HeidelbergCement India Ltd Management Discussions

Global & Indian Economy at a glance

Particulars	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024
										Est.	Est.
A. World Output / Real GDP (Annual percent change)
World	3.5	3.4	3.3	3.8	3.6	2.8	-2.8	6.3	3.4	2.8	3.0
- Advanced Economies	2.0	2.3	1.8	2.5	2.3	1.7	-4.2	5.4	2.7	1.3	1.4
- Emerging Market &	4.7	4.4	4.4	4.7	4.7	3.6	-1.8	6.9	4.0	3.9	4.2
Developing Economies
India	7.4	8.0	8.3	6.8	6.5	3.9	-5.8	9.1	6.8	5.9	6.3
B. In ation: Consumer Prices (Annual Percent change)
World	3.2	2.7	2.7	3.2	3.6	3.5	3.2	4.7	8.7	7.0	4.9
- Advanced Economies	1.4	0.3	0.7	1.7	2.0	1.4	0.7	3.1	7.3	4.7	2.6
- Emerging Market &	4.7	4.8	4.4	4.5	4.9	5.1	5.2	5.9	9.8	8.6	6.5
Developing Economies
India	5.8	4.9	4.5	3.6	3.4	4.8	6.2	5.5	6.7	4.9	4.4
C. Current Account Balances (Percent of GDP)
- Advanced Economies	0.5	0.6	0.8	1.0	0.7	0.7	0.2	0.8	-0.5	0.0	0.3
- Emerging Market and	0.5	-0.3	-0.4	-0.1	-0.2	0.0	0.5	0.8	1.4	0.3	0.0
Developing Economies
India	-1.3	-1.1	-0.6	-1.8	-2.1	-0.9	0.9	-1.2	-2.6	-2.2	-2.2
D. World Trade Volume	3.9	2.9	2.2	5.6	4.0	1.0	-7.8	10.6	5.1	2.4	3.5
(Annual percent change)
E. Commodity Prices
(Annual percent change)
- Oil		Base	22.5	29.4	-10.3	-32.0	65.8	39.1	-24.1	-5.8	-2.8
- Non-fuel (Primary Commodities)		Base	3.8	-1.2	-3.1	1.7	26.1	14.1	-5.6	-2.8	-2.2

Source: World Economic Outlook (April 2023) published by International Monetary Fund (IMF)

A. Global Economy

World economy made a strong comeback clocking 6.3% growth in 2021 compared to a contraction of -2.8% a year ago due to the Covid-19 pandemic. Demand that shrunk in the Covid years, swelled in the late and early quarters of 2021 and 2022 respectively. However, the ongoing Russia - Ukraine war, which had begun in Feb 2022 has led to various sanctions on Russia. These sanctions coupled with the release of pent-up demand spurred world inflation to 8.7% in 2022 that was more than twice that of pre-pandemic levels. Increase in demand and fear of supply disruptions exerted upward pressure on oil and gas prices. The high inflation triggered reactions from global central banks who started tweaking interest rates to curtail inflation. The surge in interest rates by the Federal Reserve of US caused the US Dollar to appreciate against Euro, UK Pound Sterling, and many other currencies. The high US Dollar further led to huge current account deficits in the net importing economies of the world hampering their growth. This high interest rate in US, triggered flight of investments, even from the European markets, into US. Adding to the woes, Chinas zero Covid tolerance policy after the evolution of new variants of Corona virus caused widespread lockdowns there. Three major banks 2 in the US and one in Europe collapsed, sending shockwaves in the financial markets. The overall impact of these events has led to low investor confidence, high demand, high inflation, tight monetary policies of central banks causing decline in the global output which is likely to continue. Global banks have reported weaker earnings and many technology companies have announced layoffs. The global economic outlook is thus predicted to be of low to moderate growth.

B. Indian Economy

Fy23 marked the 75 year of Indian independence. In this “Amrit Kal” the economy showed signs of recovery having clocked a growth of 7.0% compared to revised estimate of 9.1% for the previous financial year. The estimated GDP for FY 23 is Rupees 272 trillion or around USD 3.4 trillion at current prices becoming the fifth largest economy of the world. The key factors contributing were high private consumption, capital formation, universal coverage of Covid vaccination, surge in exports, increase in housing and construction sectors and recovery of Micro Small and Medium Enterprises to name a few.

