<dhhead>MANAGEMENT DISCUSSION AND ANALYSIS</dhhead>
COMPANY OVERVIEW
Sika Interplant Systems Limited {SIKA) is actively involved in four
main areas, namely, engineering (design and development); manufacturing, assembly and
testing; projects and systems integration; and maintenance, repair and overhaul (MRO).
Additionally, your Companys in-house capabilities in technology development and
production ars complemented by tis-ups with international partners. The majority of our
Companys business is catered to serving the Aerospace, Defence & Space (AD&S) and
Automotive sectors.
Building on its established expertise in systems integration,
documentation and certification, your Company continues to work on a number of prestigious
Indian projects within the AD&S sector. Under these typically long gestation programs,
SIKA offers its customers a combination of one or more of design, development,
manufacturing, assembly, testing, certification, supply and integration of systems, and
implementation of the projects. In addition, the Company has set up facilities to provide
MRO for its own products and, with the backing of its customers, with forsign partners to
provide MRO services for their AD&S products in India.
Your Company is one of the select privats enterprises to have held
design approval from the Center for Military Airworthiness and Certification (CEMILAC)
continuously from 1999 through 2020, when the issue of such approvals was discontinued.
SIKA has also been granted an Industrial License for Defence production from the
Government of India, which enables it to undertake these projects and also qualifies the
Company for offset programs. A number of international OEMs have significant offset
obligations outstanding, and so the opportunity from offsets in the coming years is
expectsd to continue to be considerable, with avenues likely to be available both in
manufacturing and services.
The Company has a professional and experienced team comprised of a
variety of backgrounds to ensure that we focus on ensuring that products delivered are of
the highest quality, matched by strong after-sales support. In line with this, during the
last Financial Year your Company successfully maintained its AS9100 cerfification, which
is a widely adopted and standardised quality management system for the aerospace industry
globally. Additionally, the company also holds approval from the Directorate General of
Aeronautical Quality Assurance (DGAQA).
In the past year, your Company has recsived recognition on multiple
fronts. Your Company has been recognised by The Economic Times as one of India’s
‘Growth Champions’ for 2023. Separately, SIKA has also been recognised by The
Financial Times, the globally renowned business news publication, in the 2023 edition of
its ‘High-Growth Companies Asia-Pacific.’
In recent years your Company has been focused on building advanced
facilities to expand its operational base to keep pace with the fast-paced development of
the AD&S sector in India, and SIKA is well positioned to meet the requirements of both
potential international partners and domestic projects.
Within the automotive sector, your Company continues to undertake
projects to supply critical capital equipment to a significant number of the major
automobile manufacturers across the country.
THE ECONOMY
Just as the world was on the mend post multiple waves of COVID, the
Russia-Ukraine conflict induced a trail of far-reaching economic, social and political
effects. Global inflation touched an all-time high of >8% with many developed sconomies
witnessing double digit inflation figures for the first time in many decades. This led the
central banks across the globs to simultaneously hike interest rates in a bid to tame
inflation. Repercussions of the conflict were also visible in disrupted trade relations
and spiralling energy prices resulting in severs global energy crunch leading to
significant diversion from the otherwise chartered growth paths. While the ramifications
were evident all over the world, Europe was hit the hardest.
According to International Monstary Fund (IMF) data published in July
2023 the baseline forecast is for global growth to fall from 3.4 percent in 2022 to 2.8
percent in 2023, befors settling at 3.0 percent in 2024. Advanced economies are expected
to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent
in 2023. In a plausible alternative scenario with further financial sector stress, global
growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1
percent. Several shocks have hit a world economy already weakened by the pandemic:
higher-than-expscted inflation worldwide especially in the United States and major
Europsan economies triggering tighter financial conditions; a worse-than- anticipated
slowdown in China, reflecting COVID- 19 outbreaks and lockdowns.
Global headline inflation in the bassline is setto fall from 8.7
percentin 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying
(cors} inflation is likely to decline more slowly. Inflation’s return to target is
unlikely before 2025 in most cases. Although most central banks tightened their monstary
policies simultansously, which is expected to decrease global inflation and bring it back
towards its targets, the rats of decrease may be slower than initially anticipated. The
ongoing war between Russia and Ukraine has created instability in the energy and commodity
markets, which is a significant factor that is restraining GDP growth.
