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Pradeep Metals Ltd Management Discussions

243.55
(1.69%)
Jul 19, 2024|09:56:00 AM

Pradeep Metals Ltd Share Price Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS

1. GLOBAL OUTLOOK

The International Monetary Fund (IMF) in its publication World Economic Outlook, 2024, has stated that the baseline forecast is for the world economy to continue growing at 3.2 percent during 2024 and 2025, at the same pace as in 2023. A slight acceleration for advanced economies, where growth is expected to rise from 1.6 percent in 2023 to 1.7 percent in 2024 and 1.8 percent in 2025, will be offset by a modest slowdown in emerging market and developing economies from 4.3 percent in 2023 to 4.2 percent in both 2024 and 2025. The forecast for global growth five years from now, at 3.1 percent, is at its lowest in decades.

Major changes are happening in the Global Economy. Interest rates are going up as Central Banks try to control inflation. Lower inflation on goods is positive. But service inflation remains high due to tight job markets across countries. Peoples real incomes are reducing as rates rise, heavily affecting global trade. Europe seems close to a recession. Chinas exports and real estate struggles indicate slowing growth. Japans bond yields turning positive shows the delicate global rate situation.

2. INDIAN ECONOMY

Deloitte, in 2024 edition of India economic outlook, has stated that the focus is on the emerging consumer spending patterns in India, highlighting the rise of the middle-income class. Not only has growth in consumer spending post pandemic been fluctuating, but there is also a shift in consumption patterns, with demand for luxury and high-end products and services growing faster than demand for basic goods. It is expected that the number of middle to high-income households with increasing disposable income to rise, this trend will likely get further amplified, driving overall private consumer expenditure growth.

But the challenge of rising household debt and falling savings could weigh on long-term growth sustainability. Controlling household debt to prevent it from crossing unsustainable levels will be essential to mitigate risks of debt overhang, maintain economic stability, and protect households against financial vulnerability.

The countrys remarkable growth rate of 8.4% in the third quarter of the fiscal year 2024 surpassed all expectations, as market analysts had penciled in a slower growth this quarter, between 6.6% and 7.2%. Deloittes projected growth for the quarter was between 7.1% and 7.4% (as published in January 2024). With substantial revisions to the data from the past three quarters of the fiscal year, Indias GDP growth already touched 8.2% year over year (YoY) in these quarters.

3. BUSINESS ENVIRONMENT

The Indian steel and forging industry outlook for 2024 looks promising with the country gearing to become a US $5 trillion economy by 2030 (or sooner). And as per market predictions and reports, the steel industry in India will play a pivotal role in steering India towards its goal (Source: EY-CII report).

As per reports by Care Edge Research, the domestic steel consumption growth rate in India is expected to be around 10-12% in FY 2024. There is also a rise in investments in the infrastructure sector and support from the government to encourage the growth and outlook of the Indian steel industry.

Steel is the basic raw material for the forging industry and typically constitutes 48-50% of the ex-factory value of forgings. As such, the volatility of steel prices has impacted the forging industry in India.

4. BUSINESS SNAPSHOT

Pradeep Metals Limited (PML) showed a modest growth and generated Rs. 25,121 Lakhs in annual sales through its products ranging from intricate closed die stainless, alloy, carbon and Nickel Alloy steel forgings as finished and semi-finished machined components. The strategy of specialization in catering to custom-made and small quantity orders continues to pay dividends and has made the Company the preferred supplier to its customers. The Companys expertise in making deliveries in short lead times, sometimes even 2 days, helps the customers to keep low level of inventories at their end.

Major customers of the Company are in India, USA, UK, Singapore, Sweden, Denmark, France, Germany, Italy, Mexico, New Zealand and Argentina. The Company uses state-of-the-art machinery with sophisticated tool-room equipment to manufacture its forgings and machined parts. It also employs hi-tech design and analysis software to create dies and tooling that play a key role in the production of forgings. The manufacturing plant is fully integrated with complete facilities for inspection, testing, cutting, dies and tool making, forging, heat-treatment, finishing, machining, cleaning, surface treatment and assembly.

The Company continues to enhance its machining capacity and capabilities by adding CNC Turning Centers, Vertical Machining Centers (VMC), Turn Mills / Mill Turns and other equipment to address the rising demand of finished machined components and sub-assemblies. In addition to in-house facilities, the Company has also made a significant effort and developed dedicated vendors for machining, in order to supplement its machining capacity and capabilities.

The Company continues to upgrade its plant, equipment and infrastructure on a continuous basis.

The Company uses its in-house metallurgical laboratory, process control, continuous improvement principles to manufacture quality products. The quality assurance systems have been approved by Global Original Equipment Manufacturers including nuclear grade and high-pressure equipments in Europe, USA and Southeast Asia. The Company is certified to ISO 9001:2015 & Pressure Equipment Directive 2014 / 68 / EU (PED). The Company continues to improve its capabilities to serve highly quality conscious markets to maintain its niche position in the industry. The Company has been concentrating on exports for long-term growth and exports about 50% - 55% of its finished goods. It has received ISO 14001:2015, ISO 45001-2018, Marine, Norsok & AS 9100D certifications, etc. which are available on the website of the Company.

5. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Standalone financial performance of the Company is summarized below this:

Particulars FY 2023-24 FY 2022-23 Change in %
Exports 12,479.52 11,743.22 6.27
Domestic Sales 12,141.01 12,442.45 (2.42)
Export Incentives 271.34 204.27 32.83
Income from Windmill 182.26 197.68 (7.80)
Other Income 506.49 421.23 20.24
Total Income 25,627.85 25,012.04 2.46
EBITDA 3,809.36 3,811.73 (0.06)
Profit before Exceptional Items and Taxes* 2,441.58 2,649.17 (7.84)
Profit after Exceptional Items but before Taxes* 2,441.58 2,514.18 (2.89)
Profit after Exceptional Items and Taxes (before Other Comprehensive income) 1,813.01 1,865.13 (2.80)
Total Comprehensive Income 1,760.24 1,818.98 (3.23)

*There is no Exceptional Item during the year as against Rs. 135.00 Lakhs in FY 2022-23 towards provision made for impairment in the value of investment in Pradeep Metals Inc., USA (WOS).

6. SEGMENT WISE OR PRODUCT WISE PERFORMANCE

Business verticals such as Valves, General Engineering and Instrumentation & Flanges contributed 32%, 38% and 30% respectively, to the total sales of the Company.

7. KEY FINANCIAL RATIOS (Standalone)

Particular 2023-24 2022-23 Variance
(Audited) (Audited)
Debtors turnover ratio 3.67 4.04 (9.16)
Inventory turnover ratio 6.08 6.68 (8.98)
Interest coverage ratio* 4.74 5.87 (19.24)
Current Ratio 1.34:1 1.33:1 0.75
Debt Equity Ratio 0.52:1 0.57:1 8.77
Operating Profit Margin 14.88% 15.50% (4.00)
Net Profit Margin@ 7.23% 7.59% (4.74)
Return on Net worth 16.02% 18.73% (14.48)

• Interest includes finance cost and bank charges.

@Prior to provision of Exceptional item(s) of Rs. Nil (previous year Rs. 135.00 Lakhs)

8. FUTURE OUTLOOK

The Management is planning to expand our Machining capacity further and also replace some of the old forging equipments. This will be one of the focus areas this year. Considering the Governments policy of encouraging green energy and benefits being derived from the operation of a 2.1 MW Windmill plant, the Company has acquired and installed a 2.25 MW Land Based Solar Plant, on turnkey basis, at the cost of about Rs. 1,200 Lakhs. The power generated through Solar Plant will be substantially economical when compared with the MSEBs tariff. The pay-back period for Plant is expected to be 5 years whereas the Plant is guaranteed to generate power for 25 years with small degeneration of 5 % per year.

9. OPPORTUNITIES AND THREATS Opportunities:

Following new opportunities have emerged to develop new overseas Customers:

• Developing trend among Countries of decreasing the dependence on China in the Post-Covid Scenario; and

• Signing of Free Trade Agreements (FTA) between India and various Countries

• New product and customer development is a focus area, which helps us to mitigate the risk of obsolete product range.

• The companys ability to support customer demand within the shortest possible lead time helps us to meet the ever-shrinking expected lead time due to the uncertain market conditions.

Threats:

• Emergence of EV market which may reduce demand for forged components.

• Labour intensive process, which can get hit during pandemics like Covid-19 and availability of skilled labour.

• Tariffs war impacting the international trade.

• Hike in the prices of Steel, Consumables, Freight, etc.

10. RISKS AND AREAS OF CONCERN

The Company has a diverse portfolio of products, spread over a large number of customers and across geographies. This insulates it against industry risks. As steel is the major input with volatility risk, the pass-through contracts provide protection against volatility in steel prices. People risks are mitigated with motivation initiatives and engagement with employees.

11. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has a sound internal control system which ensures that (a) its financial reports are reliable; (b) its operations are effective and efficient; (c) its activities comply with applicable laws and regulations; and (d) accountability of assets and protects against loss through unauthorized use. The internal control systems are further supplemented by an internal audit carried out by an independent firm of Chartered Accountants and periodical review by the Management. The Internal Audit process is designed to review the adequacy of internal control checks in the system and covers all the significant areas of the Companys operations. Implementation of ERP is under process and its completion will further strengthen the financial controls.

The Audit Committee of the Board of Directors reviews the adequacy and effectiveness of the internal control systems and tracks the implementation of corrective actions. Significant audit observations and corrective actions taken by the Management are presented to the Audit Committee. To maintain its objectivity and independence, the Internal Audit reports are submitted to the Chairman of the Audit Committee. The Audit Committee plays a key role in providing assurance to the Board of Directors.

12. HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT

The Companys philosophy is to engage with its employees at all levels. Dedication and commitment are encouraged and rewarded. The Company provides in-house training to its employees and sends them to obtain training from various organizations. The Company had a total of 535 employees on its payroll as on 31st March, 2024.

Cautionary Statement:

Details provided hereinabove relating to various activities and future plans may be ‘forward-looking statements within the realm of applicable laws and regulations. Actual performance may differ substantially or materially from those expressed or implied. The Company may need to change plans or other projections due to changes in Government policies, tax laws, market conditions and other incidental factors.

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