Dynamic Cables Management Discussions


Company Overview

Dynamic Cables Limited is a manufacturer of power infra cables that includes LT, HT, EHVC, power control & instrumentation cables, flexible & industrial cables, solar cables and railway signalling cables. Our products are widely used for projects in power generation, electricity transmission and distribution, airports, railways and residential projects. The Company supplies cables to government distribution companies (discoms), private discoms, private EPC contractors, and industrial and export clients. Dynamic Cables has 3 manufacturing plants situated at Jaipur and Reengus. Business operations are managed through a corporate office in Jaipur and 5 regional sales offices across India. In the last 20 years, the Company has showcased its capabilities & focus on developing new products to meet the market requirements in line with the evolution of the industry.

Sector Basics

Cables involve one or more conductors which are used for the transmission of electricity, data, or signals. Demand for cables and conductors are directly linked to the growth of the manufacturing and infrastructure sector like power, telecommunications, and residential and commercial real estate.

The Indian wire and cables market is estimated to have surged to around Rs. 600 billion in FY 2021-22 from Rs. 430 billion in FY 2020-21 and from Rs. 490 billion in FY 2019-20. It is estimated that the industry registered a volume growth of around 12% in FY 2021-22 and similar growth is expected in FY 2022-23 on the back of higher infrastructure spending by the government.

The cables industry can be broadly segmented into extra high voltage power cables greater than 66 KV, medium voltage power cables up to 33 KV and low voltage power cables up to 1 KV, instrumentation and control cables, light-duty cables, fibre optic cables, copper telephone cables, elastomer rubber cables and speciality cables.

Economic Review Global Economic Review

The global economy contracted by 3.1% in Calendar Year 2020 due to the global outbreak of the Covid-19 pandemic. However, the Calendar Year 2021 saw the global economy bounce back

sharply by around 6% as economic activities resumed across the globe backed by favourable fiscal and monetary policies.

However, supply-side pressures, rising inflation and geopolitical tensions continued to weigh on global economic recovery. The Russia-Ukraine war since February 2022 has induced fuel and food price pressures across the globe. Central banks are hiking interest rates to rein in inflation, which can take a toll on economic growth in the near term.

For Calendar Year 2022, the International Monetary Fund (IMF) has slashed its global growth outlook to 3.6% from 4.4% projected earlier. Beyond 2023, global growth is forecasted to stay at about 3.3% over the medium term.

Indian Economic Review

India was hit with a deadly second wave of the Covid pandemic in the early part of FY 2021-22. The last quarter too saw some disruption due to the spread of the third wave of the Omicron variant of the virus. However, the economic impact was not as severe as the first wave of the pandemic in 2020 due to partial lockdowns and higher vaccination penetration.

In FY 2021-22, Indias economy grew by 8.7% after contracting by 6.6% in FY 2020-21. Positively a rebounce in capex, both from the private sector and the government, was seen in FY 2021-22. Investments in the economy measured as Gross Fixed Capital Formation (GFCF) grew by 15.8% in FY 2021-22 after having contracted by 10.4% in FY 2020-21.

In FY 2021-22, the industrial sector grew by 10.3% led by a 9.9% growth in manufacturing, 11.5% growth in construction, and electricity and other utility sector growth of 7.5%.

In FY 2022-23, while many high-frequency indicators show that the economy is on the growth path, inflation has raised its head. The prospects for economic growth in FY 2022-23 will depend on trends in the global economy, settlements of geo-political tensions and the pace of monetary tightening by the RBI. In FY 2022-23, Indias GDP is expected to grow by 7-7.5%.

High-frequency indicators like PMI and IIP and capacity utilization, which reached around 74% in Q4 FY 2021-22, is estimated to have increased further to the 75-80% range in Q1 FY 2022-23. This augurs well for demand from end market for the cables industry.

Key structural drivers for the sector

The cables industry is at the cusp of a new growth era on the back of a robust capex cycle, both by the government and private sector, and the normalization of business activities post the Covid pandemic. The governments initiatives on various fronts like - power, housing, infrastructure and digitization will generate a lot of business for the wire and cable industry in the medium to long term.

Here is a list of a few structural drivers for the sector.

1) Consumption - demographic dividend, rising disposable income, trend towards nuclear families, evolving consumer behaviour.

2) I nfrastructure - Indias infrastructure market is expected to remain bullish on the back of flagship schemes such as the National Infrastructure Plan, Gati Shakti program, Sagarmala, Bharatmala, Jal Jeevan Mission, etc.

