Sanghvi Forging & Engineering Ltd Management Discussions.
According to the International Monetary Fund (IMF) the global expansion has weakened. Global growth for 2018 is estimated at 3.7%, despite weaker performance in Europe and Asia. The global economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, because of the negative effects of tariff increases enacted in the United States and China. During the year 2018, the global economy continues to expand, but third- quarter growth has disappointed in some economies. Idiosyncratic factors (new fuel emission standards in Germany, natural disasters in Japan) weighed on activity in large economies. But these developments occurred against a backdrop of weakening financial market sentiment, trade policy uncertainty, and concerns about Chinas outlook. Crude oil prices have been volatile since August 2018, reflecting supply influences, including US policy on Iranian oil exports and, more recently, fears of softening global demand.
Financial conditions in emerging markets have tightened modestly since the fall, with notable differentiation based on country-specific factors. Emerging market equity indices have sold off over this period, in a context of rising trade tensions and higher risk aversion.
Fiscal 2018-19 belied expectations. For a period, which started out with the promise of robust economic growth (GDP growth in Q1 was 8%) ended on a suboptimal note as Indias GDP growth slid to under 7% in 2018-19 against 7.2% in 2017-18 and considerably lower than the 7.4% estimate set out by the Government agencies at the year-start.
This was primarily owing to the lack lustre performance of the economy in the second half of the fiscal (Oct18-Mar19) - GDP growth under 7%. This was mainly due to the poor performance of farm, mining, and manufacturing sectors.
Indias Industrial Production (IIP) growth slowed to a three- year low of 3.6% in 2018-19 as against 4.4% in the previous fiscal. However, behind this subdued performance, there were some important positives
Improvement in investment rate was the most positive development in 2018-19, increasing by 0.3 percentage points to 28.9%.
Continued improvement in the fiscal discipline has been another major positive of 2018- 19. Although government consumption increased in relation to GDP, the combined fiscal deficit of central and state governments is projected to reduce by 0.6 percentage points to 5.8% of GDP in 2018-19.
The Ministry of Finance in its Monthly Economic Report of March 2019 warned that Indias economy appears to have slowed down in 2018-19. The proximate factors responsible for this slowdown include declining growth of private consumption, a tepid increase in fixed investment, and muted exports.
Economy experts are also of the same opinion owing to a drop in several key economic indicators.
Household savings have declined; these have pulled down investments by ten basis points during the period 2012-2018.
Direct tax collections fell short by50,000 crore on account of poor personal income tax collections, thereby failing to meet the revised target of 12 lakh crore for 2018-19
IIP contracted by 0.1% in March 2019, the lowest in 21 months, mainly due to the manufacturing sector slowdown.
Sale of passenger vehicles in the domestic market declined by 2.96% on a year-on-year basis in March to 291806 units
Foreign Direct Investment (FDI) into India contracted by 1% to US$ 44.4 billion during fiscal 2018-19 - the first-time in six years.
While the performance indicators may appear dismal, the prospects for the Indian economy have considerably improved considering the resounding victory of the incumbent party at the Centre because it suggests the continuing of favorable policies which will fuel economic progress.
Global Forging Industry
According to a research report by Technavio on global forging industry, the market will exhibit a healthy CAGR and expected to reach at USD 9 million tons by 2022. But with the automotive industry reaching a mature stage in the forging market, it is expected that other non-automotive sectors will mostly contribute to the growth of the global forging market until 2020. The introduction of hybrid forging techniques will drive the growth prospects for the global forging market in the forthcoming years. Hybrid forgings is basically using the advantages of open die forging combined with the near-net shape capability of closed die forging, wherein the forging process can be tailored to optimize time and cost savings. Also, with the growing use of computer-aided designing (CAD) and innovations, the costs as well as the time is optimized, which, in turn, further increases the demand for hybrid forging techniques in the market. In terms of geography, APAC (Asia Pacific) accounts for the maximum market share in 2019 and will continue to dominate the market for the next few years. One of the major factors responsible for the markets growth in the region is the increasing outsourcing of forging activities to developing countries, which results in the low cost of labour and raw materials.
