MANAGEMENT DISCUSSION AND ANALYSIS
INDUSTRY STRUCTURE AND DEVELOPMENT
The projected growth of Companys products (Plywood, Laminates, Cement and FerroAlloys) is based on the push-and-pull effects of supply and demand determinants like theeconomic trends in India, growth of infrastructure and housing.
Home is an invention on which no one has yet improved. Of all aspirations known tohumankind, owning a home is most basic. It is the basic infrastructure required fordevelopment of a country and its citizens. Housing is a highly sensitive investment areathroughout the world. Investment in this sector is often recognized as a barometer tomeasure the health of an economy at any point of time. The extreme sensitivity of thehousing sector on the overall economic growth is not difficult to explain. The sector, bythe nature, is widely linked with a very large number of manufacturing segments. There areabout 250 industries, large and small, which depend on what happens in the housing andconstruction business. This includes large ones that make cement and steel, medium onesthat make plywood, paint, tiles, electrical and the small ones that make nuts and bolts.These linkage effects not only stimulate production and investments in the linked segmentsof manufacturing, they also push up the aggregate additional income generated in theprocess. In short, growth in housing stimulates production and overall growth in theeconomy.
In developed countries like United States 72.5% of citizens own their homes. While 69%live in their own houses in the UK. If we aspire to become a developed nation by the year2020, we must ensure a decent home for each family of our country. According to the tenthfive year plan, there is a shortage of 22.4 million dwelling units and over the next 10to15 years 80 to 90 million housing dwelling units will have to be constructed. Accordingto Confederation of Real Estate Developers Association of India (CREDAI) Indiastotal housing requirement can be estimated at 200-225 million housing units, out of whichwe have just 170 million. We will have to create additional 30 million to meet gap.Further next 15-20 years will create an additional demand for 70 million houses. So, byyear 2020 we are to gear up to build 100 million additional houses. A daunting target, butachievable. It is achievable because almost all Indians have capacity to buy a reasonablehome. All Indians, not owning their own home are already paying rent on theiraccommodation. Even if they are living in slums, they are paying rent to their slumlords.The EMI of housing loan today is either equal or not substantially more than the rent onehas to pay for rented house. The rent one pays is an expense that once paid is lost,whereas the EMI is payment for creation of an asset, value of which will multiply withpassage of time. Anyone who lives in a rented apartment will be unable to afford rentafter 20 years as the rent will keep on increasing year to year. Anyone who acquire houseon EMI will have a home of his own by parting with almost same money, but with multifoldasset value. Availability of easy home loans at reasonable interest rates has propelledgrowth of housing. Although rising interest rates may adversely affect housing but thatcan be considered temporary. In long run housing sector growth is bound to propel.
Provision of quality and efficient infrastructure is essential to achieve growth andutilize full potential of the emerging Indian economy. Economic and population growthplace additional pressure on existing infrastructure facilities and unless they aredeveloped further to cope growth, they become constraint to development. In the recentfinance budget a sum of Rs. 2,14,000 crores has been provided for infrastructuredevelopment, which account for over 48.5% of total plan allocation. With theGovernments continued focus on infrastructure development, it seems very probablethat the countys economic survival will be driven by infrastructure growth.
OPPORTUNITIES AND THREATS
Plywood and Laminate Segment
In view of potential growth of housing and infrastructure, the overall demand forPlywood and Laminates is expected to remain buoyant The Indian Plywood and panel market isestimated around Rs. 12000 crores, with expected growth of 15% year on year basis. Themarket is highly fragmented, with unorganized sector controlling major market share. Theorganized segment is highly concentrated, with only few players constituting around 30% ofthe market. The unorganized segment has advantages in terms of excise waivers and otherbenefits due to their SSI status. In the year 2007-08 the excise duty on plywood relatedproducts was reduced by half to 8% and is now pegged at 10%. Narrowing excise differencesand the eligibility to claim MODVAT benefits on inputs have put the organized sector notonly at par compared to the unorganized sector, but also in an advantageous position dueto volume, quality and the brand. Now the growth of organized sector is estimated to be20-25% compared to the overall market growth of 15%. Organized sector growth will partlycome from conversion of some of unorganized sector players as organized sector players.
Cheap imported products particularly Chinese products may eat away organized sectormarket and hence slow down companys growth. Emergence of new organized players willincrease competition in organized sector.
