Walchandnagar Industries Ltd Management Discussions

Annexure ‘A to Directors Report

Economic Overview

The financial year 2023-24 has been a period of dynamic economic developments in India, characterized by robust growth and significant structural shifts. For a mid-sized heavy fabrication company, this landscape presents both opportunities and challenges.

Indias GDP growth rate for 2023-24 has been good, projected to hover around 6.5-7%. This growth is primarily driven by the infrastructure sector, which has seen substantial investment from both the government and private players. These projects span across transportation, energy, and urban infrastructure.

However, mid-sized companies face unique challenges. Rising costs of raw materials, especially steel, and fluctuations in energy prices have squeezed profit margins. Unlike larger firms, mid-sized companies often have less negotiating power with suppliers and may struggle to absorb these increased costs or pass them on to customers.

Interest rates have been another critical factor. The Reserve Bank of India (RBI) has maintained a cautious stance on monetary policy, with periodic adjustments in interest rates to control inflation. Higher interest rates have increased borrowing costs for mid-sized companies, affecting their ability to finance expansion projects or invest in new technologies and working capital cost. These companies often rely on loans for working capital and growth, and elevated interest rates can strain their financial resources.

Moreover, the global economic environment, characterized by geopolitical tensions and supply chain disruptions, poses risks to the steady supply of raw materials and components. Mid-sized companies often lack the diversified supplier base of larger firms, making them more vulnerable to these disruptions.

Impact on WIL & Notable Achievements

In light of the dynamic economic trends of the financial year 2023-24, Walchandnagar Industries has strategically decided to raise equity capital amounting to Rs. 216 crores through the issuance of warrants. This capital infusion sees participation from both the promoters and external marquee investors, showcasing confidence in the companys growth trajectory and market potential.

Of the raised capital, approximately Rs. 105 crores will be allocated towards capacity building initiatives. This strategic investment aims to enhance the companys infrastructure and operational capabilities to capitalize on the robust growth in economic activity. With significant expansions anticipated across various core sectors, such as transportation, energy, and urban infrastructure, this investment will enable Walchandnagar to scale its production facilities, integrate advanced technologies, and improve efficiency in meeting the increasing demand for heavy fabrication services. The decision to bolster capacity is timely, aligning with the governments aggressive infrastructure projects under the National Infrastructure Pipeline (NIP) and the Gati Shakti plan. These projects have created a surge in demand for steel structures, machinery, and components, presenting lucrative opportunities for the company. Additionally, the manufacturing sectors expansion, driven by the ‘Make in India initiative and Production Linked Incentive (PLI) schemes, necessitates enhanced production capabilities to support the growing needs in automotive, aerospace, and defense sectors. This strategic move to raise equity capital not only strengthens Walchandnagars financial position but also positions it to effectively leverage the favourable economic conditions and drive sustainable long-term growth. By investing in capacity building, the company is poised to meet future demands, enhance its market presence, and ensure continued profitability amidst the evolving economic landscape.

Despite the strategic advancements and capital investments, Walchandnagar Industries faced challenging times due to a 42-day labour strike. This industrial action significantly disrupted operations, resulting in a revenue loss of around Rs. 30 crores. The prolonged strike also impacted the companys contribution margins negatively. The labour strike highlighted the vulnerabilities within the operational framework and underscored the importance of fostering a more resilient and cooperative work environment. In response, the company has initiated measures to address labour concerns, improve dialogue with employees, and ensure more robust contingency plans to mitigate such disruptions in the future A few key achievements in the year gone by are as follows:

1) Successful qualification in 4 new missile programs thereby making WIL qualified for a total of 10 missile programs of DRDO.

2) Received the first sample batch order of ASTRA missile, full-fledged production to take off shortly.

3) Successful development, manufacturing, testing and delivery of missile launchers for strategic programs.

4) Successful manufacturing and delivery of key sub-assemblies of "Crew Escape System" for the human space flight program Gaganyaan).

5) Major share in the manufacturing, delivery and assembly of core equipment for the first ultrasonic wind tunnel for ISRO.

6) INR 50 Crore plus order booking in both Gear and Crushing & Grinding Solutions businesses. 100 plus Centrifugal Machines orders successfully won.

