Yuken India Ltd Management Discussions

The global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in FY 2023-24 is expected to come from Asia, despite the weaker-than-expected recovery in China, sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment. Growth in advanced economies is expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening takes effect. Emerging market and developing economies are projected to report a modest growth decline from 4.1 percent in FY2022 to 4.0 percent in 2023 and 2024.

Global inflation is expected to decline steadily from 8.7 percent in FY 2022 to 6.9 percent in 2023 and 5.8 percent in 2024, due to a tighter monetary policy aided by relatively lower international commodity prices. Core inflation decline is expected to be more gradual; inflation is not expected to return to target until 2025 in most cases. Global trade in goods was expected to have declined by nearly USD 2 trillion in

2023; trade in services was expected to have expanded by USD 500 billion. The global equity markets ended 2023 on a high note, with major global equity benchmarks delivering double-digit returns. This outperformance was led by a decline in global inflation, slide in the dollar index, declining crude and higher expectations of rate cuts by the US Fed and other Central banks.

Asia is expected to continue to account for the bulk of global growth in FY 2024-25. Infiation is expected to ease gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy has demonstrated resilience amid high inflation and monetary tightening, growth around previous levels for the next two years

(Source: World Bank).

The Indian economy was estimated to grow 7.8 per cent in the FY 2023-24 fiscal against 7.2 per cent in FY 2022-23 mainly on account of the improved performance in the mining and quarrying, manufacturing and certain segments of the services sector. India retained its position as the fifth largest economy. The Indian rupee displayed relative resilience compared to the previous year; the rupee opened at RS. 82.66 against the US dollar on the first trading day of 2023 and on 27 December was RS. 83.35 versus the greenback, a depreciation of 0.8%.

The nations foreign exchange reserves achieved a historic milestone, reaching USD 645.6 billion. The credit quality of Indian companies remained strong between October 2023 and March

2024 following deleveraged Balance Sheets, sustained domestic demand and government-led capital expenditure. Rating upgrades continued to surpass rating downgrades in H2FY24.

(Source: Budget FY24; Economy Projections, RBI projections, Deccan Herald)

The FY 24 growth in the economy was the highest since FY 17, excluding the 9.7% post- Covid rebound in gross domestic product (GDP) in FY 22 from the 5.8% contraction in FY 21.

As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output was estimated to grow 6.5 per cent in FY 2023-24 compared to 1.3 per cent in FY 2022-23. The Indian mining sector growth was estimated at 8.1 per cent in FY 2023-24 compared to 4.1 per cent in FY 2022-23.

Real GDP or GDP at constant prices in 2023-24 was estimated at Rs 171.79 lakh crore as against the provisional GDP estimate of 2022-23 of Rs 160.06 lakh crore (released on 31^st May 2023). Growth in real GDP during 2023-24 was estimated at 7.3 per cent compared to 7.2 per cent in 2022-23. Nominal GDP or GDP at current prices in FY 2023-24 was estimated at Rs 296.58 lakh crore against the provisional FY 2022-23 GDP estimate of Rs 272.41 lakh crore. Indias exports of goods and services were expected touch USD 900 billion in FY 2023-24 compared to USD 770 billion in the previous year despite global headwinds. Indias net direct tax collection increased 19 per cent to Rs. 14.71 lakh crore by January 2024. The gross collection was 24.58 per cent higher than the gross collection for the corresponding period of the previous year. Gross GST collection of Rs 20.2 lakh crore represented an 11.7% increase; average monthly collection was Rs 1,68,000 crore, surpassing the previous years average of Rs 1,50,000 crore.

The agriculture sector was expected to see a growth of 1.8 per cent in FY 2023-24, lower than the 4 per cent expansion recorded in FY 2022-23. The Indian automobile segment was expected to close FY 2023-24 with a growth of 6-9 per cent, despite global supply chain disruptions and rising ownership costs. The construction sector was expected to grow 10.7 per cent year-on-year from 10 per cent in FY 2023-23. Public administration, defence and other services were estimated to grow by 7.7 per cent in FY 2023-24 compared to 7.2 per cent in FY 2022-23.