The Company is Indias leading plywood manufacturing company with a very strongbrand image. "CENTURY PLY" the brand name under which the Company marketsits products is known for quality. The company manufactures entire range of products,catering to different cost segments. Over the years the company had invested heavily onbrand building and maintained customer faith by providing guarantee on its products. Thecompany could ward off competition from other players and imported products due to thesereasons and expect to sustain its growth levels and continue to command market dominance.The Company, with its 5 units (including one of Subsidiarys) spread over differentgeographical locations of the country is ready to meet present and future demand of theproducts across the country with a huge logistical advantage. The company is prepared tomeet increased demand through organic expansions at its existing units and will also beopen to inorganic growth through mergers and acquisitions. Future expansions will besynchronized with the demand. The two green-field units one at Gujarat and another atAndhra Pradesh are in planning stage.
Laminate is used to provide aesthetic look to plywood. Its market scenario goesalong-with plywood market scenario. Like plywood, company is aspiring to achieve utmostcustomer confidence for its laminates and as such is focusing more on quality thenquantity. The capacity expansion of laminate division is in planning stage.
In view of potential growth of housing and infrastructure, the overall demand for Ferroalloy which is one of the ingredients of steel is expected to remain buoyant. The Indiansteel capacity which at present is 73 million tonnes per annum is expected to grow to 293million tonnes per annum by the year 2020.
Ferro Alloy market is dependent on steel market and witnesses short cycles of boom andbust, which can happen more than once in one financial year. During boom period demand isat peak and industry makes handsome profit. When demand dampens the price of product comesdown and it become unviable to keep production on.
The companys ferro alloy unit is situated in Meghalaya, where there is abundantavailability of raw material and the unit is entitled to various fiscal incentives as pernorth east policy of Central and State Governments. The only problem which can disruptproduction is availability of power, as production process of ferro alloy is highly powerintensive and supply of power in Meghalaya is not comfortable. In order to combat thisproblem, the company has installed a captive power plant to ensure un-interruptedproduction. When the demand of ferro alloy dampens, the company stops ferro alloyproduction and start to sell power generated out of its captive power unit. This helpscompany to recover its overheads and ensure overall yearly performance of the ferro alloydivision.
In view of potential growth of housing and infrastructure, the overall demand forCement, which is basic to any construction project, is expected to remain tilted towardsdemand.
The companys major subsidiary Cement Manufacturing Company Limited (CMCL), alongwith its subsidiaries, has the cement and clinker units situated at Lumshnong inMeghalaya. CMCL sells its cement under the brand name STAR CEMENT. STAR CEMENTis today the leading and the highest selling cement brand in the North Eastern part of thecountry. This unit has the advantage of its own captive lime stone mines and is situatedat a close proximity of large reserves of coal at a distance of only 25 kms. CMCLslime stone mines has reserves of 300 Million Tonnes, enough to meet all its rawmaterial requirements (based on expanded capacity) for the next 70 years. The unit is alsoentitled to various fiscal incentives as per the North East policy of the CentralGovernment and the State Government. The unit uses state of the art dry process rotarykiln technology and manufactures high grade Ordinary Portland Cement (OPC), PozzolandPortland Cement (PPC) and other specialty grades required for infrastructure projects.
Cement is a highly localized/regionalized industry due to its unique characteristic ofbeing a bulky but low value product. Proximity to either source of raw material(limestone) or end market is imperative to keep cost of end product (cement) competitive.Overall cement market of north east is estimated to be a 5 MTPA against which the totalcement production in north east is 3 MTPA, with the deficit being met from outside northeast. This demand supply mismatch and high logistic cost of bringing cement from outsidenorth east has resulted in north east being a high price-end market. Based on thedevelopments envisaged to take place in the North Eastern region the cement demand in theregion is expected to grow at a CAGR of 12-15% per annum. A big spurt in demand is alsoexpected after two years when many of the Hydel Power Plants will be launched in the NorthEast, particularly in Arunachal Pradesh. At present CMCL cement unit is the biggest cementunit of north east and has twin advantage of proximity to raw material and close proximityto the highest price-end market. On comparison of peers it is found that CMCL EBIDTAmargin is the highest in the industry.
