Tembo Global Industries Ltd Management Discussions

TEMBO GLOBAL INDUSTRIES Financial Year 2024

Global Economy

In 2024, the global economy is projected to grow by 3.1%, slightly exceeding initial forecasts. This uptick is largely due to the fiscal stimulus measures implemented by China, coupled with stronger economic performance in the United States and other key economies. Despite challenges such as the pandemic, the conflict in Ukraine, and escalating living expenses, the economic rebound has shown remarkable resilience. Inflation, which soared to record levels in 2022, is now subsiding more rapidly than anticipated, helping to alleviate its potential adverse effects on employment and overall economic activity. The decline in inflation is primarily attributed to positive supply chain developments and the success of central banks in keeping inflation expectations stable. The quicker-than-expected reduction in inflation rates is also linked to improvements in global supply chain conditions.

SOURCE: International Monetary Fund (IMF) 2024 Report

The forecast for annual real GDP growth has been revised upward to 2.6%, from the initial estimate of 2.3% at the beginning of the year. This revision is due to slightly more optimistic growth projections for countries such as the United States, the United Kingdom, and India. The prediction for global real GDP growth in 2025 remains unchanged at 2.6% annually. Quarterly real GDP growth, which reached a high of 0.4% in the final quarter of 2023, is expected to recover to 0.8% by the second half of 2024.

Indian Economy

In the fiscal year 2024, Indias economy experienced impressive expansion, with a 7.6% increase in GDP. This surge was driven by robust internal demand, proactive government strategies, and positive developments in key industries. Joint actions by the government and the Reserve Bank of India (RBI) successfully kept inflation in check through measured policy changes, increased food stockpiles, and improved import processes. The provisional budget for the fiscal year 2025 introduced critical measures aimed at boosting economic progress and advancement. Significant funding was allocated to capital expenditures, with a focus on vital sectors such as infrastructure improvement, healthcare, education, and the upliftment of rural areas. The expansion of the production-linked incentive (PLI) scheme to various industries, along with strategic investments in infrastructure ventures, is expected to attract investment, enhance manufacturing, and create job opportunities. The economic forecast for India remains positive, with the RBI predicting a 7% growth rate for the fiscal year 2025. This continued growth is anticipated to be supported by strong investment activity, a revival in private spending, and encouraging trends across different sectors. With a conducive economic environment and persistent initiatives for reforms and development, India is on track to maintain its growth path and strengthen its status as a prominent player in the global economy.

SOURCE: NSOs Second Advanced Estimates

Government Initiatives

Key Infrastructure Initiatives:

Capital Expenditure: The government has allocated a significant portion of the budget for capital expenditure, d emonstrating a strong commitment to infrastructure development. State Support: The government is encouraging states to provide similar support for infrastructure development, aligning with their local priorities. Private Sector Investment: The government is promoting private sector investment in infrastructure through various measures such as viability gap funding and supportive policies.

Market-Based Financing: The introduction of a market-based financing framework will enhance the efficiency and sustainability of infrastructure funding. Specific Measures and Initiatives: Long-Term Interest-Free Loans: The government is providing long-term interest-free loans to states to assist them in their resource allocation for infrastructure projects. Public Private Partnership (PPP) Promotion: Various mechanisms such as the PPPAC, VGF, and the India Infrastructure Project Development Fund Scheme are being used to foster PPPs. National Monetisation Pipeline (NMP): The NMP aims to attract private sector investment for new infrastructure creation through asset monetization. Pradhan Mantri Gram Sadak Yojana (PMGSY): The government is expanding the PMGSY to provide all-weather connectivity to more rural habitations. Irrigation and Flood Mitigation: The government is providing financial support for irrigation and flood mitigation projects in various states. Overall Impact: These initiatives are expected to have a significant positive impact on Indias infrastructure development, leading to: Economic Growth: Infrastructure development can create jobs, improve connectivity, and boost economic activity. Social Development: Improved infrastructure can enhance access to education, healthcare, and other essential services. Regional Development: Infrastructure investments can help bridge the development gap between urban and rural areas. By prioritizing infrastructure development and adopting a multi-faceted approach, the government is working towards creating a more developed and prosperous India.

Industry Overview

Tembo Global Industries Limited is witnessing strong expansion across its diverse business areas, which encompass engineering solutions, textiles, and defence manufacturing. This growth is propelled by heightened demand in infrastructure and real estate projects, as well as governmental initiatives aimed at b o lstering self-sufficiency in d efense production. Additionally, the company stands to gain from the growing market for niche engineering goods and the processing of yarn.

