Nelcast Ltd Management Discussions

INDUSTRY STRUCTURE AND DEVELOPMENTS

The Indian Auto sector witnessed a robust growth trajectory in fiscal year 2024, registering an impressive 12.5% year-over-year growth in Domestic sales as per SIAM. This growth spanned across various segments with the Two-Wheeler segment seeing a 13.3% increase, attributed to greater availability of models, introduction of new and innovative products, and a rising positive market sentiment. This was further bolstered by the burgeoning electric vehicle (EV) market and strategic launches in the premium Two-Wheeler segment. The Three-Wheeler segment set a new industry benchmark with a staggering 41.5% growth, driven by the rollout of cost-effective CNG options, an influx of new EV models, and an increased demand for last mile mobility in expanding urban settings. Passenger Vehicles (PV) achieved a milestone with an 8.4% growth, propelling the segment to an all-time high,with magnificentmodel mix, better vehicle availability, and a significant contribution from the SUV segment, which now commands a 50% share of the market. The commercial vehicle (CV) industry faced a challenging landscape in FY2023-24. The declaration of elections led to a short-term dip in buying activity, yet projections indicate a rebound after the polls, coinciding with less anxiety over the upcoming monsoon season. The sector battled multiple issues, including a downturn in recent times, disappointing results in the agricultural domain, intensified discounting, and hurdles in securing financing. Nevertheless, certain segments experienced robust demand, particularly in the transportation of coal and cement. This demand was driven by substantial bulk orders and updates to vehicle fleets, leading to increased interaction with customers After hitting a recordvolumeof944,000unitsinfiscalyear 2023, the tractor industry saw a downturn in 2024 due to poor rainfall and inconsistent monsoon conditions. According to ICRA, a less-than-ideal and irregular monsoon season has affected agricultural sentiments and curtailed the demand for tractors. Preliminary projections suggest a reduction in crop yields; tardy harvesting of the kharif crops has pushed back the rabi planting season. ICRA predicts that the domestic tractor market will experience a slight growth ranging from 1% to 4% in fiscal year 2025, bolstered by early forecasts of a normal upcoming monsoon season.

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 productstodiversifiedsegments and customers, which will give us a competitive edge in the market.

SEGMENT WISE OR PRODUCTWISE PERFORMANCE

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

OUTLOOK Global Economy:

Despite supply chain disruptions and the Ukraine conflict, the global economy has shown resilience, managing to evade stagflation and recession. Economic activity continues, even with notable inflation and widespread monetary tightening. The World Economic Outlook predicts a steady global growth of 3.2 percent for 2024 and 2025, with various factors such as high borrowing costs and geopolitical tensions moderating this growth. Inflation is expected to fall from 6.8 percent in 2023 to 4.5 percent by 2025. Advanced economies are likely to reach inflation targets before emerging markets. However, the five-year global growth forecast stands at a historically low 3.1 percent. Central banks now aim to guide the economy to a soft landing, navigating inflation carefully without premature policy shifts or excessive tightening.

Indian Economy:

In the fiscal year 2024, the Indian economy exhibited strong performance with a 6.8% GDP growth, as per the IMFs World Economic Outlook Update in April 2024, with a forecast of 6.5% for 2025. India maintained growth momentum amidst global economic headwinds due to macroeconomic stability and a resilient financial sector. Notable achievements include controlled inflation, a strong external financial stance, continued fiscal consolidation, and a robust banking sector. Indias economic recovery in FY 2022 stood out globally, with a quick return to pre-pandemic growth levels by FY 2023.

Despite facing inflation challenges escalated by Europes geopolitical tensions in the reviewed fiscal year, coordinated actions by the Indian government and the RBI, and the dip in global commodity prices, successfully kept inflation below the RBIs upper threshold by November 2022, showcasing the Indian economys capacity to manage complexities in the global environment.

Source: World Economic Outlook, April 2024: Steady but Slow: Resilience amid Divergence (imf.org)

Commercial Vehicle Outlook:

Indias commercial vehicle (CV) market remained largely unchanged for fiscal year 2024. According to ICRA the medium and heavy commercial vehicle (M&HCV) segment observed a modest annual growth of 4% in wholesale and 7% in retail sales during the period, yet its projected to face a minor decline of 4-7% in sales volumes for FY2024-25 due to a high base effect and election-related disruptions in infrastructure projects. Meanwhile, the light commercial vehicle (LCV) sector experienced a slight contraction in FY2023-24, with wholesale and retail sales dropping by 1% and 3%, respectively. The downward trend is anticipated to continue into FY2024-25 with an estimated 5-8% decline in LCV wholesale volumes, attributed to the lingering effects of a high base, a slowdown in e-commerce, and competition from electric three-wheelers. Collectively, the domestic CV industry reported an incremental annual growth of 0.6% in wholesale volumesand significant4 .8% more uptick in retail sales for FY2023-24. The majority of this growth occurred during the first nine months of the fiscal year, propelled by infrastructure projects, but these gains tapered off in the final quarter due to the impactful combination of the high base effect and reduced infrastructure activity amid the enforcement of the Model Code of Conduct. As we look ahead to FY2024-25, ICRA anticipates a levelling off in the domestic CV markets growth, with an expected minor decrease in sales volumes.

