Yuken India Ltd Management Discussions.

Global economic overview

The global economy grew 3.6% in 2018 compared witRs. 3.8% in 2017, largely on account of the failure of Brexit negotiations, tightened financial conditions, geopolitical tension and higher crude oil costs. Global growth is estimated at 3.3% in 2019. (Source: World Economic Outlook).

Global economic growth over six years

Year 2015 2016 2017(E) 2018(E) 2019 (P) 2020 (P)
Real GDP growth (%) 3.2 3.1 3.8 3.6 3.3 3.6

[Source: World Economic Outlook, January 2019] E: Estimated; P: Projected

Indian economic overview

India emerged as the sixth-largest economy in the world and retained its position as the fastest-growing trillion-dollar economy. However, after growing 7.2% in 2017-18, the Indian economy was forecasted to grow at 6.8% in 2018-19 as per the provisional second advanced estimates of the Central Statistics Office.

The principal developments during the year under review comprised a sustained increase in per capita incomes, decline in national inflation, steadying interest rates, and weakened consumer sentiment starting from the second half of the financial year. The weaker sentiment was on account of a large non-banking financial company announcing its inability to address liabilities.

In 2018, the country attracted ~US$ 42 billion in FDI inflows as per the World Investment Report, 2019. Driven by strong policy reforms, India witnessed a 23-notch jump to a record 77th position in the World Banks latest report on the ease of doing business that captured the performance of 190 countries. The commencement of the US-China trade war opened a new opportunity for India, particularly in the agro sector. Inflation (including food and energy prices) was pegged at 2.6% on an annual basis, one of the lowest in years and well below the Reserve Bank of Indias medium-term target of 4%. The rupee rebounded to Rs. 69.44 on 31.03.2019 after touching a low of Rs. 74.45 in the year under review. During the fiscal under review, the Indian Government continued to invest deeper in digitalisation, renewable energy capacity generation and infrastructure building.

Key government initiatives

The Indian Government embarked on a number of initiatives to accelerate economic reform.

Bank recapitalisation scheme: In addition to infusing Rs. 2.1 lac crore in public sector units, the Indian Government announced a capital infusion of Rs.41,000 crore through recapitalisation bonds in FY2018-19.

Expanding infrastructure: The Government of India invested Rs.1.52 trillion to construct 6460 kilometres of roads in 2018. Its expenditure of Rs. 5.97 trillion (US$ 89.7 billion) towards infrastructural development for 2018-19 is expected to strengthen the national economy.

Increasing MSP: The Government fixed Minimum Support Prices (MSPs) of 22 mandated Kharif and Rabi crops and Fair & Remunerative Prices (FRP) for Sugarcane. The government committed to provide farmers with a 50% return over the cost of production for all mandated crops, strengthening the rural economy.

The Insolvency and Bankruptcy Code (Amendment), Ordinance 2018: Passed in June 2018, the ordinance provides significant relief to home buyers by recognizing their status as financial creditors. The major beneficiary comprised Micro, Small and Medium Sector Enterprises (MSME), empowering the Government to provide a special dispensation under the Code.

Minimum income for farmers: The Indian Government announced in February 2019 the Pradhan Mantri Kisan Samman Nidhi, a scheme promising an annual assured income of Rs. 6,000 (US$ 84.5) for any farmer owning up to 2 hectares of farmland. The budget for fiscal year 2020 allocated Rs. 75,000 crore for the scheme, benefiting an indicative 120 million land-owning farmer households. Direct Benefit Transfer: The Direct Benefit Transfer initiative has re-engineered the cash disbursement process in welfare schemes through simpler and faster flow of information/funds to ensure accurate targeting of beneficiaries, de-duplication and reduction of fraud. In 2018-19 alone, this scheme is estimated to have transferred more than Rs. 3,00,000 crore and the gains to have accrued since scheme implementation (upto March 2019) estimated at Rs. 1,41,677.56 crore.

