of order.

Competitive threat

The Companys finished products may be subject to competition. Also, product substitution is a risk.

Measures undertaken

The Company takes special care in understand customer requirements and reaches out to the customers on a regular basis. This allows to innovate and introduce newer products to match the customers growing demands. Silver contacts are an integral part of switchgears and are expected to remain so in the foreseeable future. Also, Good R&D/ Development led innovation and customer connect program will create a barrier

Capital allocation risk

The Companys capital expenditure may be subject to time or cost overrun and may not yield the desired benefits.

Measures undertaken

The Company undertakes market feasibility study prior to expansion or new product launches and linked with market demand assessment.

Operational risk

The Companys operations may be subject to various interruptions including supply chain delays, accidents and natural disasters and pandemics.

Measures undertaken

Modison has a strong supply-chain arrangement along with necessary disaster management systems to mitigate risks and accidents and act in a timely manner. The Company has sufficient insurance cover in line with its business operations along with a robust Business Continuity Plan to overcome any pandemic-induced and other natural and accidental issues.

Human Resources

People are the biggest asset of an organisation, irrespective of the sector it operates in. They are a powerful enabler of growth and development. Modison believes in creating a people-centric environment that fosters individual growth along in line with organisational growth. The Company is focussed on upskilling and reskilling its people to match global standards and they do this through targeted training and development initiatives.

Internal Control Systems and their Adequacy

The Company is in charge of establishing and maintaining adequate and effective internal financial controls, as well as financial statement preparation and presentation. The assertions on internal financial controls are in accordance with the Companys broader criteria. Material miss-statements in financial reporting due to error or fraud may occur and go undetected due to the inherent limitations of internal financial controls, including the possibility of collusion or improper management and control override. Furthermore, projections of any evaluation of internal financial controls are subject to the risk that the internal financial controls will become insufficient as conditions change, or that the degree of compliance with policies and procedures will deteriorate. An organizations ability to act ethically and in accordance with its abilities and objectives requires a strong, complete internal control system. For the Company, we have established a strong internal control system to ensure that operations are effective and efficient, that laws and regulations are followed, that assets are protected, and that financial and management reporting is accurate. The Company employs highly qualified and experienced personnel who are responsible for designing, implementing, maintaining, and monitoring the internal control environment.

Research and Development Capabilities

Modisons growth and diversification rests on its research, development, and design capabilities. We believe that our R&D pipeline has the potential to substantially increase our revenues and profits. Therefore, to keep up with global and industry standards, the Company invests significantly in R&D with a strong focus on import replacements, efficiency, technological advancements.

Corporate Social Responsibility

Modison is committed to improving the lives of the communities it operates in. It has been serving the society in small but significant ways in the areas of healthcare and education. The group is committed to contributing towards medical aid for the less privileged along with a commitment to help fight tuberculosis (TB) in India. The group also believes in empowering deserving children with access to quality education and has set up scholarships for deserving students.

The recent feather in the cap

1. Construction of Modison Government College, which is under construction.

2. Award by Honble Minister of Gujarat via Rotary Club for humanitarian work during Covid pandemic

Cautionary Statement

The statements in this report on "Management Discussion and Analysis", describing the Companys objectives, estimations, expectations or projections, outlook etc., may constitute forward looking statements within the meaning of the applicable Rules, Laws and Regulations. Actual results may vary from such expectations, projections etc., whether express or implied. These statements are based on certain assumptions and expectations of future events over which the Company has no direct control.