udaipur cement works ltd Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

OUTLOOK FOR INDIAN ECONOMY, INDUSTRY STRUCTURE AND DEVELOPMENTS

The Fiscal 2022-23 began when global uncertainties were already rife. Whilst the pandemic was just receding the Russia-Ukraine war broke out in February 2022, which led to a sharp rose in the prices of food, fuel, and fertiliser and they remained at elevated levels for several months together. The risk of another round of supply chain disruptions emerged, but they were not as severe as feared.

Nonetheless, both the price and the availability of essential commodities had the potential to dent the industrys optimism on consolidating the recovery of FY22 and further accelerating it. Despite all the above challenges, it is fair to say that the Indian Economy recovered well and staged a broad-based come back across sectors to get back to the pre-pandemic growth path in FY23. Overall, Gross Value Added (GVA) by the Industrial Sector, based on data available for the first half of the FY23, rose 3.7%, which is higher than the average growth of 2.8% achieved in H1 of the last decade. While Indias retail inflation rate peaked at 7.8% in April 2022, above the RBIs upper tolerance limit of 6%, the overshoot of inflation above the upper end of the target range in India was however one of the lowest in the world.

With high allocation under the Union Budget 2022-23 for infrastructure, affordable housing government schemes such as MGNREGA, PM Garib Kalyan Rozgar Abhiyan and Road & Railway projects to fuel the economy, the domestic cement industry poised for a volume surge and boost the demand for cement. Under the housing for all segment, 8 million households were identified under Pradhan Mantri Awas Yojana (PMAY), both rural & urban and ~ Rs.48,000 Crores was allocated for the purpose. The Government also approved an outlay of ~ Rs.199,107 Crore for the Ministry of Road Transport and Highways and this step is likely to boost the demand for cement. In the FY 23, Indian Government built 5.28 million houses under the flagship rural housing scheme which was 25% higher than the houses built in the FY 22 and has proposed to build 5.73 million houses by FY 24, to achieve the target to build 29.5 million houses under PMAY.

Indias cement production and consumption both grew by ~ 9% in FY23 on a y-o-y basis, driven by the Governments push for infrastructure development and increased real estate activity. EBITDA margins of cement players declined by almost 10% y-o-y in H1 FY 23 mostly due to an increase in power and fuel cost on the back of a sharp surge in coal prices. Limestone prices also escalated during H1 FY 23. There has been a 3% y-o-y increase on an average in wholesale cement prices in FY 23. While the prices have remained flattish in Q3, Q4 witnessed a further marginal decline in prices. As projected, industry is likely to add 30-35 Million Tonnes of capacity in FY23 reaching 590-595 Million Tonnes of Pan India cement capacity. Lower double-digit demand should see a rise in capacity utilisation by about 2% to ~ 66% level.

Industry is likely to see ~9% to ~10% y-o-y volume growth in FY 23, supported by sustained demand from infrastructure projects and recovery in individual housing demand. Long term growth expectations to be in the range of ~7% to 8% mainly based on higher projected growth coming from these two segments. The current global uncertainty and fear of global recession due to prolonged Russia-Ukraine war is likely to cast its shadow in the construction sector further. The industry which is already grappling with the impact of phenomenal rise in fuel and transportation costs would find it difficult to pass on the cost increase to the market when the offtake is low.

Key energy items like Pet coke/ Coal were marginally down, but owing to the higher cost inventory, benefits are unlikely to percolate fully. Additionally, after a gap of two years, busy season surcharge (@ 15%) was reintroduced by railways from October-22, which has impacted the freight costs. Diesel price trend has been sideways in past few months and is a relief. Due to divergent and volatile trends in major cost items, individual companies costs are likely to be influenced by inventory levels and rail mix of each company. Further, the acquisition by large cement players and competitive posture has brought some turbulence in the market. In an uncertain environment, most manufacturers have been focussing more on volumes than on prices to mitigate high costs. Industry is attempting to close the gap between billing and transactional prices for better transparency and working capital utilisation with the channel.

Going forward, while FY24 appears to be a year full of opportunities as well as uncertainties and challenges; however, we remain optimistic for the outlook for the cement sector which according to us would firmly remain in long-term trajectory of sustainable annual growth ranging from 6% to 8%. As per CRISIL Ratings, the Indian cement industry is likely to add ~80 Million Tonnes (MT) capacity by FY24, the highest since the last 10 years, driven by increasing spending on housing and infrastructure activities. Overall, the Outlook for the cement industry is very positive.

The increasing demand for infrastructure and green construction materials will help to drive significant growth in the coming years.

FINANCIAL PERFORMANCE

During the Financial Year 2022-23, the Companys Cement Production was higher by 13% at 14.69 Lakh Tonnes as against 13.05 Lakh Tonnes achieved during the last Financial Year. The Companys sales during the Financial Year ended 31^st March 2023 were up by 4% at 20.35 Lakh Tonnes against 19.49 Lakh Tonnes logged in the last Financial Year.