Outlook

Indias markets are expected to remain in a state of slowdown througRs. 2019-20 even as the medium-term outlook appears better and the long-term outlook favourable. (Source: CSO provisional estimate, May 19, pib, dbtbharat, Pound sterling live, Livemint, Hindu Business Line)

Global hydraulic component industry overview

The global hydraulic market is valued at US$ 5.81 billion as on April 2019 and projected to grow to US$ 7.4 billion by 2024 following increased capital expenditure by a number of manufacturing sectors, marked by fluid power in modern engineering and hydraulics replacing the mechanical and electrical drive systems.

The US is the largest global market for this business even as the Asia-Pacific region is emerging as a fast growing region owing to increased consumption, growth in the construction sector, increased investment in smart machine tools as well as growing investment in the steel, aviation, mining and oil & gas sectors.

With increasing digitalisation, hydraulic equipment manufacturers offer a range of electro-hydraulics components and modules with digital interfaces and sensor intelligence. These conveniences empower users to operate and monitor machines from a single display interface. There is also a trend towards real-time equipment supervision through enhanced digitalisation and IoT. (Source: State time, Marketwatch, Strategyr)

Outlook

Even as the global market is slowing (projected growth for the current year 30 bps lower than the 3.6% growth of the previous year), infrastructure investments in some developed and developing economies is expected to catalyse market growth. (Source: Technavio)

Indian hydraulic components industry overview

The manufacture of earth-moving and construction equipment like hydraulic excavators, wheel loaders, backhoe loaders, motor graders, vibratory compactors, cranes, dumpers, tippers, forklifts trucks, dozers, pavers, batching plants among others, use hydraulic equipment and components.

Hydraulic equipment is also used in industries like steel, cement, mining, oil and gas. Any growth in these sectors has a positive trickle-down impact on the hydraulics sector. Indias hydraulics sector has responded to the overarching need for modernisation through new designs, materials and manufacturing technologies marked by lower energy consumption, enhanced equipment uptime and longer life-cycles.

The Indian hydraulics industry is expected to grow at around 12-15% between 2018 and 2024, reversing a consistent decline since 2011. The growth is a result of a robust domestic demand, government infrastructure investments and higher capital equipment offtake. The outlook is optimistic on account of a sustained increase in demand for hydraulic compenents from the manufacturing, construction, mining, agriculture, aerospace, and defence sectors. The demand for hydraulic cylinders should be positively affected by the greater use of material handling equipment such as level luffing cranes, the likes of which are extensively used by the food and beverage industry, and industries like power and energy, and retail and oil refineries. (Source: Businesswire, Equipment India, Dantal Hydraulics, PR Newswire)

Emerging trends

Innovation: Improvements in design with attention on reduced operational costs, improved machine performance, reduced fuel / energy consumption and low life-cycle costs. Energy efficiency: The end users of components demand efficient machines with low operational costs.

Specific equipment segments: Most hydraulic manufacturers provide products for specific equipment segments offering technical features and advantages over the conventional systems.

Outlook and Growth drivers

Economic growth: India retained its position as the fastest-growing major economy through most of 2018. The growth was be generated by strong demand, sustained economy reforms by the Government of India and an improved credit offtake.

Rising income: Indias per capita income is growing every year, creating a foundation of personal consumption growth on the one hand and industrial growth on the other.

Consumer spending: India is the eighth-largest consumer market where, ~50% of a population of ~1.35 billion is economically productive and more than 25 years old. This age-cohort is inclined to a high rate a consumption. A growing consumer base, consumer heterogeneity and increasing aspirations are expected to catalyse national consumption. Infrastructure: Indias infrastructure sector is directly catalysing development. The Government of India is expected to invest substantially in the construction of highways, renewable energy generation and urban transportation.

Government regulations: The Central Governments 100%-FDI policy (49% under the automatic route) was formulated to boost local manufacturing and reduce imports.