Textile Industry

In 2023, the Indian Textile and Apparel (T&A) sector was valued at $165 billion, with domestic sales making up 76% and exports accounting for 24% of the market. India is recognized as the worlds second-largest textile producer and the top exporter. The home market for T&A grew by 7% and is expected to expand at a 10% rate. Since 2010, the export sector has seen a compound annual growth rate (CAGR) of 4% and is anticipated to continue growing at a 10% rate through 2031. Notably, exports in the first half of 2022 were close to reaching a record high but then saw a significant drop in the second half of the year. By the fiscal year 2024, Indias T&A exports stood at $28.72 billion. India has also secured Free Trade Agreements (FTAs) with countries like the UAE, Australia, and Canada. The T&A sector is a major employer in India, providing jobs to 45 million people, second only to agriculture in terms of employment.

The Indian T&A industry holds several competitive edges, including strong market demand that is expected to persist. India has a comparative advantage over other textile-exporting countries due to its skilled labor force and lower production costs. Between April and June of FY24, the country exported technical textile items worth $715.48 million. The industry is bolstered by supportive government p o licies, such as allowing 100% Foreign Investment (FDI) in textiles. Investments in the sector are climbing, evidenced by the governments approval of textile R&D projects totaling $7.4 million in June 2023. The Amended Technology Upgradation Fund Scheme, which is a credit-linked subsidy program, has been introduced to stimulate investments in the T&A sector, leading to an increase in private equity investments and job creation.

(Source: IBEF report on Textile Industry)

Engineering & Capital Goods

Indias engineering industry stands as the cornerstone of its industrial landscape, comprising 27% of all industrial factories and accounting for 63% of foreign collaborations. The sectors demand is fuelled by expansion activities in various industries, including infrastructure, power, mining, oil and gas, refineries, steel, automotive, and consumer electronics. India boasts a competitive edge in manufacturing costs, market knowledge, technological prowess, and innovation across different engineering sub-sectors. The engineering sector has experienced significant growth due to increased investments in infrastructure and industrial production, making it a critical component of Indias economic framework. Government policies and initiatives have played a pivotal role in the advancement of the engineering sector. The industry has been deregulated and is open to 100% foreign direct investment (FDI), positioning it as a leading contributor to Indias export earnings from merchandise. (SOURCE: Indias Engineering & Capital Goods Manufacturers Industry : IBEF)

Manufacturing Sector

Indias manufacturing exports achieved a record high in FY23, reaching $447.46 billion, a 6.03% increase from the previous fiscal years $422 billion. By 2030, the Indian middle class is expected to account for 17% of global consumption, becoming the second-largest consumer group worldwide. The countrys gross value added (GVA) at current prices was $770.08 billion in the first quarter of FY24. Indias e-commerce exports are on an upward trajectory, with projections indicating growth from $1 billion to $400 billion annually by 2030, contributing to a goal of $2 trillion in total exports. Indias GDP saw an 8.4% rise in the October-December quarter, exceeding forecasts. This growth was largely fuelled by the manufacturing and construction sectors, with manufacturing growing by 11.6% and construction by 9.5% annually. The manufacturing sector in India is on track to reach a $1 trillion valuation by 2025-26. The country is poised to become a significant contributor to the global manufacturing landscape, potentially adding over $500 billion annually to the global economy by 2030. Employment in the manufacturing sector has shown a steady increase, from 5.7 crore in 2017-18 to 6.24 crore in 2019-20. Additionally, the display panel market in India is expected to double approximately $7 billion in 2021 to $15 billion by 2025. For the first quarter of FY24, the manufacturing GVA at current prices was estimated at $110.48 billion. Overall, Indias manufacturing sector is demonstrating robust growth and export potential, with significant contributions to both the domestic and global economies. (SOURCE:Manufacturing Industries in India & its Growth : IBEF)

Defence Manufacturing

The Indian Defence sector is a dynamic and integral part of the national economy, with the government and defence manufacturing industry working in tandem to achieve significant growth and self-reliance. The Ministry of Defence has set ambitious targets for aerospace and defence manufacturing turnover, aiming for US$ 25 billion by 2025, including US$ 5 billion in exports. The defence budget for FY 2023-24 has seen a substantial increase, with a focus on modernization and fleet enhancement across all armed services over the next 5-7 years, totalling an estimated US$ 130 billion in spending. India is currently the third-largest defence spender globally and aims to boost its exports significantly by 2026. The government has taken various initiatives to promote indigenous research and development, including allocating a portion of the defence R&D budget to private industry and startups. The issuance of industrial licenses and the growth in defence exports highlight the sectors progress and international reach. Efforts to reduce dependency on foreign procurement have been successful, with a notable decrease in the percentage of defence procurement from foreign sources. The government has also introduced policies to encourage domestic manufacturing, such as the Atmanirbhar Bharat initiative, which includes indigenization lists and the SRIJAN portal to promote local production.