In India, the Economic Survey estimates that the economy grew by 7% in
real terms for the financial year ending 315 March, 2023, which follows the post-covid
bouncs of 8.7% seen in the previous year. After recording the strongest GDP rebound in the
G20 in 2021, the Indian economy is adjusting to the new normal as inflationary
expectations remain elevated dus to rising global energy and food prices, while monstary
policy normalises, and global conditions remain uncertain. That said, consulting firm
Deloitte expects India to grow by 6%-6.3% in FY23-24, with a stronger outlook thereafter.
The optimistic growth forecasts for India stem from a number of
positives like the rebound of private consumption providing a boost to production activity
and higher Capital Expenditure. This relative optimism is driven by the fact that India is
primarily a domestic demand-driven economy with consumption and investments contributing
to majority of the economic activity. The govemments capital spending remains buoyant,
while India’s gross tax collections continue to trend upwards. Higher capital
spending on infrastructure and assst-building projects is likely to boost growth
multipliers in the medium term.
India’s manufacturing sector growth looks encouraging as several
multinational companies continue to look for resilience and cost-sffsctiveness in the
post-pandemic environment, further aided by an anticipated pick-up of corporate investment
facilitated by the Production-Linked Incentive Scheme.
INDUSTRY STRUCTURE AND DEVELOPMENT
India’s geopolitical scenario and compulsions, real or perceived,
are continuing to drive the development of its A&D industry. The stand-offs seen in
recent years on the Indo-China border have renewed the urgency to build capability and
capacity for India’s defence industry. The geopolitical situation in South Asia and
the Indian Ocean region, as well as the wider theatre of Southeast Asia and South China
Sea, has important implications for the defence sector.
The last decade has seen India emerge as one of the most attractive
A&D markets in the world given the Ministry of Defences {MoD} continusd emphasis on
modsrnisation of the armed forces, which is expected to result in capital expenditure of
about USD 250 billion over the next 10 years. There is a broad acknowledgement that while
the man behind the machine remains motivated, some machines being manned need an upgrade.
With the world’s third largest armed forces, the Government of
India’s {Gol} increase in the defence budget for 2023-24 to USD 72 billion also makes
India the worlds third largest defence spender, behind the US and China. This amounts to
nearly 2% of GDP, or 13.2% of government spending.
The budgetary allocation {excluding pensions & civilian defence
budget) for 2023-24 has seen an increase of 12.3% over the previous year, which is the
highest growth in the last decade. This growth is largely due to 15.9% growth in revenue
budget while capital budget grew at 6.7%. Over the last five years, the defence budget has
grown at 8.9% (CAGR) revenue budgst at 7.4% and capital budget at 11.6%.
Important to note, defence pensions have grown exponentially, from less
than 10% of the defence services expenditure up to the late-1980s to over 26% in 2022-23.
Defence already accounts for over 13% of central government spending and is the
govemments largest expenditure after debt servicing, and so it cannot afford to spend
both on modernising the military and paying for pensions. Multi-pronged moves will be
required to address this issue, and towards this the latest budget saw the allocation
defence pensions decline almost 10% from last years revised estimates.
Although resources allocations for national defence may appear
deficient, a larger picture of cumulative resources devoted toward meeting all spectrum
security challenges paint a different story. Resources for national defence (MoD),
internal security (Ministry of Home Affairs), resources for military and security
dimensions for atomic energy and spaces together account for a quartsr of central
government expenditure. Allocations for Jammu & Kashmir and Ladakh have added new
dimensions as a reasonable amount of these will be spent for security purposes. Important
to nots here is that even such a reasonable allocation has happened under challenging
economic circumstances.
As India continues to be one of the top defence spending countries in
the world, a dire need to reduce import dependency and enhance domestic production has
been made a priority by the Gol. Moreover, India has one of the highest numbers of active
military personnel in the world. Equipping such a large force with the latest technology
is one of the key challenges that the military planners face today.
The Gol, over the past few years, has demonstrated its commitment
towards the development of indigenous defence manufacturing capabilities by launching and
promoting the ‘Make in India’ in defence sector. It has been highly encouraging
to see the strides being made towards this goal through a series of policy amendments and
reforms that on one side lower entry barriers and sase the process of teaming bstween
foreign OEMs and Indian entities, and promotes Indigenously Designed, Developed and
Manufactured (IDDM) products and marching towards level playing field across segments of
Indian Industry.
