Shilpi Cable Technologies Ltd Management Discussions

This report is an integral part of the Directors Report. Aspects on industry structure and developments, opportunities and threats outlook, risks, internal control systems and their adequacy, material developments in human resources and industrial relations have been covered in the Directors Report. We present below a composite summary of performance of the various businesses and functions of the Company.

Industry Overview

India has emerged as the fastest growing economy in the world as per the Central Statistics Organization (CSO) and International Monetary Fund (IMF). The Government of India has forecasted that the Indian economy will grow by 7.1% in FY 2016-17. As per the Economic survey 2016-17, the Indian economy should grow between 6.75% and 7.5% in FY 2017-18. India has retained its position as the third largest startup based in the world with over 4,750 technology startups, with about 1400 new start-ups being founded in 2016, according to a report by NASSCOM.

The Government of India announced demonetization of High denomination bank notes of Rs.1000 and Rs.500 with effect on November 8, 2016, in order to eliminate black money and to tackle the growing menace of fake Indian Currency notes, thereby creating opportunities for improvement in economic growth. By passing the risk of slowdown due to demonetization, the Indian economy is estimated to have grown rate at 7.1% in Financial Year 2016-17 according to CSO. However this growth would be still be lower compared with the impressive 7.9% growth rate in FY 2015-16.The Indian economy is expected to embark on a higher economic growth trajectory in FY 2017-18 owing to many proactive measures taken by the government, complimented by favorable economic conditions expected to prevail during the course of the year.

The economy is expected to grow at 7.5% in FY 2017-18 on the back of increased agricultural production, owing to prediction of near normal monsoons this fiscal, increased government spending in infrastructure, expected surge in consumer spending with pent up demand being satiated and implementation of the Goods and Services Tax (GST). Besides, Government has also come up with Digital India Initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Future prospects

The key drivers of business growth are identified as:

1. To leverage our world class manufacturing facility for energy cables in the telecom sector which uses these cables for their network rollouts.

2. To maximize sale of RF cables in rollouts, IBS segment, Jumper business.

3. Company is aiming at maximum utilization of enhanced capacities created in the previous year.

4. To explore alternate energy sector for energy cables.

Industry Structure, Developments & Outlook

Brief discussion on the major sectors/segments in which the Companys business is present, with regard to their outlook, size, opportunities and prospects is presented below:

Telecom Sector

The Indian Telecom Sector is expected to generate four million direct and indirect jobs over the next five years according to estimates by Randstad India. The Employment opportunities are expected to be created due to combination of governments efforts to increase penetration in rural areas and the rapid increase in smartphones sales and rising internet usage. International Data Corporation (IDC) predicts India to overtake US as the second- largest smartphone market globally by 2017 and to maintain high growth rate over the next five years as people switch to smartphones and gradually upgrade to 4G.

The mobile industry is expected to create a total economic value of Rs.14 trillion (US$ 217.37 billion) by the year 2020. The total number of telephone subscribers in the country rose by 11.13% year-on-year to 1,151.78 million in the September-December quarter of 2016.

The Government has fast tracked reforms in the telecom sector and continues to be proactive in providing room for growth for telecom Companies. The Telecom Regulatory Authority of India (TRAI) focuses on identifying issues that make it difficult to do telecom business in India like license acquisition and spectrum allotment among others. The Government of India plans to auction the 5G spectrum in bands like 3,300 MHz and 3,400 MHz to promote initiatives like internet of Things (loT), machine to machine communications, instant high definition video transfer as well as its Smart Cities initiative.

India is the worlds second-largest telecommunications market, with over 1.0 billion subscribers as of May 2015. The wireless segment (97.36 per cent of total telephone subscriptions) dominates the market. It has also been growing at a brisk pace. During FY 07-15, wireless subscriptions witnessed a CAGR of 24.78 per cent to 969.8 million. It is also the second largest country in terms of internet subscribers. The country is now the worlds second largest smartphone market and will have almost one billion unique mobile subscribers by 2020.

Indias telecommunications market is expected to experience further growth, fuelled by increased non-voice revenues and higher penetration in rural market. Telecom penetration in the nations rural market is expected to increase to 70 per cent by 2017. The emergence of an affluent middle class is triggering demand for the mobile and internet segments.

Strong policy support from the government has been crucial to the sectors development. Foreign Direct Investment (FDI) cap in the telecom sector has been increased to 100 per cent from 74 per cent.

Termination of Joint Venture

The Joint Venture Agreement was executed last year (FY 2015-16) between Eyecom Telecommunication Equipments Limited (ETEL) and Shilpi Cable Technologies Limited for the purpose of developing the business of manufacturing, importing, marketing, selling, repairing and installation of GSM cellular antenna, full line of RF repeaters and DAS components and telecommunication and automation system integration business in India. The whole idea to enter into the Agreement was to serve the Indian Market by providing the Antenna which are required by Indian Telecom Operators.

ETEL was under a contractual obligation to provide the technical know-how and technical assistance for setting up the manufacture facility, manufacturing of the products and establishing the manufacturing operations of the Company.