The present combined capacity of CMCL and its subsidiaries is now 1.20 MTPA of Cement.CMCL is also adding further 1.75 MTPA Clinker capacity, through its wholly ownedsubsidiary Star Cement Meghalaya Limited. The clinker so produced will be taken toCMCLs proposed two grinding units at Guwahati (Assam) and Kahalgaon (Bihar), where3.20 MTPA OPC and Slag Cement will be produced. After effecting these expansions CMCLcement production capacity will go up from present 1.20 MTPA to 4.40 MTPA. The projectsare under implementation and are expected to commence production by September 2011.Meghalaya Power Limited is setting up a 51 MW Power plant, which will be a captive powerplant to its existing as well as planned clinker unit of SCML. Both grinding units atGuwahati and Kahalgaon will also have captive power plants of adequate capacity.
Cement is considered to be a cyclical industry. Addition of new capacities particularlyin north east may tilt industry more towards supply situation. Cement is highly capitalintensive and fairly long gestation industry. The expansion plans may make the companyvery high leveraged to face any demand set back.
With strong brand image and early mover advantages, the company does not expect to faceany problem in near and fairly distant future.
The ports and international cargo handling facility are important part of physicalinfrastructure of a country. Ports and cargo handling facilities play a crucial role infacilitating Indias international trade. India with a coastline of 7,517 km. isadded with 12 major ports and 60 non-major ports, which handle traffic. Average turnaroundtime of Indian ports is 3.5 days compared to 10 hours in Hong Kong. This high turnaroundtime undermines the competitiveness of Indian Ports. Congestion at ports is primarily dueto the slow evacuation of cargo rather than a lack of handling facility. More than half ofthe worlds traded goods are containerized and this is expected to increase further.In order to decongest ports it is imperative that dwelling time of containers at ports isdecreased by developing Container Freight Stations, where containers can be moved aftermaximum decided dwelling time. In order to decongest congested Kolkata Port the KolkataPort Trust is encouraging development of Container Freight Stations.
The Company ventured into logistic business in the year 2001 when it entered into apartnership with the Ministry of Commerce, Government of India, to turn-around a lossmaking and virtually non operational jetty (minor port) at the Falta Export ProcessingZone near Kolkata. Within one year of this arrangement the jetty was turned fullyoperational and profitable. This jetty now handles both captive requirements of thecompany and also extends its services to others. This jetty can now handle 1.50 lactones of cargo every year.
Based on its experience of successful operation of jetty and encouraged by the KolkataPort Trust (KPT) the company ventured into the Container Freight Stations (CFS) business.Through a competitive bid, it has acquired around 1 lac square meter land near KolkataPort Trust to develop its CFS business. In view of the heavy congestion at theKolkata Port and the emerging opportunity in this sector the company has alreadyestablished a full fledged logistic division to develop this business segment. Thecompanys first private sector state of the art CFS (consisting of approx 100000 sqmeter area) is already operational and can handle 130000 containers (20 feet) annually.
The logistic business of the company is related to infrastructure and service sector.The business may face problem only on slow down of economy and substantial reduction inimport cargo. Entry of new players may expose the company to competition. In view ofprevailing congestion at Kolkata Port Trust and expected increase in traffic withavailability of limited CFS facility the company does not expect to face any problem innear and fairly distant future.
Other segments consist mainly of trading in chemicals and minerals, where business callis taken on the basis of profitability.
Segment-wise or product-wise performance
The turnover of Plywood segment was up from Rs. 592.25 crores in 2009-10 to Rs. 779.41crores in 2010-11 showing growth of over 31%. This is mainly due to improved globalmarkets and overall economy, especially in the real estate sector.
Laminate division also performed quite well. The companys focus remained to grabpremium market share. The CENTURYLAMINATES the brand under which companyslaminates are being sold is today a symbol of quality and is attaining consumerpreference. The turnover of Laminate segment was up from Rs. 120.72 crores in 2009-10 toRs. 158.04 crores in 2010-11 showing growth of over 30%.
Ferro Alloys & Power
Ferro Alloys segment recovered phenomenally and posted a turnover of Rs. 79.11 croresin 2010-11 against Rs. 40.87 crores in 2009-10 showing growth of over 93%. Profit fromthis segment also increased substantially by 603% to Rs. 11.19 crores against Rs. 1.59crores last year. Power segment also performed well with a turnover of Rs. 41.14 croresagainst Rs. 36.55 crores last year.
The cement capacities run by companys subsidiaries also posted impressiveperformance. The turnover increased from Rs. 506.12 crores to Rs. 685.90 crores showinggrowth of over 8.70%. Segment profit however reduced from Rs. 133.84 crores to Rs. 113.34crores.
