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Gearing up for the challenge ahead
Industry structure & Development
While the world economy is slowly ebbing out of one of the worst financial crisis ofthis age, the Indian economy sustained the growth momentum during 2010 despite the highinflationary pressure for most part of the year. The index of industrial productionwitnessed a marginal increase on a cumulative basis although the manufacturing sectorcould not deliver a consistent performance. However, the farm sector development has beengood with adequate rainfall across the country and is all set to give a boost to theeconomy.
The performance of capital goods industry as such was encouraging despite theslackening pace of implementation of new projects. At the same time announcement of newprojects continues unabated.
From the Companys point of view, the business climate continued to be testingduring 2010 and the Company could not sustain its performance both on the order intake andsales revenue fronts. However, the continuous technological advances of the CompanysPrincipals as a part of its efforts to offer products more suited to the needs of thecustomer and its own innovations to offer customized process solutions, served as a solidplatform for enabling the Company to spread its reach for a deeper market penetration.
Equipment Division, responsible for the sale of high speed separators, heat exchangers,self cleaning filters and floWequipment caters to the requirements of highly diversifiedindustries in the domestic market. The Division also accounts for the export of the aboveproducts to the Principals.
The year 2010 developed positively for the products coming out of the stable of theEquipment Division for the domestic market. With the need for boosting capacities to caterto the growing requirements of the markets served by the Company, 2011 is expected to begood while the recovery process setting in after the recession, is expected to raise thevolume of export of separators, decanters and floWequipment to the Principals.
Process Technology Division
The Process Technology Division of the Company leverages the three core technologies ofseparation, heat exchange and fluid handling with the Company specific Drying andEvaporation technology, aseptic solutions, local fabrication expertise and projectengineering skills to offer products and engineered solutions to varied industries.
The order inflow for the year 2010 belied expectations mainly due to the slackeningpace of implementation of new projects as indicated above. However, as is alwaysassociated with the Project business, the decisions on projects could take its own coursebut with the unabated announcement of new projects, the current year should spring in somegood business for this segment.
Parts and Service
With the continuing growth in the installed base and with a tool in place to track thesame, Parts and Service business catering to both the above segments, is now more focusedon service. The Company has a well established sales and service network providing closestproximity to the customers thereby improving the response time both directly andindirectly. The focus on service business should also enable the Company to persuade itscustomers for upgradation/replacement for optimum performance of their processes therebypaving the way for the installation of the latest and cost efficient models of products.The Company is also constantly enhancing the technical competence of its service force torender prompt and quality service.
With the Indian economy chugging along, the industry responded by pushing ahead theirinvestment plans gradually. The order intake of the Equipment Division in the domesticmarket moved along well thereby pushing along the sales revenues for the year 2010. In thewake of a slow recovery in Euro zone and with orders not really flowing to overreachcapacities therein, the flow of orders from the Principals was lower than that of theprevious year. The slackness in demand for the spare parts in some of the relevant marketsimpacted the order intake of Parts & Service business and consequently the salesrevenues. The aggregate order book of the Division at the end of the year was reasonablygood. On an overall basis, the Equipment Division marginally bettered its performance overthe previous year.
Total revenue of the Equipment Division for the year ended 31st December, 2010 was Rs.3,997.94. M representing about 48% of the total revenues. This segment earned a profitbefore unallocated expenses and tax of Rs. 638.35 M. The capital employed for this segmentwas Rs. 1,819.85 M.
Process Technology Division
The Process Technology Division took off a little slowly considering that decisions onmoving ahead with mid size and large projects followed a cautious trend. With a few largevalue orders eluding the Companys grasp and with a few other major orders notgetting concluded in all respects, the order intake for the year under review was lower ascompared to the previous year. The sales revenues of the Division also slipped mainly dueto the spill over of the deliveries quarter on quarter leading to a higher order backlogat the end of the year. The tracking of the large installed base aided the Parts andService business which showed good growth in both the order intake and sales revenues overthe previous year.
Total revenue of the Process Technology Division for the year ended 31st December, 2010was Rs. 4,362.40 M representing about 52% of the total revenues. This segment earned aprofit before unallocated expenses and tax of Rs. 1,017.63 M. The capital employed forthis segment was Rs. 749.33 M.
In general, the outlook for the business of the Company is promising with the Industryquite keen on moving ahead with its investment decisions. The Company is gearing up tolaunch some new products during the current year adding to its wide range while theresearch and development activities of the Principals would supplement the introduction ofnewer models of products from time to time which should aid in market penetration in thiscompetitive environment.
Notwithstanding the economic recovery, the current year, like the year under review,would continue to be a challenge for achieving the targeted order intake while the higherorder backlog should help in shoring up the sales revenues.
Risk and Concern
The Companys business mix is more oriented towards the Projects business thoughover a period of time, the component business has come a long way to be almost in the sameproportion. However, the stakes in the Projects business continue to be high consideringthe long gestation period which brings along the inherent risks like variations in inputprices, adverse development at customers end leading to project delays, prolongedproject management, performance issues, impact on profitability etc. Though every care istaken to mitigate the impact of any adverse element, the inherent nature of projectsbusiness cannot be devoid of such elements.
Business from certain sectors feature prominently in the Companys business planand any reversal of business cycle in such sectors could cause an imbalance in theCompanys business volumes.
Though the Companys products and process solutions are technically well provenand the Company is a leading player in most of the business segments, the competition isquite handful not only from the local companies forging tie-ups with the technologyproviders from abroad but also from the international companies through the import routeand through their own manufacturing facilities. The increasing options for the customersare leading to a cut-throat competition where the pricing still assumes a lot ofsignificance and wins over technology and in such circumstances retaining market sharewill be a big challenge for the Company.
