Management Discussion And Analysis Report
Pursuant to Clause 49 of the Listing Agreement, a Management Discussion & AnalysisReport covering segment-wise performance and outlook is given below:
(A) Industry structure and developments-2013
Your Company operates across all three major market sectors of the lubricantindustry-Automotive, Industrial and Marine & Energy.
The overall industry is led by your Company and Indian national oil companies, whocontribute to approximately 55% of the market in terms of volumes. Another 20% of themarket, by volume, is accounted for by private multinationals that are mostly integratedoil companies and the rest of the market is constituted by numerous smaller players,largely local in nature. There are over 30 established players in the Indian lubricantindustry, making it very competitive. The market for automotive applications, where yourCompany has earned a well-entrenched position over the years, is the predominant oneamongst the three sectors within the lubricant industry.
Demand drivers: India is an important market for the lubricant industry worldwide,contributing to over 5.5% of global automotive lubricant demand and over 4% of industriallubricant demand.
Demand for automotive lubricants is driven by the dual forces of growth in vehiclepopulation and the extent of use of these vehicles.
The demand for lubricants in the Industrial sector is primarily driven by industrialproduction. The Index of Industrial Production (IIP) has been observed to have a strongcorrelation to consumption demand for industrial lubricants in India.
In case of Marine applications, global and local ship movements are the drivers ofdemand. Large-scale global movement of goods happens predominantly by sea. This demand forshipping services drives fleet utilization and freight rates for shipping companies, inturn driving consumption of marine lubricants. With Energy lubricants, the installed baseof off-shore rigs along the coast-line of India and their up-time, drive demand for suchproducts.
Supply drivers: Lubricants are manufactured by blending base oils and additives, withbase oil being the main component. India is a net base oil deficit market and manyadditives used in lubricants are sourced from outside India. This necessitates large-scaleimport of raw materials and thus also exposes lubricant businesses to fluctuations inforeign exchange rates.
Major industry developments
The year 2013 was a challenging business environment due to the twin effects of aslower GDP growth rate of around 4.7% and relatively high inflation rates prevailingthrough the year. In addition, the lubricant industry faced many other strong headwindsfrom demand and supply drivers alike during the year.
Vehicle sales in India grew by 1.7% in the year 2013 compared to the previous year.With respect to sales in the previous year, commercial vehicle sales declined by 15%,passenger car and utility vehicle sales declined by 8%, while two-wheeler sales grew by4%. In addition, the slowing down of the economic growth translated into weakening ofgoods movement across the country and also a slowing down of infrastructure projects. Thishas had a direct impact on lubricant consumption in the commercial vehicle sector andother business-to-business segments.
The choice of lubricant and its specification plays a key role in enabling OriginalEquipment Manufacturers (OEMs) to comply with tightening regulations on tail-pipeemissions and to meet demands for lower cost of operations. This places onus on thelubricant industry to respond with products that are able to cope with the increasingsophistication of these modern vehicles. These improved products, typicallysynthetic lubricants, are also able to maintain their physico-chemical andperformance properties for a longer period of usage than earlier generation lubricants,thus lengthening oil drain intervals.
This has had an impact on structural demand in the industry. Lubricant volumeconsumption for the same rate of use decreases while per unit cost and price realizationincreases. Therefore, other drivers remaining unchanged, the growth in demand forlubricants is expected to lag vehicle population growth rate in the foreseeable future.
Two-wheelers: In the two-wheeler industry, gearless scooters seem to be finding favourwith the consumers over the past few years. Scooter sales have grown by 14% in 2013,helping the industry overcome the sluggish growth rate in motorcycles sales. This hastranslated into an increase of 7% growth in two-wheeler population in the country and asimilar growth in demand for two-wheeler oils.
With an increasing number of two-wheelers being sold into the smaller towns andvillages over the past decade, an estimated 50% of the two-wheeler population resides inrural India today.
Passenger cars: Passenger car sale continued its declining trend in the year 2013vis--vis the previous year. Utility Vehicles, which witnessed a growth in saleslast year, also experienced a decline in 2013, impacted by weakening consumer sentimentand hike in duties, lending rates and diesel prices. The year witnessed an addition ofcirca 10% to the car population which is estimated to have increased the demand forpassenger car oils. This was partly offset by the shift to higher quality, syntheticlubricants that provide longer oil drain intervals, resulting in a net increase of 5% indemand for passenger car oils during the year.