Investments in the defence sector are on the rise, with the government approving R&D projects and setting up Defence Industrial Corridors to attract investment and innovation. The Draft Defence Production and Export Promotion Policy aims to significantly increase defence turnover and exports by 2025. (SOURCE: Indian Defence Manufacturing Industry Analysis (ibef.org))

Company Overview

Tembo Global Industries stands as a prominent entity in the industrial sector, specializing in the production and assembly of metal components for Pipe Support Systems, Fasteners, Anchors, HVAC, Anti-Vibration Systems, and Equipment for a range of installations including industrial, commercial, utility, and OEM. The company also engages in the trade of metal products that complement its manufacturing operations. As an export-driven enterprise, Tembo has earned the distinction of a 2 Star Export House. In 2023, Tembo ventured into the EPC (Engineering, Procurement, and Construction) contracting arena, securing orders from prestigious clients like Kalpataru, L&T, Tata Projects, and RDC-Maldives. Additionally, the company has interests in the textile trading market.

Business Strengths

1. Diversified Business Model: The company operates across multiple segments, including engineering solutions, textiles, and defence products, reducing dependency on a single market.

2. Strong Order Book: A robust order book of INR 800 crores, including L1 orders, provides revenue visibility and stability.

3. Established Brand Reputation: High-quality standards with UL and FM approvals and ISO 9001:2015 certification boost customer confidence and brand reputation in domestic and international markets.

4. Experienced Management Team: Over 40 years of industry experience among the management, leading to effective decision-making and strategic planning.

5. Integrated Manufacturing Capabilities: Forward and backward integration in manufacturing processes allows for cost savings, better control over the supply chain, and improved profitability.

Weaknesses

1. High Dependence on Engineering Segment: A significant portion of revenue comes from engineering products, making the company susceptible to fluctuations in this market segment.

2. Limited Geographic Diversification: Although there is some presence in international markets, the majority of revenue is still generated domestically, which exposes the company to economic conditions in India.

3. Lower Margins in Certain Segments: The textiles segment operates at a lower EBIT margin (2.4%) compared to other segments, impacting overall profitability.

4. Debt Levels: Although the debt-to-equity ratio has improved, the company has had a relatively high debt level, which could impact financial stability and flexibility in times of economic downturn.

Opportunities

1. Expansion into High-Margin Businesses: Entry into the defence sector and expansion into high-margin products like ERW pipes, EPC contracts, and specialized defence products provide significant growth potential.

2. Government Initiatives: Benefiting from government programs like ‘Make in India and ‘Atmanirbhar Bharat that promote local manufacturing and defence production.

3. Export Market Potential: Increasing penetration in international markets, including the Middle East, USA, and Europe, offers a chance to diversify revenue streams and reduce dependence on domestic demand.

4. Technological Advancements and Innovation: Investment in R&D and new product development, particularly in defence, can enhance competitive positioning.

Threats

1. Raw Material Price Volatility: Fluctuating prices of key raw materials like steel can significantly affect production costs and margins.

2. Economic Slowdown: A slowdown in the global or Indian economy could impact demand in key sectors like automotive, real estate, and infrastructure.

3. Regulatory and Compliance Risks: Changes in environmental regulations, export-import policies, and safety standards could impact operations and profitability.

4. Intense Competition: The company faces stiff competition from both domestic and international players in all its business segments, which could lead to margin pressures.

5. Geopolitical Risks: Export markets are exposed to geopolitical risks, which can affect trade policies, logistics, and market access.

Growth Outlook

The Company laid its strategic focus on integrating advanced manufacturing technologies and processes to enhance efficiency. By prioritizing the production of margin-accretive value-added products, the company is poised to achieve higher production output, which will positively impact its financial performance.

The centralization of operations, coupled with streamlined supply chain logistics, is set to bolster operational agility, allowing the company to respond swiftly to market demands and supply chain dynamics. The adoption of lean manufacturing principles demonstrates the companys commitment to minimizing waste and optimizing the use of resources, which is likely to lead to cost savings and improved profitability.