The high paced recovery and GDP growth is expected to slow down in FY24 owing to global inflation rate, worldwide monetary policies, geo-political conflict including ongoing sanctions, climatic conditions etc. The rays of hope are the relatively stable oil prices, and performance of export-focused sectors that will ease Current Account Deficit. There will be some benefits arising from the slowdown in advanced economies and China that will yield capital inflows back into India. Since our estimated inflation rate has fallen, the RBIs monetary policy is expected to be dovish.

C. Indian Cement Industry

C.1. Capacity and Demand

Installed cement capacity in India in FY23 was around 570 MnT and the demand / production was 390 MnT yielding a capacity utilization of 68% - an improvement of 2% over FY22. The demand growth is in the region of 8% over FY22. A brief overview of per capita consumption of cement vs cement production rate shows that barring Covid year the per capita consumption has grown indicating healthy state of economy. In the union budget for FY24 new schemes and infrastructure projects have been announced:

The outlay for PM Awas Yojana is BINR 790.

Capital outlay of INR 2.4 trillion has been provided for the Railways.

Priority investments of BINR 750 in critical transport infrastructure projects for last and first mile connectivity for ports, coal, steel, fertilizer, and food grains sectors.

Fifty (50) airports, heliports, water aerodromes and advance landing grounds will be revived for improving regional air connectivity.

Urban Infrastructure Development Fund (UIDF) to be established to create urban infrastructure in Tier 2 and Tier 3 cities with an outlay of BINR 100 per annum.

C.2. Input Costs

The world has recovered to normalcy after three rapid waves of Covid-19. However, there are still many challenges such as disruption in global supply chains, the ongoing war between Russia and Ukraine, and other trade disputes affecting many countries. The Russia Ukraine war has led to widespread sanctions on oil purchases and increase in prices of various commodities. In line with the global indexes, domestic prices of various commodities have also shot up due to demand and supply mismatch. For cement industry, Coal is a major fuel. The supply constraints in coal led to its significantly reduced availability, decline in quality and sudden surge in prices. Your Company has mitigated quality risk by constantly changing its fuel mix and the supply risks by entering into long term contracts with local companies exploring new mines, continuous participation in e-auctions.

C.3. Price and Earnings

The demand supply gap has widened close to ~ 180 MnT. Being a large-scale industry, the tendency of the producers is to maximize production. We foresee these conditions to persist in the coming years until the demand supply gap narrows. There are also new capacities in pipeline which will take the installed capacity of India to ~ 600 MnT by next year. A supply side push has an adverse effect on the prices and margins.

The industry has been successful in passing on part of the input cost increases to the end consumers.

C.4. Opportunities

Demand for the industry can be attributed to three main sectors viz.

Housing & Real Estate: Easy availability of credit from banks, higher production of rabi crop will assist in cement demand from rural housing.

Public Infrastructure: Plan outlay for railways, ports and urban infrastructure fund for Tier 2 and 3 cities will bode well for cement demand.

Industrial Development: 5G services, Green Hydrogen Mission, Zero Carbon emission, Renewable energy transmission and Energy Storage projects are some of the futuristic schemes that are the focus for industrial development in FY24 budget. The industrial program aims to empower states and grant relief to MSME sector that was badly hit by the COVID.

The Company foresees a healthy demand in the construction sector resulting from heightened capital spending from businesses.

C.5. Threats

World is facing inflation, food shortage, closure of businesses, appreciation of dollar against major currencies, and fuel prices surge due to ongoing Russia Ukraine war. Due to hawkish monetary policy adopted by the Central Banks to rein in high inflation there has been a flight of capital to regions where the interest rates are high. High interest rates may dampen the demand for new houses.

Supply & pricing of key cementitious materials like Slag and Fly Ash too continues to be a challenge. The utilisation factor of coal-based thermal power plants in India is consistently falling thus impacting fly ash availability and increase in its price due to demand supply mismatch.

C.6. Outlook

Cement Industry follows the GDP growth trajectory. IMF forecast for GDP growth for FY24 is ~6%. Accordingly, we expect cement demand to grow by 7%-9% in FY24. The governments spending on major infrastructure projects is likely key driver for cement sector. The input costs are likely to soften due to reduction in prices of crude oil which will help in improving operating margins.

