sterling tools ltd share price Management discussions

Global Economic Review

The cumulative losses to global activity, relative to its pre-pandemic trend, are projected to continue growing over the projection horizon, notably among the Emerging Market and Developing Economies (EMDEs), due to more than two years of unfavourable shocks. In sophisticated economies, rising energy costs, less favourable financial conditions, and supply chain disruptions are dismal indicators, which the Ukraine conflict has exacerbated.

As a result, growth in these economies is likely to decelerate from 5.1 per cent in 2021 to 2.6 per cent in 2022, which is 1.2 percentage points lower than initially estimated1.

Global Economic Outlook

As a result of several hurdles like unusually high commodity prices and extended monetary tightening, the global GDP is forecast to expand modestly to a sluggish 3% in 2023. Global growth is predicted to remain around 3% in 2024 as activity returns to its desirable potential. The total losses to international migration, compared to the pre-pandemic levels, are expected to climb much more, particularly among EMDE commodity importers2.

Indian Economic Review

India?s recovery accelerated after the second wave of the pandemic, A widespread vaccination coverage and thereby a faster resumption of the economy and businesses helped in boosting the output with several sectors demonstrating a steady step-up to the pre-pandemic levels. India, therefore, registered a growth of 8.7% and has retained its position as the fastest growing economy.

The Russia-Ukraine face-off towards the end of the fiscal, however, slowed India?s growth. While inflationary pressures did persist in India throughout the year, they were exacerbated post the Ukraine war with escalating commodity and crude oil prices.

Indian Economic Outlook

India is anticipated to be the fastest expanding major economy in FY23 with an expected GDP growth of 7.5 per cent, as per the World Bank reports. This is likely to be supported by a recovery in demand, large Government capital spending, and rising capex. The several structural reforms announced in the 2022 Union Budget and the massive expenditure for India?s infrastructure growth has helped boost the economy, providing it with promising prospects in the longer term. In addition, simplification of labour standards, privatisation of underperforming state-owned firms, and likely modernisation and integration of the logistics industry would all act as tailwinds to the economy3.

Indian Auto Industry Overview

The Indian automotive industry was negatively impacted by the second wave of the pandemic, and its lingering impacts. While the sector was expected to post a recovery in fiscal 2021-22, after witnessing a challenging period in FY20 and FY21, it instead experienced a contraction of -6% in FY224. Sales of all four segments remained low.

A global chip shortage due to supply constraints came as a major issue in the second half of 2021, which impacted sales. Towards the end of the fiscal the Russia-Ukraine crisis and another lockdown in China further worsened the scenario. The two-wheeler segment was the worst hit by the pandemic, reporting its lowest wholesales figures in the last 10 years. In addition to the chip shortage, the industry saw a steady rise in raw material costs leading to the original equipment manufacturers (OEMs) being forced to increase prices of the vehicles while waiting periods were on an average above 90 days. At present too, supply chain and high input costs weigh heavy on the automobile industry.

The one silver lining was that automobile exports from India increased to 36,91,583 units in April-Nov 2021 from 22,77,990 units during the same period in 20205.

Although uncertainties prevail in the near term, with the easing of the demand and supply-side issues, India?s automotive market is positioned for high single to double-digit expansion across segments, from commercial vehicles (CVs) and tractors to passenger vehicles and two-wheelers. While the two-wheeler and tractor segments are anticipated to profit from a revival in the rural economy, the CVs are anticipated to benefit from a robust replacement demand.

Passenger vehicle (PV) sales, which have remained range bound due to semiconductor issues, are anticipated to develop quickly and will be the first to reach the peak volume levels of FY19 as automakers begin sourcing chips from multiple vendors. Additionally, the industry?s persistent efforts to domesticate automobiles and parts will help in overcoming any further downturn.


From April 2021 to March 2022, the industry produced 22,933,230 vehicles, comprising passenger vehicles, commercial vehicles, three-wheelers, two-wheelers and quadricycles compared to 22,655,609 units from April 2020 to March 2021.

Segment 2019-20 2020-21 2021-22
Passenger Vehicles 2,773,519 2,711,457 3,069,499
Commercial Vehicles 717,593 568,559 716,566
Three-Wheelers 637,065 2,19,446 260,995
Two-Wheelers 17,416,432 15,120,783 13,466,412
Quadricycle 942 -12 124
Grand Total 21,545,551 18,620,233 17,513,596

Domestic Sales

The total number of passenger vehicles wholesaled in FY22 went up by 13% from 2,711,457 to 3,069,499 units. Sales of passenger cars fell from 1,541,866 to 1,467,056 units, while utility vehicle sales rose from 1,060,750 to 1,489,178 units, compared to the previous year. From April 2021 to March 2022, 113,265 vans were sold, compared to 108,841 from April 2020 to March 2021.

Overall, sales of commercial vehicles expanded from 568,559 to 716,566. From April 2021 to March 2022, sales of medium and heavy commercial vehicles climbed from 160,688 to 240,577 units, while sales of light commercial vehicles rose from 407,871 to 475,989 units.