The Companys exports, major portion of which accounts for supplies to thePrincipals, now constitute a relevant portion of the total sales turnover. In thisscenario, the developments in global economy are always the driving force behind theexport performance of the Company. The currency risk is an inherent part of doing exportsbusiness and with the usual volatility attached to the exchange rates in line with globaldevelopments, the Company is exposed to exchange rate fluctuations despite theCompanys well defined and conservative forex management policy.
A small part of the risk emanates from those persons who indulge in sellingnon-original spare parts which at times spreads to the components business also. Thoughthis aspect is continuously monitored and encountered at the right stage, the proceduresto minimize the effect of such unfair competition take an unduly long time during whichthe Company stands to be deprived of some business opportunities.
With the signs of industrial recovery, job opportunities have opened up. Consideringthe Companys business plan, it becomes imperative to retain the Companysskilled and trained manpower. Though the Company takes several initiatives to attract,retain and develop the talent, the risk of talent migration will persist considering thedemand potential for trained personnel from reputed companies.
Financial performance vis-a-vis operational performance
I. Financial performance:
Total income for the year under review was Rs. 8,592.32 M. The profit before interest,depreciation and tax was Rs. 1,790.49 M. After providing Rs. 5.30 M for interest, Rs.127.10 M for depreciation and Rs. 576.88 M for taxation, the net profit for the year wasRs. 1,081.21 M. While the book value of the Companys shares stood increased to Rs.232.50, the earning per share reduced to Rs. 59.54 on the back of fall in profitability.The return on shareholders funds and the return on total capital employed were 25%and 39% respectively.
II. Operational performance
The order inflow for the year under review was lower as compared to the previous yearwhich included two large value orders. Despite a healthy order backlog at the beginning ofthe year, invoicing, mainly due to the abovesaid spill over of deliveries quarter onquarter dropped by about 6% to Rs. 8,360.34 M as compared to Rs. 8,875.73 M in theprevious year. The Companys export business from the Principals continued to fill inthe capacities though not with the same pace experienced in the past given thedevelopments in the global economy especially the Euro zone. The Parts and Servicebusiness riding on the back of the large installed base, registered a good growth on boththe fronts. The drag on invoicing impacted the operating profit marginally.
While a new assembly unit established at Sarole during the previous year went on streamfurther with complete manufacturing facility, a new manufacturing facility at Dapodi, Puneis expected to be operational during this year. A sizeable capital expenditure is proposedfor the current year mainly for the new facility at Pune and for sprucing up the facilityat its other manufacturing sites besides development of infrastructure to achieve optimumproductivity.
The project for improvement of systems and processes has completed its journey and theCompany should start reaping the rewards of an improved and seamless working environmentand enhancement of efficiency of the processes given the ever expanding requirements. Itshould also help in the implementation of other global tools in the Companys systemand help to serve the Companys customers in a more efficient manner.
With a view to give more thrust to the various market segments and enhance thecompetence image in the eyes of the customer, the sales force was realigned to representthe market segments directly in the field for bestowing specialized attention to thecustomers requirements. Accordingly, the Company continued its efforts to strengthenthe organization on the technical and field sales fronts in line with its above strategytowards the aim of achieving the challenge ahead.
Internal control system & their adequacy
The Company has established an adequate system of internal controls commensurate to thesize and nature of the Companys business. The internal control system, whileensuring protection of Companys assets and adherence to the policies, rules andguidelines, is focussed on processes to ensure integrity of the Companys financial,accounting and reporting processes and compliance with the Companys legalobligations besides providing for automatic checks and balances. The ERP system has beenfinetuned for achieving the desired objective.
The Company has a well defined risk management programme for identifying and mitigatingrisks across all the functions which is reviewed by the Board of Directors of the Companyperiodically.
The Company engages independent internal Auditors who conduct periodical audits toensure adequacy of internal control systems, adherence to management policies andcompliance with the laws and regulations of the country. The reports of such audits aresent to the Management which studies and takes corrective actions where appropriate, andare further placed before the Audit Committee for their review. From time to time, theCompany arranges for audit of some of the key business processes and the recommendationscoming out of this process are taken for implementation in right earnest. The Company alsointends to strengthen the internal audit system to cover not only the transactions butalso the key processes.
The Audit Committee, chaired by an independent Director conducts periodical meetingswith the Management, internal auditors and representatives of the Companys statutoryauditors to review the internal audit programme, recommendations of the Statutory Auditorsand the Managements responses thereto besides reviewing the financial informationand other issues related to the Companys operations.
Material development in HR front
During the year under review 146 neWemployees including 55 Graduate Trainee engineersjoined the Company. The Companys overall headcount as at 31st December 2010 was 1203after taking into account the resignations and retirement.
Several initiatives were undertaken by the Company to enhance the skills and competenceof the employees and to retain and nurture the talent available in the organization. Whilesome of the initiatives were function related, some others encompassed majority of theemployees across the Company. The performance development tool for all managerial cadreemployees to identify the career development and training needs for the employees acrossall functions were updated and addressed through specific training programmes and functionrelated workshops for developing the competence further.
The industrial relations remained cordial at all locations of the company. During theyear under review, wage agreements with the workmen unions at Sarole and Satara weresigned. The various Unions continue to interact with the Management to nurture conducivework environment.
This report contains some forward looking statements based on the data available withthe Company and on certain assumptions having regard to the economic conditions,government policies, political developments within and outside the country, factorsgoverning the selling and marketing of its equipment. The Company does not guarantee theaccuracy of the assumptions and the projected performance of the Company in future. Actualresults may differ from those expressed or implied herein.