Trucks: The medium and heavy commercial vehicle (M&HCV) population in India grew bycirca 2%, while the micro-light commercial vehicles grew by 22% during 2013. Continuingweak transporter sentiment due to higher interest rates, vehicle & fuel prices andweaker freight rates, continued to adversely impact M&HCV usage in 2013. Your Companyestimates that this has resulted in a circa 5% decline in consumption of truck engineoils.
Tractors: Tractor sales have experienced 15% growth in 2013 over previous year, on theback of a good monsoon and better price realization for the Rabi crop in largeagriculture-driven states. As a result, tractor population in India is estimated to haveincreased by 6% during the year.
Off-road vehicles: Off-road vehicle sales and utilization were also negatively impactedby the slowing down of many material infrastructure-related projects and due to thebottle-necks in the mining sector.
Non-automotive sectors Industrial lubricants
The year 2013 was one of unprecedented challenges for some of the key industrialsectors and for the Indian economy alike. Industrial activity remained subdued for most ofthe year, reflecting a flat growth in aggregate output. Industrial output measured by theIndex of Industrial Production (IIP), has grown by circa 0.6% in 2013. This was the lowestgrowth recorded for the index in more than a decade. This is believed to have beentriggered by sustained inflation, higher raw material prices and lower demand for consumerdurables and capital goods. All of the above has had a knock-on effect on sectors such asautomobile manufacturing, machinery manufacturing and fabricated metal goods (FMG)industries, causing a decline in their respective outputs.
This has impacted the overall demand for Industrial lubricants which remained flatduring the year.
Marine and Energy lubricants
Global shipping industry is still passing through one of its worst phases in severaldecades. The Indian shipping industry has followed the global pattern to a large extent,where global trade had grown 12.6% in 2010, before slowing down to 3.2% in 2012.
The ban on iron ore export from India, changes in tax structure of coal exportingcountries and high cost of funding have exacerbated the problems of the Indian shippingbusiness.
During 2013, many Indian shipping and ship management companies increased scrapping orsale of vessels, with several companies turning delinquent.
Impact of foreign exchange, crude oil and raw material prices
From a supply perspective, 2013 was challenging due to multiple unfavourable dynamicssuch as the global economic slowdown, high crude oil prices and significant rupeedevaluation. Crude oil stayed at an average of $108/bbl, causing continued pressure oninput raw materials throughout the year.
The Indian rupee witnessed its highest ever rate of devaluation in 2013, devaluing by13% between January and December 2013.
Higher crude prices coupled with the huge devaluation of currency had cascading effecton prices of base oil, downstream performance additives and chemicals during the year.This resulted in higher input cost across all commodity segments for the industry and yourCompany.
The overall economic slowdown across the globe since 2012 has impacted base oilconsumption and markets were oversupplied. Despite the subdued base oil market, priceswere soft to stable in first few months of the year before taking an upward trend due tothe twin effects of seasonal demand change from the April-June quarter and currencydevaluation. The following graph indicates the trend of crude prices and Rupee/USD for theyear 2013.
Prices of polymers continued to show an upward trend across the year, with an averageincrease of 14% over exit 2012. Since polymers form majority of packaging material used bythe industry, this contributed to an increase in cost of goods sold.
However, in a very challenging and unpredictable business environment, your Companycontinued generating value for its investors through strategic sourcing, value improvementinitiatives, extensive focus on service and continuous monitoring of costs.
Your Company worked determinedly on a cost effective purchase model and value-basedinventory management, keeping a close watch on cash costs and working capital, withtremendous improvement in service levels.
Market behaviour and outlook
GDP growth rate is expected to have bottomed out in 2013 and to average slightly higherin 2014 than it was for 2013. The Wholesale Price Index for inflation is expected toincrease marginally from the average of 5.5% in 2013 to about 6.3%. Consumer sentiment isexpected to be muted, especially in the first half of 2014.
The outlook for the automotive sector has been examined closely by your Company throughthe three broad dimensions of demand drivers, distribution channels and competitiveactivity.
The outlook for each segment where your Company operates are explained below:
Two-wheelers: Fuelled by the growth in demand in rural markets, the two-wheelerpopulation is expected to grow by 7% on its high base in 2014 and to drive the demand fortwo-wheeler lubricants. Also, the surge in demand for gearless scooters is expected todrive the growth of a separate sub-category of scooter oils in the year 2014.
Passenger cars: Passenger car population is expected to grow by 8% in 2014 over theprevious year, while car sales are expected to remain sluggish. The strongtrend of increasing oil drain intervals and use of higher quality lubricants isexpected to mute growth in demand for passenger car oils to about 4% over 2013.