Performance Overview

Summary of the revenue & profitability for FY 2023-24 as compared to previous financial year is tabulated below:

(Rs in Lakhs)

Cash Profit = PAT+ Depreciation + Provision for doubtful debts(excl. bad debts)

(All figures in INR lakhs except EPS, which is an absolute number)

WIL has a healthy order book of INR 938 Crore as on 31st March 2024. Out of the new orders booked in FY 24 (INR 158 Crores), the highest numbers came from Aerospace (INR 48 Crore) followed by Gear (INR 34 Crores) and Centrifugal (INR 33.80 Crores). The order portfolio is quite well balanced at the moment with 52% by value coming from strategic businesses and the rest from industrial products. It will be your companys topmost priority to grow the order book even further in FY25. Factors like near to mid-term probability for scaling up of new missile programs, diversification of industry base in Crushing & Grinding Solutions, deepening relationship with DRDO and NPCIL would aid in the same laying the base for scaling up of the revenue in the period ahead. There is also a lot of emphasis going to be laid on exports with the current geopolitical situation opening up new opportunities.

Human Resources Development

Market volatility also caused considerable attrition in some of the industry sectors. While WIL also faces these market risks, our HR team has ensured that sourcing of the right talent has not been a constraint for us. Your company plans to revive some of the practises that faced hindrances during the pandemic years like "Graduate Engineer Trainee" program, "Diploma Engineer Trainee" program to have a constant feed of young talent and fresh ideas into our ecosystem. As has been mentioned elsewhere, a critical look at the organization structure across business and functions, identification of skill gaps, succession planning and attrition management are areas which we continue to focus upon on an ongoing basis. In order to have interoperability across locations, we would also be strengthening the mechanism of inter-location transfer of manpower (specifically workmen) so that there is better diversity, sharing of best practises and optimal utilization of human resources.

Risk Management & Control

Risk factors that could impact the financial plan for FY 24-25 include potential policy changes, especially with the impending Lok Sabha elections. Sectors such as aerospace, missile, defence, and nuclear are reliant on government spending and there could be delays at times. Any slowdowns in these processes could hinder and delay project execution. Additionally, operational challenges stemming from geopolitical tensions, such as those in the Red Sea region, have led to increased transportation costs and extended delivery times, further delaying execution. These delays could result in the imposition of Liquidated Damages (LDs), thereby exerting pressure on profit margins. Such factors could collectively have a detrimental impact on our financial performance.

Technology Upgradation and Product Development

The comprehensive modernization of manufacturing technology is currently in progress, involving the acquisition of cutting-edge machinery. This initiative is expected to significantly enhance productivity and efficiency, aligning with our expansion plan and capital investment strategy. The benefits of this upgrade are anticipated to materialize over the next 12-18 months as the new machinery is installed. This transformation will have a profound impact on key sectors such as aerospace, nuclear, and gearboxes. Additionally, we are concurrently enhancing our safety infrastructure to ensure compliance with new and modern Environmental, Health, and Safety (EHS) standards.

Significant advancements in information technology have been made across various departments. Tailored ERP software, iCast, designed specifically for foundry operations, has been effectively integrated. The installation of SAP Solution Manager, also known as SAP Life Cycle Manager, has been successfully completed. Notably, only 30% of external man days support for SAP has been utilized, with the remaining issues addressed internally.

Strategic Initiatives

Strategic initiatives have been comprehensively planned to enhance operations across the board. These include optimizing sourcing strategies, improving utilization through advanced planning and project management, and managing energy costs by integrating new machinery and procuring renewable energy at more competitive prices. Strengthening relationships with the labour union and implementing a Voluntary Retirement Scheme (VRS) are also key measures aimed at reducing costs and improving overall efficiency.

Cautionary Statement

The statements in the "Management Discussion and Analysis Report" describe your Companys objectives, projections, expectations, estimates or forecasts which may be "forward-looking statements" within the meaning of the applicable laws and regulations. Actual results may differ substantially or materially from those expressed or implied therein due to risks and uncertainties. Important factors that could influence the Companys operations, inter alia, include global and domestic demand and supply conditions affecting selling prices of finished goods, input availability and prices, changes in Government regulations, tax laws, economic, political developments within the country and other factors such as litigations and industrial relations.