Management discussion and analysis
Indian economy review
India emerged as one of most attractive investment destinations across the globe, witha vigorous 8.6 per cent GDP growth in 2010-11, outperforming the developed nations. Thesix core industries recorded a growth rate of 5.9 per cent during April-March 2010-11 asagainst 5.5 per cent in the previous year. However, there are considerable concernsrelated to high rates of inflation, triggered by enhanced commodity and energy costs,along with firming of interest rates. The Indian policy makers have undertaken suitablefiscal measures to ensure long-term growth prospects.
Industry structure and developments
Commercial vehicles
India’s overall freight traffic is a function of industrial and agriculturalproduction. High growth in GDP reflects higher economic activity, which typically resultsin increased volumes of freight transportation of industrial and agriculture production,translating into higher demand for Commercial Vehicles (CV). The CV industry hasregistered significant growth, along with economic recovery in India.
India is one of the largest markets for CVs in the world accounting for 60 per cent offreight traffic.
The CV industry is broadly categorised into Light Commercial Vehicles (LCV) which havea gross vehicle weight of less than 7.5 tonnes and Medium to Heavy Commercial Vehicles(MHCV) with a gross vehicle weight above 7.5 tonnes. Typically, MHCVs are used for longdistance haulage and then goods are delivered via LCVs for the final leg of the journey.
The CV business in India is cyclical in nature and the current cycle is in an upturnmode. The MHCV segment registered a strong re-bound in 2010-11 that registered 36 per centy-o-y volume growth compared to the long-term average growth of 9 per cent (1971-2010). Inaddition to this the CV market is expected to grow at 15% in the year 2011-2012.
The MHCV segment registered a strong re-bound in 2010-11 that registered 36 per centy-o-y volume growth compared to the long-term average growth of 9 per cent (1971-2010).
India’s CV market is set to experience significant changes leveraging thehub-and-spoke model of transportation. With increased road infrastructure development, CVsales in India would be driven through sustained focus on application-specific vehicles.
Railways
Indian Railways (IR) has played a critical and historical role in providingconnectivity to the far corners of India’s vast land mass. Its network of over 64,000route kms has integrated markets and connected communities over extensive geographiesacross the length and breadth of the country.
The Railway Budget 2011-12 aimed at acquiring 18,000 wagons annually to meet thetargets set in the Eleventh Plan. However, in 2011, delivery has been in the region of13,000-15,000 only due to certain budgetary constraints. The balance order was delayed byalmost 1.5 years. The delay has resulted in a temporary increase in pressure over thefreight traffic and has also induced the use of refurbished wagons.
Power
India’s power sector is witnessing an exciting growth phase with relatively highGDP trajectory, leading to enhanced electricity demand, capacity addition in generation,transmission and distribution, stable regulatory environment, coupled with focus on ruralelectrification, nuclear and renewable sources of energy. The overall power generation inIndia has increased from 771.551 billion units in 2009-10 to 811.143 billion units in2010-11. Despite this generation, India has been constantly witnessing a peak hour deficitof around 12 per cent annually.
The Government of India (GOI) has targeted an addition of 78 GW of capacity in theEleventh Five-year Plan (2007- 12). It is estimated that approximately 51 GW of generationcapacity would be successfully achieved by the end of this Plan.
Opportunities
The Eleventh Five Year Plan (2007-2012) has outlined a multitude of infrastructureexpansion projects, including those in the rail and road sectors. The CV industry and therailway transportation network will benefit from the pan-sector investment ininfrastructure as CVs and trains are an integral part of the construction process –from sourcing of raw materials, their transportation to installation and fabrication. Thiswill not only provide impetus to growth of fabrication/body building sector, but also leadto high revenue growth for CEBBCO in near future.
The Government has proposed to set to a target of one lakh MW power generation underthe Twelfth Five-Year Plan to meet the burgeoning requirement of electricity throughoutthe country. With various state-owned enterprises and private sector players constructingmultiple power plants, including ultra mega power projects, CEBBCO is well positioned toaddress their various structural needs.
Human resources and industrial relations
Industrial relations continue to remain cordial and peaceful at all the fivemanufacturing units. All the employees and labor working at the manufacturing units have acommon objective of Profit, Growth and Excellence.
De-risking at CEBBCO
| Risks | Mitigation |
| Cyclical nature of the commercial vehicle industry | The demand for CEBBCO’s end products is closely linked to overall industrial growth. This makes the Company vulnerable to cyclicality in the commercial vehicle industry. Entry into the railways and power sector will also help in reducing this risk. |
| Single-customer dependence | The Company’s established relationship with Tata Motors ensures a steady stream of revenues. The Company has also forayed into the attractive railways and power sectors, which would reduce the revenue dependence on Tata Motors. |
| Increase in key raw materials costs | The Company has been constantly leveraging its negotiating powers with the vendors to keep the raw material cost in line with the end price of the product. In certain cases, the Company passes on the price increase to the customers. Besides, it is also focusing on cost-cutting measures. |
| Entry into relatively new sectors – railways and power | CEBBCO is leveraging its rich fabrication expertise to cater to the requirements of the railways and power sector. The approval from the RDSO and receipt of orders from big players in the power sector has enhanced confidence of the Company considerably. |