The global forging market is fragmented and dominated by large international players. The small vendors find it difficult to compete against international vendors in terms of quality, features, functionalities, and services. The global forging industry is oscillating between low cost manufacturing and differentiated solution manufacturing is going on continuously with each one going up and down.
One side we have low cost manufacturing like China with huge spare capacities and capability to do reverse engineering, then we have Japan competing with total quality and productivity and then we have Germans and the Americans who are changing the part configuration all together so that manufacturing of those components will require a specific technology which may not be affordable by low cost countries. Indian forging industry is tactically positioned with lost cost and high technical capabilities
Indian Forging Industry
The Indian forging industry is one of the key contributors to the manufacturing sector of the Indian Economy. Its of strategic importance in the growth of the Indian automobile industry as well as other industries such as general engineering, construction equipment, oil, gas and power. With an installed capacity of 38.5 lakh MT, Indian forging industry has a capability to forge variety of raw materials like Carbon steel, Alloy steel, Stainless steel, Super Alloy, Titanium, Aluminium, etc. Automotive industry is the main user segment which commands the lions share of 58% of total production while the remaining 42% is the diversified nonauto segment.
Governments impetus on manufacturing sector with initiatives like Make in India and Skill India has generated strong long-term positive economic sentiments amongst the business community. Many global OEMs and Tier-I players are setting up purchasing offices in India and looking at procuring high standard quality products, which will open many avenues to the Forging Industry. Indian forging industry which was initially labour intensive; is rapidly adapting itself to the changes in requirement of the end user industries is now investing heavily in capital intensive manufacturing technologies, consequent to which quality standards in the industry have improved significantly and the sector is now well known globally for its high quality.
Over the years, the Indian forging industry has evolved from being a labour-intensive industry to capital-intensive manufacturing sector. The current investment in the plant and machinery by Indian forging companies is worth of INR 27,833 Crore.
Based on their installed capacity, the forging units may be classified as very large (capacity above 75,000 MT), large (capacity above 30,000 to 75,000 MT), medium (capacity above 12,500 to 30,000 MT), small (capacity above 5,000 to 12,500 MT) and very small (capacity up to 5,000 MT). Based on this classification it is seen that about 83% of the total number of units are small and very small, while only about 8% can be classified as very large and large units; the balance about 9% constitute the medium sized units.
Steadily Growing end markets
On the demand front, US and European CV (commercial vehicle) outlook continues to be stable; similarly, domestic CV (commercial vehicle) outlook too continues to be sturdy characterized by consistent sequential growth. With the revival in domestic auto market and higher export sales, the forging component sector prospects look promising
Indian Governments renewed thrust on manufacturing sector with initiatives like Make in India and Skill India has definitely created positive economic sentiments amongst the Indian as well as global business community, which will be a major fillip to the non-automotive forging markets like Defense, Oil & Gas , Railways, Power Ship-building etc. with the automotive industry reaching a mature stage in the forging market, it is expected that other non-automotive sectors will mostly contribute to the growth of the global forging market in the coming years.
Sanghvi Forging is one of the preferred supplier of critical components in Power, Defence, Aerospace, Oil & Gas, Tool Steel & Engineering Items.
Indian power sector is undergoing a significant change that has redefined the industry outlook over the long term. Sustained economic growth continues to drive electricity demand in India. The Government of Indias focus on attaining Power for all has accelerated capacity addition in the country. Expected growth in the global economy is driven by emerging economies, with China and India accounting for half of the increase. Energy Consumption is expected to grow less quickly (1.3 p.a.) than in the past (2.2% p.a. 1995 to 2015). The demand for energy is set to increase significantly driven by increases in prosperity in the developing world. Around 293 global and domestic companies will generate 266 GW of solar, wind, hydel and biomass-based power in India over the next 10 years. Share of renewable in Indias electricity demand to rise from 4% currently to 13% by 2022. India is expected to double its nuclear power generation capacity to more than 10,000 MW over the next five years. Nuclear Power Plant and Advanced Ultra Super Critical Power Projects will require Large number of critical forgings.
Sanghvi Forging has its strong presence in the Nuclear Hydro & Thermal Power markets in India. However the shift in market from conventional to Nuclear and Renewable source of energy will give major growth to the Company.
