orient bell ltd share price Management discussions

An economic overview

Global economy: In FY23, energy costs soared globally due to geopolitical tensions, resulting in supply-side disruptions distorting commodity prices. This volatility triggered a rise in inflation everywhere, with the global average at around 9% and many countries experiencing very high inflation. Consequently, Central banks tightened the monetary policy by increasing interest rates to reduce liquidity in the system and restore price stability.

Owing to this and multiple other factors such as the cost-of-living crisis, post-pandemic tightening of fiscal conditions by

Governments, the lingering effects of the COVID-19 pandemic and the multi-dimensional global impacts of the Ukraine - Russia conflict, the world economy witnessed a moderate growth of 3.2% in 2022 in comparison to 6.1% in 2021.

Outlook: The IMF expects the growth to stabilise at 2.8% in 2023 and rise again to 3% in 2024, which would still be below the historical average of 3.8%. The global inflation should moderate to 7% in

2023 before easing out to 4.9% in 2024 yet remaining elevated vis-?-vis the pre-pandemic levels. On a positive note, however, certain factors will help catalyze a faster-than-expected recovery. The reopening of Chinas economy, higher global demand and slowing inflation projected across geographies are a few which could add cheer to the following year. Indian Economy: FY23 has been a challenging year for India, as for most other countries, owing to high inflation (a fallout of the Russia-Ukraine conflict) and subsequent increase in interest rates by the Reserve Bank of India (RBI). The challenge of rupee depreciation persisted with the widening of the current account deficit (CAD). Indias forex reserves, however, remained adequate for funding this CAD and enabled the country to navigate the increased volatility in the forex markets.

Growth in factory output or index of industrial production was 5.4% in the first ten months of FY23, as against 13.7% during the same period a year ago, reflecting the weakness in Rs.omestic demand. Indias exports (including merchandise and services) performed better and are likely to increase by 13.84% to a record US$770.18 billion in FY23.

Outlook: The RBIs rate-setting panel has projected Indias real GDP to grow at 6.5% in FY24, about ten basis points higher than its earlier estimate. With the broader favourable macros and enablers in place, India should continue to outshine the other geographies in FY24 and beyond.

Indian tile sector

Tiles are sought after for both their practical and aesthetic benefits apart from the advantages around economics/life cycle vs. other competing products.

"Tile is a designer product". Tiles are used because they are durable, easy to clean, cost effective, resistant to moisture and they create a decorative effect. They add value to houses and buildings by offering a unique aesthetic appeal to their interiors and facade. As such, the residential sector dominates the demand for ceramic tiles in India with a 70% market share, while the rest of the order comes from the commercial sector. Indias ceramic tile market is one of the fastest-growing markets in the world. India is the second-largest producer of ceramic tiles in the world after China and the second-largest consumer of ceramic tiles after China, with a consumption quantum pegged at 750 msm and accounting for almost 6% of the world.

Ceramic tile exports increased significantly over the last decade.

Post-pandemic, however, Indian tiles have also found interest from newer and bigger markets from

Asia-Pacific, Europe, Africa, and

America, creating more possibilities for growth. The broader acceptance of Indian tiles globally is reflected in the statistics - tile exports in FY23 were up 24% y-o-y, implying average monthly exports of C1,300 crore in

FY23. This number stood at around C700-800 crore in the pre-pandemic times. On the domestic front, aside from the growth in real estate, rapid urbanisation, a young demographic, nuclear families, the Governments affordable housing program & other schemes and increasing income are contributing to the demand for tiles. Until some years ago, cities were the demand centres for the tile industry. But in the recent past, the next phase of growth has emerged from tier II and tier III towns where new aspiration and affordability created a demand for plush residential creations, driving the demand for high-value tiles. Tile factories & trade have both rushed to seize this opportunity, a trend expected to continue over the medium term. Performance: While FY22 was a dream year for the Indian tile industry, FY23 was significantly challenging for multiple reasons.

1) Overall slowdown in Rs.omestic demand owing to inflationary headwinds, the shift of consumer spending to discretionary areas such as travel and entertainment and sustained interest rate hikes.

2) Increase in capacities by players - both branded as well as peers at Morbi.

3) The surge in energy prices impacts business viability and margins.

