orient abrasives ltd share price Management discussions

Overview:

This report is an integral part of the Boards Report and covers management perspective on economic environment, industrial scenario, business performance, opportunities, threats, risks & concern, internal control etc. during the Financial Year 2022-2023. This should be read in conjunction with the Companys Financial Statements, the schedules, and notes thereto and other information included elsewhere in the Annual Report.

Economic Overview:

As the Global economy was recovering from receding pandemic, war in Ukraine broke out in February 2022 resulting in inflationary pressures across the developed nations. Prices of food, fuel and important commodity items rose sharply. As inflation rates accelerated, central banks of advanced countries responded with monetary policy tightening measures. In the South Asia region, many developing countries faced severe economic stress due to the combination of higher import prices, devaluing currencies, increasing living costs and appreciating dollar, making debt servicing more expensive. Even in this backdrop, the Indian economy is staging a broad-based recovery across sectors, and the Indian economy is positioned to ascend the pre-pandemic growth rates very soon. Private consumption in H1, FY23 is the highest since last 8 years leading to a boost in production activities and enhanced capacity utilisation across sectors.

For India, 2022 was a landmark year as it marked the 75th year of Indias Independence and India became the 5th largest economy in the world. Indias GDP growth accelerated to 6.1% in Q4, FY23, making it the fastest among major economies. Exports of goods and services accounted for 23.5% of GDP, the highest since 2014-15, while Gross Value Added (GVA) in construction sector, agriculture sector, and financial services sector grew at more than 5%, which shows increase in economic activities in these sectors. The Indian economy remains stable and will continue to be among the fastest growing major economies of the world in FY24, with estimates from major economic bodies pegging the GDP growth rate to be more than 7-7.5%. This shall materialize in to increased industrial output and infrastructural development, leading to a good potential growth opportunity for your Company in the sectors of interest.

Industry Scenario:

Below table details our key product segments and industries and customers they cater to:

Product Segment	Industries / End Customers
Ceramic Raw Materials	Metals & other related industries, Refractories, Abrasives
Refractories	Metals (predominantly steel), Cement, Power, other related industries
Speciality Ceramics	Oil & Gas
Building Materials	Real Estate Projects, Building Materials Distributors and Retail

Indian Steel Industry is slated for a sustained growth due to an amalgamation of factors, ranging from Policy support from the Indian Government, increased investments in the sector, and growing demand in related industries like construction, automobiles, capital goods, and consumer durables. Steel demand in India is expected to reach around 130 MnT by the end of this year and expected to rise by about 6% in next fiscal year to reach 137 MnT. In the long term, domestic steel market is on a strong footing with the Government announcing PLI schemes for value-added steel, leading to an additional investment of Rs. 30,000 crores in the domestic steel sector.

Growth in the refractory Industries is directly linked to the growth in industries such as steel, glass, cement, and non-ferrous metals where the refractories are used in high-temperature applications. With the Indian Governments push towards the growth in infrastructure - roads, ports, and airports, it is also expected to drive demand for refractories. The industry reported a decline in profitability during H1 of FY23, due to higher input costs, however, the revenues increased by over 15%, due to increased demand in related sectors. Government of India is looking to include refractories in the PIL scheme 2.0 for steel, as the steel industry is the biggest consumer of refractories, with about 70% of total usage. With the projected growth in steel, the existing 15,000 crores refractory industry is expected to reach 3 MnT by 2030, even with conservative estimates. Anticipating this demand rise, major refractory companies have announced their expansion plans to increase their capacities. Despite the positive outlook, several challenges including increasing competition from other countries apart from China, fluctuating raw material prices, and environmental regulations, dampen the growth of refractories. To remain competitive, refractory manufacturers in India are investing in new technologies and processes to improve efficiency, reduce costs, and reduce their carbon footprint.

The global oil and gas industry has earned record profits in 2022, with a sharp increase in their free cash flows to its highest ever $1.4 trillion. The market grew from $6.9 trillion to $7.3 trillion at a rate of 4.9% last year and is expected to grow to $8.7 trillion by 2027, at a CAGR of 4.3%. There has also been an increased push towards artificial intelligence and big data analytics in this sector to drive further profitability. The overall crude oil production continues to decline y-o-y, further increasing the volatility in crude oil prices through the year. With an increasing shift towards green energy across sectors, same is being witnessed even in the major O&G companies. This has resulted in reduction of new oil well exploration, and oilfield services giants like Schlumberger Limited, focusing on increasing their fracking activities in existing wells. This will lead to increased demand for specialty ceramic products like proppants.