3) Capex push - Annual Budget 2023 outlined a notable boost for capex revival in India to invigorate the virtuous cycle of investment. Private Capex is also expected to pick up on the back of the PLI scheme and Make in India program.

4) Emerging levers - digitalization, renewable energy, electric vehicles, IoT.

5) Exports - Traction in electricity transmission & distribution to continue in the Middle East, SAARC and America.

Financial performance

Business overview

Corporate India has used the Covid-era to deleverage its balance sheet. Fresh Capex is at multi-decade high levels and the cables and wire industry is witnessing robust demand from both government and private sectors. Inflation is triggering corporates to revive their paused capex plans. This bodes well for our business.

Thus, despite sharp inflation witnessed in the last two-quarters of FY 2021-22, the overall business environment remained quite supportive for the Company. Projects delayed due to Covid have started to materialize in FY 2021-22. For the Company, the demand environment continued to remain encouraging from metro and railway projects, oil & gas, steel, and cement sectors and due to the push towards transitioning to renewable energy.

During the latter part of FY 2021-22, inflation in our raw material basket was in the mid-single digits. We continuously endeavour to safeguard our business model from raw material cost inflation.

Operating revenue in FY 2021-22 grew by 64.5% as compared to FY 2020-21 and around 32% as compared to FY 2019- 20. Operating Margin improved to 10.62% in FY 2021-22 from 7.48% in FY 2020-21 and 10.5% in FY 2019-20. PAT increased to Rs. 3089.98 lakhs in FY 2021-22 as compared to Rs. 984.50 lakhs in FY 2020-21 and Rs. 1820 lakhs in FY 2019-20. Recently, the company has received an upgrade in its rating from BBB (Brickwork) to BBB+ (CRISIL). The benefit of moving towards a better credit rating agency will be easy access to debt markets.

2021-22

2020-21

Debtors Turnover Ratio Revenue from Operations

56356.91

3.93

34266.2

2.47
Average Debtors

14351.82

13898.2

Inventory Turnover Ratio Revenue from Operations

56356.91

6.34

34266.2

5.03
Average Inventory

8883.66

6819.03

Interest Coverage Ratio EBITDA excluding Other Income

5984.03

4.60

2562.8

2.16
Interest Cost

1300.46

1188.91

Current Ratio Current Asset

29398.54

1.66

24073.73

1.64
Current Liabilities

17659.01

14658.00

Debt Equity Ratio Total Debts

7657.75

0.52

11761.82

1.00
Equity

14762.05

11717.03

Operating Profit Margin EBITDA excluding Other Income

5984.03

10.62%

2562.80

7.48%
Revenue from Operations

56356.91

34266.20

2021-22

2020-21

Net Profit Margin Net Profit After Taxes 3089.98

5.48%

984.50

2.87%

Revenue from Operations 56356.91

34266.20

Return On Equity Net Profits After Taxes 3089.98

23.34%

984.50

8.75%

Average Shareholder Equity 13239.54

11250.88

Return on Capital employed EBIT 5451.10

23.75%

2527.38

11%

Avg Capital Employed 22949.00

22976.00

Return On Asset Net Profits After Taxes 3089.98

8.83%

984.50

3.32%

Total of Balance Sheet 35011.92

29675.88

Segment-wise or product wise performance Customer segment wise sales break-up:

Segment Sales (Rs. In lakhs)
Domestic
- Government 12863
- Private 36788
Fxport 6184
Others 521
Total 56356

Product wise sale break-up:

Product Sales (Rs. In lakhs)
HT Cables 28513
LT Cables 18127
Railway Signaling Cable 785
Conductors 8191
Others 740
Total 56356

Going Ahead

The Company continues to believe that there is a huge opportunity in the institutional business on the back of capex- led demand revival in the economy.

Dynamic Cables which was largely a discom supplier has explored new markets in the power sector. Even, exports and railways are expected to have high growth rates and will contribute significantly to our growth journey in the future. The Company also plans to explore the EV and Renewable cable market in the future.

We are focused on deploying efforts towards the development of new products as extensions to our core products. The current capacity of the Companys plants can generate Rs.8000 million to Rs.10000 million of revenue with marginal capex.

Here are our focus areas.