Trucks: The demand for lubricants in old generation commercial vehicles is expected todecline more sharply than in 2013 due to continued low freight rates keeping fleetutilization levels unchanged from the previous year. At the same time, demand forlubricants in micro-light commercial vehicles (MLCVs) is expected to continue the increasein demand seen in the year 2013, on the back of a projected 20% increase in MLCVpopulation. Overall, commercial vehicle population is expected to grow by 2% in 2014.However, lubricants demand is expected to decline in 2014 compared to 2013 due to lowerutilization rates of vehicles and the longer oil drain intervals being driven by truckmanufacturers.
Tractors: Due to an estimated 7% increase in tractor population, increased area undersowing for the Kharif crop and improved price realization, helping the agriculture economyin 2014, the demand for tractor oils is expected to grow at a similar rate.
Off-road vehicles: The slowdown observed in the infrastructure sector is expected tocontinue and key projects being delayed during the year will keep equipment utilizationlevels low.
2. Channels of distribution
Customers in urban India continue to move towards premium synthetic lubricants drivenmostly by manufacturer specifications. Rural customers have also begun to make theirpresence felt with unprecedented levels of consumption demand for the category.
The composition of dealer types within the retail channel continues to evolve.Government investment in the rural economy has seen a rapid rise in the disposable incomesof rural households, leading to increasing economic activity for small towns and villages.
Your Company has, yet again, pioneered the development of effective and efficientdistribution networks to harness this opportunity. Over the last two years, innovations inthe route-to-market have led to exponential growth in business from small towns and ruralIndia, which today looks slated to reach one-eighth of all retail sales. In urban markets,your Companys focus has been on improving customer service by providing increasinglevels of reliable service and more relevant customer oriented loyalty programmes.Your Company has, as in the past, stayed at the cutting edge of technology to servicecustomers better-like the usage of Personal Digital Assistants (PDAs) which enableour sales people to customize offers to dealers.
3. Competitive activity
The competitive situation remains largely unchanged with all major internationallubricant players having been present in the market for several years now. Televisionremains the most popular medium for reaching out to consumers with brand messages acrossthe automotive sectors. Your Company continues to be one of the leading brands in theretail automotive sector, followed by the public sector brands. However, the smallerplayers have been competing aggressively, with lower prices and higher sales promotion togain market share. In the urban retail automotive segment, against a backdrop of strongcompetitive action, your Company has held share overall compared to 2012, with significantgains in the motorcycle oils category.
The manufacturing activity is expected to gather momentum during 2014, owing to apick-up in the domestic demand and likely growth in exports. Improved rural income due togood agricultural output and an improvement in consumer sentiment in the urban areas areexpected to generate higher demand. Besides, the investment demand is also expected toshow a gradual improvement. Some of the key Industrial sectors like automobiles, metals,machinery manufacturing and cement are expected to capitalize on the higher demand andrecord better growth during 2014.
Marine and Energy lubricants
Decisions on policy changes are under discussion within the Oil & Gas Ministry andwith other key stakeholders. Policy decisions and investments in this sector would be asignificant stimulus to the Energy lubricants sub-sector.
(B) Opportunities and threats Automotive sector
a. First time users (FTUs) of personal mobility: With higher disposable incomes,personal mobility through two-wheelers or four-wheelers is a phenomenon that has gained alot of momentum in the past decade. These first time users of personal mobility needreliable solutions to ensure the upkeep of their prized investment. Since the needs,socio-economic backgrounds and media consumption patterns of these new entrants into thecategory differ from the more mature consumers, they need specially tailored products andmarketing communication to enable your Company to tap into this new consumer segment.
Two-way engagement through media, prominently digital and social media, is emerging asa strong alternative to communicate with these first time users.
b. Two-wheelers in small towns and emergence of gearless scooters: More than 50% oftwo-wheelers sold in the last decade have been in the small towns and villages. Withlagging public transport infrastructure, these two-wheelers are the only reliable mode oftransport for many. Providing reliable supply of vehicle fluids to ensure the upkeep ofthese essential mobility solutions for two-wheeler owners in these markets is a materialopportunity.
The share of gearless scooters in domestic two-wheeler sales has also consistentlyrisen over the last six years. This provides a further opportunity for a new,differentiated product.
c. Partnerships with Original Equipment Manufacturers (OEMs): Partnerships with keyOEMs across vehicle types, especially those that are material or are growing market share,is a significant opportunity for lubricant players. In spite of relatively muted levels ofeconomic growth, there have been signs of activity and increased commitment to operate inIndia by almost all automotive OEMs.
