Technocraft Industries (India) Ltd Management Discussions.

2018-19

ECONOMIC REVIEW

Global Economic

The world economy grew by 3.6% in 2018, according to the International Monetary Fund (IMF). During the second half of 2018, this rate of development gradually declined, owing to impending US-China trade war and some slowdown across developed markets.

Emerging and developing markets of Asia maintained their steady progress at 6.4% during 2018. However, it’s important to note that India’s economy expanded at 7.1% in 2018 vis--vis 6.7% in 2017, whereas China’s growth deteriorated from 6.9% in 2017 to 6.6% in 2018 (Source: IMF)

Outlook

Global growth is projected to moderate further to 3.3% in 2019, reflecting concerns over potential escalation of trade tensions between US and China, unwinding of fiscal stimulus in US, weakening financial market sentiment, uncertainty about BREXIT outcome and possible slowdown in Chinese economy.

Indian Economic

India continues to be one of the fastest growing major economies in the world and is expected to be among the world’s top three economic powers in the next 10-15 years. The Indian economy is expected to improve and close the year 2019 with a GDP growth of 7.3% (Source: IMF).

The key contributors to this growth include its robust private consumption, the implementation of GST, an array of structural reforms and low food inflation that was partly offset by disruption caused by the floods in Kerala.

India’s ranking in the World Bank’s Ease of Doing Business Index continued to improve, jumping 23 places in the 2018 edition to assume the 77th position. Today, India is the world’s seventh largest economy in real terms, backed by strong demand, positive consumption pattern and rising disposable income. In PPP terms, the economy is expected to be among the top five global economies by 2020.

BUSINESS OVERVIEW:

Drum Closure

Each steel drum requires one set of closure, a precision engineering product so as to ensure that the liquid inside does not spill out. The Company has designed and developed the next generation technology for manufacturing of drum closures. It also manufactures all its gaskets and clamps and offers a full range of drum closure products to its clients. With patented technology, there has been substantial reduction in manufacturing costs, improvement in quality and this has helped catapult TIIL to the second largest global manufacturer of steel drum closures.

Your Company is the second largest manufacturer of steel Drum Closures and continues to enjoy a worldwide market share of about 36% (excluding China). The Company produces a wide variety of closures and related equipment ranging from fully automatic flange insertion systems to cap-sealing tools. The Company caters to all leading steel drum manufacturing companies of the world. The Company is also expanding capacity for which two additional shed already constructed for drum closure division.

The company achieved the revenue from drum Closure segment Rs. 33,408.34 Lakhs as compared to Rs. 31,048.40 Lakhs for previous year, which is increased by 7.60%. Profit before Tax and Interest of the drum closures division was increased by 6.07% as compared to the previous year i.e. from Rs. 8,272.86 Lakhs to Rs. 8,775.07 Lakhs for this year. Out of the total revenue of drum division, approximately 90% of revenue was generated from Export Sales.

Scaffoldings & Formwork

Scaffolding is a temporary structure used to support people and material in the construction industries, real estate and any other large structures. It is usually a modular system of metal pipes or tubes, although it can be from other materials also.

The Company is a leading Indian manufacturer and distributor of scaffoldings and formwork systems. The Company exports approx. 73% of scaffolding formwork out of India. The Company has been supplying scaffoldings to global markets for over 20 years. During the Financial Year the company has increased its domestic sale, as the Company has started supplying to various infra Projects.

Despite the volatile nature of construction and allied activities, the Scaffolding & Formwork (S&F) market is thriving in India and one can expect brighter times ahead.

With the government laying special emphasis on construction and infrastructural development in the 12th Five Year Plan, opportunities abound in the Indian Scaffolding and Formwork (S&F) Industry. With the demand rising in the wake of ongoing and future projects, S&F manufacturers are keeping pace with the Construction Industry.

The Company has strategically located state-of-the-art manufacturing facilities with installed capacities of 40,000 MT and 25,000 MT in India and China, respectively. The Company is positioned as an end-to-end solution provider owing to its well-integrated manufacturing capability. The Company supplies itsproductstodiversifiedset of end markets including oil & gas, power, refineries, petrochemical, infrastructure and commercial construction.