Despite of various reminders by the Company, ETEL failed to provide the antenna with the specifications as presently used by Indian operators which have defeated the whole purpose of the Company entering into the Agreement with ETEL. The non-availability of the required technology has also resulted into loss of business opportunity at various occasions for the Company. Due to which Company has decided to terminate the Joint Venture with ETEL.

Automotive Sector

The Automotive industry accounts for 7.1% of the Countrys Gross domestic Product (GDP). The Two Wheelers segment with 81 per cent market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the Companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 13 per cent market share.

The sales of Passengers Vehicles, Commercial Vehicles and Two wheelers grew by 9.17 per cent, 3.03 per cent and 8.29 per cent respectively, during the period April-January 2017.

The Indian automotive aftermarket is estimated to grow at around 10-15% to reach US$ 16.5 billion by 2021 from around US$ 7 billion in 2016. It has the potential to generate up to US$ 300 billion in annual revenue by 2026, create 65 million additional jobs and contribute over 12% to India Gross Domestic Product. The industry has attracted Foreign Direct Investment (FDI) worth US$ 15.79 billion during the period April 2000 to September 2016, according to data released by Department of Industrial policy and Promotion (DIPP).

The Government of India encourages foreign Investment in the automobile sector an allows 100% FDI under the automatic route. Government aims to make automobiles manufacturing the main driver of ‘Make in India initiative, as its expects passenger vehicles market to triple to 9.4 millions units by 2016, as highlighted in the Auto Mission Plan (AMP) 2016-26. Further, Government plans to promote eco-friendly cars in the country i.e. CNG based vehicle, hybrid vehicle and electric vehicle and also made mandatory of 5% ethanol blending in petrol.

Consumer Durables

The consumer durables market is expected to reach US$ 20.6 billion by 2020. Urban markets account for the major share (65 per cent) of total revenues in the consumer durables sector in India. There is a lot of scope for growth from rural markets with consumption expected to grow in these areas as penetration of brands increases. Also demand for durables like refrigerators as well as consumer electronic goods are likely to witness growing demand in the coming years in the rural markets as the government plans to invest significantly in rural electrification.

Under the upcoming Budget Scheme 2017-18, the government is likely to retain its focus on rural economy by continuing the pro-poor and pro-farmer schemes.

The FMCG sector has grown at an annual average of about 11 per cent over the last decade. The overall FMCG market is expected to increase at (CAGR) of 14.7 per cent to touch US$ 110.4 billion during 2012-2020, with the rural FMCG market anticipated to increase at a CAGR of 17.7 per cent to reach US$ 100 billion during 2012- 2025.Food products is the leading segment, accounting for 43 per cent of the overall market. Personal care (22 per cent) and fabric care (12 per cent) come next in terms of market share.

Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the consumer market. The Government of Indias policies and regulatory frameworks such as relaxation of license rules and approval of 51 per cent foreign direct investment (FDI) in multi-brand and 100 per cent in single-brand retail are some of the major growth drivers for the consumer market.

The growing purchasing power and rising influence of the social media have enabled Indian consumers to splurge on good things. The Indian consumer sector has grown at an annual rate of 5.7 per cent between FY 2005 to FY 2015. Indias nominal year-on-year expenditure growth of 12 per cent, which is more than double the global anticipated rate of 5 per cent, will lead to India becoming the third largest consumer market by 2025.

India is one of the Largest Growing Market in the world. By 2020, the electronics market in India is expected to increase to US$ 28 billion from US$ 100 billion in FY 2017-18. The production is expected to reach to US$ 104 billion by 2020. Some of the Consumer Electronics key products are as follows:

a) Liquid Crystal Displays (LCDs):

The price decline due to relatively low import duty on LCD panels, higher penetration levels & the introduction of small entry-size models are key growth drivers in the segment. In 2015, total market for Flat Panel Display TV is expected to reach USD6.40 billion while 14.38 million units are expected to be bought in the same year.

b) Direct to Home (DTH):

The Set-Top Box (STB) market is growing rapidly, due to the expansion of DTH & introduction of the Conditional Access System (CAS) in metros. DTH subscriber base in India reached 88.40 million in FY16 & is expected to reach 200 million by 2018, thereby making India one of the worlds largest DTH market.

c) Refrigerators:

This segment makes up 31 per cent of the consumer appliances market. The import and export of refrigerators stood at 382.48 million & 250.22 million. Whereas in FY17 (April-Sept), the import stood around US$ 215.08 million and exports were valued at US$ 144.36 million.

d) Air Conditioners (ACs):

The Indian ACs market size by volume accounted for sales of 10 million units in 2015.The size of the residential segment of room ACs expanded to USD1.47 billion in 2015.The production of air conditioners was 27.96 lakh in FY16 and 17.12 lakh in FY17 (April-Oct) in the organized sector.

e) Washing Appliances:

This Segment size is estimated to be USD727 million in 2015. Washing machine is expected to exhibit 8-9 per cent year on year growth. In the organized sector, production of washing appliances was 43.10 lakh in FY16 and 31.09 lakh in FY17 (April-Oct).