Stronger emission norms and demand for fuel efficiency is driving OEMs to keepdeveloping new engine technologies rapidly. This is expected to translate into demand forlubricants with very specific physico-chemical and performance properties and will implyopportunities to introduce more advanced lubricants to cater to the needs of these newengines in the Indian market.
d. Diesel cars and sports utility vehicles (SUVs):
Population growth of diesel cars continues to outpace that of petrol cars. Since dieselcars are driven more than their petrol-powered variants, their demand for lubricants ishigher.
e. Micro-light commercial vehicles (MLCV): MLCV population is expected to grow at ahealthy pace. The MLCV segment remains least impacted by economic downturn as it is stillunderpenetrated as a customer segment.
(ii) Threats a. Input costs: Volatility in commodity prices is one of themost material risks to business stability. Crude oil prices are expected to remain firm in2014. An adverse foreign exchange situation and high inflation could put increasedpressure on input costs in 2014.
b. Competitive activity: The Indian lubricant market is highly competitive.Most international players have identified India as a focus market and competition acrossall categories and sub-categories, is likely to remain intense in the foreseeable future.The industry has also witnessed a trend of some OEMs introducing lubricants under theirown brand name, further impacting the competitive landscape.
c. Heavy-Duty Segment (transport fleets, building & construction andmining):
This segment is largely dependent on the recovery of the infrastructure sector. Whilethere has been a recent policy push to drive growth, the following factors may impact thissector in the near term:
i. Growth of the construction industry is directly linked to GDP growth. Any slowdownin the economy will have an adverse impact on growth in the construction sector.
ii. Interest cost has drastically increased in the recent past, impacting margins,availability of funds and liquidity of infrastructure companies.
iii. Impediments to mining activity due to policy review or environmental concerns. iv.Administrative hurdles in obtaining statutory clearances leading to implementation delays,cost overruns and profitability of major projects.
Non-automotive sector (i) Opportunities
Manufacturing sector is expected to post a moderate growth especially in some of ourfocus industrial sectors like automobiles, metals, machinery manufacturing and cement. Thegrowth will be driven by rise in both consumption demand and investment demand.
The automobile manufacturing sector is expected to return to growth during 2014 withhigher production of motor vehicles compared to the earlier year. Overall growth in thissector is also expected to generate good demand for automotive components. The pick-up inautomobile production and a gradual improvement in the construction activity in 2014 areexpected to augur well for both the Metal & the Fabricated Metal Goods (FMG) sectors.Higher exports mainly due to improved economic condition in United States will positivelyimpact the growth of machinery manufacturing and textile industries.
On the supply side, improvement in availability of key inputs such as mined productsand agricultural products is expected to help the manufacturing sector grow. Betteravailability of sugarcane is expected to result in healthy double digit growth in sugarproduction in the next crushing season.
Continuous increase in input cost of raw material and fuel prices is impacting theperformance and profitability of industrial companies. This may lead to increase in theselling prices of finished goods resulting in lower consumer demand of products.
Further rupee depreciation could adversely impact the input cost of lubricants. Thismay put pressure on our margins and market share.
Sustained inflation and higher interest costs have resulted in unrelenting increase incost of raising capital for the industries. This may result in delay of expansionplans of some of the industrial customers.
(C) Performance of segments and categories
I. Automotive lubricants Overview
Your Company delivered a strong performance across the personal mobility segments oftwo-wheelers and passenger car oils in the year 2013, driven by performance of its PowerBrands-Castrol Activ, Castrol Power1, Castrol GTX and Castrol Magnatec. The stronghead-winds in the commercial vehicle oils segment, impacted your Companysperformance in this category. This was offset to some extent through new productintroductions and a play in the mid-price segment.
There were also significant challenges that your Company encountered in the Heavy Dutycategory which caters to large fleets, mining, and building and construction equipmentapplications. This is due to the twin effects of lowered economic activity in thiscategory and rising input costs for the industry.
The Castrol brand continued to pioneer and drive the movement towards synthetics inresponse to the demands from vehicle manufacturers (OEMs) for better performing andenvironment-friendly products, while also selectively making a play in the mid-pricesegment in certain categories. Your Company continued its close association with its OEMpartners, especially Maruti Suzuki, Jaguar Land Rover, BMW, Ford and the Volkswagen groupand introduced co-engineered products with Tata Motors during the year under review.