Logistics division also performed quite well. During current financial year thissegment recorded a turnover of Rs. 35.86 crores and profit of Rs. 7.60 crores.
Other segments mainly chemicals also performed well during 2010-11.
Your Companys and its subsidiaries products are Plywood, Laminates, Cementand Ferro Alloys demand for which is linked to infrastructure and real estate sector. Inview of improved economic situation and the Governments thrust towardsinfrastructure and real estate activities, your company is hopeful to achieve betterresults and attain growth. With modern plants, latest technologies, and precious brandsthe products of your company are positioned to fully exploit emerging opportunities.
Risks and Concerns
Your Company has a comprehensive risk management policy. The risk policy provides foridentification of risk, its assessment and procedures to minimize risk. The risk policy isperiodically reviewed by the Audit Committee to ensure that the executive managementcontrols the risk as per decided policy.
Some of the key risks affecting your Company are illustrated below:
Foreign Exchange Risk
Your Companys imports exceed exports. At any given time your company hassubstantial foreign exchange liability. Adverse fluctuations as happened in financial year2008-09 may expose company to substantial foreign exchange risk. The company has policy ofreviewing foreign exchange risk on regular basis and decide about hedging as per situationprevailing and predicted. In adverse times company defer its forex liabilities by availingbuyers credits overseas, thereby avoiding immediate exchange losses and availingcredits at very low interest rates.
Interest Rate Risk
Your Company is exposed to interest rate fluctuations on its borrowings. Your Companyuses a judicious mix of fixed, floating, domestic and overseas debts within thepermissible parameters. Your company has been able to negotiate the debts at mostcompetitive rates due to its reputation, compliance record, high ratings and satisfactoryperformance.
Manpower retention Risk
Your Company has a wide marketing network spread across the country. Your company dealsin consumer goods through large dealers network and has to maintain large marketingand administrative team. Your company can not be an exception to man power attrition. Yourcompany has devised a stimulative HR policy and performance based incentive system toaddress this.
Government Policy Change Risk
Changes in Government Policies especially with respect to Custom Duty and Excise Dutymay affect the operations of your Company. However, in recent past, the GovernmentsPolicies have remained favourable to the industry and companys product segments.
Internal control system and their adequacy
The Company has adequate and effective internal control system, which are continuouslyreviewed for their effectiveness. The systems are periodically reviewed and correctivemeasures are taken to further strengthen them. The Company has double Certifications ISO9001 (Quality Systems) and ISO 14001 (Environment Management Systems) from DetNorske Veritas (DNV). The Company has implemented SAP (ERP Solution) for integrated andonline information system, across all locations.
Discussion on financial performance with respect to operational performance
During the financial year the total income of your company increased from Rs. 849.82crores to Rs. 1091.10 crores reflecting growth of over 28%. Profit before Tax, howeverreduced from Rs. 96.48 crores last year to Rs. 75.78 crores this year. The increase inturnover reflects increasing market share for the Companys products.
Material developments in Human Resources/Industrial Relation front, including number ofpeople employed.
The Company strictly adheres to ISO 9001:2000 mandated training. All employees receiveon going learning opportunities through customized programs that are designed in-house.Company encourages its employees to attend outside seminars. The employees are encouragedto offer constructive suggestions for improvement in their respective areas which arethoroughly discussed in departmental meetings. Employees are covered by incentive systemencouraging them to perform to their best.
The company maintains absolute harmony with its work force. Since inception there hasnot been even a single instance of strike or lock-out at any of the companysmanufacturing establishments.
The total manpower strength of the Company as on 31st March, 2011 was 3882.
The statements in the "Management Discussion and Analysis" section describingthe Companys objectives, projections, estimates, expectations and predictions may be"forward looking statements". All statements that address expectation orprojections about the future, including but not limited to statements about thecompanys strategy for growth, product development, market position, expenditures andfinancial results are based on certain assumptions and expectations of future events. Thecompany can not guarantee that these assumptions and expectations are accurate or will berealized. The companys actual results, performance or achievement may thus differmaterially from those projected in such forward looking statements. The company assumes noresponsibility to publicly amend, modify or revise any forward looking statement on thebasis of any subsequent developments, information or event.
| ||For and on behalf of the Board of Directors |
| ||Sajjan Bhajanka ||Hari Prasad Agarwal |
| ||Managing Director ||Vice Chairman |
|Kolkata, 24th May, 2011 || || |