Nelcast Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS

The automotive industry in India has been witnessing a slowdown over the last three years and 202021 magnified this due to the outbreak of the Covid-19 pandemic. This impact was felt more severely in the Commercial Vehicle industry which also was undergoing the transition from the BS-4 to the BS-6 emission norms. The Medium and Heavy Commercial Vehicle industry was severely impacted in the first half of the year and despite some recovery in the second half, sales registered a degrowth of 21% for the full financial year 2020-21. The Tractor industry experienced an exceptional growth last year despite the impact of lockdowns in the first quarter and registered a growth of 27% for the full financial year 2020-21.

OPPORTUNITIES AND THREATS

The Company supplies castings for Commercial Vehicles, Tractors, Off-Highway Vehicles and Railways. The Company enjoys the confidence from its valued customers for providing quality products. Therefore, as newer and more advanced castings are developed, the Company has an edge over the competition due to its diverse capabilities.

The company has made significant investments to increase capacity and is poised to take advantage from the growth from both the domestic automotive industry and the global market.

The Company continually reviews its business plan and draws out action plans to leverage on its opportunities and counter any threats. The main threat to which the industry is exposed to is volatility of the market which affects capacity utilization and volatility of commodity prices which impacts the input costs. However, the Company strives to create sustainable profitable growth by continuing to focus on technology and quality while offering wide range of products to diversified segments and customers, which will give us a competitive edge in the market.

SEGMENT WISE PERFORMANCE

The Company deals in only one segment i.e., Iron Castings. Therefore, segment wise performance is not applicable for our Company.

OUTLOOK

While the second wave has dampened some of the growth expectations, the commercial vehicle industry is still expected to record growth in the current year due to the focus on infrastructure development, increase in E-Commerce and low base effect. The tractor industry is also expected to record mild growth in the current year due to good rainfall last year and normal rain is expected in the current year in addition to other favorable tailwinds. The Global automotive industry is also experiencing strong growth as the developed economies are experiencing a sharp recovery due to the economic stimulus and strong pace of vaccinations which has helped turbo charge growth. In addition to the growth of the industry, over the past year, the Company has also developed several new products used in the new models of Commercial Vehicles, Tractors and Off-Highway Equipment which will increase our share in the industry. The company has also been awarded several new products which will be exported to North America & Europe. These new products will ramp-up over the next two years and form the backbone for long-term growth for the Company.

RISKS AND CONCERNS Economy and Market Risk:

Economic recession gripped global economy following the lockdowns and surge in infections due to the Covid-19 pandemic was sudden and unexpected. While India is facing a tough battle with the second wave, a potential third wave or other complications could again impact both the domestic and global economy. External factors such as government policies and rainfall could have a significant impact on sales of Tractors and Commercial Vehicles, which are cyclical in nature. To mitigate the risk of seasonality & cyclicality in the domestic market, the Company has been developing its exports and products in other segments viz. off-highway, railways etc.

Input Cost Risk:

Our profitability and cost effectiveness may be affected due to change in the prices of raw materials, power and other input costs. While we are typically able to pass on these costs to our customers with a slight lag. This risk is significant and is carefully monitoring.

Currency Risk:

The Companys exposure on foreign currency is primarily through earnings from exports. The company also might import some capital goods and raw materials only when prices are favourable. However, this exposure is typically short term. The company does selective hedging of imports and exports to hedge its risks associated with exchange rates. Any substantial long-term liabilities viz. ECBs are fully hedged by the Company.

Interest Rate Risk:

The Company aims to judiciously managed the debt-equity ratio. It has been using a mix of debt and internal cash accruals. The company works closely with our banks to minimise the interest costs. The Company works to manage the working capital requirements to reduce the overall interest cost.

Capacity Expansion:

The Company has completed its second phase of expansion project at Pedapariya in Andhra Pradesh and started its commercial production. The Company closely monitors volume forecasts and will appropriately deploy assets to target optimal utilisation.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Internal control systems in the organization are looked at as the key to its effective functioning. The Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorized use. The Companys internal controls are supplemented by an extensive programme of internal audit, review by management and documented policies, systems support, guidelines and procedures. The internal control is designed to ensure that financial and other records are reliable for preparing financial information and other data.