India reached a pivotal phase in its S-curve, characterized by acceleration in urbanization, industrialization, household incomes and energy consumption. India emerged as the fifth largest economy with a GDP of USD 3.6 trillion and nominal per capita income of Rs. 123,945 in FY 2023-24. Indias Nifty 50 index grew 30 percent in FY 2023-24 and Indias stock market emerged as the worlds fourth largest with a market capitalization of USD 4 trillion.

Outlook: India withstood global headwinds in 2023 and is likely to remain the worlds fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rates and robust foreign exchange reserves. The Indian economy is anticipated to surpass USD 4 trillion in FY 2024-25.

Union Budget FY 2024-25: The Interim Union Budget FY 2024-25 retained its focus on capital expenditure spending, comprising investments in infrastructure, solar energy, tourism, medical ecosystem and technology. In FY 2024-25, the top 13 ministries in terms of allocations accounted for 54% of the estimated total expenditure. Of these, the Ministry of Defence reported the highest allocation at Rs. 6,21,541 crore, accounting for 13% of the total budgeted expenditure of the central government. Other ministries with high allocation included Road transport and highways (5.8%), Railways (5.4%) and Consumer Affairs, food and public distribution (4.5%).

(Source: Times News Network, Economic Times, Business Standard, Times of India)

The hydraulic components market size is projected to grow from USD 48.23 billion in FY 2023 to USD 72.89 billion by FY 2032, exhibiting a compound annual growth rate (CAGR) of 5.30% during the forecasted period FY 2024 to FY 2032.

On a regional basis, the North American hydraulic components market area will dominate this market, owing to the increasing adoption of automated and mechanized agriculture practices across the region. Europes hydraulic components market accounts for the second-largest market share because of the growing demand for machinery and equipment for applications in growing manufacturing, agriculture, mining, and oil and gas sectors in the region. The Asia-Pacific hydraulic components market is expected to grow at a CAGR of 3.3%, the fastest from FY 2023 to FY 2032.

The market is driven by the growing need in industries including manufacturing, construction, aerospace, and agriculture for high-performance and precise equipment. This rise accompanied by demand for ecologically friendly hydraulic _uids, the requirement for energy-e_cient solutions, and the worldwide trend toward automation are the main factors driving the hydraulic components market.

Furthermore, the growth in the hydraulic components market is driven by the rise in the global construction industry, with the sector poised to reach a value of USD 15.5 trillion by FY 2030. The majority of this growth is expected to stem from countries such as China, India, and the US. This, coupled with technological advancements within the core construction and infrastructure sectors, is anticipated to elevate the demand for hydraulic systems.

(Source: Marketresearchfututre, Researchandmarkets, Precedenceresearch, Marketsandmarkets)

The global market for hydraulic components is projected to reach size of USD 72.89 billion by FY 2032. The market is expected to be propelled by factors such as expansion in construction and manufacturing, automation adoption, and eco-friendly innovations. However, the segment faces a number of challenges, including competition from electric actuators and environmental concerns. Despite these obstacles, the market outlook remains positive, offering opportunities for innovation and industrial application growth.

(Source: Marketresearchfututre, Researchandmarkets)

The Indian hydraulic components market is estimated to grow at a CAGR of 6.2% during FY 2020 to FY 2026. Hydraulic machinery has diverse applications across industries such as construction, aerospace, defense, steel plants, mining, agriculture and more. The growth of these sectors directly impacts the hydraulic components industry.

The hydraulics components industry is poised for recovery as demand revives in the sectors it serves, following a period of restrictions. These industries include key sectors such as road construction, rural development and mining, where the government has allocated significant funding for infrastructure development. (Source: Orion Market Research)

Infrastructure: India aims to emerge as the worlds third-largest economy, reaching a GDP of USD 5 trillion in the next three years and USD 7 trillion by the year 2030, supported by ongoing reforms.