D. Company Review - Operational and Financial

Performance

A snapshot of the Companys financial performance for

FY23 compared with FY22 is as under:

(INR in million)

Particulars	FY23	FY22
Revenue (Net of Excise Duty / GST)	22,381.0	22,969.6
Power & Fuel Cost	7,726.3	6,424.2
Freight and forwarding expenses	3,116.1	2,957.1
EBITDA (including other income)	2,941.4	4,836.2
EBIT	1,818.3	3,715.7
Finance Cost	460.6	364.4
Net Profit after Tax	991.7	2,522.6
Earnings Per Share (EPS) - INR	4.4	11.1
Book Value Per Share - INR	64.5	69.1

Snapshot of some of the key financial ratios are given below:

Particulars	FY23	FY22	Change
Debtors Turnover (Days)	4.59	4.66	-1.52%
Inventory Turnover (Days)	8.17	8.09	1.04%
Interest Coverage Ratio	17.15	19.64	-12.68%
Current Ratio	1.31	1.42	-7.51%
Debt Equity Ratio	0.12	0.12	-2.15%
Operating Profit Margin (%)	11.26	19.38	-8.12%
Net Profit Margin (%)	4.49	11.25	-6.76%
Return on Net Worth (%)	6.55	16.49	-9.94%

The primary reason for change in the above-mentioned ratios is drop in volume and increase in variable cost which could not be fully passed on to the consumers leading to decline in margins and earnings.

Digitization initiatives:

To boost resilience, the company is focusing on using the power of digital tools and advanced analytics. SAP Ariba technology will make business more personal, contextual, intelligent, and efficient in the years ahead and in the process, procurement will become less tactical and more strategic. Some digitization initiatives are given below:

Project	Benefits
Hdigicube	- Empowering MLE (Mobile Lab Engineers) with Mobile app instead of manual forms and certificates.
	- Real time status of concrete cube tests across all regional offices.
	- Digital Repository of all region-wise testing.
SAP ARIBA Buying	- Shorter cycle time from Purchase Requisition to Purchase Order
	- Catalogue items are pre-negotiated under Annual Rate Contract (ARC).
SAP ARIBA Sourcing	- Portal for Vendors to submit their quotations.
	- Transparency of prices as equal chance is given to each supplier to submit Request for Proposal (RFP).
	- RFP prices can be accessible only after due date of submission.
	- Bid Price Comparison can be downloaded.
WhatsApp for Business	- Direct interaction with customers for Business
	- Interactive content format
	- Opportunity to showcase brand
	- Improved marketing campaigns

E. Product Performance and Customer Relations

The Company has professionally managed team for providing requisite assistance and guidance at the construction sites to make the structure more robust and sustainable through Mobile Technical Lab and Concrete Solutions Lab which facilitate various kinds of tests at construction sites.

Being one of Indias preferred cement manufacturers with a legacy of 150 years, we have a deep understanding of consumer needs. The cement we produce contributes towards enhancing the quality of life be it roads, buildings, or bridges and therefore makes us conscious of the responsibility we shoulder which culminates in producing quality cement that surpasses the expectations of our customers.

F. Business Risks and Concerns

Although the world has come out from the clutches of Covid-19 but still there are many challenges such as disruption in global supply chain, the ongoing war between Russia and Ukraine and other trade disputes among countries.

The Companys management periodically meets to discuss on mitigating measures to cover major risks in operations. The Companys foreseeable risks are adequately covered through strategic planning and insurance.

Major business risks and their mitigation strategies are as follows:

I. Economic Risk: The ongoing Russia-Ukraine war, tight monetary policy of central banks, surging inflation, high dollar, flight of capital from Europe to US and the recent failure of major banks has cast serious concerns over the recovery of global economy.

Mitigation Measure: We will endeavor to get best rates from our suppliers with advance contracts, maintaining inventory of essential spare parts, minimizing operational disruptions and searching for tolling arrangements.

II. Supply Risk: In 2020, the COVID-19 pandemic was the primary cause of supply chain disruptions, followed by extreme weather events, transportation/logistics issues etc. and a number of organizations have been rocked by unforeseen supply-chain vulnerabilities and disruptions. Supply chain risks can be,

External Risks: Ex - Demand risk, Supply risk, Environmental risk and Business risk.

Internal Risks: Ex - Manufacturing Risks, Business Risks, Planning and Control Risks and Mitigation and Contingency Risks.