OPPORTUNITIES AND THREATS
The country’s Defence expenditures has been punctuated by
big-ticket deals and modernisation programs, the latter in response to the urgent need to
enhance the deterrent and operation capabilities of the armed forces through
upgradation/modernization of existing equipment, as well as additional acquisitions of
‘state of the art’ equipment. The large scale of the market provides a
significant opportunity for foreign original equipment manufacturers (OEMs), Indian
industries and SMEs.
The need for a self-reliant Defence sector and a sharp focus on
minimising dependence on imports is seeing the continusd opening up of the sector for
private participation. In 2001, the government opened this sector to private and forsign
investors and set a challenging target of achieving 70% indigenisation. This focus on
indigenisation should continue to gather pace, with the current government continually
re-emphasising the importance of this endeavour, including with respect to the bigger
picture of ‘Make in India.’
In line with this, the defence sector has continued to withess several
policy reforms over the last 2-3 years. Building on the Prime Ministers call to build an
Aatmanirbhar Bharat, has resulted in several initiatives from the Gol / MoD:
. Defence Acquisition Procedure (DAP) 2020, released and made effective
since October 2020, provided a comprehensive overhaul of the existing procurement policy
framework. DAP 2020 has overhauled a number of procedural aspects with a view to improving
the procurement cycle time while continuing to provide for significantly increasing the
share of local purchases through prioritisation of clauses like “Buy IDDM,”
“Buy Indian,” “Buy & Make {Indian},” and “Strategic
Partnerships” (SP) ahead of global procurement options.
e The sequential “positive indigenisation” lists, announced
in seven phases thus far, pertaining to import of both equipment/platforms as well as
systems/sub-systems has underlined the ‘Atmanirbhar’ goal of the government as
the cornerstone of defence procurement policy.
. Implementation of important policies such as restriction on global
tenders for government procurement up to INR 200 Cr, separates budget for domestic capital
procurement, liberalisation of forsign direct investment procedures, and rationalisation
of General Staff Qualitative Requirements and testing requirements will add further fillip
to the participation of the Indian industry including MSMEs.
e The 2023-24 defence budgst has introduced further catalysts including
earmarking 75% of the capital procurement budget for the domestic industry, up from 68% in
the previous year, as well as 25% of the defence R&D budget for private industry.
. Private industry is also being encouraged for design and development
of defence platforms and equipment in collaboration with government-owned defence
organisations through the SPV (special purpose vehicle) route.
It is estimated that during the next decade India will buy close to USD
250 billion worth of fighter aircraft, radars, missiles and warships. Though it is
difficult to reach a clear estimate on the value of offsets which will be involved with
this huge Defences Import, nevertheless the offsets figures could well be above USD 30
billion. The implementation of this value of offsets is both a challenge and an
opportunity for the Indian Defence industry.
Most of the threats to the domesticA&D industry are rooted on the
policy front. These include slippages on the fiscal front, lengthy procurement and
evaluation processes, controversies related to corruption and disputes over shortlisting
in compstitive bids. These will serve to delay acquisition plans of the armed forces and
impact timing of execution of already long-dated projects.
For example, on the fiscal front, with respect to the allocation for
capital expenditure in the budget, a significant proportion of that is devoted to existing
obligations and committed liabilities, lsaving litle room for new procurements. Similarly,
three surprising aspects of the revamped offset policy as in the draft DAP 2020 are the
exemption of procurements under the intsrgovernmental agreements (GAs) from the
application of the offset provisions and omission of offset banking, even as the list of
sligible offsets avenues appears truncated, all of which are likely to have a negative
impact on future opportunities through offsets.
Further, given the nature of the A&D businsss, the products and
systems involved are typically of complex advanced technologies, often resulting in the
approval and certification cycle extending for materially longer than originally planned.
This can result in delays in production orders and consequent deliveries, affecting the
timing of revenues.
OUTLOOK
The overall outlook for next Financial Year (2023-24) is optimistic
even considering the impact of the aforementioned negative factors on the global economy.
As discussed above, we expect that the combination of a continued increase in domestic
defences spending and the opportunity from offsets aided by the 1.5x multiplier made
available for MSMEs coupled with the balancing investments made in expanding your
Companys operating base will provide us with a solid platform for sustained and
consistent growth in our business over the medium term.