The Company is present in the premium segment of Scaffolding business. Scaffolding segment is growing on the back of the strong demand from the international infrastructure markets and also getting good response from infra projects in India.

The Company’s Scaffolding segment comprises of Scaffolding and Formwork business. Its major revenues accrue from overseas markets. The Company is also started giving its scaffolding on renal basis; The Company is finding good scope and margin in this growing business.

Formwork Business

Formwork is the term given to either temporary or permanent molds into which concrete or similar materials are poured. Traditionally, formwork was built using easy to produce timber and plywood, or moisture-resistant particleboard. Over a period of time formwork is now made more of steels which are more durable and reusable.

Looking at Indian government’s focus on rapid infrastructural development across the country by constructing railways, roads, bridges, dams, airports, power plants and many more, construction is now growing at a fast pace. Contractors have started adapting newer technologies, faster systems, advanced concrete techniques and better and established management tools.

Engineered Formwork Systems are built out of prefabricated modules with a metal frame - usually of steel or aluminum - and covered on the application (concrete) side with material having the wanted surface structure (steel, aluminum, plastic, timber, etc) The Company has entered into manufacturing of sophisticated engineered Formwork systems for building, construction and infrastructure projects in India.

The Company has state-of-the-art manufacturing plant in India and is well placed to play a larger role in the construction growth in India and overseas,withanetworkofoffices . at Mumbai and overseas

The revenue of Scaffolding Segment was increased tremendously by 22.53% during the Financial Year 2018-19 as compared to previous Financial Year. The revenue generated from this division for the current financial year 2018-19 was Rs. 484,56.94 Lakhs and for the previous year Rs. 39,545.66 Lakhs.

Profit before Tax and Interest for the year was reduced toRs. 7,756.46 with that of previous year i.e., Rs. 7,776.97 which decreased by 0.26% as compared to previous year

Yarn

The Company produces variety of products ranging from NE 20 to NE 40, Carded and Combed varieties of Cotton Yarn. The Spinning mill is equipped with world-class Swiss, Japanese, German, Spanish equipment. Currently, the Company exports approx.60% of yarn products mainly in Europe, Asia, Latin American countries etc.

The Company manufactures premium quality active wear products and provides superior service. Products are custom knit, dyed, finished, cut, sewn, decorated, packaged and distributed.

Being part of a diverse group, the Company has access to the latest trends in the European markets, thus enabling it to offer high quality products and latest fashions with Indian prices in a very short lead-time.

During the Financial Year the revenue of Yarn Division was decreased slightly as compared to last Financial Year. Total revenue from the segment in the Financial Year 2018-19 was Rs. 27,227.92 Lakhs as compared to Rs. 27,327.66 Lakhs for previous year. This division generated loss before Interest and Tax of Rs. 587.07 Lakhs as compare to Loss of Rs. 635.83 Lakhs of last year.

Fabric/ Garments

Changing lifestyles and increasing demand for quality products are set to fuel the need for apparel and corresponding growth in Garment Units.

During the current Financial Year the revenue from the Garment Division was increased to Rs.13,540.07 Lakhs as compared to previous year of Rs. 11,659.06 Lakhs, which is increased by 16.13%. Further, this segment generated loss before interest and tax of Rs. 895.46 Lakhs as compare to loss of Rs. 389.51 Lakhs for previous year.

Captive power generation

The Company has a coal based captive power generation plant of 15MW to cater to its power requirements, resulting into less dependence on state electricity board and surety of continuous power supply to all its divisions.

During the current Financial Year the revenue from power division was increased to Rs. 5324.96 Lakhs as compared to previous year of Rs. 5138.75 Lakhs which shows increase of 3.62%. However, profit before tax and interest was decreased to Rs. 874.65 Lakhs against Rs. 905.22 Lakhs of previous year, reflecting decrease of profit by 3.38% as compared with that of previous year.

Engineering & designing services through Subsidiary

Technosoft Engineering Projects Limited (‘Technosoft’) is a subsidiary of the Company. Technosoft is a global technology services company offering broad-based engineering, designing and IT services using a variety of client-partnership models for delivery. Technosoft’s client base spans various industry verticals including heavy machinery, automotive, aerospace, manufacturing, oil & gas, high-tech, telecom, healthcare and financial services. The company’s client base is widely spread globally including many clients from US, Canada, UK and Germany.