Product mix: The management is focused on creating a resilient business model for sustainable growth by diversifying its product mix and market. This will help reduce our concentration risk. The Company has been tweaking its product mix towards high- margin accretive products like high voltage cables. Consequently, the share of low-margin conductors has come down from 44.6% in FY 2016-17 to 14.5% in FY 2021-22. Consequently, shares of HT products have increased from 16.2% in FY 2016-17 to 50.5 in FY 2021-22.

Export Market: Exports received better than expected traction for the Company in recent years. We continue to explore the global opportunity. Key growth opportunity for the Company is driven by power infrastructure investments in Africa and Asia. Export contributed a 10% share to overall sales in FY 2021-22, despite

the previous year being disrupted and fractured by Covid and global supply chain issues.

Indian Railways & signalling: The Company recently got a major breakthrough in the signalling segment for Indian railways. The railway signalling business may have a sizable share in the overall business that may bring higher than expected growth in the next 3-4 years.

Power sector: The governments thrust towards additional power distribution infrastructure and revamping of existing distribution infrastructure augur well for the Company. Increasing privatization of the power distribution sector and focus of the government to support the state power discoms and improve their financial and operational health will ensure the required investment in power infrastructure.

New segments: Such as electric vehicles, exports, railway electrification, import-substitution, etc. will evolve as sizable business opportunities for the Company. The Company has deployed its R&D team efforts towards development of special- purpose cables.

Union Budget 2022-23 - starting of investment cycle

The Union Budget 2022-23 presented by the Finance Minister on 1 February 2022, laid a great emphasis on public capital expenditure to invigorate the virtuous cycle of investment and thereby create employment. With a 35% jump in capex from Rs. 5.50 lakh crores in FY 2021-22 to Rs. 7.50 lakh crores in FY 2022-23, the push to crowd-in private investment includes the announcement of a master plan for expressways, expanding national highway by 25,000 km, new multi-modal parks, 100 PM Gati Shakti cargo terminals, new trains, and ropeways and 50% rise in budget allocation to roads.

Railway reforms & Signalling cable demand

Technology augmentation for modernization of Indian Railways is a continuous process. Indian Railways is on a mission mode to electrify its entire Broad-Gauge network to provide environment friendly, green & clean mode of transport under the Mission 100% Electrification - Moving towards net Zero Carbon Emission plan.

Indian Railways have prepared a National Rail Plan (NRP) for India - 2030. The Plan is to create a future ready Railway system by 2030. As part of the National Rail Plan, Vision 2024 has been launched for accelerated implementation of certain critical projects by 2024 such as 100% electrification.

In order to boost investment from the industry in the development of additional terminals for handling rail cargo, a new Gati Shakti Multi-Modal Cargo Terminal (GCT) policy has been launched on 15.12.2021 and the target is to commission 100 Gati Shakti Cargo Terminals (GCTs) within the next three financial years, i.e., 2022-23, 2023-24 and 2024-25.

Fifty-eight Super critical Projects of a total length of 3750 km costing Rs. 39,663 crores and 68 Critical Projects of a total length of 6913 km costing Rs. 75,736 crores, have been identified for completion by 2024.

SCOT analysis Strength

In the mid-tier cables suppliers segment, the Company has consolidated its position on the back of its strong ability of order execution, high-quality product range and robust investment to build its R&D capabilities. In the last 20 years, Dynamic Cables has showcased its capabilities & focus on developing new products to meet the market requirements in line with the evolution of the industry. Recently, the Company has developed railway signalling cables and has received RDSO approval. The management has a track record of calculative capital allocation and rational capital structure.

Challenges

The raw material prices like PVC, copper and aluminium are volatile. This can have an impact on the margins of the Company. While payment is certain, a weak financial position of power discoms can also lead to delays in payments. Further, the performance of the sector and the Company is contingent on macroeconomic developments, both domestic and global.

Opportunity

The Indian wire and cables market surged to Rs.600 billion in FY 2021-22 from Rs. 430 billion in FY 2020-21 and Rs. 490 billion in FY 2019-20. The industry is likely to see a healthy growth rate of 11-12% in the near to medium term. Various Indian government initiatives on housing, smart cities, telecom and a major focus on the infrastructural sector will lead to a huge opportunity for the cable and wire market growth. According to an estimate by research firm TBRC the global wires and Cables market is expected to reach worth US $292 billion by the calendar year 2024 from the current US $236billion.

Threats

Stiff competition within the sector, fast changes in technology, unfavourable policy changes by the Indian government, the introduction of trade barriers globally and scarcity of local technical skilled labour are major threats to the Company.

