Rajratan Global Wire Ltd Management Discussions.

Global economic overview

Global economic activity remained weak owing to the slowdown in the momentum of the manufacturing sector coupled with a global financial crisis.

In the backdrop of this financial crisis, global growth was estimated at 2.9% in 2019, the lowest since 2008–09.

Indian economic review

The Indian economy grew 4.2% in 2019-20 compared with 6.1% in the previous financial year.

The nominal per capita net national income was estimated to be Rs. 1,35,050 in 2019-20, up 6.8% from Rs. 1,26,406 in 2018-19.

Despite the slowdown, India was among the top 10 recipients of Foreign Direct Investment (FDI) in 2019, attracting $49 billion in inflows, a 16% increase over the previous year.

India emerged as the fifth-largest world economy in 2019, overtaking the UK and France with a gross domestic product (GDP) of $2.94 trillion.

According to UN, India emerged as the third most attractive investment destination after China and the US for global companies. The year also witnessed parliamentary elections with NDA government entering its second consecutive term.

Key government initiatives

National infrastructure pipeline: To achieve a GDP of USD 5 trillion by 2025, the government announced National Infrastructure Policy with an investment plan worth Rs. 102 trillion in five years.

Corporate tax relief: The government slashed the corporate tax rate to 22% from 25% to promote investment; it announced a new tax rate of 15% for new domestic manufacturing companies, providing a boost to the

Make-in-India initiative. The new effective CIT would be 25.17%, inclusive of a new lower surcharge of 10% and cess of 4%, closer to the worldwide average statutory CIT of 23.03%.

Outlook

The outlook for the company account of the uncertainty in consumer demand caused by Covid-19. However, the medium-term outlook of the sector appears cautiously optimistic as consumer demand revives.

Indian automobile industry overview

The Indian automobile industry is one of the primary drivers of Indian economy. Domestic automobile sales grew at a CAGR of 6.71% between FY13-19 with 26.27 million vehicles sold whereas domestic automobile production increased at a CAGR of 6.96% between the same period.

However, the year under review was marked by muted consumer sentiment.

Vehicles manufactured in India sold 2,30,73,438 units in 2019 compared to 2,67,58,787 units in 2018, a de-growth of 13.77%, the sharpest in nearly a decade.

With Indias auto industry dependent on Chinese imports to the extent of nearly 27% of all imports (electrical to fuel injection parts to steering components), the outlook for renewed imports appears uncertain.

However, the governments initiatives of incorporating electrical vehicles into the public transport systems and deduction of additional income tax of

Rs. 1.50 Lakhs on the interest paid on the loans taken to purchase electrical vehicles, may act as a catalyst for the growth of the industry. (Source: Live Mint, ET Auto, IBEF, SAIM)

The Chinese connection

Indias auto industry has significant linkages with China that accounts for 27% of total imports of vehicles parts.

Global tyre industry overview

The global automotive tyre market was pegged at US$ 112.16 billion in 2019 with a volume of 3.2 billion units, growing at a CAGR of 4% between 2014 and 2019. Asia-Pacific accounted for the largest market share more than 55% due to the technological advancements and R&D investments.

Outlook

The global tyre market is projected to reach a volume of 4 billion units by 2025, growing at a CAGR of 3.7% between 2020 and 2025.

 

(Source: IMARC, Market Watch)

Indian tyre industry overview

The Indian tyre market reached a consumption value of 185 million units in 2019, making it the fourth largest market for tyres. The domestic tyre demand is estimated to de-grown by

4-6% (volume) in FY20, lower than the growth rate of 12% and 5.5% in FY18 and FY19 respectively. The OE tyre demand is estimated to have de-grown by 12-14% (units) in FY20, whereas the growth of the replacement tyre demand remained flat. However, domestic tyre exporters are optimistic about long-term prospects due to the continuing decline in tyre imports as a result of anti-dumping duties on

Chinese truck and bus radial tyres, along with countervailing duty and customs duty on truck bus radial and passenger vehicle tyres. Over the last few years, Rs. 34,500 Crores was spent on capital expenditure but some tyre manufacturers deferred their capital expenditure due to the slowdown. (Source: Times of India, IMARC, Economic Times)

Outlook

The Indian tyre market is projected to reach a consumption volume of

245 million units by 2025, growing at a CAGR of 4.8% between 2020 and

2025. The market will be driven by the increase in radialization and electrical vehicles (Source: ICRA, Economic Times, Business Standard).

Growth drivers

Infrastructural development: A significant growth in the construction of roads and highways and the introduction of five Smart Cities are expected to catalyse tyre demand.

Electric vehicles: The Government approved the FAME-II scheme with Rs. 10,000 Crores funding, helping introduce electrical vehicles into the public transport system.

Rising investments: Major tyre manufacturers have capital expenditure worth Rs. 17,000 Crores planned till 2022. The Government of India expects foreign and local investments worth US$ 8-10 billion in the automobile sector by 2023.

Policy boost: Government initiatives like ‘Make in India, ‘NEMMP 2020 and ‘Automotive Mission Plan 2026 are projected to grow the automobile sector.

Thailand: The new centre of the tyre universe

Thailand is the source of 37% of the worlds new raw rubber supply.

The country is the worlds largest rubber exporter.

The country produces every category of tyre (except flat tyres).

The Thai government plans on increasing tyre production from

530,000 tonnes per year to more than a million tonnes

The worlds tenth-largest tyre maker

(and Chinas largest) Hagzhou Zhongce Rubber built a new facility in Thailand, as did Linglong Tyre and Double Coin.