Technosoft has a strong team of over 250 engineers and designers located worldwide. Its engineers and designers are equipped with state-of-the-art hardware and software tools, including tools for 3-D modeling, Finite Element Analysis and process simulation.

Technosoft operates in North America through its subsidiaries, which provides general engineering & designing services and EPC Management Services in the oil and gas and other industry.

OPPORTUNITY & FUTURE PLAN

For an enterprise there is nothing more important than to find and exploit new market opportunities.

The Government of India has set an ambitious target of increasing the contribution of manufacturing output to 25 percent of Gross Domestic Product (GDP) by 2025.

The Government of India has taken several initiatives to promote a healthy environment for the growth of manufacturing sector in the country. Likewise Ministry of Heavy industries and Public Enterprises, in partnership with industry associations, has announced creation of a start-up center and a technology fund for the capital goods sector to provide technical, business and financial resources and services to start-ups in the field of manufacturing and services.

Focus of the company is to consolidate and grow its position in each of its core businesses which is Drum Closures, Scaffolding, Engineering & Designing Services and Textiles. The Company sees the Drum Closure division growing at same or higher rate next year and this is certainly one of its core focus areas.

The Company is working strongly and increasing the sales and profitability in China which is one of the main growing markets for Drum Closures division. Drum Closure division is growing in China. Scaffolding division can perform better this year. Management expects a good growth rate both in top line and bottom line.

Government initiatives such as RERA, Affordable housing, Smart Cities etc. are expected to bring a transformational shift and boost growth of Indian real estate industry, which will create tremendous growth in scaffolding. Awareness towards safety will also generate more demand and growth for scaffolding business.

RISK & THREAT

Global Slowdown - More than 70 % of TIIL’s revenue comes from global markets. Any slowdown in economic activities in global markets in general and U.S. market in particular may affect TIIL’s performance.

Foreign exchange - Being an export oriented company, the Company’s competitiveness, revenue growth & margins may be affected in case Indian Rupee appreciates significantly against major global currencies in long run. In the short run, volatility in foreign exchange markets may affect the Company’s profitability as it does not hedge its export receivables fully.

Commodity prices - Increase in commodity prices like steel & cotton may affect the Company’s performance in case it unable to pass the rise in commodity prices to its customers.

Capital allocation The Company’s certain businessesgeneratesignificantcash flows and The Company’s cash & cash equivalents and current investments were stood at Rs. 3,219.92 Lakhs and Rs. 12,370.99 Lakhs respectively as on March 31, 2019. TIIL’s management has plans to invest this amount into various businesses and keep looking for inorganic growth opportunities. Inorganic growth opportunities pursued in future may or may not generate economic returns as desired due to various factors. However, management has narrowed down focus to "engineering" area (considering management’s background & expertise) while pursuing inorganic growth opportunities and evaluating certain opportunities in specialized drum closures/scaffolding segment and engineering services segment

Market Share- any rise in competitive landscape in domestic or international markets can lead to reduction in market share and can affect profitability.

Financing: The Company’s growth strategy is dependent on the internal cash generation level and ability to draw external capital for growth projects.

Considering the industry volatility, Technocraft continued its journey of developing new markets and products and enhancing value added services to its customer.

The Company aims to address risks, opportunity and threat posed by the business environment by developing appropriate risk mitigation measure.

The Management has also put in place effective measures to monitor the Risk Management System and appropriate steps are taken to strengthen the existing business practices and policies to the overcome the challenges.

Risk Management System is a way to try alternative solution as to determine what works and what doesn’t and testing and refining assumptions.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Internal Control System plays an integral role in the Company’s Success. It helps the management to monitor the effectiveness of the controls in an ever-changing environment. Internal control and risk management are critical in the process of setting and achieving operational, strategic, compliance and reporting objectives.

The Company’s internal control policies are in line with its size and nature of operations and they provide assurance that all assets are safeguarded, transactions are authorised, recorded and reported properly following all applicable statutes and General Accepted Accounting Principles.