Mitigation Measure: Your Company values close and productive cooperation with its suppliers and therefore your Company has globally applicable “Supplier Code of Conduct” which acts as a shield to mitigate any Supply chain risks and also have robust Supply Chain Risk Management programs/strategies, Diversified supplier base, end-to-end supply chain visibility etc. Furthermore, your Companys Business Associates/Suppliers are required to adhere to these principles from their direct suppliers and exercise diligence in verifying that these principles are being adhered to in their supply chains.

III. Freight Cost Risk: Cement is a low-value high-volume product; therefore, logistics becomes a significant component in its overall cost. Rail and truck availability or increase in fuel costs could swing the margins significantly.

Mitigation Measure: The Companys Rail-Road mix currently stands at about 55:45. Warehouse & lead optimization and continuing measures to control logistics costs remains a focus area for the Company.

IV. Competition Risk: The cement demand has shown unprecedented vacillations from the industry predictions. There has been an entry of a series of new brands from distant regions and also from new plant capacities in our traditional markets.

Mitigation Measures:

Increasing % contribution of premium products & Trade Sales.

Balancing growth between distant and home markets.

Aligning service team to hand hold the independent home builders during various construction phases.

Addition of new channel partners.

G. Internal Control Systems

The Company has through its thrust on automation and digitalization, established a well-structured and effective internal control and compliance system. Audit Committee regularly discusses the risk based annual Audit Plan and approves the same. The Audit Plan evaluates internal control systems, compliance, robustness of internal procedures, sound business practices, safeguarding Companys assets, compliance with laws and regulations, accuracy in financial reporting and completeness in records.

Based on reports of internal audit function, process owners undertake corrective actions, while material observations, if any, are placed before the Audit Committee. Statutory auditors have also audited the internal controls over financial reporting and have opined that the same are adequate and are operating effectively.

The Company ensures that well-structured and effective controls remain in place that are commensurate with the size of its operations.

H. Human Resources

HR Digitization initiatives: The Contract Labor Management System introduced phase-wise at all locations, continues to provide better productivity and efficiency as well as control and compliance in Labor management and wage payments. “Workday”, the new digital platform was launched as part of the group digitization and standardization initiative. This will be the single source for all employee data with many analytical tools available for more efficient and cost- effective working.

Senior Management and Middle Management Succession Planning: With Cement sector opening, FY23 witnessed many changes such as the employee turnover and scaling of hiring. The momentum of succession planning begun in the previous year has started fructifying. Many positions were filled up internally, including some of the key ones, while we revisited our inventory of talent availability in the Organization at top, senior and middle management levels.

Learning and Development: A total of 128 internal trainings were conducted covering 2050 participants approximately, including contract labor with some employees attending multiple trainings. 26 external trainings were conducted, covering 890 employees approx. Over 65% of the employees received development focus with 115 internal and external training programs conducted during the year. Focus on workmen development continued with organization of four training initiatives, including Behavior based safety, first aid and shop floor productivity through external faculty. Compliance trainings were attended by nearly 100% of the eligible employees on e-learning platform.

Talent Acquisition and Development: Nurturing internal talent is a value the Organization espouses with great zeal. Approx. 60 vacancies were filled up through internal hiring process which makes up almost 25% of the total hiring, this being the all time high no. since inception. The Organization also sustained its drive for young talent acquisition, visiting reputed Institutes for engineering and management graduates.

Over 160 new recruits joined the Organization during the year giving impetus to renewal of resources, energizing the talent pool.

Employee Reward and Recognition: A total of 120 employees were recognized through the “Employee of the month” and “Team of the month” initiative of the Company. Sales incentive program also saw a few employees receiving due recognition during the year.

Employee engagements and Employee relations: The Company had 1002 employees on its rolls as on 31 March 2023. Many employee engagement programs were conducted during the year, including celebrations, sports activities and cultural festivities. The employee relations remained cordial across all locations throughout the year.

Cautionary Statement

Statements in the Management Discussion and Analysis Report, which describe the Companys objectives, projections, estimates, expectations or predictions, may be considered to be “forward-looking statements” within the meaning of applicable Securities Laws and Regulations. These statements are based on certain assumptions and expectations of future events. Actual results could however materially differ from those expressed or implied. Important factors that could make a difference to the Companys operations include global and Indian political, economic, and demand-supply conditions, finished goods prices, raw materials cost and availability, cyclical demand and pricing in the Companys principal markets, changes in Government regulations, Policies, tax regimes, economic developments within India besides other factors such as litigation and industrial relations as well as the ability to implement strategies. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, on the basis of any subsequent development, information or events or otherwise.