Manufacturing: Indias manufacturing sector possesses the potential to reach US$ 1 trillion by 2025. If the country can fulfill that potential, it should emerge as one of the three leading economies and a preferred manufacturing destination in the coming decade. (Source: Provisional second advanced estimate, Agri Corp, India Water Portal, World Bank)

Opportunities

Yuken India is attractively placed to capitalise on Indias growth due to the following reasons:

• Established a multi-decade track record

• Carries out proprietary research and possesses product development capabilities

• Offers a range of products to address a range of customer needs

• Established service standards, strengthening the brand and respect

• Multi-year customer engagement with a high wallet share

• Known for superior product quality, low delivery lead time and competitive pricing

• Benchmarked with global quality standards

Threats

• Shifting customer preferences

• Premium on technology upgradation

• Need to continuously develop new products

• Growing competition

• Currency volatility

• Increasing input costs

• Challenging and competitive global markets

Financial analysis (Consolidated)

Gross revenues increased by 28% to Rs. 345.03 crore during FY2018-19 compared to Rs. 270.60 crore during FY2017-18. Operating profit (EBITDA) stood at Rs. 34.45 crore (excluding JDA Income) compared to Rs. 25.19 crore during FY2017-18.

Finance costs decreased by 3.11% from Rs. 8.14 crore to Rs. 7.88 crore during FY2018-19 due to decrease in average utilisation of loans.

Total expenses stood at Rs. 356.76 crore, including current tax worth Rs. 32.56 crore and deferred tax charge/(benefit) worth Rs. (0.46) crore.

Profit after tax including other comprehensive income (OCI) stood at Rs. 119.18 crore which includes one time exceptional income from Joint Development of Rs. 101.47 crore compared to Rs. 7.07 crore during previous year. Net worth stood at Rs. 173.77 crore as on 31st March 2019 compared to Rs. 55.31 crore on 31st March 2018.

Property, plant and equipment and intangible assets including investment property increased by 13% to Rs. 95.32 crore during FY2018-19 from Rs. 84.57 crore during FY2017-18.

Capital work-in-progress for the year has increased to Rs. 8.92 crore during FY2018-19 compared with Rs. 1.14 crore during FY 2017-18 primarily on account of expansion programme.

Cash and cash equivalents stood at Rs. 1.02 crore as on 31st March 2019 compared to Rs. 0.63 crore as on 31st March 2018.

Key financial ratios
Particulars FY2018-19 FY2017-18
EBIDTA/Turnover 10% 9%
Net profit/Turnover 35% 3%
Debt-equity ratio 0.13 0.31
Current ratio 1.44 0.92
Interest coverage ratio 0.05 0.41
Inventory Turnover (no of days)- excluding residential units from JDA. 52 54
Debtors Turnover(no of days) 87 88
Return on Networth( %) 69 13
Book value per share (Rs.) 144.81 46.09
Earnings per share (Rs.) 99.50 5.92

Note:-

The significant changes in the ratios is due to one time exceptional Income of Rs. 130.48 crore accounted in respect of Joint development.

Internal control systems and their adequacy

In Yuken India, transparency and accountability has always been a part of its organisational culture . The Companys corporate governance has been strengthened by its code of conduct and various policies framed in compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations,2015. The Company has in place the Prevention of Sexual Harassment Policy in line with the requirements of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

The Company has formed a robust Audit Committee that monitors and controls regular internal processes. The Committee of the Board and the Constitution of the Company assures that the internal procedures and accounting policies are in confirmity with the requirements of Section 177 of the Companies Act, 2013 and also with that of the requirements of Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Human resources

The Company believes that its people are its vital assets. Founded on that belief the Company has put in place policies that encourage innovation, talent recognition and performance. The Company constantly endeavors to provide a platform for professional growth to employees. The Company had 483 employees as on 31st March 2019.