The Company has an Audit Committee all the members including the Chairman are independent directors in order to maintain objectivity. Internal Auditor of the Company conducts audit in various functional areas. Audit planning and executions are oriented towards assessing the state of internal controls, making them stronger and addressing the risks in the functional areas of the Company. Internal Auditor, reports to the Audit Committee its findings and observations. Audit Committee meets at regular intervals to review audit issues and follow up on implementation of corrective actions.

Besides the above, the Company has also met the Internal Financial Control requirements as per Companies Act, 2013 where policies and procedures have been adopted by the Company for ensuring the orderly and efficient conduct of its business, including adherence to Company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information. Audit Committee also seeks views of the statutory auditors on the adequacy of internal control systems in the Company. In compliance with Section 143(3)(i) of the Act, the Statutory Auditors have issued an unmodified report on the Internal Financial Controls over Financial Reporting which forms a part of the Independent Auditors’ Report also forming part of this Annual Report.

SEGMENT WISE FINANCIAL PERFORMANCE

The summarized segment-wise performance of the Company for the Financial Year 2018-19 is as follows:

(Rs. In Lakhs)

Business Segment Drum Closures Scaffolding Yarn Fabric Power Total
A. Segment Revenue 33,408.34 48,456.94 27,227.92 13,540.07 5,324.96 1,27,958.23
B. Segment Results (profit and loss before interest) 8,775.07 7,756.46 (587.07) (895.46) 874.65 15,923.65
Less:
i) Finance Cost 2,903.14
ii) Other un-allocable expenditure net of un-allocable income (1,160.88)
Total Profit before tax 14,181.39
C. Capital Employed (Segment assets -Segment liabilities) 15,743.54 41,133.10 22,316.79 12,122.43 2,371.27 93,687.13

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The Company believes that a good Human Resource Policies are very effective for supporting and building the desired organisation culture and to maintain the same our company takes actions on the day-to-day activities of the organization.

The Company continues to focus on creating strong and long term relationship with all employees as employee retention and development are among the highest priorities of the Company.

The Company is working on enhancing its competencies to take care of current and future business. Its employee strength as on March 31, 2019 was 1,595. Human Resource and Industrial Relations departments have developed systems and policies on recruitment, performance management, learning and development, and employee engagement.

The workers union of the Company has maintained healthy and cordial industrial relations, and has been an equal partner in implementing Company’s policies and achieving stretched operational targets, year on year.

PERFORMANCE SNAPSHOT

The standalone financial highlights for FY 2018-19 are as follows:

(Rs. In Lakhs)

Particulars FY 2018-19 FY 2017-18 Variance
Revenue from operations 1,15,105.30 1,01,390.12 13.53%
Profit before exceptional items and taxes 14,181.39 15,554.03 -8.83%
Exceptional items (net) - - -
Profit before tax 14,181.39 15,554.03 -8.83%
Profit after tax 10,235.16 10,862.26 -5.77%

Key Financial Ratios

Ratios FY 2018-19 FY 2017-18 Change%
Debtors Turnover 3.35 3.57 (6.16)
Inventory Turnover 3.89 4.07 (4.42)
Interest Coverage Ratio 5.88 10.01 (41.26)
Current Ratio 0.82 0.84 (2.38)
Debt Equity Ratio 0.70 0.61 8.20
Operating Profit Margin % 14.57 14.81 (1.62)
Net Profit Margin % 8.89 10.75 (17.30)
Return on Net Worth % 13.65 16.77 (18.60)

Note:

Change in Interest Coverage Ratio is on account of higher level of working capital facility required for business and term loan for expansion.

Net profit margin and return on net worth are lower mainly on account of reduction in net profit due to high cost raw material and higher interest on debt.

CAUTIONARY STATEMENT

Statements made in Management Discussion and Analysis Report describing the Company’s objectives, estimates, expectations or predictions are "Forward looking Statement" within the meaning of applicable laws and regulations. They are based on certain assumptions and expectations of future events. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Company’s operation include global and Indian demand- supply condition, raw material availability, trained manpower, changes in Government regulations, tax regimes, economic development within India and the countries within which the Company conducts business and other incidental factors.