Pradeep Metals Management Discussions


1. GLOBAL OUTLOOK

International Monetary Fund (IMF) in its publication World Economic Outlook, 2023, has stated that global outlook seems to be uncertain again amid financial sector turmoil, high inflation, ongoing effects of Russias invasion of Ukraine, and three years of COVID.

The baseline forecast is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent. Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly. Inflations return to target is unlikely before 2025 in most cases.

2. INDIAN ECONOMY

The Asian Development Bank (ADB) projects growth in Indias Gross Domestic Product (GDP) to moderate to 6.4% in fiscal year (FY) 2023 ending on March 31, 2024 and rise to 6.7% in FY 2024, driven by private consumption and private investment on the back of government policies to improve transport infrastructure, logistics, and the business ecosystem.

Despite the global slowdown, Indias economic growth rate is stronger than in many peer economies and reflects relatively robust domestic consumption and lesser dependence on global demand. The Government of Indias strong infrastructure push under the Prime Ministers Gati Shakti (National Master Plan for Multimodal Connectivity) initiative, logistics development, and industrial corridor development will contribute significantly to raising industrial competitiveness and boosting future growth.

3. BUSINESS ENVIRONMENT

The Indian steel and forging industry outlook for 2023 looks promising with the country gearing to become a US $5 trillion economy by 2030 (or sooner). And as per market predictions and reports, the steel industry in India will play a pivotal role in steering India towards its goal (Source: EY-CII report).

As per reports by Care Edge Research, the domestic steel consumption growth rate in India is expected to be around 10-12% in FY 2023. There is also a rise in investments in the infrastructure sector and support from the government to encourage the growth and outlook of the Indian steel industry.

Steel is the basic raw material for the forging industry and typically constitutes 60-65% of the ex-factory value of forgings. As such, high steel prices have seriously impacted the forging industry in India. The disruption caused by the corona virus has affected the automobile industry and hence, the automotive components and forging industries too. While the industry was reviving post the pandemic, the increase in steel prices has hampered the forging industry in India.

4. BUSINESS SNAPSHOT

Pradeep Metals Limited (PML) showed healthy growth and generated Rs. 24,588 Lakhs in annual sales through its products ranging from intricate closed die stainless, alloy and carbon steel forgings as finished and semi-finished machined components. The strategy of specialization in catering to custom made and small quantity orders continues to pay dividends and has made the Company the preferred supplier to its customers. The Companys expertise in making deliveries in short lead times, sometimes even 2 days, helps the customers to keep low level of inventories at their end.

Major customers of the Company are in India, USA, UK, Singapore, Sweden, Denmark, France, Germany, Italy, Mexico, New Zealand and Argentina. The Company uses state-of-the-art machinery with sophisticated tool-room equipment to manufacture its forgings and machined parts. It also employs hi-tech design and analysis software to create dies and tooling that play a key role in the production of forgings. The manufacturing plant is fully integrated with complete facilities for inspection, testing, cutting, dies and tool making, forging, heat-treatment, finishing, machining, cleaning, surface treatment and assembly.

The Company continues to enhance its machining capacity and capabilities by adding CNC Turning Centers, Vertical Machining Centers (VMC), Turn Mills / Mill Turns and other equipment to address the rising demand of finished machined components and sub-assemblies. In addition to in-house facilities, the Company has also made significant effort and developed dedicated vendors for machining, in order to supplement its machining capacity and capabilities.

Looking to the rising demand for machined components, the Company has expanded its machine shop capacity by importing surplus machineries from its Step-down Subsidiary namely Dimensional Machine Works, LLC, Houston (USA) and upgraded them. The Company continues to upgrade its plant, equipment and infrastructure, on continuous basis.

The Company uses its in-house metallurgical laboratory, process control, continuous improvement principles to manufacture quality products. The quality assurance systems have been approved by Global Original Equipment Manufacturers including nuclear grade and high-pressure equipments in Europe, USA and South East Asia. The Company is certified to ISO 9001:2015 Pressure Equipment Directive 2014 / 68 / EU (PED). The Company continues to improve its capabilities to serve highly quality conscious markets to maintain its niche position in the industry. The Company has been concentrating on exports for long term growth and exports about 50% - 55% of its finished goods. It has received ISO 14001:2015, ISO 45001-2018, Marine & Norsok certifications, etc. which are available on the website of the Company. Recently the Company has also embarked on a journey to improve its bottom line by employing TOC techniques in the process.

5. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Standalone financial performance of the Company is summarized below: -

(Rupees in Lakhs)

Particulars FY 2022-23 FY 2021-22 Change in %
Exports 11,766.62 10,381.23 13.35
Domestic Sales 12,419.05 9,987.91 24.34
Export Incentives 204.27 151.49 34.84
Income from Windmill 197.68 197.18 0.25
Other Income 424.43 565.27 (24.92)
Total Income 25,012.04 21,283.07 17.52
EBITDA 3,811.73 3,096.72 23.09
Profit before ExceptionalItems and Taxes* 2,649.19 2,070.56 27.95
Profit after Exceptional Items but before Taxes* 2,514.19 1,935.56 29.89
Profit after Exceptional Items and Taxes 1,865.14 1,423.95 30.98
(before Other Comprehensive income)
Total Comprehensive Income 1,818.98 1,427.57 27.42

*Exceptional Items represent, provision made for impairment in the value of investment in Pradeep Metals Limited Inc., Houston, USA (WOS) of Rs. 135.00 Lakhs (previous Year Rs. 135.00 Lakhs).