Sustainability is at the forefront of the companys agenda, with certifications in environmental management and ethical manufacturing practices underscoring its dedication to responsible production. This commitment not only enhances the companys reputation but also aligns with the growing global demand for environmentally conscious and ethically produced goods.

The establishment of Tembo Defence Products Pvt. Ltd aligns with the governments increasing emphasis on sourcing high-quality Made in India defence products. This strategic move positions the company to capitalize on the governments push for self-reliance in defence procurement.

The companys foray into the defence sector, leveraging its manufacturing prowess in engineering products, indicates a strategic expansion that could open new revenue streams. With the aim to manufacture and deliver top-quality defence products, the company is set to mirror the governments vision of increasing self-reliance in defence.

Furthermore, exploring opportunities to export defence products presents a significant growth avenue for the company. With the global defence market being extensive and diverse, the companys entry into exports could lead to substantial growth, increased market share, and enhanced international presence.

Operational Performance

1. Revenue Growth Chart

Financial Year	Revenue (INR Crores)
FY21	1	0	4	.5
FY22	1	7	5	.9
FY23	2	4	9	.8
FY24	4	3	2	.1

2. EBITDA and EBITDA Margin Chart

Financial Year	EBITDA (INR Crores)	EBITDA Margin (%)
FY21	7.5	7.2
FY22	8.2	4.7
FY23	13.4	5.4
FY24	19.0	4.4

3. Order Book and Order Bidding Pipeline

The current order book value and the order bidding pipeline (including L1)

Category	Value (INR Crores)
Order Book	800
Order Bidding Pipeline	1,200

4. Revenue Mix for FY 24

Segment Wise Revenue Mix: o Engineering Products: 30% o Textiles: 70%

5. PAT and PAT Margin Chart.

Financial Year	PAT (INR Crores)	PAT Margin (%)
FY21	2.3	2.2
FY22	3.2	1.8
FY23	5.8	2.3
FY24	14.2	3.3

6. Debt to Equity Ratio Chart

Financial Year	Debt to Equity Ratio
FY21	1.55
FY22	1.62
FY23	1.03
FY24	0.75

Risks and Concerns

Market Risk: The companys performance is linked to economic cycles. A downturn could impact demand in key segments.

Raw Material Risk: Fluctuations in steel and textile raw material prices can affect profitability.

Regulatory Risk: Changes in environmental, safety, and export-import policies may pose challenges.

Internal Control Systems and Their Adequacy

The Company has established a robust and appropriate internal control system that matches its size and business type, aimed at safeguarding assets from unauthorized use or loss and ensuring transactions are properly authorized, recorded, and reported. These internal controls are enhanced through regular internal audits, management reviews, and the implementation of documented policies and procedures. The design of the system is to guarantee the reliability of financial and other records for the generation of financial data and to maintain asset accountability. Additionally, the Audit Committee of the Board of Directors regularly evaluates all financial and audit control systems.

Material Developments in Human Resources/Industrial Relations Front

The company regards its workforce as its most valuable resource. In the fiscal year 2025, the company persisted in emphasizing the importance of staff training and development to boost efficiency and foster creativity. The company also sustains a harmonious rapport with its workforce.

Changes in key financial ratios

The key financial ratios of the Company where there have been significant changes (25% or more) are summarized below:

Particulars	2023-24	2022-23	% Change	Reason for Change
Debtors Turnover	3.99	2.47	61.31	Due to change in sales policy of the Company
Inventory Turnover	2.79	2.09	33.89	Due to change in sales and purchase policy of the Company
Debt Equity Ratio	0.75	1.01	(26.20)	Due to repayment of loan term debt and margin structure of the Company
Net Profit Margin	3.21	2.33	37.68	Due to change in margin structure of the Company
Return on Net Worth	19.30	13.76	40.23	Due to change in margin structure of the Company

Cautionary Statement

Statements in this Management Discussion and Analysis of the Company describing the Companys objectives, expectations or predictions may be forward-looking within the meaning of applicable laws and regulations. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised. The Company assumes no responsibility to publicly amend, modify or revise forward looking statements, based on any subsequent d evelopments, information o r events. Thus, the Companys actual performance/results could d iffer from the p rojected estimates in the forward-looking statements. The discussions on our financial condition and result of operations should be read together with our audited, consolidated Financial Statements and the notes to these statements included in the Annual Report.