The Turnover of the Company during the Financial Year 2022-23 increased by 18% from Rs.875.98 Crores in Financial Year 2021-22 to Rs.1,030.97 Crores in Financial Year 2022-23. Despite the tremendous pressure of rising inputs and fuel your Company achieved an PBIDT margin of 13% against 17% achieved during last Financial Year.

KEY CHANGES IN FINANCIAL INDICATORS

The various Financial Ratios for the year under review as compared to the same of the previous Financial Year are given hereunder:

Sl. No. Particulars	Unit of Measurements	2022-23	2021-22
1 Operation Profit Margin	%	13%	17%
2 Net Profit Margin	%	3%	6%
3 Return on Net Worth	%	11%	18%
4 Current Ratio	Times	0.50	0.76
5 Interest Coverage Ratio	Times	2.84	3.06
6 Debt Service Coverage Ratio	Times	1.35	1.75
7 Debt Equity Ratio	Times	3.31	3.20
8 Net Debt Equity Ratio	Times	3.30	2.10
9 Debtors Turnover	Times	281	423
10 Inventory Turnover	Times	9	12

OPPORTUNITIES AND THREATS

For the past 3 years there have been significant behavioural changes in the life and work style of individuals and organizations as well many of these are perhaps permanent. Such changes are both opportunities and threats for the Industry. Companies are giving weightage to Work from Home and this trend has been seen increasingly being adopted across various sectors in the industry. Video meetings still remain a cost effective way of conducting meeting where physical travel is not absolutely necessary. These changes have come mainly due to impact of COVID, Russia- Ukraine war situation and global increase in fuel and input material costs. That being said, the truth remains that India shall continue to sail better than most countries. On a positive, with the upcoming general elections in 2024, there is a strong anticipation of uptick in pre-election construction and a surge is expected in demand post FY22-23.

RISKS AND CONCERNS

The COVID-19 pandemic which started 3 years ago and the war situation in Europe since early 2022 has impacted the Socio-Economic and Financial fabric of the economy, both at macro as well as at micro level. Resources got dried up in combatting the pandemic and sustaining rather than in growth.

We saw the IMF (International Monetary Fund), World Bank Group, World Health Organization and World Trade Organization coming together to accelerate access to COVID- 19 vaccines, therapeutics and diagnostics by leveraging multilateral finance and trade solutions, particularly for low and middle-income countries with the aim to vaccinate the major portion of the population. Now post pandemic and circa war times, the global economy is bearing the risk of recession. However the silver lining seems to be that, India would far better than most countries. Talking about our own industry, a lingering concern remains viz., High GST Slab of 28%. The Industry has already made several representations to the government in the past for reduction in the GST rates on Cement from 28% to 18%. In the backdrop of the slowdown of the Economy, the Industry is ever hopeful that the government will reduce the GST rate of Cement which will help it to come out of this current difficult phase.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Internal Control Systems are the foundation for ensuring achievement of organisations objectives of operational efficiencies, reliable financial reporting and compliance with laws, regulations & policies. The Company has laid down strong internal control systems in line with the size, complexity and geographical spread of its business. These Internal Control Systems ensure that the assets & interests of the Company are well protected. These Internal Control Systems are reviewed regularly by the Management and also by the Internal Auditors of the Company and are found to be effective and adequate. The Company has an in-house Internal Audit Department which carries out the Internal Audit based on a Systematic Audit Plan covering all key functions and aspects of the business. The internal audit reports, are reviewed by the Top Management and are placed before the Audit Committee of Directors.

The Audit Committee undertakes a total review of the audit observations and also the action taken by the Management on all the findings of the Internal Auditors. The implementation of the recommendations of the Internal Auditors is regularly reviewed and monitored by the Senior Management and the Action Taken Report is placed periodically before the Audit Committee. The Company also has an Internal Risk Management Committee comprising of Functional Heads. This Committee meets on a quarterly basis to evaluate the risk as also the mitigation plan put in place to minimise the impact of various internal and external risks to the Companys business. In addition, there is a Risk Management Committee at board level to review the various risks which impact the Companys operations and the management plan to meet those risks. The Company also has a robust MIS system and budgetary control system under which the operating and financial performances are reviewed on a monthly basis. The variations with the budget are analysed and corrective actions are taken to minimise the variations with the budget wherever shortfalls are noticed. Further, the Company has also put in place Legal Compliance Monitoring Tool to ensure timely compliance of all the applicable status at its different locations.

HUMAN CAPITAL MANAGEMENT

The Company is driven by its values including "Caring for People. We believe our employees are the key assets for achieving our vision and mission seamlessly. Their dedication, commitment and conscientious approach to work is at the backbone of our strive for operational excellence and success.