Government focus of Hydro Power will further help the Company in increasing the Product market share.
Defence & Aerospace:
India has been rapidly augmenting its spending on defence year on year. India stands as the third largest defence spender in the world after US and China. Equipment spending by Ministry of Defence has increased 15-20% over the last five years and is projected grow at a much higher pace in the future. With importing nearly USD 5.5 Billion worth of military hardware, India has emerged as the largest arms importer in the globe accounting nearly 15% of such imports internationally. This has created an urgent need to achieve self-reliance to sustain the needs of Indian defence sector is of vital importance for strategic and economic reasons. The government has been assiduously working upon building the defence manufacturing capabilities over the years. "Make in India" has triggered the positive sentiments for making India to stand at par with its global counterparts with respect to its in house defence manufacturing competencies. The government has introduced compulsory industrial licensing for most of the components and raw materials used in defence production has been scrapped which means such components or raw materials required in castings, forgings, production machinery, testing equipment have been taken out of the purview of industrial licensing. At present, about 50% of the defence manufacturing in India is dominated by the international players (via imports). With enhancing the participation of domestic players in the defence space, the share of imports is projected to drip down by 20-25% in 4-5 years down the line. The government has introduced compulsory industrial licensing for most of the components and raw materials used in defence production has been scrapped which means such components or raw materials required in castings, forgings, production machinery, testing equipment have been taken out of the purview of industrial licensing. Indian private sector has also been allowed to receive maintenance transfer of technology (MToT) in Buy (Global) cases. Overseas defence companies are required to discharge offsets of at least a minimum of 30 percent of the total value of the defence contract. These obligations can be fulfilled either through transfer of technology, direct purchase of components and systems from the defence industry, or by creating specific manufacturing facilities and investing in skill development and training.
Our Company has developed many products in coordinate with the R & D and Testing laboratories of Defence procurement. This developed product gives a huge annual potential for the company seeing the focus on import substitution and exporting this products to the International Market.
The introduction of new DIPP by government for Defence procurement will further help the company in fast tracking the new product development and indigenous of products.
By 2025, India is expected to become the "third largest" aviation market and supply about 478 million passengers by 2036. There could be a demand for more than 2,000 new aircraft in India over the next two decades, which would be dominated by single-aisle aircraft.
The oil and gas sector is among the six core industries in India and Government of India has adopted several policies to fulfil the increasing demand. It has allowed 100 per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others. The countrys gas production is expected to touch 90 Billion Cubic Metres (BCM) in 2040 from 23.09 BCM in FY2016-17 (till December 2016). Gas pipeline infrastructure in the country stood at 15,808 km in December 2015. 22 % of the countrys sedimentary basins have been explored, series of large deep water blocks untouched. Government has awarded 247 total blocks over the last 13 years; only 16 of the blocks have been developed. New projects are also expected in Middle East region. State-owned Oil and Natural Gas Corporation (ONGC) dominates the upstream Investments in Indias oil and gas sector will likely touch Rs 2.5 - 3 trillion (US$ 37.5 - 45 billion) over the next few years, which will help raise the share of gas in the countrys primary energy mix to 15 per cent by 2030, as per British multinational oil and gas company BP Group. The Government of India plans to merge state oil companies to create integrated oil major that could compete globally, and utilise the synergy between various state entities for achieving efficiency and cost competitiveness to create more value for all shareholders. The Government of India plans to unveil a new policy for renewing and extending the lease of 28 oil and gas blocks in the country, with a view to attract more investments into these fields.
Our Company is well positioned to get bulk order from top oil drilling and exploration companies.
With the current stability in crude oil price in range of 55.60 dollar per barrel has ensured continuation drilling in US shale gas which becomes one of the most important market.
Company is also present in downstream and refining business through various client and successful completion of contracts.
The future of the Indian forging industry looks promising and optimistic, driven primarily by the lucrative export prospects, backed by a unique mix of the cost arbitrage offered by Indias lower labour costs and its technical capabilities. Forging is becoming increasingly uneconomical & unviable in the West because of imposition of prohibitive labour and environmental compliances which has led to sharp rise in costs, characterized by slowing capacity additions. India has a significant cost edge whereby average labour costs in India are 25% of the labour costs in the West and countries like Korea, who also possess forging technical capabilities, enabling Indian companies to gain a strong cost arbitrage.
