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.
Production
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.
Exports
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.
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