6. SEGMENT WISE OR PRODUCT WISE PERFORMANCE

Business verticals such as Valves, General Engineering and Instrumentation & Flanges contributed 32%, 37% and 31% respectively, to the total sales of the Company.

7. KEY FINANCIAL RATIOS (Standalone)

Particular 2022-23 2021-22 Variance %
(Audited) (Audited)
Debtors turnover ratio 4.04 3.89 4
Inventory turnover ratio 6.68 6.83 (2)
Interest coverage ratio* 5.87 5.71 3
Current Ratio 1.30:1 1.31:1 -
Debt Equity Ratio 0.57:1 0.69:1 (17)
Operating Profit Margin 15.50% 14.93% 4
Net Profit Margin@ 7.59% 6.87% 10
Return on Net worth 18.73% 15.72% 19

* Interest includes finance cost and bank charges.

@Prior to provision of Exceptional Item(s) of Rs. 135.00 Lakhs (previous year Rs. 135.00Lakhs)

8. FUTURE OUTLOOK

The Management is planning to expand our Machining capacity further and also replace some ofthe old forging equipment. This will be one of the focus areas in this year.

Considering the Governments policy of encouraging green energy, benefit being derived from the operation of a 2.1 MW Windmill plant and the experience gained, the Company has decided to acquire and install a 2.25 MW Land Based Solar Plant, on turnkey basis, at the cost of about Rs. 1,200 Lakhs. The said Solar Plant will be commissioned in FY 2023-24. The power generated through Solar Plant will be substantially economical when compared with the MSEBs tariff. The pay-back period for Plant is expected to be 5 years whereas the Plant is guaranteed to generate power for 25 years with small degeneration of 5 % per year.

9. OPPORTUNITIES AND THREATS

Opportunities:

Following new opportunities have emerged to develop new overseas Customers:

Developing trend among Countries of decreasing the dependence on China in the Post-Covid

Scenario; and

Signing of Free Trade Agreements (FTA) between India and various Countries

New product and customer development is a focus area, which helps us to mitigate the risk of obsolete product range.

Companys ability to support customer demand within the shortest possible lead time helps us to meet the ever-shrinking expected lead time due to the uncertain market conditions.

Threats:

Emergence of EV market which may reduce demand for forged components.

Labour intensive process, which can get hit during pandemics like Covid-19 and availability of

Skilled labour.

Tariffs war impacting the international trade.

Hike in the prices of Steel, Consumables, Freight, etc.

10. RISKS AND AREAS OF CONCERN

The Company has a diverse portfolio of products, spread over a large number of customers and across geographies. This insulates it against industry risks. As steel is the major input with volatility risk, the pass-through contracts provide protection against volatility in steel prices. People risks are mitigated with motivation initiatives and engagement with employees.

11. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has a sound internal control system which ensures that (a) its financial reports are reliable; (b) its operations are effective and efficient; (c) its activities comply with applicable laws and regulations; and (d) accountability of assets and protects against loss through unauthorized use. The internal control systems are further supplemented by internal audit carried out by an independent firm of Chartered Accountants and periodical review by the Management. The Internal Audit process is designed to review the adequacy of internal control checks in the system and covers all the significant areas of Companys operations. Implementation of ERP is under process and its completion will further strengthen the financial controls.

The Audit Committee of the Board of Directors reviews the adequacy and effectiveness of the internal control systems and tracks the implementation of corrective actions. Significant audit observations and corrective actions taken by the Management are presented to the Audit Committee. To maintain its objectivity and independence, the Internal Audit reports are submitted to the Chairman of the Audit Committee. Audit Committee plays a key role in providing assurance to the Board of Directors.

12. HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT

Industrial relations in Company have been harmonious and cordial. The employees gave remarkable support to Company during Covid times and continue to support Company in meeting its targets. Company, on its part, purchased Insurances to protect the employees from financial losses in case of Covid impact.

A company is only as good as its people. Companys philosophy is to engage with its employees at all levels. Dedication and commitment are encouraged and rewarded. The Company provides in-house training to its employees and sends them for obtaining training from various organizations. Company had a total of 513 employees on its payroll as on March 31, 2023.

Cautionary Statement:

Details provided hereinabove relating to various activities and future plans may be ‘forward-looking statements within the realm of applicable laws and regulations. Actual performance may differ substantially or materially from those expressed or implied. Company may need to change plans or other projections due to changes in Government policies, tax laws, market conditions and other incidental factors.