Dynamic Cables Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Company Overview

Dynamic Cables Limited is a manufacturer of power infra cables that includes LV, MV, HV, EHV, power control & instrumentation cables, flexible & industrial cables, solar cables and railway signaling 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. Company has been awarded Two Star Export House status by the Directorate General of Foreign Trade (DGFT). 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 cable market according to various reports is estimated to have surged to around ~ Rs. 750 billion in FY 2022-23 from Rs.335 billion in FY 2014-15. It is estimated that the industry registered a volume growth of around 10% between FY15 and FY23 and going forward it is expected to grow at 13% CAGR till FY27 taking it to Rs 1200 billion on the back of higher infrastructure spending by the government and growth in real estate sector and private capex.

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, fiber optic cables, copper telephone cables, elastomer rubber cables and specialty cables.

Economic Review

Global Economic Review

According to IMF World economic Outlook (Apr-2024), Economic activity was surprisingly resilient through the global disinflation of 2022 23. As global inflation descended from its mid-2022 peak, economic activity grew steadily, defying warnings of stagflation and global recession. Growth in employment and incomes held steady, reflecting supportive demand developments including greater than expected government spending and household consumption and a supply-side expansion amid, notably, an unanticipated boost to labour force participation. The unexpected economic resilience, despite significant central bank interest rate hikes aimed at restoring price stability, also reflects the ability of households in major advanced economies to draw on substantial savings accumulated during the pandemic.

The pace of expansion is low by historical standards, owing to both near-term factors, such as still-high borrowing costs and withdrawal of fiscal support, and longer-term effects from the COVID-19 pandemic and Russias invasion of Ukraine, weak growth in productivity and increasing geo-economics fragmentation. Global headline inflation is expected to fall from an annual average of 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. The latest forecast for global growth five years from now at 3.1 percent is at its lowest in decades.

Risks to the global outlook are now broadly balanced. On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices. A divergence in disinflation speeds among major economies could also cause currency movements that put financial sectors under pressure. Monetary policy remains focused on aligning inflation with the target to pave the path for sustained growth in the medium-term

Source: IMF World Economic Outlook April 2024

Indian Economic Review

Amid a challenging global economic landscape and deteriorating geopolitical conditions, India continues to shine as a bright spot. It is the fifth-largest economy in the world and is poised to retain its position as the worlds fastest-growing major economy. Its GDP growth remained buoyant at 8.2% in FY 2023-24 as against 7.0% in FY 2022- 23, supported by robust domestic demand, moderate inflation, a stable interest rate environment, and strong foreign exchange reserves. Furthermore, an accelerated pace of economic reforms and increased capital expenditure paved the way for construction activities and large-scale employment opportunities in the country.

The International Monetary Fund (IMF) commended Indias economic resilience, robust growth, and notable progress in formalization and digital infrastructure. India had successfully harnessed inflation in FY 2023-24 which is still plaguing major advanced economies. Indias Consumer Price Index (CPI) inflation rate further decreased to 4.83% (provisional) in April 2024 against 4.85%(final) in March 2024. The RBI, in its efforts to control inflation and boost economic growth, decided to keep the policy repo rate unchanged at 6.50%.

Due to increasing disposable income levels, there is a surge in household consumption in both urban and rural regions, boosting the demand across sectors. Indias economic outlook is optimistic as it reaps the benefits of demographic dividend, physical and digital infrastructure enhancements, increased capital expenditure and the governments proactive policy measures such as Production Linked Incentive (PLI) Schemes. According to the IMF, the Indian economy is expected to expand steadily at 6.8% in 2024.

Raw material challenge

The demand for wire and cables remained strong in FY 2023-24, supported by government investments in infrastructure and housing sectors, along with robust export demand. However, the sector faced challenges due to the volatility of input costs, particularly for raw materials like copper and aluminum Prices of raw materials such as copper and aluminum have been volatile over the past years. Copper price was $6,636 per ton in March 2014, which has increased to $8,879 per ton in March 2024, reaching the high price of $9,974 per ton in April 2024. The prices of copper have been highly volatile Likewise, the price of aluminum has also increased from $1,731 per ton in March 2014 to $2,270 per ton in March 2024, reaching the high price of $2,650 per ton in April 2024. The increase in prices of raw materials poses a key challenge to W&C manufacturers as it leads to an increase in raw material costs.

This increase can either be passed on to the consumer or absorbed by the manufacturer or a combination of both. As per industry practices, generally the corresponding increase in prices of copper and aluminum has been passed on to the consumers historically. The volatility in raw material prices may have an impact on demand of the product. Based on overall industry dynamics and macroeconomic factors, the revenue and profitability of players may be impacted.