Your Company has very recently forayed in to B2C segment with its Building Materials and Construction Chemicals division, through the brand Cetcon. Residential demand received a boost post the pandemic. Sentiments were bolstered due to pent up demand, developer discounts, historically low interest rates and the Government support. Housing sales across major seven cities like Mumbai Metropolitan Region, Delhi-NCR, etc., touched an all-time high in the year 2022 at around 365,000 units. The real estate industry is likely to witness a record completion of projects in the current financial year. Housing projects worth more than Rs.8 trillion are likely to be commissioned in 2023-24 most of which include projects under the Pradhan Mantri Awas Yojna (PMAY). Under the PMAY-Gramin scheme, the Government has targeted to build 29.5 million low-cost homes for the rural poor, of which, more than 20 million houses have been constructed. The Government aims to complete the construction of the remaining houses by March 2024 ahead of the general elections.

Opportunity and Threats:

Your Company is a challenger in most of its business divisions, competing with major domestic players as well as facing stiff competition from China both in terms of pricing and scale. With Indias projection to reach 300 MnT annual capacity of Steel by the end of this decade and parallely 3 MnT of capacity for refractories, this vision requires heavy investment in Research and Development initiatives, as technological advancements are driving down per unit consumption in Steel. Ceramics raw materials division is facing challenges in terms of consistent high quality raw materials and the costs are shooting up as well. Fuel price is another challenge your Company is dealing with and trying to find alternatives. There are industry calls for beneficiation of ores such as Magnesite, for reducing dependence on single source raw materials.

In Speciality Ceramics division, your Company is the only major producer of Ceramic Proppants in the country. With the Companys location advantage for supply to the major markets in the Middle East, your Company has an edge in this space in short term. There is an opportunity for healthy growth in exports market as alternative suppliers and in domestic market as the only major manufacturer in the country. Long term advantages will be driven by continuous investments in R&D to drive down the production cost. New markets are being developed in the Oceania region as well as in some parts of Europe.

Building Materials business is a very competitive landscape, with incumbent industry giants having their established market shares over the years. Your Companys opportunity across businesses lie in being cost competitive, gaining market share from incumbents and outpacing their growth rates, and launching new grades and products at speed to increase your Companys addressable market.

Risks and Concerns:

Around 25-30% of the refractory products are still imported from China and the competitive pricing offered by China, dampens domestic refractory profitability growth. Dependence on Steel Industry is also a major risk for refractories. Also, capacity utilizations in India remains low at just about 55-60% levels. Raw materials availability and increased prices remain major concern for ceramics division.

Growth in the world demand for Oil is expected to decline with the increased shift towards cleaner energy. In particular, the use of oil for transport fuels is set to decline after 2026 as the expansion of electric vehicles, the growth of biofuels and improving fuel economy reduce consumption. Price volatility remains a major concern in this segment.

Building Materials being a new business line, will require time to stabilize and contribute to the Companys financials. Sector demands high working capital, branding spends and creating a robust supply chain, which will come with its gestation period. Your Company has been more attuned to the B2B business models with its Ceramics division. Building Materials division being majorly a B2C model, will come with its unique risks and challenges for your Company.

Outlook:

Indias GDP growth forecast has been slated to grow around 6-6.5% by various world bodies such as World Bank, IMF, amongst others. This is attributed to strong domestic investments and reflects sentiments due to stronger than expected growth in Q3 and Q4 of FY23. However, concerns remain due to global financial uncertainty - including higher interest rates, slower recovery in China, debt distress in emerging economies and threats to trade due to geo-economic fragmentation. The Refractory industry is projected to grow in tandem with growth in cement, steel, and related industries, providing an opportunity for your Companys refractory and ceramic raw materials divisions. The Oil & Gas industry is slated to continue growing, with expected peak in global oil demand by 2027. Healthy balance sheets of the Upstream Oil companies will drive further capital investments and opportunities. Shift in the trend towards cleaner energy remains a risk in the long term. Being a comparatively smaller player and a challenger in most of its divisions, your Company is expected to outperform industry growth rates and gain market share from competitors.

Internal Controls systems and their adequacy:

Your Company has proper and adequate internal control procedures and vigilance system in place that are commensurate with its size and nature of operations to provide reasonable assurance that all assets are safeguarded, transactions are authorised, recorded and reported properly. These controls have been developed and designed in a manner to properly maintain accounting records for ensuring reliability of financial reporting, monitoring of operations, protecting assets from unauthorized use or losses and compliance with regulations.

On the recommendation of the Audit Committee, the Company appointed M/s Atul HMV & Associates LLP as the Internal Auditors of the Company for the financial year 2022-2023. The internal auditors of the Company conduct audit of various departments and areas. Observations made in internal audit reports on business processes, systems, procedures and internal controls and implementation status of recommended remedial measures by the Internal Auditors, are presented quarterly to the Audit Committee. The statutory auditors also provide assurance on the adequacy of the internal control systems in the Company.

Segment-wise performance

Please refer Note No. 39 of the Financial Statements.