Faced with rising costs and demand uncertainty, Morbi players were forced to shut down manufacturing operations temporarily for a month to balance demand with supply and liquidate inventories to the extent possible. This was in addition to the permanent closures of certain unviable capacities, more

wall tile plants at Morbi. On average, Morbi operated at 60-70% capacity utilisation for most of the year. On the other hand, the larger brands experienced similar headwinds but were relatively on a better footing owing to the strength of their brand and distribution penetration. Going forward, industry experts expect demand revival for tiles, more specifically from the second half of FY24, owing to the following positives: 1) new real estate projects launched over the last 2-3 years post-pandemic; and 2) infrastructural projects expected to be completed prior to the Union Elections scheduled in FY25.

With the energy cost and container freight rates normalising, exports from Morbi are also expected to do well next year, limiting their need for aggressive liquidation of inventory in the domestic markets.

Business profitability, too, is expected to improve once gas prices and other input costs stabilise.

Opportunities & Optimism

Residential segment: Rapid urbanisation and rising disposable incomes significantly contribute to the demand for residential buildings, boosting the demand for tiles. Indias real estate market demand which broke records in 2022, is further expected to scale new peaks over the new few years. Housing sales have grown since January 2023, a momentum industry experts and developers expect to continue through this year. According to a joint report by National Real Estate Development Council (NAREDCO) and E&Y, 25 million affordable housing units will be required by 2030. Luxury housing is also one of Indias most dynamic real estate segments, bouncing back after the pandemic and remaining insulated from more significant macro-economic concerns. The luxury market was the primary growth driver for real estate in 2022, and the trend will likely continue in 2023. Renovation: Home renovation is too expected to do well over the next few years owing to evolving lifestyles, inclination towards aesthetics, growing aspirations, and a spurt in the real estate market. The trends of preference for a Work-From-Home (WFH) culture ever since the onset of the pandemic, technological advancement, increase in Rs.isposable income, and pent-up demand in real estate are factors driving this growth.

Commercial Real Estate/ Office

Spaces: After the pandemic, Indias commercial property market has grown exponentially. The rising economy, digitalisation, IT/ ITeS sector growth, and varied government reforms (industrial corridors, FDI policy, RERA, REITs) have led to higher demands for the commercial real estate space. This will also translate to higher demands for the tiles industry. Retail: Globally, India is a preferred retail destination, among the highest in the world in per capita retail store availability. Indias retail sector is growing exponentially, and retail development is taking place not just in major cities and metros but also in tier II and III cities. Hotels: The demand for hotel rooms are expected to double due to the strong domestic travel segment and a rebound in inbound tourism after the pandemic. Owing to the growth of domestic leisure travel, the upcoming supply will be spread out across several locations rather than being concentrated in a select few key markets.

Hospitals: Healthcare facilities have developed considerably to attract international patients for medical treatment. The rising demand for hospitals (both public and private) also presents an opportunity for the tile sector.

(Data on the Economy and Sector are taken from sources in the public domain)

Operational Performance

As part of our vision of being well-prepared for a better and brighter tomorrow, we have focused on several key action areas in FY23. People: We continued to add to our team, more particularly our sales force, to grow our business volumes. We achieved a teeth-tail ratio of 2.2:1 as on March 31,

2023. We intensified our training program for our team members across the hierarchy. We extended our employee stock option scheme to cover a larger section of our team. We also implemented a new asset-light car policy for our employees. Despite business headwinds, we continue our reward and recognition events to felicitate outstanding performances across sales, marketing, finance and other support functions.

New product development: We continued to rejuvenate our product basket with new sizes and superior designs. Our consistent penchant for creative solutions yielded satisfying results. New products launched in FY22 contributed 14% to the Companys revenue in FY23. Brand building: We increased our marketing investments significantly in FY23 to reinforce the reputation and popularity of our brand. As a result, our branding recall improved considerably on websites and social media platforms. We have continued focusing on our efforts to make Tile Shopping Easier.

Stronger reach: We continued to expand our reach nationwide. We added net 67 OBTBs during FY23, taking the total count of active OBTBs to 352 by March 31, 2023 - these OBTBs contributed 39% of our overall sales In FY23.

Connections: Our annual engagement with the frontline, "Unstoppable," was hosted across cities where in addition to the frontline sales team, we engaged with more than 200 channel partners. We organised multiple trips under the Foreign Trip Incentive Scheme (FTS) for qualified Channel Partners in

Nepal, Dubai and Phuket.

