Thejo Engineering Ltd Management Discussions

Global trade is set to increase this year, driven by low inf i ation and a booming US economy, according to three major international economic organizations, viz. IMF, OECD, and WTO, all of which forecast an uptick in global trade flows in 2024. Despite lower inflation, interest rates, and increased economic activity, persistent risks and divergences between economies still threaten international trade. Slow but steady economic growth at 3.2% for 2024 and 2025 is predicted by the IMF in its World Economic Outlook - with a small uplift for the advanced economies but slightly lower growth in emerging and developing economies. The geopolitical tensions and trade fragmentation must be mitigated to keep growth on track. The Red Sea crisis and confi ict in the Middle East are causing delays and increasing shipping costs for some sectors. Environmental risks such as the low water levels in the Panama Canal - one of the worlds main shipping arteries - add to the geopolitical issues affecting this and another major trade channel, the Suez Canal. The significant shifts and new challenges for businesses and policymakers caused by Generative AI could help advanced economies offset their lack of labour and emerging economies raise their workers productivity and income levels (Source: World Economic Forum, May 2024).

India

Indias core sector growth eased to 5.2% in March 2024, impacted by various industries. The Index of Industrial Production (IIP) is likely to see a moderate growth of 3.5-5% in the same period. The slow growth in eight core industries, which have a 40% weight in the IIP, is likely to lead to slower industrial growth as well. With respect to steel sector, one of the major sectors catered by the Company, India remains a bright spot in the global steel industry and the steel demand in the country is expected to show a healthy growth of 7.7% in 2024 compared to a global growth of 1.9%, according to the Outlook of the World Steel Association.

Australia

The outlook for Australia remains positive but weaker growth is expected for 2024. Inflation has been higher than expected and labour market conditions have proven stronger than anticipated. Overall, higher interest rates have led people to cut back on spending. This is slowing economic growth and bringing demand into better balance with supply. Considering the potential market size in Australia, Thejo Australia Pty Ltd has a good growth potential over the long-term.

Saudi Arabia

The Saudi Arabian mining sector is expected to expand substantially in the coming years and play a crucial role in the Kingdoms economic diversification efforts. The government is focused on accelerating exploration and mining activity and reducing the Kingdoms dependency on oil revenue. The governments ambition to transform mining into the third pillar of the countrys economy, is expected to provide us with robust opportunities in the coming years. Thejo Hatcon Industrial Services Company is expected to capitalise on the business opportunity and enhance growth.

Brazil

Despite downside risks from exports to China, the Brazilian economy is likely to grow further this year, thanks to the falling interest rates and a tight labour market. The Brazilian Industry Institute IBRAM predicts that investments in the countrys mining industry will amount to $64.5 billion in 2024-2028 (Report: S&P Global). On the back of low base and steady establishment of our products with key clients, our subsidiary in Brazil, Thejo Brasil Comercio E Servicos Ltda, could target further growth in this geography.

Chile

Chile continues to be a strong trading partner and export market for U.S. companies, largely due to its open market policies, zero tariffs, solid business practices, and low corruption index. The expected upturn in activity in 2024 should ensure that growth comes close to its potential, driven by household consumption, private investment and mining exports. On the back of the steady establishment of our products and our brand in the market, our subsidiary in Chile, Thejo Engineering LatinoAmerica SpA, is expected to perform well in the coming years.

United Arab Emirates (UAE)

The 2024 economic outlook for UAE remains positive, with expected GDP growth of 4% driven by sustained public infrastructure investments, and expansion of non- oil sectors such as tourism, financial services and technology. With better logistics and connectivity to European and African markets, our new subsidiary TE Global FZ-LLC at Ras Al-Khaimah has robust opportunities for future growth and profitability.

With quality and safety as top priorities, our Subsidiaries are expected to grow in the long term.