Tractor Sales:

After hitting a record volume of 944,000 units in fiscal year 2023, the tractor industry saw a downturn in 2024 due to poor rainfall and inconsistent monsoon conditions. Preliminary projections suggest a reduction in crop yields; tardy harvesting of the kharif crops has pushed back the rabi planting season. The delay in kharif harvest resulted in the postponement of rabi planting, which in turn led to a similar year-over-year area being cultivated with rabi crops. It is expected that the domestic tractor market will experience a slight growth ranging from 1% to 4% in fiscal year 2025, bolstered by early forecasts of a normal upcoming monsoon season.

ABOUT NELCAST LIMITED

Incorporated in 1982, Nelcast Limited ("Nelcast" or "the Company") is a leading producer of ductile & grey iron castings in India. Besides a strong position in the domestic market, the Company has a rapidly growing presence spread across North America, Europe and Southeast Asia as well with over 26% of its overall revenues generated from the export markets. The Company caters to a marquee clientele of Original Equipment Manufacturers (OEMs) and Tier-1 customers in Commercial Vehicle, Tractor, Off-Highway Equipment, Railways & Passenger Vehicle segments. Nelcast has an aggregate installed production capacity of 160,000 Metric Tonnes per annum. Its factories are located at Ponneri in Tamil Nadu, and at Gudur and Pedapariya in Andhra Pradesh..

1. Diversified Nelcast has a distinguished customer base of over 40 customers that includes OEMs and Tier 1 companies. It serves as a strategic supplier and partner of first choice to TAFE, Tata Motors, DANA, Ashok Leyland, Automotive

Axles Limited, Meritor and American Axles & Manufacturing, among others. The Company is a one-stop shop for its customers for Grey Iron, Ductile Iron and Austempered Ductile Iron ranging from 0.5 kg to 400 kg. Awards received over the past few years for categories like – ‘Best in Class Supplier, ‘Best Delivery Performance, ‘Platinum Award for Best Quality, among others serve as a validation for its efforts to deliver value to its customers.

2. Strategic Location: Nelcasts manufacturing plants are in close proximity (37-140 km) to Chennai, which is a major manufacturing hub for automotive companies. Chennai forms both a key customer base for Nelcast and a reliable source of steel scrap, a crucial raw material for the Company. All 3 plants are within 15-110 km of Indias largest source of Silica Sand near Gudur. Moreover, Chennais International airport with direct flights to Europe, Middle-

East & Southeast/East Asia make it convenient for customers to visit and see the Companys world class facilities first hand. The location also enhances Companys export business given it is close to Krishnapatnam & Chennai seaports that gives Nelcast easy access to reach its customers around the world.

3. Strong Export growth potential: India is being viewed as a key cog in the global automotive supply chain. Sourcing machined castings from India is now becoming an attractive option for global customers. Nelcast is among the few companies in the industry capable of meeting the requirements of top global OEMs & Tier 1 manufacturers. Currently, the Company exports machined castings to reputable corporates in North America, Europe and Southeast Asia. Revenue from exports has grown 35% in the current year and stood at 445 Crores in FY2023-24.

4. Strong product mix: Nelcast has a very differentiated product portfolio as it transitioned from manufacturing basic products to specializing in medium to high complexity products that will allow Nelcast to generate high margins. This helps the Company to compete against the local and Chinese suppliers, that mainly compete on low complexity products.

RISKS AND CONCERNS Economy and Market Risk:

External factors such as government policies and rainfall couldhave significantimpact 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 export segments 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 monitored.

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 is exposed to interest rate risk pertaining to funds borrowed from Banks. The Company works closely with our banks and using its working capital effectively to minimize the overall interest costs.

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, wherever needed 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 of 1266.94 Crores as against 1263.97 Crores in 2022-23, a marginal increase compared to previous year. Our Exports business registered a growth of 35% compared with previous year and stood at 445.27 Crores. Profit Tax made during the year including exceptional item is 54.41 Crores as against 29.73 Crores in 2022-23, an increase of about 83%. The production during the year was 85,366 MT, compared to the previous years 84,238 MT. During the year the sales has been affected due to slow down in the tractor sector and profitability improved due to better realization and increased exports.

THE DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

1. The increase in Operating Profit Margin is due to increase in profit. 2. The increase in Net Profit Margin is due to increase in profit. 3. The increase in Return on Net Worth is due to increase in profit.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

Human Resource is a continuous and ever evolving function in our Company. The Company believes that human resources enable the organisation 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 31^st March 2024, the employee strength of the Company was 1210.

HEALTH, SAFETY AND ENVIRONMENT

TThe 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 Management System (EnMS), Occupational Health & Safety (OHSAS) and Environmental Management System (EMS) 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 stakeholders 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.