From April 2021 to March 2022, two-wheeler sales fell to 13,466,412 units, compared to the previous years volume of 15,120,783.

Compared to the previous year, three-wheeler sales grew from 219,446 to 260,995 units during the year.


Passenger vehicle exports increased from 404,397 to 577,875 units from April 2021 to March 2022, commercial vehicle exports increased from 50,334 to 92,297 units, three-wheeler exports was up from 393,001 to 499,730 units, and two-wheeler exports rose from 3,282,786 to 4,443,018 units - over the same period last year6.

Global Automobile Fastener industry

The pandemic had hindered the growth of the global automobile fastener industry. The supply chain disruptions, interruptions in large scale manufacturing and travel restrictions resulted in a slowdown of the market. However, with the reducing trajectory of the virus, the automobile fastener industry showed considerable recovery in 2021-22. The size of the global automotive fasteners market is anticipated to grow from an estimated USD 23 Billion in 2021 to over USD 27 Billion in 2028, at a CAGR of 2.60 per cent.

Indian Fastener Industry – Opportunities

• The Government has proposed H 57,000 crore as aid under the Production-Linked Incentive (PLI) plan, which is anticipated to enhance opportunities for end product and component makers. Moreover, replacement of old vehicles with new ones is expected to increase in the years ahead due to the implementation of policies like ‘Green Tax? on polluting cars and the Vehicle Scrappage Policy.

• India is continually emerging as a global hub for auto component sourcing with industry exports contributing to a significant amount of its annual production.

• The China Plus One strategy will enable auto and auto component industries to take advantage of the global market while leaving imprints on the global value chain.

• The Union Budget 2022 declared a Minimum Support Price payment of H 2.73 Lacs crore for the farming sector, which will drive the demand for new vehicles in the rural markets. This will be beneficial for the OEMs as a large portion of new vehicle sales, in the entry-level segments of four-wheeler and two-wheeler markets, occur in the rural areas.

Indian Fastener Industry – Risks

• Covid-19 has hampered many units which prompted them to limit output, lockdown/close teams/slash working hours, and forced lay-offs.

• Many OEM?s limited their output as a consequence of the slowdown in the auto industry, such as Maruti, Tata Motors, and Ashok Leyland, among others. As a result, many auto component units are unable to meet essential obligations such as energy bills and wage payments, among others.

• The markets growth is hampered by a lack of product diversification and the price elasticity of raw materials.

• Spurious and low-quality fasteners hurt longevity and can lead to catastrophic mishaps.

• Steel prices in India are controlled by supply and demand, as well as worldwide pricing.

• The cost of raw materials required to produce automobile fasteners is rising, thus reducing profitability.

Electric Vehicle (EV) Industry overview

The electric vehicle industry in India ended the fiscal FY22 on a high note as the total registered EV volumes (all segments) reported strong growth at 4.3 Lacs units compared to 1.3 Lacs units in FY21 i.e. 3X growth. The EV industry in India is less than 10-year-old and cumulative EV sales till FY 22 has been 1 million vehicles. Large pie of market has been dominated by Passenger Electric three wheelers (~59.4%) followed by E-Two wheelers (32.8%) and balance is E3W cargo, E-car and E bus. About 50% of EV vehicles in India are registered in four states i.e. Uttar Pradesh, Maharashtra, Karnakata and Tamilnadu. The major players in EV space are some of reputed auto companies as well as the start-ups e.g. Hero Electric, Okinawa, Ampere vehicles, Ather energy, Pure energy, OLA for E2W; YC Electric, Mahindra Electric in E3W; E-buses have players like TATA, Leyland, PMI Electro Mobility, JBM, Olectra.

• Rising fuel prices, incentives from Central and State governments, resumption of normal economic activities, e-commerce growth and revival of the gig economy will propel the growth of EVs and sales momentum is expected to continue in FY23 as well.

• Revenue of the electric vehicle (EV) components? market in India is likely to grow at a compound annual growth rate of 76% to H725 Billion in fiscal 2027 from H43 Billion in FY 22. Among the key auto segments, two-wheelers and passenger vehicles are seen driving the transition and commercial vehicles and other auto segment will see far lower penetration due to unfavourable economics.

Company Overview

Sterling Tools Limited is a manufacturer of high-tensile cold forged fasteners for the automotive industry, with a presence in all segments of the industry, including passenger vehicles, commercial vehicles, two-wheelers, farm equipment, and off-road vehicles. Sterling Gtake E-Mobility Limited, a subsidiary, manufactures Motor Control Units (MCUs) for electric cars.

As a result, the companys performance is principally linked to the expansion of the vehicle, agriculture, and farm equipment industries.

