Sealmatic India Ltd Management Discussions

Introduction

Mechanical seals prevent the leakage of liquids or gasses through the clearance between the stuffing box and the shaft and these include cartridge seals, balanced and unbalanced seals, pusher and non-pusher seals and host of other conventional mechanical seals.

The Company is a well-established player in the mechanical seal industry catering to the ever evolving needs of the customers. A future-focused Company which believes in innovation, the Companys bespoke quality and manufacturing excellence makes it a preferred choice of a growing and ever- evolving customer base. The Company designs and manufactures mechanical seals and associated products mainly for the oil & gas, refinery, petrochemical, power, marine, chemical, pharmaceutical, pulp & paper, mining and for many more industrial applications. It provides the most complete selection of engineered mechanical seals and sealing support systems and its products are globally recognized as one of the most trusted products in the process industry in over 45 countries. With a wide range of products and services, the Company has solutions for every sealing requirement such as API 682 mechanical seals, highly engineered mechanical seals, standard cartridge seals, metal bellows seals, split seals, gas-lubricated seals and many other custom-built sealing solutions.

(a) INDUSTRY STRUCTURE AND DEVELOPMENT

General

Despite the rising interest rates and external headwinds, the domestic demands remain resilient. The inflation is expected to anchor down to the pre-pandemic levels by the end of 2024. The broad-based recovery in manufacturing is expected to be driven by the robust domestic demand. Government focus on infrastructure and the capital investments by private sector are expected to drive growth in the medium term. The improving investment outlook backed by Production-Linked Incentive (PLI) schemes for various sectors is expected to draw-in private investment in the manufacturing sector. Despite the effect of global slowdown on exports of merchandise and services, the service sector is expected to maintain a healthy growth rate.

Mechanical seal industry

The demand for mechanical seals is witnessing an upward trend, which is mainly due to growing manufacturing as well as the investments in various infrastructure projects globally and the growth of the industrial sectors across the world, which can be attributed to the increase in supportive investment, more particularly the capex spending in India and foreign investment policies throughout the globe. Furthermore, the rising applications in the core sector industry will contribute to the expansion of the market for mechanical seals. According to various surveys, the global mechanical seals market is projected to grow by about USD 1.37 billion with a CAGR of 5.27% by 2026 whereas the global mechanical seals market stands at USD 4.15 billion as of date.

The focus of Indian government on infrastructure and capital expenditure is expected to crowd-in private investment thus benefitting the capital goods industry. Indian mechanical seals industry is one of the fastest growing markets in the world. Government focus on irrigation projects, drinking water supply, sanitation, infrastructure, core sector such as refineries, power projects and urban housing is expected to drive the demand for mechanical seals in the various core industrial sectors. A series of capacity expansion drives and greenfield projects in the refinery, petrochemical, steel, cement and other allied industries will help the mechanical seals market.

With the growth in manufacturing, process industries and various infrastructure projects the Indian market for mechanical seals is expected to grow at a sustained pace over the medium- and long-term. The technological innovations in this sector are contributing towards a drive for a greener and sustainable manufacturing.

(b) Opportunities & Threats

The buoyant activity in the industrial and manufacturing sectors will increase the demand for mechanical seals. At the same time the growth in aftermarket sales is expected to be one of the key factors for stimulating demand for mechanical seals. As the primary function of a mechanical seal is to prevent leakage of liquid or gas, it is one of the critical components in various types of pumps, compressors and agitators, amongst others. High-pressure or high-temperature fluids if leaked to the environment can cause various damages and hence even a small leakage or damage will make it necessary to replace mechanical seals. The majority of mechanical seals replacements involve ‘like for like replacements, which means that the end-users which uses mechanical seals will continue to employ and replace mechanical seals at a periodic interval of 12 to 18 months during the life time of the equipment, which generally is 25 years. As most of the mechanical seals have a relatively short lifespan and as such their frequent replacement is required.

Mechanical seals are manufactured by using steel and alloys, silicon carbide, tungsten carbide, carbon amongst other exotic materials. Therefore, the fluctuating price of steel and other related material will have an impact on the sales of the final product. As the substantial revenue is earned through exports, the uncertain geographical and political instability can also have an impact on the revenue of the Company. We have put in place sound mitigation strategies for threats arising out of commodity prices and exports slowdown. We are allocating necessary resources and investing adequately to ramp our capacities to cater to the increasing order intake.