The infrastructure outlay for FY2024-25 is Rs. 11.11 billion (USD 13.4 million), recognizing the sectors crucial role in achieving this goal. Various initiatives like the National Infrastructure Pipeline and the National Monetization Pipeline (NMP) have driven increased investments. Growing government support, particularly for highway projects, aims to enhance economic activities through improved connectivity.

India as a manufacturing hub:

Contributing 17% to the nations GDP and employing over 27.3 million workers, the manufacturing sector plays a significant role in the Indian economy.

Growing urbanization: Following rapid urbanization, there is an increasing demand for sustainable and modern infrastructure in cities. This includes the development of smart cities, urban transport networks like metro rail services, and green infrastructure. The estimated urban population amounts to 590 million people by 2030, the number growing by an estimated 2.3 per cent each year.

Foreign direct investments: Foreign Direct Investment (FDI) inflows in Indias infrastructure sector have been robust. These investments enhance technological expertise, managerial know-how, and can lead to spillover effects benefiting various industry segments. The country maintained its consistency with FDI inflow, as USD 70.9 billion of the amount was registered in FY 2023-24. The construction sector, among others, witnessed a significant growth.

Industrial expansion: Overall industrial output grew 5.8% in FY 2023-24, a tad higher than the 5.2% rise in the previous year, with manufacturing output growing 5.5% compared with 4.7% in FY 2022-23 and mining output accelerating by 7.5% last year from a 5.8% rise in the preceding year, rising electricity demand.

(Source: India briefing, Times of India, Urbanet, pib, The Hindu, Economic Times)

The capital investment outlay for infrastructure is being increased by 33% to Rs. 10 lakh crores (USD 122 billion) in FY 2023-24, which would be 3.3 per cent of GDP and almost three times the outlay in FY 2019-20.

In recent years, there has been a substantial increase in the pace of construction of national highways, from an average of 12 kilometres per day in FY 2014-15 to around 34 kilometres per day in FY 2023-24.

As per the Union Budget FY 2023-24, a capital outlay of Rs. 2.40 lakh crores (USD 29 billion) has been provided for the railways, which is the highest ever outlay and about 9 times the outlay made in FY 2013-14.

The Infrastructure Finance Secretariat is being established to enhance opportunities for private investment in infrastructure that will assist all stakeholders for more private investment in infrastructure, including railways, roads, urban infrastructure and power.

The Government has decided to continue the 50-year interest free loan to state governments for one more year to spur investment in infrastructure and to incentivize them for complementary policy actions, with a significantly enhanced outlay of Rs. 1.3 lakh crore (USD 16 billion) under the Union Budget FY 2023-24.

The government identified 100 critical transport infrastructure projects, for last and first mile connectivity for ports, coal, steel, fertilizer and food grains sectors, as these projects will be taken up on priority with an investment of Rs. 75,000 crores (USD 9 billion), including Rs. 15,000 crores (USD 1.8 billion) from private sources under the Union Budget for FY 2023-24.

50 additional airports, heliports, water aerodromes and advanced landing grounds will be revived to improve regional air connectivity.

An Urban Infrastructure Development Fund (UIDF) will be established through use of priority sector lending shortfall, which will be managed by National Housing Bank and will be used by public agencies to create urban infrastructure in Tier 2 and Tier 3 cities.

(Sources: IBEF, The Times of India)

Yuken India is poised to capitalize on the expanding opportunities in the hydraulics industry by leveraging its strengths:

A well-known and reputable brand.

Wide range of products meeting various client demands.

Excellent service standards and fast delivery dates.

Competitively priced products that meet international standards.

Constant investments in research to improve the capacity for product development.

A substantial market share and enduring customer connections.

Rising input expenses.