Total revenue of SGEM (100% subsidiary of STL in EV space) for the year ended March 31, 2022, is H 38.4 crore, an incredible journey for a company that was only registered in Jan 2020 and that has operated in the shadow of the COVID pandemic for its entire existence. In July 2021, it has bagged an order worth H 60 crore from a leading electric two-wheeler maker for high-speed electric two-wheeler application and has also secured a follow-up order for H 100 crore from the same customer. It has also secured orders from 10 other EV OEMs. Electronics and Pure EV component sales now constitute around 10 % of STL?s consolidated revenues and this is expected to increase to 15-20% in the near future.

SGEMs product portfolio covers the entire spectrum of applications from 1 KW to 200 KW and 48V to 700V. SGEM is in advanced stages of discussions with an additional 30 automobile (EV) OEMs for their MCU requirements for different vehicle segments.

Company Outlook

The Company recovered strongly from the slowdown in the automobile industry during the pandemic in the Financial Year 2020-21. The management continues to be focused on cutting costs without sacrificing product quality or employee safety. Even during these challenging times, the Company has been able to sustain profitability because of its fiscal restraint, new client acquisition and well-planned infrastructure. The Company is upbeat that it will be able to capitalise on future opportunities and overcome future obstacles to satisfy its shareholders expectations for long-term development and profitability.

Risks and Concerns

Although most of the Companys supplies are to OEMs in India, any variables impacting the growth of the automobile industry would affect it. Downturns in the economy, changes in Government policies and legislation, economic development, competition from domestic and international companies, cost inflation in manufacturing input costs, and financial risks associated with fluctuations in foreign currency rates and rising interest rates are all examples of such exigencies.

The management addresses the risks mentioned above by frequently evaluating risk factors on the basis of its Risk Management Policy. The risks and concerns are also communicated to the Board of Directors regularly. Corrective actions and mitigating measures are undertaken as needed.

Internal Control System & their adequacy

Your Company has an excellent internal control system, with established procedures for all corporate activities and production plants. Internal control systems are intended to offer reasonable confidence about the efficacy and efficiency of operations, the sufficiency of asset protections, the dependability of financial controls, and adherence to applicable laws and regulations.

Internal control mechanisms are implemented in the form of numerous policies and procedures established by the management, including all key and significant activities such as revenue management, manufacturing operations, purchasing, finance, human resources, and safety, among others. Internal auditors check compliance with these rules and processes, which are reviewed regularly. The Company is continuing its efforts to integrate all of its procedures and controls with industry best practices. Internal controls are evaluated as part of the internal audit process, which is carried out for each operational unit and all significant company operations.

The focus of these reviews is on:

• Identifying weaknesses and areas of improvement;

• Complying with defined policies and processes;

• Safeguarding of tangible and intangible assets;

• Managing business and operational risks; and

• Complying with applicable statutes;

The Boards Audit Committee controls the internal control environments adequacy by reviewing audit results regularly and monitoring the execution of internal audit recommendations through reports.

In their report, your Companys Statutory Auditors concluded that it has appropriate internal controls over financial reporting.

A CEO and CFO Certificate would confirm the existence of effective Internal Control Systems and processes in the Company in the Corporate Governance Report.

Financial Performance w.r.t. Operational Performance

• Your Company?s revenue (without excise duty/taxes) from operations Increased from H 35,528.99 Lacs to H 47,124.25 Lacs.

• Operating profit, excluding other income, was H 6991.70 Lacs for 2021-2022 increased by 8.12% compared to H 6466.60 Lacs for 2020-2021.

• Operating profit was 14.84% for 2021-2022 as against 18.20% for 2020-2021.

• Finance costs were H 662.65 Lacs for the year 2021-2022 as against H 760.25 Lacs for the year 2020-2021.

• Paid-up equity share capital as of March 31, 2022, stood at H 720.48 Lacs.

• Earnings Per Share (EPS) was H 8.25 for 2021-2022 as against H 6.78 for the year 2020-2021.

• Cash Earnings Per Share (CEPS) was H 15.62 for 2021-2022 as against H 13.82 for 2020-2021.

Key Financial Ratios

Particulars FY2022 FY2021 YOY change(%) Remarks
Debtors Turnover Ratio 11.12 10 11 *
Inventory Turnover Ratio 1.79 1.44 25 **
Current Ratio 2.15 2.05 5 *
Operating Profit Margin (%) 14.84% 18.20% (18) *
Net Profit Margin (%) 6.31% 6.87% (8) *
Return on Net Worth (%) 8.19% 7.30% 12 *
Interest Coverage Ratio 7.28 5.71 27 ***
Debt Equity Ratio 0.30 0.31 (4) *

*There has been no significant change in key financial ratios.

** Increase in Revenue and operations has resulted in an improvement of ratio *** Increase in profit along with better interest rate has resulted in increase of ratio

Cautionary Statement

Statements in this Management Discussion and Analysis Report outlining the Companys aims, plans, estimates, and expectations may be considered "forward-looking statements" under the laws and regulations. Actual outcomes may differ from what has been said or indicated. Economic developments in the country, industry demand and supply circumstances, changes in government regulations, tax laws, and other variables such as litigation and labour relations are all critical elements that might impact the Companys success.