Segment:

Segment performance is evaluated and monitored based on profit or loss and is measured consistently with the statement of profit or loss. Operating segment have been identified on the basis of nature of products and other quantitative criteria specified in the Ind AS 108. The chief operational decision maker monitors the operating results of its business segment separately for the purpose of making decision about resource allocation and performance assessment.

The Board of Directors of the Company has authorised its KMPs to assess the financial performance and position of the Company, and make decisions in normal course of business operations. For key strategic decisions, the Board of Directors take decisions after evaluating the possible options and recommendations given by the management.

Segment revenue and results:

Unallocable expenditure which are not directly attributable to any business segment are shown net of allocable income.

Segment assets and Liabilities:

Segment assets include all operating assets used by the operating segment and mainly consist of property, plant and equipment, trade receivables, inventories and other operating assets. Segment liabilities primarily includes trade payable and other liabilities. Common assets and liabilities which cannot be allocated to any of the business segment are shown as unallocable assets / liabilities.

Inter segment transfer:

There is no change in the nature of business of the Company during the year under review. The Company has two major business segments in terms of the nature of output (i) Fused Aluminium Oxide Grains including Calcined Products and Refractories Monolithic and (ii) Electricity (Power Division). Inter segment revenues are recognised at sales price. The same is based on market price and business risks. Profit or loss on inter segment transfer are eliminated at the group level.

Financial Highlights & Accounting Treatment:

The Financial Statements for the year ended 31st March, 2023, have been prepared in accordance with the Companies (Indian Accounting Standards) Rule, 2015 (Ind AS) prescribed under section 133 of the Companies Act, 2013 and other recognised accounting practices and policies to the extent applicable.

During the year under review the revenue from operations of the Company stood at Rs. 28,384.93 Lakhs and gross profit & net profit stood at Rs. 1589.48 Lakhs & Rs. 1262.67 Lakhs respectively. Revenue and profit before tax increased vis-a-vis compared to previous financial year is mostly attributable to the partial commencement of activities at the Porbandar Plant as well as change in product mix. In Porbandar plant, the Company continued to produce and trade in other fused products, where specialised grade raw bauxite is not required. Through technical expertise, the Company continues to focus more on the manufacturing activities and value-added products compared to mining and related activities. During the year under review, gross revenue from sale ofpower (wind energy) stood at Rs. 690.71 Lakhs.

Dividend:

The Board has recommended dividend of Rs.0.25/- per equity share for the Financial Year ended 31st March, 2023, payable subject to approval of the Members at the ensuing Annual General Meeting. This will result in a total outflow of Rs. 299.10 Lakhs.

The Company believes in maintaining a fair balance between dividend distribution and cash retention. The cash retention is required for future growth, probable acquisitions and to meet any unforeseen contingencies.

Key Financial Ratios:

The key financial ratios for FY 2022-2023 and FY 2021-2022, are as follows:

Sr. No. Particulars	2022-23	2021-22	% of Change	Reasons for change in the ratio by more than 25%
1 Debtors Turnover	3.94	2.88	36.65	Increase in revenue & decrease in debtors
2 Inventory Turnover	4.87	3.80	28.25	Increase in revenue & decrease in inventory
3 Interest Coverage Ratio	3.07	2.48	24.09	-
4 Current Ratio	4.07	2.66	53.02	Decrease in current liabilities
5 Debt Equity Ratio	0.06	0.15	(62.81)	Decrease in debt
6 Operating Profit Margin (in %)	8.23%	6.74%	21.96	-
7 Net Profit Margin (in %)	4.45%	2.71%	63.97	Increase in profit
8 Return on Net Worth (in %)	4.99%	2.87%	73.94	Increase in profit

Human Resource/Industrial Relation Development:

As on March 31,2023, the Company had a total head count of 109 as against 84 in the previous year.

The Company continues to maintain healthy and harmonious relations across its plant and all its offices. The Human Resources function has been enabling business transformation by striking a balance between business needs and individual aspirations. Senior management is easily accessible for counselling and redressal of grievances.

The Company recognizes that its human asset is critical to the Companys success and therefore, is committed to training, skilling and up skilling its human asset on an ongoing basis which ensures that its employees are able to adopt to evolving technologies, processes and techniques.

Statutory Compliance:

The Whole-Time Director /Managing Director makes a declaration at each Board Meeting on quarterly basis, regarding the compliance with provisions of various statutes after obtaining confirmation from all the unit heads of the Company. The Company Secretary also ensures compliance, inter-alia, with the provisions of Companies Act, 2013 and SEBI Regulations.

Cautionary Statement:

Statements made in this report describing the Companys objective, projections, estimates and expectations may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Important factors that could make a difference to the Company operations include, among others, economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in government regulations, tax laws and other statutes and incidental factors.

Although the expectations are based on reasonable assumptions, the actual results might differ.