(c) Segment-wise or product-wise performance

During the year under review, mechanical seals worth Rs. 7,101.68 lakhs (Previous Year - Rs. 5,854.05 lakhs) were sold. Out of the above export accounted for Rs. 4,325.57 lakhs (Previous Year Rs. 3,625.24 lakhs)

(d) Outlook

As growth in global and in Indian economy is expected to increase and due to the impetus especially of the Indian Government on infrastructural investment, the Company expects a healthy growth in the Indian market for mechanical seals. The Export growth is expected to be slower due to the global slowdown but on the positive side the trade restrictions because of Russo-Ukrainian war has created a huge surge in demand for mechanical seals from Russia and other CIS countries. The impact of a global slowdown on domestic consumption in India though limited, can affect the capex projects in private sector to some extent.

(e) Risks & Concerns

Risks to the outlook are primarily to the downside. With the ever-evolving political situation, high inflation globally and rising interest rates, the global growth is likely to be affected. The increased competition in domestic market due to the possible slowdown in exports is expected to lead to aggressive price competition, impacting the bottom lines. The withdrawal of cheaper liquidity may also lead to a slowdown in the capex cycle in the industry and may hurt the demand for mechanical seals.

(f) Internal Control Systems and their adequacy Internal Control Systems are in place:

• To safeguard the Companys assets from loss or damage.

• To keep constant check on cost structure.

• To provide adequate financial and accounting controls and implement accounting standards.

The system is improved and modified continuously to meet with changes in business condition, statutory and accounting requirements.

During the year under review internal controls were adequately supported by periodic review by the management and now onwards will be reviewed by the Internal Auditor.

(g) Financial Performance with respect to operational performance

The following statements cover the financial performance review.

a) Distribution of income

b) Financial position at a glance

c) Financial Summary

Note 1 : The Paid-up capital was increased during the FY 2022-23. Hence there is a variation in values as on 31.03.2022 compared to the earlier years.

(h) Material developments in HR/IR including number of employees

Year 2023-24 has proven to be a year of resilience setting multiple records, pivotal moments and achievements. By keeping the SILs core sustainability principles like Environmental protection, Social commitments and Governance Culture (ESG) at center of operations we have attained new heights in business. We have adapted appropriate employee engagement and Health and Safety measures. We have also implemented measures like restructuring of departments, investment in expansion of plants & infrastructure, employee friendly policies, Diversity & Inclusion, Employee Engagement activities, Communication Meetings with all employees, state of art offices and enhanced Health & Safety. By refocusing our business around core strengths we have become significantly more profitable, better balanced and more cost-efficient. With the execution of our HR strategy, we have been able to support our employees through the challenging conditions and embarked the high quadrant in the employee engagement survey. This execution of strategy includes continued eOorts to raise awareness and facilitating open dialogues through several initiatives. We steered our eOorts on Skill and Knowledge enhancement, Process Improvisation, Retention of Employees, Leadership Development, Performance Management and Employee Engagement. We could maintain the attrition rate below industry standards due to pleasant work environment, prioritization of growth of employees, offering competitive compensation and benefits, Development of Infrastructure, Communication Mechanisms, Succession Planning and Reward and Recognition. Healthy and co- operative employee relations at all plants ensured support to the business growth As a result of these collaborative and collective efforts, we are well-equipped to deliver sustainable growth and have established us as a strong brand in the market.

The Company had 342 employees (330 Male and 12 female) on its roll as on 31^st March, 2024.

(i) Key Financial Ratios

Note :

1. During the year under review, the payment towards interest was Rs. 33.33 lakhs as against Rs. 23.69 lakhs during the year 2022-23 , (increase by about 40.69%). Whereas the profit before tax Decreased by Rs. 126.56 from Rs. 1480.29 lakhs as on 31^st March, 2023 to Rs. 1353.73 lakhs as on 31^st March, 2024 . (Decrease 8.54%). Due to this reason there is a substantial variation in the interest coverage ratio.

2. The levels of Inventory, Receivables increased due to bunching of the orders during the months of February and March, 2024.

(j) Changes in Return on Net Worth

The Return on Net worth as on 31^st March, 2024 was 15.22% whereas the same was 18.27% as on 31^st March, 2023. The reduction to the tune of 16.69 % in the Return on Net worth.

Disclosure of Accounting Treatment

The financial statements are prepared as per the Accounting Standards applicable to the Company. Disclosures with respect to demat suspense account/unclaimed suspense account No shares are in the demat suspense account or unclaimed suspense account as on 31.03.2024 CAUTION

This document contains statements about expected future events and financials of the SIL, which are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the assumptions, predictions and other forward-looking statements may not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause assumptions, actual future results and events to differ materially from those expressed in the forward-looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications and risk factors referred to in the Management Discussion and Analysis Section of this Annual Report.

On behalf of the Board of Directors