INDUSTRY STRUCTURE AND DEVELOPMENT

As the Company primarily caters to core sector industries, especially the customers in mineral and steel industry, the fortunes of the Company are closely tied to the fortunes of these industries. World Steel Association expects India to be the main driver of demand growth as Chinese demand continues to decline. Global steel demand is expected to rise by 1.7% to 1.793 billion metric tons in 2024 and to increase further in 2025 (Source: Reuters). The countrys rapid economic development, urbanisation, and growing population will sustain metals and steel production in the mid to long term. Sustainability-led demand for metals like copper and aluminium should lead to higher sales prices and margins in the long-term. The Company continues to focus on value-added products along with high volume products. The focus is on increasing services business with robust working capital management. The Company continues to develop its overseas markets and pay attention to exports as domestic growth is expected to be average in the long run.

COMPANY PROFILE AND KEY DEVELOPMENTS PROFILE

Thejo Engineering Limited is a premium engineering solution provider to mining, mineral processing and bulk material handling industries through manufacturing products and offering onsite maintenance through technical as well as operations and maintenance services. The Company serves a variety of industries like steel, mining, mineral processing, aggregates and sand, power, chemical and fertiliser, cement, ports, etc. The Products business of the Company centres around design, development, manufacture and supply of rubber and polyurethane-based engineered products for belt cleaning, spillage control, flow enhancement, impact and abrasion protection, and screening applications. Thejo Engineering is one of the few companies in the sub-continent offering manufacturing, marketing, and servicing activities under one roof.

Thejo Engineering was listed in the SME-EMERGE platform of the National Stock Exchange of India Limited (NSE) in 2012. The Company migrated to the Main Board (Capital Market Segment) of NSE with effect from 10^th October, 2023. The Company has global presence with subsidiaries in Australia, Saudi Arabia, Brazil, Chile and Ras Al-Khaimah, UAE. The Company caters to India, Australasia, Middle East, South America, North America, Sub-Sahara and West Africa markets. The Company has manufacturing facilities and in-house R&D Centre in Chennai. The Company has distributor networks in various geographies.

RESEARCH AND DEVELOPMENT

The R&D Centre of the Company is focusing on developing new and innovative products, as well as bringing about continuous improvement of existing products to meet the needs of customers and tap into new markets. One of the primary functions of the centre is to spearhead innovation through researching and developing new techniques, equipment, and processes aimed at improving efficiency, reducing environmental impact, and enhancing safety in operations. The focus is on developing sustainable practices and technologies to mitigate environmental impact. The sustained efforts of the R&D Team have helped the Company to develop diverse product ranges capable of withstanding some of the hardest working conditions in core sector industries.

The Company has applied for patents in respect of several products/inventions. As at the end of the financial year, the Company had applied for 33 product patents and three design protections, of which 25 product patents have been awarded and the balance are in process.

Collaboration with industry stakeholders, academia, and government agencies is integral to the functioning of the R&D centre. By fostering partnerships and sharing knowledge, the centre is engaging in collaborative basic research projects with academic universities.

SAFETY

As part of its policy of giving utmost importance to safety, the Safety Department of your Company is continuously evaluating every process at its manufacturing as well as work sites and taking necessary steps for the safety of personnel as well as of properties. The Company conducts safety reviews on regular basis and takes appropriate steps based on the findings.

The Company has its Excellence Centre to train the technicians of the Company on safety and various technical aspects of the job. Safety, quality and speed are key to our services business.

OPPORTUNITIES AND THREATS

Opportunities

The Company has been leveraging its experience for long term planning by uncovering new global opportunities and consolidating single-source solutions. Thejo has been broadening and deepening customer relationships by continually looking for new opportunities and newer areas in their businesses to add value, proactively investing in building newer capabilities, exploring new markets, re-skilling its workforce and launching newer services towards long-term sustainability goals.

Majority of the product division output goes to steel sector and mines. The products as well as services offerings of the Company are primarily intended for the core sector industries. The opportunities for the industry in which the Company operates go hand in hand with the opportunities for the core sector industries. The Indian steel processing industry stands at a pivotal juncture, poised to leverage emerging opportunities while navigating through an array of challenges. The Indian government is vigorously advancing the second phase of the Production Linked Incentive (PLI) scheme, aimed at further expanding the operational capacities of the metallurgical sector. This move is anticipated to significantly boost steel production in 2024, providing an impetus not only for enhanced domestic capabilities but also for elevating the international competitiveness of Indian steel companies through innovation and capacity enhancement.