Key structural drivers for the sector

The cables industry is poised for significant growth, driven by a robust capital expenditure cycle from both the government and private sector. Government initiatives across various sectors such as power, housing, infrastructure, and digitization are expected to create substantial business opportunities for the wire and cable industry in the medium to long term. Additionally, the industrys growth will be propelled by infrastructure development, urbanization, the establishment of smart cities, the expansion of residential and commercial real estate, rural electrification, and the shift towards renewable energy, collectively suggesting a promising future for the cables and wires sector.

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

1) Consumption Increase in per capita consumption, demographic dividend, rising disposable income, evolving consumer behavior.

2) Infrastructure Indias infrastructure market is poised to remain robust, buoyed by flagship schemes including the National Infrastructure Plan, Gati Shakti program, Sagarmala, Bharatmala, Jal Jeevan Mission, Smart Cities Mission, and RDSS, among others.

3) Capex push-The Annual Budget for 2024 has proposed a significant boost in capital expenditure (capex) aimed at enhancing investment in infrastructure activities in India. This initiative is expected to catalyze a corresponding increase in private sector capex, supported by key initiatives such as the Production Linked Incentive (PLI) scheme and the Make in India program.

4) Emerging levers - Digitalization, Shift towards Renewable energy, Electric Vehicles, IoT.

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

Companys performance

Operating revenue in FY 2023-24 grew by 14.9% as compared to FY 2022-23 and around 36.3% as compared to FY 2021-22. Operating margin was at 10.1% in FY 2023-24. PAT increased to Rs. 37.77 Crs in FY 2023-24. Company also has received an upgrade in its credit rating from Crisil BBB+(positive) to Crisil A-(stable) and new rating assigned from India Ratings of IND A-(stable)

Financial Performance

PARTICULARS		2023-24		2022-23
	Revenue from Operations	76,800.36		66,863.02
Debtors Turnover ratio	Average Debtors	23,070.30	3.33	18,271.37	3.66
	Revenue from Operations	76,800.36		66,863.02
Inventory Turnover ratio	Average Inventory	10,760.58	7.14	9,137.22	7.32
Debt Service Coverage Ratio	Earnings Available for Debt Service	6,777.42		5,515.14
	Current Interest and	2,879.18	2.35	2,420.68	2.28
	Installments of Loan
	Current Asset	42,635.69		34,269.47
Current Ratio	Current Liabilities	27,688.50	1.54	21,279.56	1.61
	Total Debts	11,916.03		8,223.57
Debt Equity Ratio	Equity	21,395.18	0.56	17,743.01	0.46
Operating Profit Margin	EBITDA excluding	8,533.09		7,075.46
	Other Income
	Revenue from Operations	76,800.36	11.11%	66,863.02	10.58%
Net Profit Margin	PAT	3,777.14		3,101.35
	Revenue from Operations	76,800.36	4.92%	66,863.02	4.64%
Return on equity	PAT	3,777.14		3,101.35
	Average Shareholders Equity	19,569.09	19.30%	16,252.53	19.08%
ROCE	EBIT	7,150.67		5,797.97
	Capital Employed (Tangible Net-worth +Total Debt + DTL)	33,281.32	21.49%	25,974.79	22.32%
ROA	PAT	3,777.14		3,101.35
	Total of Balance Sheet	49,852.85	7.58%	40,333.93	7.69%

Segment-wise or product wise performance

Customer segment wise sales break-up:

Segment	Sales (Rs. In lakhs)
Domestic	17,850.00
- Government
- Private	49,492.36
Export	9,439.24
Others	-
Total	76,781.60

Product wise sale break-up:

Segment	Sales (Rs. In lakhs)
HT Cables	45,260.74
LT Cables	21936.02
Railway Signaling Cable	2103.19
Conductors	6559.62
Others	922.03
Total	76781.60

Going Ahead

The Company remains optimistic about the substantial opportunities within the institutional business, driven by the resurgence of demand stemming from capital expenditure initiatives in the economy. Formerly focused predominantly on supplying to discoms, Dynamic Cables has diversified into new segments within the power sector. Anticipated high growth rates in exports and railway sectors are expected to play pivotal roles in the Companys future growth trajectory. Additionally, the Company intends to venture into the renewable cable markets, reflecting its forward-looking strategy.

Efforts are concentrated on expanding the portfolio through the development of new product offerings that complement its core products. This strategic approach underscores the Companys commitment to innovation and adapting to emerging market opportunities, ensuring sustained relevance and competitiveness in the evolving industry landscape.

Here are our focus areas;

Product mix: The management is strategically focused on establishing a resilient business model to foster sustainable growth through diversification of its product mix and market. This approach aims to mitigate concentration risk effectively. The company has strategically adjusted its product mix towards high-margin accretive products such as high voltage cables and specialty products. As a result, the proportion of low-margin conductors has decreased significantly from 20.60% in FY 2018-19 to 8.56% in FY 2023-24. Concurrently, the share of high-tension (HT) products has risen from 34.90% in FY 2018-19 to 57.78% in FY 2023-24.

