Bharat Bijlee Ltd Management Discussions

INDUSTRY STRUCTURE AND DEVELOPMENTS, OPPORTUNITIES AND THREATS

After a muted year 2020-21, in which the global COVID-19 pandemic affected nations and economies across the world, India was faced with the second and the third waves of the pandemic during the financial year 2021-22. The year also witnessed a significant spike in commodity prices, and delays in buying and investment decisions.

Systematic and accelerated vaccination efforts helped tame the impact of these fresh waves in India. The favourable monetary policy measures by the Reserve Bank of India, together with Central and State Government actions - a supportive fiscal policy, support to vulnerable groups, and increased infrastructure spend - helped the Indian economy emerge out of the shadows of the pandemic.

However, several global factors including the uncertain geopolitical situation has caused unprecedented ballooning of commodity prices and unpredictable availability of certain components. Inevitably there has been a cost-push and supply-side inflationary impulse. The duration of the global uncertainties is also likely to keep costs and supplies both volatile and unpredictable for some time. The spike in crude prices has taken a toll not only on the Government?s finances but also on private consumption.

The Indian Transformer industry has long been witnessed overcapacity and fierce competition amongst market players. The industry?s growth has been stagnant over the past several years due to the slowdown in private investment in the manufacturing sector.

Your Company?s initiatives to broaden its market reach have shown results. Energy-efficient motors, Infrastructure, Railways, Water Management and Paper are sectors driving demand.

OPERATIONAL AND FINANCIAL PERFORMANCE OF SEGMENTS

The Company operates in two business segments, viz. Power Systems and Industrial Systems.

Power Systems:

This segment comprises of the design, commissioning and marketing of power transformers; EPC projects for electrical substations including delivery, rectification, commissioning and servicing of transformers; and marketing of maintenance products.

The sector continues to suffer from over-capacity and almost stagnant demand, making it a buyers? market. Such an intensely competitive market has kept prices depressed and margins abysmally low. The public sector electricity undertakings have been delaying finalization of orders due to increase in tendered prices in the wake of the hyper-inflation in commodity prices.

During the year, we supplied 200 MVA 220/132/33 kV Auto Transformers to a private utility company. This is the highest rating of Auto Transformers we have supplied to any private utility.

We continue our cautious approach in the Projects business, targeting orders from customers of repute to ensure timely completion of projects and payments, with reasonable profitability.

The revenue of the Power Systems segment increased by 107% compared to the previous year overcoming the disruptions caused by the pandemic in the previous year. Correspondingly, the segmental profit improved to Rs. 3021.19 lakhs from a segmental loss of Rs. 241.14 lakhs in the previous year.

Industrial Systems:

This segment comprises of the development, marketing and manufacture of a wide range of standard and customized electric motors, magnet technology machines and the engineering and supply of Drives and Automation systems

The Motors business, despite only moderate GDP growth against the backdrop of a very low base, as the economy contracted in the previous fiscal due to the impact of strict anti-COVID pandemic restrictions and measures, continued its growth by enlarging product offerings, focusing on value propositions, and deepening geographical reach.

Our SynchroVERT? Ultra Premium Efficiency Class IE5 motor was selected for Technology Demonstration in the ‘2020 Innovation Challenge? held under the Facility for Low Carbon Technology Deployment (FLCTD) Programme. The product was exhibited during the year at an exhibition organized by the United Nations Industrial Development Organization (UNIDO) titled "National Innovation Conclave on Low-Carbon Technologies".

During the year, we supplied our first 11 kV motors to a leading manufacturer of pumps and pumping systems for the GIDC water desalination plant in Dahej, Gujarat, the largest of its kind in India. The Sewage Water Reverse Osmosis plant will supply water to petroleum and chemical industries.

The Drives & Automation business continues to develop new applications and solutions with an eye on widening its sectoral reach.

During the year, to augment our range of servo solutions, we launched a compact new package for the Plastic?s industry that combines KEB?s Sensorless Closed Loop (SCL) technology and our SynchroTorq? servo motors. This new solution fulfils the twin objectives of torque control and dynamic response.

The Magnet Technology Machines business continues to hold a strong position in the domestic market for gearless elevator machines, with ongoing inroads in export markets through our technology partner in Spain.

The revenue of the Industrial Systems segment increased by 50% compared to the previous year. Correspondingly, the segmental profit improved to Rs. 9556.92 lakhs from Rs. 6942.34 lakhs in the previous year.

SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

Key Financial Ratio	FY 2021-22	FY 2020-21	Change (%)	Reason
Debtors Turnover Ratio1	4.35	2.74	58.52%	Faster collections from customers.
Inventory Turnover Ratio2	5.33	3.22	65.49%	The Company achieved pre-Covid levels of operations with control over inventory.
Interest Coverage Ratio3	4.72	3.42	37.81%	The Company achieved pre-Covid levels of operations coupled with lower interest rates.
Current Ratio	1.38	1.68	-17.75%
Debt Equity Ratio	0.54	0.52	5.22%
Return on Net Worth4	11.42%	5.83%	96.00%	The Company achieved pre-Covid levels of operations with control over operating expenses.
Operating Profit Margin5	5.89%	5.01%	17.57%
Net Profit Margin6	4.39%	3.56%	23.23%

1 Turnover (net) / Average Trade Receivables

2 Turnover (net) / Average Inventory

3 (Profit before Tax + Finance Cost + Depreciation + Loss on sale of Fixed Assets (net)) / (Finance Cost + Lease payments)

4 Profit After Tax / Average of (Equity Capital + Other Equity - Other Comprehensive Income)

5 (Profit before Tax - Exceptional Income) / Turnover

6 Profit after Tax / Turnover

RISKS AND CONCERNS

The unprecedented inflation in commodity prices, and the global tightening of money supply and rising interest rates remain a threat to public and private capital expenditure plans. This, coupled with uncertainties about new variants of the COVID-19 virus, together with geopolitical tensions remain the key risks.

INTERNAL CONTROLS AND RISK MANAGEMENT

Most internal controls of the Company have been automated through the SAP ERP system. System-driven controls ensure consistency, continuous monitoring and compliance. Internal controls have been designed to mitigate financial and operational risks and to ensure that transactions are made within the authority delegated by top management, properly recorded, and correctly reported. Internal controls across the Company are periodically reviewed and tested to assess their adequacy and effectiveness both by the Company?s Internal Audit team and the Statutory Auditors. The Management and Audit Committee are apprised of the outcome of such reviews. Internal controls are further reinforced based on such reviews as required.

The Company has defined a framework for Risk Management that is reviewed regularly and updated for all businesses of the Company.

OUTLOOK

Industrial manufacturing activities are facing headwinds due to elevated commodity prices. Geo-political tensions are causing increased freight costs and supply disruptions; lockdowns in China to contain spread of the pandemic are causing shortages of critical inputs, and central banks globally are raising interest rates with a tightening of money supply.

A normal monsoon together with Government led CAPEX would help the Indian manufacturing sector.

Your Company has been continuously investing to upgrade and expand its production capabilities and enrich its product offerings. It has the right capital structure to seize opportunities arising from increased public and private capital expenditure under "Atmanirbhar Bharat" initiatives such as the PLI Scheme, spend on infrastructure, Smart Cities, and Power for All.

For Bharat Bijlee Limited

Nikhil J. Danani

Vice Chairman & Managing Director