Your Company also further deepened relations with key retail channel partners throughthe highly successful Anmol Ratn programme. The Castrol Engine Experts Club was launchedduring the second half of 2013 to further endear brand Castrol to mechanics, who are keyinfluencers in the choice of oil and who are the primary handlers of lubricants in manycategories.
The following sub-sections of the report detail out the performance of each categorywithin automotive lubricants.
Two-wheeler oils: Two-wheeler oils category consists of oils for four-stroke andtwo-stroke engines that power motorcycles and scooters. Oils for four-stroke motorcycleengines dominate the category currently, while the gearless scooters segment is witnessinga re-emergence. Castrol operates in this space through three principal productbrands-Castrol Activ, Castrol Power1 and Castrol GoI. Castrol Bike Points are exclusivestock-and-sell independent two-wheeler workshops and a key driver of growth for yourCompany in this category.
Two-wheeler oils category delivered strong growth in volumes during the year, poweredby some exciting brand activations for Castrol Activ and Castrol Power1 and bybroad-basing its play through the introduction of Castrol Go! in the mid-price segment.
With a majority of two-wheeler owners, especially first time users, being heavyconsumers of digital media, the two-wheeler oils category witnessed some strong activationcampaigns on this platform, especially on Facebook, Twitter and other popular social mediaplatforms.
Castrol Activ, the largest brand in volume terms for your Company, witnessed a stronggrowth on the back of exciting 360 consumer campaigns. Your Company leveraged itsrelationship with the International Cricket Council (ICC) as its official PerformancePartner at the ICC Champions Trophy in UK. This was dovetailed with an excitingTwitter-enabled digital activation targeted at cricket fans, a large proportion of whoride a motorcycle.
Castrol Power1 continued to build on one of the largest online marketing communitiesfor bikers-Castrol Biking-on Facebook and kept its over one million users engaged throughexciting content and promotions.
Through a mix of new account acquisitions and exciting promotions at Castrol BikePoints, this exclusive Castrol channel has delivered a growth of 14% in 2013.
Passenger car oils in the after-market (PCO Retail):
PCO Retail consists of engine oils for cars & utility vehicles and brake fluids. Itcaters to the market with principally three product brands-Castrol GTX, CastrolMagnatec and Castrol EDGE. Passenger car oils sell through two major channels in theafter-market-retail channel and the stock-and-sell independent workshops.
The year 2013 was a period of strong performance where the PCO Retail business grewsignificantly in volume terms over the previous year. Your Company also achievedsignificant progress on the syntheticisation agenda in the category, with strong growth inboth Castrol Magnatec and Castrol EDGE. In addition, two exciting programmes enabled thesegrowth stories:
a. Winning in big cities: With less than 2% of the Indian population owning cars, thereis a very high concentration of cars in the key metros. Your Company devised and executeda strategy to win in these big cities through a 360 approach, targeting the top metros.The PCO Retail business is now growing at more than twice the rate in these marketscompared to the rest of the country.
b. Winning with mechanics: Your Company launched a training-on-wheels programme in keycities to spread awareness about the special requirements of modern engines and to explainwhy the new generation Castrol Magnatec is the right solution for these sophisticatedmachines. A number of these units that are operational across the key cities were verywell appreciated by the experts community. This unique programme wasrecognized and commended internally within the wider BP group as a best-in-class marketingprogramme.
Passenger car oils in OEM franchised workshops (PCO FWs): Products supplied to PCOfranchised workshops include engine oils and drive-line oils. OEM approvals for productsand strong relations with franchised workshops of the respective OEMs are the businessdrivers of this segment. Since the year 2011, your Company has embarked on a journey tocater to this specialized channel through a dedicated range of products called the CastrolProfessional series. Through a combination of variants of Castrol Magnatec Professional,Castrol GTX Professional and Castrol EDGE Professional, your Company caters to the engineoil requirement of franchised workshops of Maruti Suzuki, Ford, the Volkswagen group,Jaguar-Land Rover, Tata Motors, BMW and other OEMs.
The category delivered a strong performance for your Company in the year 2013 with asignificant growth in volumes. This was possible through new account acquisitions and thelaunch of a new service-advisor advocacy and capability-builder programme.