The Audit Committee reviews all the reports as prescribed under the regulations and compliance systems and suggests better internal control systems, policies and procedures as and when required. It also reviews Companys financial reporting processes, disclosure of financial information, related party transactions, etc.

Internal Financial Control

The Company has an established Internal Financial Control framework including internal controls over financial reporting and operating controls. The framework is reviewed regularly and tested by the internal audit team. The Companys business processes are enabled by the ERP for monitoring and reporting process resulting in financial discipline and accountability.

OVERVIEW

The financial statements have been prepared in compliance with the requirements of the Companies Act, 2013 and in compliance with Companies (Indian Accounting Standards) Rules, 2015. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, so that the financial statements reflect in a true and fair manner.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year, the Company recorded Revenue from Operations by way of Net Sales of Rs.610.96 Crores as against Rs.566.76 Crores in 2019-20, a marginal increase of about 8%. Our Exports business registered a growth of 12% compared with previous year and stood at Rs.126.29 Crores. Profit After Tax made during the year is Rs.9.04 Crores as against Rs.36.01 Crores in 2019-20. The production during the year was 55706 MT, compared to the previous years 52175 MT.

KEY FINANCIAL RATIOS

SI. No. Particulars 2020-21 2019-20
(i) Debtors Turnover Ratio (months) 2.72 2.47
(ii) Inventory Turnover Ratio (months) 2.42 2.86
(iii) Interest Coverage Ratio 1.71 3.46
(iv) Current Ratio 1.39 1.68
(v) Debt Equity Ratio 0.42 0.50
(vi) Operating Profit Margin (%) 8.53 10.83
(vii) Net Profit Margin (%) 1.46 6.20
(viii) Return on Net Worth (%) 2.10 8.57

1. Interest coverage ratio was at 1.71 compared to 3.46 of previous year. The reduction is due to the impact of Covid-19 and the borrowings for the expansion project that the company recently commissioned. The current Interest Coverage Ratio still indicates stronger financial health and capability of meeting interest obligations.

2. The reduction in Operating Profit Margin, Net Profit Margin and Return on Net worth is due to the impact of Covid-19 in the first half of the year, early stages of ramp-up of Phase-2 of the Pedapariya plant and increase in raw material prices.

HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT

Human Resource is a continuous and ever evolving function at our Company. The Company believes that human resources enable the Company to consistently meet customer requirements and deliver exceptional performance for all stakeholders. The Company continues to maintain its record on cordial industrial relations. The Company believes that human resources are its most valuable assets and is thus committed to the welfare of its employees and their families. The Company continues to invest in people through various initiatives viz. training programmes, upgradation of knowledge etc. which enable the work force to meet out the challenges. As on 31st March 2021, the employee strength of the Company was 1117.

HEALTH, SAFETY AND ENVIRONMENT

The Company is fully committed to the ultimate goal of employee safety. Safety management is integrated with the overall Environment, Health and Safety (EHS). The Company has been certified under Integrated Management System (IMS) which consists of Energy (EnMS), Occupational Health & Safety (OHSAS) and Environmental (EMS) Management System to meet the compliances of the standards ISO 50001:2011, OHSAS 18001:2007 and ISO 14001:2015 respectively. The Company aims to be a preferred organization for all stake holders through the scaling performance of Energy, Safety, Health and Environment. standards ISO 50001:2011, OHSAS 18001:2007 and ISO 14001:2015 respectively. The Company aims to be a preferred organization for all stake holders through the scaling performance of Energy, Safety, Health and Environment.

CAUTIONARY STATEMENT

Statement in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be "forward looking statements" and based on certain assumptions/expectations and current scenario and the input available. Actual results might differ substantially or materially to those expressed or implied. Important developments including global or domestic trends, political and economic environment in India or Overseas might affect the Companys operations.