There lies a significant opportunity for domestic forging companies, who have taken far sighted decision of bringing on-stream additional capacities, through significant investment in capex over 5 years through FY16; the commissioning of which is expected to coincide with the revival in demand in key domestic and overseas markets. While execution will remain a crucial success factor, higher capacity presses would improve product mix, value add potential and new customer acquisitions.
Unutilized plant capacities and intermittent plant shutdowns are two major stumbling blocks in achieving our true potential and we are unabatedly working towards on improving the capacity utilizations at our new plant through timely and successful execution of our orders. We are also trying to augment and diversify our order book across different sectors, which will further improve and optimise the plant operations. Company Strategy to improve the capacity utilization through various tie ups has paid dividend and moving forward.
Risk & Mitigation:
Sanghvis risk management policies are dynamic and proactive and are designed in such a manner that the company can respond swiftly to the risks and implement necessary mitigation activities. A prudent risk management framework has been developed, which helps us identify and analyze internal and external risks and minimize its impact on operations and financials.
Industry & Market Risk: Forging activities are ancillary to manufacturing industry and any downturn in the manufacturing activity directly affects the demand in the forging industry. Any downturn in the industry thus affects our order book position and leads to unutilized plant capacities and shutdowns.
Mitigation Strategy: We have diversified our product portfolio across different sectors in the manufacturing sector which shall help the company in serving customers with new approvals.
Raw Material Price Volatility Risk: Its the risk associated with regards to the volatility in the price of raw material costs steel, energy and freight, which has direct impact on its production costs and profitability.
Mitigation Strategy: Company has developed alternate raw material sources ensuring smooth flow of raw material as per requirements. Further import options have also been evaluated and buying decisions are made on landed cost comparison basis.
Technological Risk: Forging is a complex process which relies heavily on technology heavy industry. Forging of critical components in key sectors requires massive investment in new technologies, which we source from international markets at significant costs. Use of obsolete technologies can lead to compromise in the quality of products and loss of productivity.
Mitigation Strategy: We have invested more than Rs 150 crore in last five years in setting up and modernizing our technology. Further we are investing in developing or expertise through material science in meeting the challenging and changing customer requirements.
Company is now evaluating to implant mechanism to comment shop floor productivity and operational effectiveness through Artificial Intelligence and Data analytics.
Human Resource Capital
We believe that people work best when there is a foundation of trust.
Human Capital is the most crucial asset of any company and no organization A cannot sustain without wholehearted peoples participation. We at Sanghvi have continued to invest in developing our teams to enhance their efficiency and with strong focus on developing skills and capabilities of our employees. Employee motivation is one of our key HR focus areas, where we regularly conduct workshops and training sessions for the overall holistic development of our people.
Companys headcount stood at 225 as on March 31, 2019 and the average age of employees was 30 which is an indicator that our resource pool is young and dynamic and capable of adapting itself in the ever-changing environment. The Company is focused on creating a competitive but cordial working environment for the development of a talented and loyal workforce.
Internal Control Systems and their Adequacy
"The Company has, since inception, laid down a system of internal control which is commensurate with the size and nature of the business. Adequate and effective checks are in place to ensure that financial data is accurate and reliable. The internal control systems also ensure that the assets and interest of the Company are well protected. The internal audit is carried out throughout the year based on a systematic procedure covering all functions and aspects of the business. The internal audit reports are reviewed by the senior management and are placed before the audit committee of the Board of Directors along with actions taken. The audit committee undertakes a detailed review of the audit observations and actions to ensure that the internal audit system is effectively functioning. The recommended actions by audit are monitored and improvements are implemented which are regularly reviewed by the senior management. The IT system of the Company is based on a robust ERP system SAP ECC 6.0 which was implemented in 2008 for ensuring seamless connectivity of plants, sales offices and head office for better control facilitating faster and more reliable processing of transactions as well as generating accurate reports for faster decision-making. The Company also has a strong control system and management reporting system which serves as the backbone of the monitoring system of operations to ensure that business results are achieved and continuous improvement projects are undertaken".