Commercial vehicle oils (CVOs)
Commercial vehicle oils category consists of lubricant applications for small and largetrucks, farm equipment and specialized products for the Heavy Duty segment. In productterms, it comprises engine oils for new and old generation commercial vehicles, and theSpecialty Products range. Specialty Products is an umbrella term representing essentialvehicle fluids other than engine oils; such as drive-line oils, greases and coolants.
Castrol CRB is the oldest and best known brand in the commercial vehicles segment,participating in the lubricants segment for agri-sector and old-generation MHCVs withCastrol CRB Plus and in the new generation commercial vehicles segment with Castrol CRBTurbo. Castrol RX Super brand leads the play for your Company in the mid-price segment inthe truck applications.
The year 2013 provided a very challenging environment for the category with almost alleconomic indicators showing an unfavourable trend and a resultant decline in lubricantconsumption in this category. While overall performance was impacted by the unfavourableeconomic conditions, mentioned below are some of the highlights of the business during theperiod under review:
a. Your Company broad-based its participation in the mid-tier price segments in truckswith the Castrol RX Super brand.
b. Fuel-saving engine oil co-engineered with Tata Motors-Castrol RX Super Max FuelSaver, launched in the second half of the year, was a first in the history of the segment.c. Tapping of the burgeoning micro light commercial vehicle segments in the urban andsemi-urban markets, through appropriately developed products packed in appropriatepack-sizes, was another driver of growth.
d. In the agri-sector, your Company launched two large-scale activations targeted atfarmers and tractor mechanics. In the Heavy Duty segment, in the face of a drasticslowdown in consumption, your Company focused on a mix of activities to maintain profits.Profitability was ensured by upgrading key customers to better performance products inhydraulics, transmission oils and performance lubricants.
II. Non-automotive lubricants Industrial lubricants
The year 2013 was very successful for your Company in this segment despite thechallenging environment. While the overall volume remains flat, your Company was able tosignificantly improve the gross margins due to acceleration in acquisition of Small andMedium Enterprise customers through the industrial distribution network, improved productmix and internal efficiency initiatives that yielded reduction in costs.
Your Company also improved its market share in its chosen segments of automotive andmachinery manufacturing and consolidated its position as the leading supplier ofmetal-working fluids and high performance lubricants-products which are technologicallysuperior and which deliver substantial value to the customers.
Marine and Energy lubricants
Your Company continues to focus on customer intimacy and provides products and servicesthat are best in class in this segment. However, there has been a drop in the volume ofmarine business due to lower utilization rates of fleets, higher lay-ups and the adoptionof slow-steaming.
Your Company has maintained its leadership position in the offshore drilling segmentduring the year under review, by focusing its efforts on value offers despite minimaldrilling activity by a leading player in the segment. We will maintain our focus on valueand specialist offers such as sub-sea solutions, as drilling moves into deeper seas, tofurther consolidate our market share in the off-shore drilling segment.
(D) Risks and concerns
The challenging macro-economic environment in India continues to impact lubricantconsumption and demand. This may impact your Companys ability to grow volumes. Theaggressive pricing strategy by local as well as international competition, in an attemptto gain market share, and commoditization of products in the premium markets, will have animpact on overall industry margin. This can be further impacted by weakening Indian rupeeand its adverse impact on cost of goods.
Employee attrition could result in loss of knowledge and business disruption, which mayimpact your Companys ability to support its growth agenda.
Safety and product integrity continue to be a focus area for your Company. Given theextremely challenging road conditions in India, road safety is an area of particularconcern for your Company as it moves its goods and people across the country.
Your Company has put together a plan to address the impact of the identified risks andput in place the necessary monitoring and mitigation actions.
Your Company continues to derive sustainable benefits from its global TechnologyCentres including the one located in Mumbai. Your Companys product developmentcapability helped the business meet pressing customer needs, partner closely with itscustomers and leverage strengths of its global affiliates to meet the needs of the localmarket.
Developments in two-wheeler oils
During the year under review, your Company continued its investment in a world classtwo-wheeler oil product development team based out of the India Technology Centre tosupport the needs of the domestic market. To enable this team in its work, your Companyalso installed state-of-the-art test rigs specific to two-wheeler engine oil development.This was an imperative as India has emerged as the worlds second largest two-wheelermarket.
Developments in passenger car oils
With Intelligent Molecules that cling and protect, Castrol Magnatec is acar engine oil with a unique proposition. With leaps in diesel engine technology and withcar OEMs introducing diesel variants for all their popular models, there was anopportunity to expand the application of the Castrol Magnatec portfolio beyond itsmain-stay of petrol engines. Along with assistance from BP lubricants globalresearch facility at Pangbourne in UK, the development cycle for a diesel variant forCastrol Magnatec could be shortened and your Company could respond to the market need withspeed.