The Company has a balanced portfolio of products and services, which helps to moderate the impact of cyclicality experienced by its customers. The Company looks at taking services business to the international markets and expanding the distributorship for its products in overseas geographies as the key areas of opportunity for the future. With the expansion of operations and penetration into the UAE market through the new subsidiary, connectivity to international clients is likely to enhance, resulting in newer business opportunities and growth in exports over the medium term.

Services sector fi nds talent supply as a challenging area in terms of technical competency, culture, and efficiency. Cost cutting through multiskilled manpower and preventive maintenance through training on safety and skill upgradation could enhance quality service and sustainable, consistent growth and development in the future. International market has good potential for services sector with skilled manpower, for the Company to capitalise.

The Companys bet on Operation and Maintenance (O&M) as the mainstay for the future is yet to materialize on the ground as O&M continues to be viewed as a commodity with consequent price pressures bordering on manpower contract. Under these circumstances, the Company intends to focus primarily on such O&M contracts that would add value to the Company as well as to the customers. The Company continues to expect good potential in O&M in the long term as and when the market matures.

The Company has been offering bundled products and is taking various measures to establish its products and services in the overseas markets as well. Mill liners and pipe conveyor maintenance are other areas where the Company believes there will be good growth opportunities. Improved distributorship networks, sustainable operations with concern for environment and focus on Environment, Social and Governance(ESG) aspects are the value additions and qualitative factors that provide competitive edge in the market in the long run.

Threats

The global economy continues to show resilience despite facing several strong headwinds, the lingering impact from the pandemic; Russias invasion of Ukraine; Chinas economic slowdown; surging financial stress with high inflation, high costs, falling household purchasing power, and forceful monetary tightening; rising geopolitical uncertainties; trade fragmentation and global climate change.

On the customer front, the steel industry is facing a complex interplay of factors, which are expected to mould steel prices. Disruptions in supply chain, fluctuating raw material costs, coupled with declining iron ore prices and elevated coal prices in Europe due to the Ukraine war pose contrasting challenges for production costs. The global momentum towards green steel projects signifies a transformative phase in the industry.

Rising inflation trend in the global market can have an adverse impact on the price of raw materials, inventory and labour. It can make it difficult for the market to gauge the current value of the companies that make up market indexes. Any adverse movements in economic cycles in the Companys target markets is mitigated to some extent due to the Companys presence in multiple and diverse markets.

The domestic product business is prone to cyclicality in the economy, especially the core sector. The competition from the unorganized sector is a challenge for the services business of the Company. In Operation & Maintenance, there is intense competition with manpower-based contracts being bagged by industry players at lower prices, especially during times of economic downturn.

The Company could be susceptible to strategy, innovation, and business or product portfolio related risks if there is any significant and unfavourable shift in industry trends, customer preferences, or returns on R&D investments. Thejo does have the benefit of being very well entrenched with many of its customers with years of established relationship. Therefore, client concentration related risks are mitigated to an extent.

Policy changes in respect of core sector industries will have a direct impact on the business of the Company as it primarily caters to core sector industries in the domestic market.

In the backdrop of the global fi uctuations in pricing, the prices of most of the raw materials used by the Company are volatile. The Company is doing its best to address this risk of material prices by framing appropriate procurement and pricing policies.

FUTURE OUTLOOK

The last two years have seen the global economy struggling to deal with various challenges caused due to aggressive monetary tightening, normalisation of energy prices, flat infiation rates, unfavourable demographics, climate adaptation, digital transformation and the fragmentation of global trade. While the impact appears to have been contained, these uncertainties continue to undermine the confidence among consumers and businesses to spend, therefore impacting economic growth. With the tighter monetary conditions continuing, global activity is proving relatively resilient. Brighter prospects are expected to be around the corner with modest growth.

India has been one of the fastest-growing major economies over the past two decades. Maintaining economic stability by improving the quality of fiscal expenditure has been a priority for Indias authorities in recent years. The strategy appears to have been effective and estimates suggest that Indias GDP can continue to grow at 6.7% per year on average over the next decade. The expectation on the Indian economy continues to remain positive and so is the Company and the Management.