The government-operated Board of Investment announced it would invest US$100 million to set up a major automotive tyre-testing facility.

The Board of Investment announced that Bridgestone Corporation, Shandong Linglong Tyre Company, and Goodyear Thailand would invest more than US$312 million to turn the country into an ASEAN hub for aircraft tyre manufacture.

Major global tyre players such as Bridgestone, Michelin, Sumitomo,

Yokohama and Goodyear, among others, operate their production facilities in Thailand.

Thailands tyre market is projected to cross $5.6 billion mark by 2022.

 

(Source: Traction News, Economic Times, Tech Sci Research)

Financial performance

Revenues

Revenue during the year stood at

Rs. 48,021 Lakh, revenue has decreased by -2.57 % as compared to Rs. 49,289 Lakhs in FY2018-19.

Interest and finance costs

Net interest and finance costs increased/ by 12.19 % during the year due to an increase in long-term loans taken for the expansion

Profit after tax

The Company registered a profit after tax of Rs. 3,304 Lakhs compared to Rs. 2,671 Lakhs in the previous year.

Details of significant changes in the Key Ratios and Return on Net Worth

As per the amendment made under Schedule V to the Listing Regulations read with Regulation 34(3) of the Listing Regulations, details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in Key Financial Ratios and any changes in Return on Net Worth of the Company including explanations therefor are given below:

Particulars Standalone Consolidated
2019-20 2018-19 Change 2019-20 2018-19 Change
Debtors Turnover 4.67 5.53 -0.86 6.18 6.85 -0.67
Inventory Turnover 9.32 12.68 -3.36 8.93 10.39 -1.46
Interest coverage Ratio 4.59 3.98 0.61 4.26 4.15 0.11
Current Ratio 1.39 1.22 0.17 0.97 0.89 0.08
Debt Equity Ratio 0.59 0.60 -0.01 0.86 1.00 -0.14
Operating Profit Margin (%) 16.52 11.51 5.01 14.41 10.98 3.43
Net Profit margin (%) 8.07 5.94 2.13 6.88 5.42 1.46
Return on Net worth (%) 15.71 14.90 0.81 20.41 20.35 0.06

Risk management

Raw material risk Mitigation: The company has been working with select raw material suppliers for years. The Company has been able to maintain its prices through rigorous negotiations with all the suppliers. Consistency of engagement and increasing demand for raw materials has made the Company a preferred customer for most suppliers.
Challenge: Rising prices and shortage in availability of raw materials posed a challenge for the most companies.
Quality risk Mitigation: The company strengthened its quality management, substantially moderating wire breakage and enhancing adhesion value. These initiatives enabled the Company to deliver an overall better product to its customers.
Challenge: Inconsistent quality could lead to customer attrition.
Customer relationship risk Mitigation: The companys business model is based around customer-centricity and works closely with the technical teams of customer companies, customizing bead wire in line with their precise requirements. The Company even provided presentations on the manufacturing process of bead wire to the technical as well as the shopfloor employees in their factories.
Challenge: A relationship break could mean a revenue setback for the Company.
Debt risk Mitigation: The company funded nearly 25% of the capacity doubling of its Indian operations through accruals whereas the borrowed funds have been sourced at an average rate of 8.80%, thereby strengthening viability.
Challenge: High cost of external funds could affect the long-term health of the business.
Product approval risk Mitigation: The company enjoys approvals (first-time and repeat) from the most prominent and prestigious tyre companies operating out of India and Thailand. Over the years, it has developed a formidable business relationship with these customers.
Challenge: Product approvals by major tyre companies are lengthy processes, which can affect the profitability of the business.
Capital cost risk Mitigation: The company has been engaged in bead wire manufacture for more than two decades, a number of its infrastructure and equipment based on lower legacy costs, resulting in a competitive advantage. This has made it possible for the company to enhance capacity at a cost lower than the prevailing average. Besides, the high capital cost per installed tonne serves as a moat, restricting the number of new industry entrants.
Challenge: Greenfield investments in the manufacture of bead wire could take an extended period to break even.
Measure: The Companys capacity doubling was carried out at 50% of the cost of commissioning a greenfield bead wire unit.
Customer dependence risk Mitigation: The company works with a large number of customers, providing them with the confidence of timely quality supply. The Company has not lost a single major customer in the last 5 years and derived 85% of its revenues from customers associated with the Company for five years or more.
Challenge: Customer attrition could affect the companys prospects.

Internal control systems and their adequacy

The Companys internal audit system has been continuously monitored and updated to ensure that assets are safeguarded, established regulations are complied with and pending issues are addressed promptly. The audit committee reviews reports presented by the internal auditors on a routine basis. The committee makes note of the audit observations and takes corrective actions, if necessary. It maintains constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively.

Human resources

The Company believes that the quality of the employees is the key to its success and is committed to equip them with skills, enabling them to seamlessly evolve with ongoing technological advancements. During the year, the Company organised training programmes in different areas such as technical skills, behavioural skills, business excellence, general management, advanced management, leadership skills, customer orientation, safety, values and code of conduct. The

Companys employee strength stood at

650 as on 31st March 2020.

Cautionary statement

The management discussion and analysis report containing your Companys objectives, projections, estimates and expectation may constitute certain statements, which are forward looking within the meaning of applicable laws and regulations.

The statements in this management discussion and analysis report could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operation include raw material availability and prices, cyclical demand and pricing in the Companys principal markets, changes in the governmental regulations, tax regimes, forex markets, economic developments within India and the countries with which the Company conducts business and other incidental factors.