Export Market: The company remains committed to exploring global opportunities, with significant growth prospects driven by power infrastructure investments in Africa and Asia. Additionally, efforts are underway to penetrate into the US market. In FY 2023-24, export sales accounted for 12.24% of the companys total revenue.

Indian Railways & signaling: The company is actively developing its signaling segment for Indian railways and anticipates that the railway signaling business will contribute significantly to its overall operations, potentially driving higher-than-expected growth over the next 3-4 years.

Power sector: The governments emphasis on expanding additional power distribution infrastructure and modernizing existing systems presents a favorable outlook for the Company. The increasing privatization of the power distribution sector, coupled with government efforts to strengthen state power distribution companies (discoms) and enhance their financial and operational efficiency, is expected to drive essential investments in power infrastructure.

New segments: Emerging opportunities such as electric vehicles, exports, railway electrification, and import substitution are set to become significant business avenues for the Company. To capitalize on these prospects, the Company has allocated its R&D team resources towards the development of specialized cables tailored to meet these specific needs.

Union Budget 2024-25 Highest Ever capital investment outlay

In Budget 2024-25, the Central Government has earmarked Rs. 11.11 lakh crore for capital investment towards infrastructure development, representing approximately 3.4% of the GDP. This allocation marks a significant increase compared to previous years, nearly 3.5 times higher than the outlay in 2019-20 and five times higher than in 2013-14. The heightened focus on infrastructure investment aims to bolster Indias growth potential, stimulate job creation, attract private sector investments, and fortify the economy against global economic challenges.

Looking forward, the RBI forecasts the Indian economy to expand by 7% in FY25, underpinned by these robust infrastructure investments and supportive economic policies. This outlook underscores the governments proactive measures to sustain economic momentum and foster long-term development across various sectors

Railway reforms & Signaling 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.

SCOT analysis

Strength

In the mid-tier cables suppliers segment, the Company has solidified its position through strong order execution capabilities, a high-quality product range, and substantial investments in enhancing its R&D capabilities. Over the past two decades, Dynamic Cables has consistently demonstrated its strengths by developing new products that align with industry evolution and market demands. The management has a proven track record of prudent capital allocation and maintaining a rational capital structure.

Challenges

The Company faces potential margin impacts due to the volatility of raw material prices such as PVC, copper, and aluminum. Despite assured payments, delays can occur due to the financial challenges of power distribution companies (discoms). Moreover, the sector and Company performance are influenced by macroeconomic factors, both domestically and globally, adding further contingency to operational outcomes.

Opportunity

The Indian wire and cable market surged to Rs. 750 billion in FY 2022-23 from Rs.335 billion in FY 2014-15. The industry is likely to see a healthy growth rate of 11-13% in the near to medium term. Various Indian government initiatives on railways, 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 Wire and Cable industry is set to reach worth Rs. 1200 billion in FY 2026-27.

Threats

The Company faces several significant threats, including intense competition within its sector, rapid technological advancements, adverse policy shifts by the Indian government, global trade barriers, and a shortage of skilled local technical labor. These factors collectively pose challenges to its operations and strategic initiatives.

Risk and mitigation

Geopolitical Risks

Geopolitical issues such as trade sanctions and wars are some of the risks that may have direct and indirect implications on the sector and the Company. Geopolitical 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 Risk

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 Risk

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.

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.

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 attributes its competitive edge to its skilled workforce. At Dynamic Cables, employees bring diverse multi-sectoral experience, technological expertise, and deep domain knowledge to the table. The HR culture emphasizes disrupting traditional norms to bolster competitiveness. Decision-making aligns closely with employees professional and personal aspirations, fostering an environment conducive to achieving an optimal work-life balance. As of March 31st, 2024, the Company had a permanent employee totaling _.

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. During the year 2023-24, company covered 77 topics with a total of 169 training sessions. This averages to 14 sessions per month, which is 41% above the set target. The total training man-hours for this financial year amount to 2,793, which is around 4 hours per associate. During this financial year, our focus was on technical and product-related trainings, accounting for around 62%. This resulted in zero customer complaints related to product quality.

Internal Control System and their adequacy

The Company maintains a robust framework of internal controls tailored to its operational scale and complexity. This framework is designed to manage evolving risk factors and reinforces a culture of strong corporate governance. Each year, the Internal Audit plan is approved by the Audit Committee, focusing on reviewing internal controls and risks across the Companys operations, including factories, warehouses, and centrally managed business units. This systematic approach ensures thorough oversight and compliance with established standards and procedures.

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.