MANAGEMENT DISCUSSION AND ANALYSIS REPORTANNEXURE III - TO THE DIRECTORS’ REPORT
A. BUSINESS SCENARIO AND PERFORMANCE SNAP
SHOT
In the financial year 2010-11, the Indian economy grew at about 9%, powered by consumerspending and growth in infrastructure related industries and project. Majority of theWelding growth was driven by power, oil & gas, steel construction and railways. Theyear was also marked by high inflation and postponement of the much expected CAPEX plansof the industry. In the second half of the last financial year, raw material prices wentup substantially putting severe pressure on the margins. Our Company could not pass on theincrease in the raw material price due to severe competition from the global as well asdomestic competitors. The pressure on the margins was particularly high in general purposewelding electrodes and the solid wire business. In such scenario, the real challenge wasmanaging of product mix and the operating costs, the success in which has enabled us tomitigate the negative impact on margins, to some extent. Business of Consumables grew by14% over the last year and Equipment registered a growth of 11%. The profit on Consumablesdropped by 2% and on Equipment by 1%.
Overall Export business grew to Rs.28 Crore from Rs.25 Crore. This growth in Exportscame particularly from Project business, whereas the Welding business in Overseas Marketsactually dropped to Rs.19 Crore from Rs.21 Crore. However, with the oil prices hardening,HY2 business in export markets was higher than business in HY1. We are expecting that thegrowth trend will continue in the next year.
Company’s expansion of capacity of Solid Wires was completed during the year atRaipur Plant. The volume of business in this segment has shown significant growth andwould continue to grow in the near future. We expect to capture substantial market sharein this segment.
The Company continues to maintain its’ unique position as a leader in Quality inthe Industry. This is evidenced by the acceptance of our special products, with special /customized attributes for critical applications, by special fabricators in the Oil &Gas Sector, Power sector and Equipment fabrication with special MOC. Our quality labs areregularly upgraded to provide certification of stringent performance qualificationsdemanded for new welding applications in the growing infra sector.
B. INCOME STATEMENT ANALYSIS
The year was marked by high inflation. The total operating revenues for the yearreported a growth of 13%. The total consumable business for the year was Rs.223 croreregistering a growth of about 14% over the previous year. The Equipment business was overRs.71 crore registering a growth of around 11% over the previous year.
The other income was at Rs.304 Lacs (Rs.463 Lacs, last year – out of which Rs.269Lacs was from sale of fixed assets), mainly accruing from prudent Management ofInvestments and exchange rate difference. The material costs as a percentage to sales at60% (last year 57%) were higher on account of the hardening of raw material prices duringthe second half of the year and which could not be fully passed on to customers. Also, thesales product mix grew more in favour of solid wires, which conventionally have lowermargins. We are continuously working at strategic sourcing of raw materials and improvingthe sales product mix of wires, especially for the high value business in oil & gas,power, etc.
Budgetary control of other operating expenses resulted in a slightly improved ratio tosales over last year. While the controls on spares & consumable stores resulted inreduced costs, the increase in energy costs due to tariff hikes and power supply outagesadded to the manufacturing costs. Transportation costs were up by Rs.47 Lacs, essentiallydue to growth in sales. As a ratio to sales, this was maintained at 1% through tightManagement of transport contracts.
The effective tax rate for the year has declined from 29% to 28%, due to increase inprofits from Silvassa Unit, tax free income from Mutual Funds and reduction in surcharge.The PBT was at Rs.35.77 Crore for financial year 2010-11 compared to Rs.36.90 Crore(Rs.34.20 Crore, excluding extra ordinary income) for financial year 2009-10. The ratio ofPBT to sales is 12.15% for financial year 2010-11 compared to 14.15% for financial year2009-10.
The drop in PBT commensurate with increase in sales is due to increase in material costto sales. As explained, this is because the increase in Raw Material costs could not befully passed on to customers and the increase in sales mostly came from Wire products,where the margins are conventionally lower.
C. BALANCE SHEET ANALYSIS
The Company funded all its operating expenses and capital investments from internalaccruals and continues to be DEBT FREE Company as on 31st March, 2011.
The Capital expenditure of Rs.10.14 Crore was invested primarily on additional capacityfor wire products. This has since been commissioned and expected to add over 30% toprevious capacity. Some investments were made to upgrade the production lines for processquality and production efficiency improvements. The R&D infrastructure for equipmentwas augmented for new technology absorption.