Developments in commercial vehicle oils
In a scenario where goods movement is impaired, freight rates are soft and dieselprices are rising, a product that reduces cost of operations for commercial vehiclecustomers was the need of the hour. Your Companys OEM Technology and global productdevelopment team had the opportunity to work with the engineers at Tata Motors-one of itsstrategic partners-to co-engineer the first-ever OEM endorsed fuel efficient engineoil-Castrol RX Super Max Fuel Saver. This product has been extensively tested and carriesan OEM endorsement for a 1.5% fuel saving.
Investments in capability building
Building internal capability to sell the technologically superior products developed byyour Company is a critical link to ensure our customers understand the superior value theyare getting when they purchase our products. Towards this end, your Company has investedin a Liquid Engineering Centre, a facility to showcase the product capabilities of yourCompany. During 2013, your Company witnessed significant improvements to the CustomerExperience and Knowledge Transfer capabilities of this centre. The Liquid EngineeringCentre also serves as a great platform to showcase your Companys productcapabilities to its strategic partners and customers. During the year under review, over450 customers visited the centre. Using modern technology and innovative ideas, yourCompany contacted a further 2000 customers (OEM customer employees) through in-fielddemonstrations. Your Company also conducted training for more than 400 employees andpartners.
Focus on quality
The year was also marked by an organization-wide initiative within your Company, titledPICASSO, to further raise the profile of quality within the organization, especially onthe aspect of product development. The initiative involved internal audits conducted bythe BP group on quality processes and assurance programmes and all processes were found tobe satisfactory.
Another major milestone that was achieved during the year was the renewal of the ISO14001 and 9001:2008 certification for the India Technology Centre.
(F) Internal control systems and their adequacy
Your Company maintains an adequate and effective Internal Control system commensuratewith its size and complexity. Your Company believes that these internal control systemsprovide, among other things, a reasonable assurance that transactions are executed withmanagement authorization and that they are recorded in all material respects to permitpreparation of financial statements in conformity with established accounting principlesand that the assets of your Company are adequately safe-guarded against significant misuseor loss. An independent Internal Audit function is an important element of yourCompanys internal control system. The internal control system is supplementedthrough an extensive internal audit programme and periodic review by management and auditcommittee.
(G) Health, safety, security and environment
Your Company remains as committed as ever to maintain the highest standards of health,safety, security and environment (HSSE) and comply with all applicable laws of the land.The HSSE performance has been integral to your Companys business performance and itcontinues its focus on the goal: No Accidents, No Harm to People and No Damage tothe Environment.
All three blending plants of your Company are certified for the Environment Managementsystem (ISO 14001:2004) and Occupational Health & Safety Management System (OHSAS18001: 2007). Your Company also implements ISO 9001:2008 (Quality Management SystemStandard) and ISO/TS 16949:2009 (Automotive Customer Specific Standard) to continuallyimprove its processes. Compliance to these systems has been certified by internationallyrecognized and accredited bodies. Your Company is implementing BPs global OperatingManagement System (OMS) to further enable continuous improvement of its processes andoperations and make them safe, systematic and reliable.
During the year under review, your Companys plant at Patalganga underwent a majorautomation and upgradation exercise. It is a testimony to your Companys commitmentto safety that the entire project was executed without any safety incident or any negativeimpact on the people, plant or processes. In fact, the Patalganga plant has completed 16years without any lost time injury (LTI).
The number of awards and recognitions conferred upon your Companys plants byindustry bodies for their exemplary safety and sustainability track-record, vindicates itsunwavering commitment to safety. In the year 2013, your Company received thefollowing safety awards:
National Energy Conservation Award from Ministry of Power (GOI)-Certificate ofMerit
Gold Award for Safety Management by Greentech
Foundation to Patalganga Plant
Gold Award for Safety Management by Greentech
Foundation to Paharpur Plant
Silver Award for Environment by Greentech
Foundation to Paharpur Plant
Appreciation on Safety Performance by National
Safety Council to Paharpur Plant
Your Company also strives to be a benchmark for road safety practices in India.Multiple new road safety initiatives such as Family Connect, Driver Health Campaigns,SMART (Safe from the Moment you PART) and driver incentive programmes have been started tosustain its track record on road safety.