Recent Investments by Key Players:

October 15:

Videocon planned an investment of US$ 76.38 million to set up mobile handset assembly plant in Punjab.

January 16:

Samsung India Electronics expanded its Smart Class initiative across the West-Bengal.

February 16:

Whirlpool Corporation announced investment of US$ 40.6 million in its dishwasher manufacturing facility, at Ohio.

June 16:

Godrej announced its plans to invest US$ 29.87 million to enhance production at its Punjab & Punes home appliances manufacturing facilities.

Further During FY 2017-18, Amway announced its entry into the customer durables sector with the launch of a premium cookware range by the brand name Amway Queen.

With the demand for skilled labour growing among Indian industries, the government plans to train 500 million people by 2022 and is also encouraging private players and entrepreneurs to invest in the venture.

Many governments, corporate and educational organisations are working towards providing training and education to create a skilled workforce.

The Government of India has drafted a new Consumer Protection Bill with special emphasis on setting up an extensive mechanism to ensure simple, speedy, accessible, affordable and timely delivery of justice to consumers.

RF Cables and Connectors etc.

It is estimated that total about 3 lakh BTS Towers per annum are going to be installed by various telecom service providers in the near future. Your Company supplies RF Cables, Earthing strips and Connectors for these towers.

The Total market for the segment is estimated at Rs. 500 Cr per annum. Though the RF cables usage 3G/4G roll out is on decline because of use of RRU, but continues to be used in the BTS which are getting relocated. Your Company continues to enjoy leadership position and dominant market share in this segment.

Opportunities

1. GST Impact

The implementation of the Goods and Services Tax (GST) will make India a common market with a GDP of US$ 2 trillion along with a population of 1.2 billion people, which will be a big draw for investors. Mr. Mark Mobius, Executive Chairman, Templeton EM, opined that the Goods and Services Tax will lead to mergers and rise of world class consumer Companies in India.

2. E-Commerce

Online portals are expected to play a key role for Companies trying to enter the hinterlands. The Internet has contributed in a big way, facilitating a cheaper and more convenient means to increase a Companys reach.

3. Focus on Lifestyle Products

Over the past two decades, liberalization and globalization has presented people of all ages with more choices in the market place. At the same time, faster economic growth has augmented disposable incomes. The Combination of these two trends has given rise to demand for more aspirational and lifestyle products. Anticipating this, the Company has been delivering lifestyle products to consumers and benefiting from this trend.

Risks

The Company is exposed to risks arising out of the dynamic macro-economic environment as well as form internal business drivers. These could adversely impact its ability to create value over the short, medium and long-term.

The Company has a Risk Management Manual in place that defines the policies, lays out the strategies and methodology to decide on the risk taking ability of the Organization. The Company constantly reviews its exposure to various types of risk, whether it be regulatory, operational, environmental, financial or political. The Company has in place adequate systems to ensure compliance with all regulatory and statutory matters, reviews the same on a periodic basis and takes appropriate corrective action when necessary. Operationally, our Company does not depend on a single vendor for any of its major raw materials. It has in place a well-defined practice on the levels of inventory that need to be maintained which while ensuring customer serviceability also ensures minimal stock holdings together with a clearly documented practice where credit risks are analyzed prior to taking exposures with customer etc.

The key risks are as follows:

a) Financial Risks

• Downgrade in credit rating of Companys Securities may have an adverse impact on the Companys ability to raise finance at Competitive rates.

• The Company has substantial amount of debt, which may adversely affect its cash flow and its ability to operate the business.

• Any Changes in assumptions underlying the carrying value of certain assets, including as a result of adverse market conditions, could result in impairment of such assets.

• Restrictive covenants in financial agreements may limit the Companys financial flexibility and adversely impact its financial condition, results of operation and prospects.

b) Regulatory Risks

• Non-Compliance to regulatory and environmental norms may result in liabilities and damage the Companys reputation.

• The Company may benefit from certain protective trade restrictions, including anti-dumping laws, countervailing duties and tariffs, which if not available, may adversely affect its operations and financial condition.

• The Companys business could be affected by potential regulatory and judicial actions.

c) Operational Risks

• The Companys operations and financial condition could be adversely affected if it is unable to successfully implement its growth strategies.

• The Companys industry is inherently hazardous. Unsafe conditions/ acts leading to loss of life, injury may result in Capital, financial and reputational damage.

• Failure of Information Technology systems which control the Companys manufacturing plants may adversely impact its business operations.

d) Market Related Risks

• Competition from other materials, or changes in the products or manufacturing processes of the Companys customers who use cables and wires products, could reduce market prices and demand for the Companys products, thereby reducing its cash flow and profitability.

• Product liability claims may adversely affect the Companys operations and finance.

e) People Risks

• The Companys success depends on the continued services of its senior management team and business and prospects could suffer if it loses one or more key personnel or if it is unable to attract and retain its employees.

• Any labour unrest could adversely affect the Companys operations and financial Condition.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys and its direct and indirect subsidiaries objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results could differ materially from these expressed or implied. Important factors that could make a difference to the Companys operations include among others, climate conditions, economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statues and other incidental factors.