Sustainability management with focus on environment will play a crucial role in future. Digitisation driven by AI is expected to replace manpower globally. AI-powered automation and IOT is being deployed to streamline processes, reduce operational costs, improve the quality of products and services, and enhance productivity and efficiency in various industries. Despite geopolitical crises, supply chain reorientations, global inflation, and climate change, the outlook for the future is positive combined with a high degree of uncertainty and unpredictability. The Company and the Management are prepared to take swift decisions based on emerging situation, keeping the interest of all stakeholders in mind.

FINANCIAL PERFORMANCE

The financial performance of the Company during the year under review has shown good growth in terms of turnover and profitability. The turnover from Manufacturing Division has increased. The Services Division also witnessed a better performance with increase in turnover. With expansion in manufacturing facilities and increase in operations, corresponding increase is witnessed in depreciation costs. Marginal increase in other costs is commensurate to the increase in operations. The Company has also stepped up its Information Technology spending focussing on enhanced digitization and digitalization. Exports registered a marginal dip of about 5% compared to the previous year.

The production of moulded and extruded products was 2,648 tonnes during 2023-24, registering a growth of 16% over the previous year (2,289 tonnes). The production of adhesives during the year under review was 438 tonnes, showing a growth of 19% over the previous year (369 tonnes).

SEGMENT WISE PERFORMANCE

Your Company has 3 segments of revenue - Manufacturing Units, Service Units and Others. The segment reporting in respect of these segments is furnished in Note 26.3, forming part of the Financial Statements.

RISKS AND CONCERNS

The Company has a Risk Management Committee in place, which was constituted by the Board of Directors at their Meeting held on 25^th May, 2023. The Company has put in place a Risk Management Policy encompassing the Enterprise Risk Management Framework for identification, assessment, management, monitoring and minimization of risks. It has identified potential risks under various categories like Business Dynamics, Operations, Liquidity, Market/Industry, Human Resources, Systems and Disaster Management. The Company is periodically reviewing the risks and their identification, assessment, monitoring and mitigation procedures. It does not perceive any major technological, operational, fi nancial or environmental risks in the near future except for the US market fluctuations, climate changes/challenges, prevailing geopolitical challenges like Russian-Ukraine confi ict, Israel-Palestine confi ict, China-Taiwan tensions, etc and their impact on the global economy.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Your Company has adequate internal control systems combined with delegation of powers and periodical review of the process. The control system is also supported by internal audits and management reviews of documented policies and procedures.

DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS

The Company continues to look at, identify, create and execute initiatives that enhance productivity and efficiency. To enthuse the employee base and increase the linear relationship between performance and reward, increments/incentives and ESOP are being provided based on performance. The Company has been presented with the ‘Tamil Nadu Best Employer Brand Award 2023 by the Employer Branding Institute, India, as part of its 18^th Employer Branding Award.

The Company will invest as hitherto in people through various initiatives which enable the workforce to meet the production and service expectations and challenges related thereto and to infuse positive enthusiasm towards the organisation, with keen focus on the training and safety of the employees.

SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

During the Financial Year 2023-24, the Company registered good growth in product and services revenue, resulting in better profitability. As a result, the profitability of the Company stood at 3,805.04 lakhs during FY24 as against 2,758.17 lakhs in the previous year.

As a result of the above factors, the Return on Net Worth increased to 19.17% in FY24 compared to 16.51% in FY23.

During FY24, there was significant change (i.e. change of 25% or more as compared to the previous year) in none of the key financial ratios.

CAUTIONARY STATEMENT

Certain statements in the Management Discussion and Analysis, describing the Companys views about the industry, objectives and expectations, etc. may be considered as ‘forward looking statements. The Company has tried to identify such statements by using words such as ‘expect, ‘anticipate, ‘hope, ‘likely, ‘plan, ‘projected, ‘believe, ‘estimated, etc. While making these statements, the Management has made certain assumptions which it believes are prudent. There is no guarantee that the assumptions would prove to be accurate. Actual results may differ substantially or materially from those expressed or implied in the statements. The Company undertakes no obligation to update any of the statements, whether as a result of any future events, change in assumptions or for any other reason, whatsoever. These statements are purely intended to put certain things in perspective based on the assumptions and estimates of the Management and in no way solicit investment or guarantee any performance or returns. Members and others are requested to make their own judgment before taking any decision to invest in the shares of the Company.