Capacity building: In Q1FY23, we completed the 0.7 MSM GVT debottlenecking project at Sikandrabad (Uttar Pradesh). We also delivered two more capex projects at Dora (Gujarat - Line-1 conversion from Ceramic to

Vitrified)and at Hoskote (Karnataka

- incremental capacity addition of 1.8 MSM Line-3) in time and within the agreed budgets, thereby adding more high-value product capacity to improve our footprint in the Bigger and High growth markets of South & West.

Inspired by the early success of the GVT product launch post-completion of the conversion project at Dora, we decided to further increase our investments at Dora - Implementation of a new 3.3 MSM GVT Line-2 at this facility is underway and is expected to commence operations by Q3FY24. The increased growth capex allocations made over the last 2.5 years ensure that Orient Bell can service the changing consumer preferences around bigger and more high-value products.

Cost optimisation: We have worked patiently in identifying areas and implementing solutions for cost optimisation and operational efficiency, given the extreme price volatility recently on the cost front. The Company has also made significant capex investments to create the flexibility to use alternative fuels across its facilities - something which should sustain our competitive edge and keep us relevant in an otherwise uncertain future.

SWOT Analysis

Strengths	Weaknesses
• Stable, capable, and experienced leadership team having experience across Industries and scale.	• Persistent inflationary headwinds denting business profitability.
• Demonstrated zeal for innovation, leading to a wider and more appealing product basket.	• Skewed domestic presence with a greater reliance on the North and East.
• Robust supply chain facilitating on-time delivery even during COVID times.	• Brand awareness.
• Astute financial management that has prudently deployed capital in capacity building and lowering external leverage.	• Higher than Industry dependence on ceramics.
• Intelligent use of digital technology to create a unique customer experience.
• Assured gas linkages in all 3 plants.

Opportunities	Threats
• Resurgence in the real estate sector and Government thrust to infrastructure development to widen opportunities.	• Rising interest rates and inflation could result in muted demand from retail consumers.
• Continuing investment in branding and advertisement to create a demand-pull.	• Continuing geopolitical uncertainty to hit international markets.
• Strengthening footprint in South and West markets to drive growth.	• Opening up of China could result in a flood of cheaper Chinese tiles internationally.
• Industry-leading Digital and Tech initiatives to remain future-ready.	• Rising fuel and Input costs may dent the growth path.
	• Attrition.

Total revenue from operations at C705.1 crore for the year ended March 31, 2023, as against C654.3 crore for the corresponding previous period, an increase of C50.8 Crores implying a growth of +7.8% y-o-y.

(Amount in C Crores)

Particulars	Consolidated
	FY22-23	FY21-22
Total Income	710.5	657.3
EBIDTA	52.6	58.7
EBIDTA Margin	7.5%	9.0%
PAT	22.5	32.2
PAT Margin	3.2%	5.0%
ROE	7.6%	12.1%
ROCE	10.3%	13.3%
EPS	15.6	22.3

Detail of significant changes in key financial ratios:

Particulars	March 23	March 22
Debtors Turnover*	50 days	43 days
Inventory Turnover*	39 days	29 days
Interest Coverage Ratio	13.2 times	11.1 times
Current Ratio	1.6 times	1.7 times
Net Debt Equity Ratio	-0.0 times	-0.1 times
EBITDA Margin	7.5%	9.0%
Net Profit Margin	3.2%	5.0%

*Calculated on the basis of sales/cost of goods sold in Q4 of applicable financial year.

Consolidated Financial Overview

The EBIDTA (Earnings Before Interest, Depreciation and Tax) was C52.6 crore for the year ended March 31, 2023 as against C58.7 crore for the corresponding previous period. High inflation and, more specifically, high gas prices significantly dented business profitability for the industry. Despite its untiring efforts to optimize costs across the organization, your Companys profitability also got impacted especially in H2FY23.

The EBIT (Earnings Before Interest and Tax) was C31.5 crore for the year ended March 31, 2023 as against C38.1 crore for the corresponding previous period.

The Profit after tax for the financial year stood at C22.5 crore, as against C32.2 crore in the corresponding previous year, a y-o-y decrease of 30.2%. The EPS (Earning Per Share) for the financial year ended March

31, 2023 was C15.6 for a face value of C10 per share, as against C22.3 for the corresponding previous period.