Changing preferences and tastes of consumers.

Growing costs related to technology updates.

A persistent need for new product development and innovation.

A volatile market for foreign exchange.

Increasing competition on the international scene.

Growing competition within the domestic market.

Environmental risks.

Gross revenues increased by 14% to Rs.427.62 crore during FY2023-24 as compared to Rs.375.04 crore during FY2022-23.

Operating profit EBITDA stood at Rs.49.88 crore in FY2023-24 compared to Rs.36.01 crore during FY2022-23.

Finance costs decreased by 14% from Rs.9.79 crore in FY 2022-23 to Rs.8.45 crore during FY 2023-24.

Total expenses stood at Rs.409.02 crore including tax expenses worth Rs.6.97 crore and deferred tax charge/ (benefit) and MAT credit entitlement worth Rs. 1.20 crore Profit after tax, including other comprehensive income (OCI), stood at Rs.18.30 crore as against Rs.9.47 crore during the previous year.

Net worth stood at Rs.279.50 crore as on 31^st March, 2024 compared to Rs.199.31 crore as on 31^st March, 2023.

Property, plant and equipment and intangible assets increased by 10% to Rs.188.32 crore during FY 2023-24 from Rs.170.62 crore during FY 2022-23.

Capital work-in-progress for the year increased to Rs.19.75 crore during FY 2023-24 compared with Rs.11.64 crore during FY 2022-23.

Cash and cash equivalents stood at Rs.10.18 crore as on 31^st March, 2024 compared to Rs.2.48 crore as on 31^st March, 2023.

The Company views its people as its most significant competitive edge. Our employees, with their extensive multisectoral experience, technological skills, and domain expertise, are essential to our success. Our HR culture thrives on challenging traditional norms to boost our competitiveness. By prioritizing decisions that align with employees professional and personal goals, the Company fosters an ideal work-life balance and instills a strong sense of pride in being part of the organization. As of March 31, 2024, the company had 389 employees.

Competitive risk: Rising competition can potentially reduce revenues and profit margins.

Mitigation: The company offers a range of products to meet the diverse needs of its customers. By enhancing the customer experience with after-sales service and transforming its products into comprehensive solutions, the company minimizes competition. This approach has fostered long-standing client relationships, resulting in a larger market share.

Sectoral risk: The companys growth could be hindered if it shifts its focus underperforming sectors.

Mitigation: The company operates in various sectors, including automobile, power, steel, and plastic, ensuring consistent profits and mitigating the impact of short-term underperformance in any single sector. It now aims to diversify by exploring sectors such as renewable energy, defence, and marine engineering. Economy risk: The industrys growth is linked to the overall economy, making it vulnerable to the countrys economic conditions and trends.

Mitigation: The companys diverse portfolio of products, sectors, and geographic regions enables it to mitigate the adverse effects of an economic slowdown.

Service risk: Inadequate service provision by the company can result in equipment downtime, affecting the brands reputation.

Mitigation: The company ensures high product availability nationwide through a network of 52 dealers. It bolstered its service division to minimize equipment downtime.

Technology risk: The introduction of new and advanced technologies in the market may reduce the demand for Yukens current products, potentially affecting the companys operations.

Mitigation: The companys products, including pumps and valves, have seen increasing demand from customers over the years.

Yuken India has established its organizational culture on a foundation of transparency and accountability, adhering to fair and comprehensive corporate governance practices, guided by its Code of Conduct and various policies that comply with the SEBI (Listing Obligations and Disclosure Requirements) Regulations of 2015.

To address workplace issues, Yuken India has implemented a Prevention of Sexual Harassment Policy, modelled after the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act of 2013. The companys proactive Audit Committee routinely oversees and controls internal processes, ensuring robust governance. Furthermore, the Committee of the Board and the Constitution of the company ensure that accounting policies and internal procedures comply with the requirements of Section 177 of the Companies Act of 2013 and Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements) Regulations of 2015.