This strive for excellence involves creating a work environment which is collaborative, enriching and fosters a culture of learning and growth in order to enable employees to perform at their full potential. Our work culture facilitates continuous interaction & dialogue with our employees thereby facilitating an open channel for two-way communication. We consciously seek feedback on any organisational changes and keep our employees adequately informed to ensure smooth transition.

We continuously emphasize on the development of talent within and strengthening the core areas of expertise by enabling continuous learning leveraging through various platform for employees for their capability & skill development. Formal digital platforms have been launched to enable sharing of ideas and best practices across work groups which helped us to drive continuous improvement and innovation such as SMART based KRAs/Goals linked with organizational objectives, Employee Engagement initiatives like Kaizen, CFTs, Suggestion Schemes, employee welfare schemes, etc., to name a few.

To retain talent with the organization, the Company has attempting advance efforts on Talent Acquisition, Talent Management, Job Enrichment, Performance Management, Reward and Recognition, Leadership Mentoring and Coaching and Employee Satisfaction Survey. We have been practicing its unique approach for employees growth and development to leadership roles from within the Company by rewarding the deserving and providing a well-defined career growth path.

Fair and transparent HR Policies, open communication and effective collective bargaining with union has helped in sustaining congenial environment in the Company.

The Company is committed to support nearby communities through their CSR interventions to the nearby villages of Plant and Mines areas. Our CSR focuses on five basic community needs such as Education, Health, Sustainable Livelihood, Rural Development and Social Courses at large. Women Empowerment is one of the thrusted areas where we are able to generate employability for poor and low earning group ladies and girls in the nearby areas.

ENVIRONMENT, HEALTH AND SAFETY

We at UCWL are relentlessly focused on product quality, customer satisfaction, resource efficiency, environmental responsibility, and sustainable innovation. This has helped us to push the boundaries and tap the immense potential for development in the infrastructure and construction sectors in the country. The Company has an integrated Cement Manufacturing unit with an installed cement production capacity of 2.2 Million Tonnes per annum (MTPA). The Company has ingrained "Sustainable Development" as one of the key ethos, of its daily business activity, led by the Integrated Sustainable Development Policy for its System structures. The working principles of the Company have been aligned to contribute to the nations commitment to meet the United Nations - Sustainable Development Goals (UN-SDGs). The Company upholds the highest levels of system standards such as ISO Certification for Environment (14001), Occupational Health and Safety (45001), Energy (50001), and Quality Management (15001) Systems. Going beyond the general industry practice, the Company has also inventoried its carbon and water footprint as per ISO 14064 -1 and ISO 14046. In line with the agenda of Climate change and the COP26 commitments made by the nation, today the Company consistently meets more than 48% of its total electricity requirement from the green renewable sources, i.e., Solar and WHRS. During FY 2021-22, the Company had already ramped up its solar power generation capacity by 4.35 MW, in addition to the existing 10.1 MW. A further addition of 1 MW floating solar was made in FY22-23 which totals it to 15.45 MW. In reference to ESG the unit has also registered with SBTi and UNGC. The Company has consumed about 63654 MWh of green energy (Solar + WHRS) that has mitigated around 51560 Tonnes of CO2 Emissions in last FY:2022-23. Being a resource-responsible entity, our Company has done considerable work in water conservation and stands around 3.6 times water positive and has saved about 4.11 lakh Metric Tonnes of virgin-natural resources by replacing them with waste-derived raw materials in the process.

Environment, Health and Safety for your Company have been one of the key fundamental pillars of its business operations and growth. The Company is committed to maintaining cleaner production with a low carbon footprint by working beyond compliances. Initiatives like utilization of Green power, i.e. Solar and Waste Heat Recovery System to the tune of more than 48% in the total power mix, installation of state of art pollution control equipment, strategic development of greenbelt and plantation, use of waste-derived materials in place of virgin natural materials, etc. are testimony of its adherence to conservation and management of environmental resources. The safety and well-being of its workforce and nearby community is topmost priority for the Company. Your Company operates on the principle that "Safety is everyones responsibility and we must not bypass it under any circumstances". Adhering to strict COVID standards, our workplaces are sanitized and COVID 19 appropriate behaviour is maintained as per the guidelines of local government. The Company is ISO 45001:2018 Certified for Occupational Health and Safety standards and has been recognized for maintaining one of the industry best Health and Safety training modules and practices at different renowned platforms.

CAUTIONARY STATEMENT

The Management Discussion and Analysis report contains forward-looking statements, which may be identified by the use of words in that direction, or connoting the same. All statements that address expectations or projections about the future including but not limited to statements about your Companys strategy for growth, product development, market positions, expenditures and financial results are forward looking statements.

Your Companys actual results, performance and achievements could thus differ materially from those projected in such forward looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent development, information or events.