Resources and Liquidity

As on March 31, 2023, the consolidated net worth stood at C310.3 crore, while the consolidated debt was at C1.9 crore. The

Company continues to remain net debt free. The cash and cash equivalents at the end of March 31, 2023 were C3.3 crore. The total net debt to equity ratio of the Company stood at -0.0 as on March 31, 2023.

Internal Control Systems and their adequacy

A well-defined internal control framework backs Your Companys operations. The efficient and effective internal control systems are constituted by good governance, robust systems and processes, a vigilant finance function and an independent internal audit function as its foundations. The Company has an internal control system commensurate to the size and nature of its operations. The internal control system encompasses financial operational controls and statutory compliances. There are appropriate controls with reference to policies and procedures, risk assessment, and ethics, which the Audit Committee periodically reviews. The Audit Committee, consisting of three independent directors, monitors the performance of the internal audits. This is conducted periodically through audit plans, findings, and the promptness of issue resolution through follow-ups.

Thus, an effective internal control structure has been set up in the Company to enhance organisational performance and contribute towards accomplishing its objectives.

Human Resource

For Orient Bell Ltd (OBL), and progress with people is at the heart of our corporate ethos and human resource policies. Over the years, the Company has been fostering a meritocratic, empowering and caring culture that encourages excellence. The Company nurtures talents by providing its people with opportunities to sharpen their capabilities. As a result, learning & development is a continuous process, and the HR function is committed to it.

OBL encourages innovation, lateral thinking, and multi-skilling, preparing its people for future leadership roles. In addition, the Company endeavors to provide a safe, transparent, conducive, and secure work environment that facilitates getting the best out of its talent pool.

The Company remains committed to ensuring zero harm to its employees, contractors, and the communities in which it operates. This is integral to the Companys business process and is laid down in the Companys safety policies, standards and working procedures. Health and safety is a key performance indicator and one of the prime drivers of the Companys corporate vision. At the same time, the Company expects its employees to honor and uphold its values while serving the organisation with sincerity, integrity and commitment.

As of March 31, 2023, the Company employed 861 employees across all locations.

Risk management

At Orient, our risk strategy is determined by a risk appetite defined by a series of risk criteria. These are based on sectoral circumstances, internal capabilities, and our earnings target within the accepted volatility limits. Risk management is part of our organisational DNA at Orient Bell to strengthen the operating model and make business growth more profitable and sustainable.

DEMAND RISK

The fragmented nature of the industry coupled with the over-capacity concerns along with slowdown in Rs.emand can impact volume off-take in the short term.

Mitigation measures

• Strengthening the market presence in Tier II and III towns.

• New Product Development to counter competitive intensity.

• Increasing product basket across price points.

• Growing the channel spread in underpenetrated markets.

• Providing easy access to company touchpoints and distribution networks.

PRODUCT AWARENESS RISK

Consumers may not be aware of new products introduced by the Company.

Mitigation measures

• Sustained investments in branding & advertisement throughout the year.

• Increased brand visibility through road shows and channel partner interaction.

• Improved teeth-to-tail ratio to drive visibility.

• Leveraging the in-house digital avenues to communicate directly and efficiently to the channel partners and end consumers.

PROFITABILITY RISK

Inflationary pressures could dent business profitability.

Mitigation measures

• Focus on enhancing the share of large format/ High Value tiles.

• Work towards increasing the sales volumes of vitrified tiles.

• Concentrate on implementing cost optimisation initiatives.

• Leverage economies of scale owing to increased operational scale.

PEOPLE RISK

Retaining the talent pool could be a challenge.

Mitigation measures

• Intensified L&D initiatives of the team to enhance knowledge and skill. Conscious skill-building activities of the employees.

• Increased involvement of mid-level management in business strategies and their execution.

• Increased coverage of the team under the ESOP scheme.

• Sustained reward and recognition strategy.

ENVIRONMENT RISK

Reducing carbon footprint is fast becoming a mandate to sustain business operations.

Mitigation measures

• Explore the viability of alternate fuels/renewable energy sources and Increase operational Innovation.

• Energy efficiency is a continuous effort on the shop floor.

• Adoption of energy best practices even from other Industries, if viable.