RISKS AND CONCERNS
Any delays from the MoD in the execution of AD&S projects
associated with it, shortfalls in planned Defences outlays, adverse changes to government
policy, stc. could directly have a directimpact on the activities of the Company and
consequently on its revenues. Further, as many of these projects are initiated by the MoD
driven by its own policies and priorities, the continusd progression of these into
long-term programs with a definitive quantum of orders depends largely on the governments
decisions. This results in an uneven and skewed pattern of sales for the Company, which is
beyond the control of the Company.
Similarly, any material rejig of the governments spending priorities
could have a knock-on effect on the activities of the Company and consequently on its
revenues.
Also, your Companys increasing exposure to international markets
brings with it inherent risks like Foreign Currency Risk and Interest Rate risk. In
addition, there are various external risk factors like a prolonged slowdown in India
and/or the global economy, change or delay in domestic economic reforms, political
instability, hostilities, natural disasters, pandemics, terrorist attacks, civil unrest
and other acts of violence could adversely affect the financial markets and our business.
INTERNAL CONTROL SYSTEMS AND ADEQUACY
We believe the Company has a proper and adequate intsrnal control
systsm commensurate with the size and scale of its operations to in place to ensures that
all activities and transactions are monitored, authorized, recorded and reported
correctly. An Internal Audit system is in places to conduct a regular check and review of
accounting methodologies with a view to improving the control systems. The Audit Committee
of the Board of Directors has appraised the adequacy of internal controls.
SEGMENT WISE PERFORMANCE
The Company is primarily engaged in the business of manufacturing and
rendering of services in engineering products, engineering projects/systems, and services.
{Core-Business).
Over the years, the management has evaluated proposals for engaging in
other businesses, not necessarily being an extension of the Core Business. With the
intention of exploring tourism, etc. (i.e., a Non-Core Business) as a business vertical,
the Company has previously recsived project sanction from the Karnataka government for a
tourism project. Further, the Company also owns undeveloped/partially developed land in
Hosakote and Bommasandra, the latter partly being used for its Core Business. To enable
focused growth of its Core Business, the Company is continuing to evaluate segregation of
its Non-Core Business.
HUMAN RESOURCES
Human Resources (HR) remained a key focus area for your Company during
the year under review. Various HR initiatives are taken to align the HR policies to the
requirement of the business. The Company provides employees with a fair and equitable work
environment and support to develop their capabilities. We are also focused on bringing in
new talent and competencies to aid the Companys growth strategy.
COMPANY PERFORMANCE
As can be seen from the financial results forming part of this report,
both the Companys turnover and net profit decreased year on year. However, the Companys
steadfast focus on profitability ensured that the net profit margin remained healthy.
Such fluctuations in revenue and accordingly profits is not unexpected
for a MSME operating in the AD&S sector, with our performance bsing affectsd by a
combination of factors including delay in project execution due to customers processes
combined with inconsistent ordering of final platforms by the end customers.
DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS
1. Debtors turnover ratio of the Company decreased to 6.22 times (FY
2021-22: 30.58 times) on account largely due to the combination of a reduction in turnover
together with an increases in trade recsivables towards the end of the financial year.
2. Inventory turnover ratio of the Company decreased to 10.84 times (FY
2021-22-: 44.06 times) primarily dus to a relatively higher execution of long-dated
projects combined with some execution delays driven by slower-than-expected customer /
regulatory authority project-specific approvals.
3. Interest coverage ratio of the Company, although still healthy at
56.54 times (FY 2021-22: 182.80 times), decreased in comparison to the previous year due
to the combination of a reduction in fumover and correspondingly profit together with
increased financing costs during the year under review.
4. Net Profit margin of the company, although still healthy at 14.51%
(FY 2021-22: 15.25%), decreased slightly due largely to normal variation in business mix
combined with a move towards normalisation in travel/business development expsnses during
the year under review (following on from pandemic restrictions in the previous year).
5. Return on Net Worth of the Company decreased to 10.70% (FY 2021-22:
19.89%) due to the combination of a reduction in turnover and correspondingly profit
together with an increase in shareholders’ squity during the year under review.
CAUTIONARY STATEMENT
Statements in the Management Discussion and Analysis describing the
Companys objectives, projections, estimates, figures, expectations and predictions may
constituts “forward-looking statements” within the meaning of applicable laws
and regulations. Actual results might differ materially from those expressed or implied.
The company assumes no responsibility in respect of forward-looking
statsments herein which may undergo changes in future on the basis of subsequent
developments, information or events.
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