Risk and mitigation

Geopolitical Risks

Some recent and ongoing geo-political events like turmoil in Afghanistan, the US-China trade war and the Ukraine-Russia war are some of the risks that have direct and indirect implications on the sector and the Company. Geo-political tensions can disturb the supply chain and also lead to demand compression.

Mitigation

The Company has exposure to over 40 countries. We regularly assess the geographical risks and feasibility of operating in a particular country or region. To mitigate supply risk, we constantly evaluate the various strategic sourcing options.

Commodity Price inflation

The Company deals with various commodities, such as steel, zinc, copper, aluminium and PVC, among others. The cable and wire sector, typically, passes on any raw material inflation to the customers.

Mitigation

For the Company, sales contracts have a price escalation clause built-in into the contract. Alternatively, the Company also sometimes books the raw material at the time of receiving the order to avoid margin volatility. Raw materials hedging is a key mitigation action that the Company undertakes.

Currency depreciation

Indian currency has shown a depreciating bias against the US Dollar over the years. While this helps competitiveness in the export market, raw material prices tend to become expensive. Indian Rupee has depreciated by 3.5% in FY 2021-22.

Mitigation

The Company tries to pass on any inflation in raw material cost to customers through an in-built clause in the sales contract. Further, the Company undertakes currency hedging practices of optimum levels to minimize any downside. We are also focusing more on exports to exploit the situation.

Pandemic Risk

The Covid pandemic has impacted the industry and the Company on multiple levels: risk to health and safety of the employees and workers, risk of disruption in production due to lockdown and demand loss from the serving sectors.

Mitigation

The safety of its workers and all the Companys stakeholders is paramount and the Company abides by required Covid protocols as mandated by the Central and State governments.

Demand Risk

Slower investments in infrastructure and manufacturing and in end market users like railways, telecom and real estate can lead to lower order intake and lower sales.

Mitigation

The Company is particular in choosing its business. The Company is focusing and seeing traction in exports. Dynamic Cables global presence in over 40 countries helps it to minimise any demand loss from the domestic market. Further, the Company has diversified its business portfolio to include emerging sectors like telecom and renewable energy to counter any demand loss from traditional sectors.

Human Resources

The Company believes that its competitive advantage lies in its people. The people at Dynamic Cables possess multi-sectoral experience, technological experience and domain knowledge. The HR culture of the Company is embedded in its ability to disrupt legacy norms to enhance competitiveness. The Company takes decisions aligned with employees professional and personal goals, achieving an ideal work-life balance. The Companys permanent employees count stood at 595 people as of March 31, 2022.

The Company implemented HRMS Module, a digital HR tool in 2022 to enhance its HR capabilities. Employee training is at the heart of the Companys HR strategy. Across all employees, training man-days jumped by 91% to 2827 in FY 2021-22 from 1479 in FY 2020-21. A 329% rise in staff training man- days at 1364 was seen in FY 2021-22 as compared to 318 in FY 2020- 21. For workers, a 26% jump was seen in training man-days in FY 2021-22 at 1463 as compared to FY 2020-21.

Another highlight on the HR management front in FY 2021- 22 was that 75% more topics were covered as compared to FY 2020-21. A 50% increase was also witnessed in training sessions in FY 2021-22 from FY 2020-21 levels. Broadly, training hours increased to 186 in FY 2021-22 from 111 FY 2020-21, a 68% jump.

Internal Control System and their adequacy

The Company maintains a robust framework of internal controls commensurate with the nature and size of its operation. This framework addresses the evolving risk complexities and underpins the Companys strong corporate culture and good governance. The Internal Audit plan is approved by the Audit Committee at the beginning of every year. The conduct of an internal audit is oriented toward the review of internal controls and risks in the Companys operations and covers factories, warehouses and centrally controlled businesses and functions.

Cautionary Statement

The Management Discussion and Analysis may contain certain statements that might be considered forward looking. These statements are subject to certain risks and uncertainties.

Actual results may differ materially from those expressed in the Statement as important factors could influence the Companys operations such as Government policies, local, political and economic development, industrial relations, and risks inherent to the Companys growth and such other factors. Market data and product analysis contained herein has been taken from internal Company reports, Industry & Research publications, but their accuracy and completeness are not guaranteed and their reliability cannot be assured.

For and on behalf of Board of Directors For Dynamic Cables Limited

Rahul Mangal

Chairman (DIN : 01591411)

Registered Office:

F-260, Road No. 13, VKI Area, Jaipur 302013 (Rajasthan)