The working capital investment (net current assets including current investment)increased by Rs.18.65 Crore, an increase of about 6%. Investments increased by Rs.14.61Crore as a result of deployment of surplus cash in debt and liquid schemes of MutualFunds. The growth in value of debt funds, as on 31st March, 2011 is around Rs.47 Lacs.
The inventory holding period is 61 days in the current year as against 53 days in theprevious year. It was a strategic decision to hold inventory of critical raw material inanticipation of likely raw material price increase from April 2011. The debtors are 39days as at 31st March, 2011 as against 29 days due to an increase in sales todirect customers on credit. This includes an amount of Rs.127 Lacs over a period of 01year due from the project business, the delay for which is due to commissioning delays atcustomer behest; however, these dues for payment are confirmed by the customers.
Current liabilities are up by 29% due to sales growth and payables at the end of theyear.
D. OUTLOOK, CONCERNS AND RISKS
Outlook for financial year 2011-12 looks generally encouraging with the provision of ahigher Central Government budgetary allocation to the infra sector and the promised focusto raise Manufacturing GDP from 15% to 25% over the next 10 years. Expansion plan ofrailways for manufacturing of additional 18,000 wagons also provides another growthopportunity. However, rising inflation, increase in the major raw material prices andhardening interest rates are major concerns. New competition from global players settingup manufacturing activities locally would increase pressure on the margins. We plan toimplement strategic initiatives related to strengthening the customer relationships, newbusiness development and new product launches in our marketing plan & cost control,productivity improvements in our manufacturing. These initiatives would enable increasethe market share at reasonable margins.
E. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company believes that internal control is inherent to the principle of governanceand freedom of Management should be exercised within the framework of appropriate checks& restraints.
The Company has a reasonable system of internal control comprising of authority level& power, supervision, checks & balances, planning & procedures. The system isreviewed and updated on an on going basis.
These systems cover the following aspects of business process and reporting:
• Financial propriety of business transactions.
• Accurate reporting of the financial transactions as per the applicableAccounting Standards.
• Efficient use and protection of resources of the Company.
• Compliance with the established Company policies, guidelines and statutes.
The Company has in place a well defined Internal Audit System. The scope of the auditis approved by the Audit Committee. The audit plan is focused on the following objectives:
• All operational and related activities are performed efficiently &effectively.
• Review all Management Risks.
• Significant legislative and regulatory provisions impacting the organization arerecognized and addressed appropriately ensuring that all the relevant statutorycompliances are complied with.
• Opportunities identified during audit for improving management control, processefficiency are communicated and acted upon.
The Audit Committee consisting of Independent Directors, reviews the Internal AuditReports and offers necessary guidance with respect to the adequacy & scope.
The Company has a sound ERP system. It is our resolve to use the ERP system tosubstantially improve the SCM function in our manufacturing operations with the objectiveto improve the effectiveness of our Cost Reduction mission and the efficiency &integrity of financial reporting, for improved decision making.
The strengthening of our ERP systems made our Financial and Accounting ManagementSystems more robust.
The Company has a very good compliance track record with all Legal and Statutoryentities in the Country, and there is a regular audit mechanism to ensure that the Companydoes not violate any of the Legal or Statutory provisions applicable to the Company orIndustry.
F. MATERIAL DEVELOPMENT IN HUMAN RESOURCES
At the end of March 2011 the Company had 764 employees. Availability of skilled andcompetent manpower remains a concern. HRD is taking all necessary steps to recruitcompetent personnel at the requisite level. The Company has also decided to recruitGraduate Engineer Trainees (GETs) who would develop into mature manpower assets. Thrust ison more learning, skill up-gradation, motivation to stimulate the performance which isbest in class. Company believes in providing conducive environment for nurturingpotential, encouraging performance and retention of talent at all levels. Leadershipdevelopment programmes and creation of critical talent pool are the key HR initiatives tosupport our growth.
Disclaimer:
The information and opinion expressed in this section of the Annual Report may containcertain forward looking statements, which the Management believes are true to the best ofits knowledge at the time of its preparation. The Company and the Management shall not beheld liable for any loss, which may arise as a result of any action taken on the basis ofthe information contained herein.