(H) Developments in human resources management
Values & behaviours and employee value proposition
People are a key resource for your Company. During the year under review, the focuscontinued to be on the development of the various facets of leadership capability andtalent management with a view to ensuring alignment to the overall business strategy.
The key focus areas for 2013 were employee engagement and recognition. These wereactively driven through an inclusive process of dialogue and articulation of the employeevalue proposition.
In the spirit of continuous learning and building capability to support the businessand people strategy, another initiative has been to pilot programmes to help line managersget better at people processes by building their awareness and capability to be betterpeople managers and coaches.
Your Company also launched the Castrol Learning Academy which incorporates internal andexternal best practises and is based on a philosophy that development is a function oflearning, experience and application on the job.
The year also marked the launch of SAP within your Company to support the automation ofHuman Resource (HR) processes and ensure efficient and effective HR process management.
Your Company has continued on its journey to build a diverse and inclusive workforce inthe year 2013. The key initiatives in this area were workshops conducted to empower womento thrive in the workplace. There was also a specific offer for women managers in Salesand Marketing-PRISM (Progress through Sales and Marketing).
There were also workshops for managers to effectively manage the different generationsat the workplace. In addition, there is a constant endeavour to ensure that your Companyis hiring and retaining diverse talent. Flexibility, through a well-defined Agile Workingpolicy, including working from home, flexi-timing, telecommuting, have been the other keyinitiatives launched to enhance your Companys employee value proposition.
Reward and recognition
It is your Companys constant endeavour to review its reward structure, benefitsand employee policies in order to make its total reward offer both contemporary andcompetitive.
Towards that objective, a Group Term Life Insurance for all employees was implemented,with the sum assured to cover for unfortunate event of death due to natural causes. Italso strengthened its Long Service Award policy by introducing new service milestones andenhanced the loan limit for Emergency Loan, which can be availed by the employees forspecific contingencies.
Your Company also launched a recognition programme during the year under review. TitledCastrol STAR Club Awards, it is based on bringing BP values to life and laysemphasis on recognition rather than reward.
Feedback was sought from employees around employee engagement and retention through anexternal agency. One of the outcomes of the project was that internal designations acrossfunctions were reviewed to represent roles better, level progression in sales wasredefined, a development centre was launched for individual contributor roles in sales andthere was a stronger focus built on building line manager capability.
These initiatives are expected to engage and retain your Companys valuableemployees more effectively.
Control and compliance
This year your Company continued its high degree of compliance with employmentlegislations by conducting audits in many of its locations and closing any gaps. It alsoimproved two-tier monitoring system which enabled improving and sustaining the complianceculture in your Company. Also, all new agreements entered into were reviewed in detail toensure a high level of compliance by the contractor.
There was some significant improvements made on payroll processing.
Employee relations at Plants
Your Company has a harmonious employee relations scenario with a participative culture,receptive to technical up-gradation at the plants.
The smooth negotiation of a long-term settlement at Silvassa with no loss ofproductivity was a significant achievement in 2013.
With the emphasis on workmen competency building and training, the plants have beensuccessful in redeployment of manpower. The total number of people employed in yourCompany as on 31 December 2013, including factory workmen, was 838.
(I) Discussion on financial performance with respect to operational performance
The business delivered a strong gross profit growth in 2013, primarily due tounderlying improvement in unit sales realization of 6% due to judicious pricing decisions.This is despite a drop in sales volume of 3% largely driven by weak market conditions inthe building & construction and the industrial segments.
The unit material cost has increased by 2%, mainly due to devaluation of Indian rupeeagainst US Dollar. However, your Company has been able to maintain the Unit Margin througha combination of premium product mix and better sales realization.
Operating & other expenses increased by Rs. 34 crores as compared to 2012 as yourCompany continues to invest in its people, brands, innovation and business growthopportunities. This has resulted in overall increase in Profit after Tax (PAT) by 14% overprevious year, to Rs. 509 crores.
The next few quarters will continue to be challenging owing to the macro-economicweaknesses and upcoming national elections. Moreover, slow automotive and industrialgrowth will continue to dampen the lubricant demand. This may put your Companysmargins under pressure.
The management team is confident that your Company with its strong brands, enduringrelationships with key stakeholders and continued commitment of its staff, has the abilityto deliver a sustainable performance going forward.
|On behalf of the Board of Directors |
|Ravi Kirpalani ||Rashmi Joshi |
|Managing Director ||Director-Finance |
|Place: Mumbai || |
|Dated: 17th February, 2014 || |