MANAGEMENT DISCUSSION AND ANALYSIS
FORWARD - LOOKING STATEMENTS
This report contains forward looking statements identified by words like‘plans’, ‘expects’, ‘will’, ‘anticipates’,‘believes’, ‘intends’, ‘projects’, ‘estimates’ orother words of similar meaning. All statements that address expectations or projectionsabout the future, including, but not limited to the Company’s strategy for growth,product development, market position, expenditures and financial results, areforward-looking statements. Since these are based on certain assumptions and expectationsof future events, the Company cannot guarantee that these are accurate or will berealised. The Company's actual results, performance or achievements could thus differmaterially from those projected in any forward-looking statements. The Company assumes noresponsibility to publicly amend, modify or revise any forward looking statements, on thebasis of any subsequent developments, information or events.
OVERVIEW
Financial Year 2011-12 was a challenging year for the economy as well as the Company.The global economy witnessed lower economic growth, resulting primarily from the Euro Zonedebt crisis and high oil prices. Rising unrest in the Middle East and North Africaresulted in unprecedented levels of crude oil volatility. The European economies stagnatedand the US witnessed a downgrade in its credit rating, while the growth engines of theglobal economy, China and India, were forced to tighten liquidity and to keep interestrates high to tame rising inflation, which was unrelenting in India. The situation wasaggravated in India due to the steep and sudden decline in the Rupee versus the US$ andother currencies and also due to lack of any policy initiatives by the Governments inIndia to address the emerging challenges. According to the International Monetary Fund(IMF), the global economy is estimated to grow at a modest pace of 3.8% in 2011, ascompared to a robust 5.2% in 2010. These global events had an overall negative impact ondemand of the Company’s products.
DOMESTIC BUSINESS
The demand for industrial cylinders continued to be robust. CNG cylinders witnessedreduced demand from the Original Equipment Manufacturers as well as the Retrofit segmentdue to various factors, such as, lower growth of automobile sector, non-coverage of newcities under the City Gas Distribution policy, continued high subsidy on diesel vis a vispetrol resulting in higher production of diesel vehicles, etc. Due to the competitivescenario, there was pressure on margins.
INTERNATIONAL BUSINESSES
(a) Dubai Operations
Due to geo-political situation in the Middle-East Asia, sales to Iran market, whichhistorically accounted for a substantial portion of its business, got severely affectedduring the year, with concomitant effect on the operating results. To tide over thesituation, development of alternate markets, such as, South America, CIS countries, etc.has been initiated.
(b) USA Operations
Due to improved business conditions and demand situation, the performance during theyear was robust, represented by about 71% sales growth, improved capacity utilisation andnegligible loss at the net level of the standalone operations. On consolidation, theresults however continue to report a loss due to amortisation of intangible assetsacquired during the business acquisition.
The order book is expected to remain good during the current year and the Company willopt for higher margin business. The huge gas discovery in the USA, the thrust on theincreased usage of natural gas and its promotion by the US Government augurs well for thebusiness in the coming years.
(c) China Operations
The China CNG cylinders operations continue to remain affected due to high localcompetition and price sensitive environment, which scenario is expected to continue. TheJumbo cylinders segment, however, has good business potential due to low competition andhigh demand and growth prospects. The business thrust, going forward, will be on the Jumbocylinders segment
STRENGTHS
EKC’s resilience in successfully weathering all such challenges is reflective ofits strengths, which are summarized below:
1. Strong Management
EKC has a strong and highly experienced management with more than three decades ofexperience in the high pressure cylinder industry. The experience of the Company’smanagement team is a key competitive advantage. Top officials of EKC have been associatedwith the Company for a long period of time which provides depth and continuity ofmanagement.
2. Sustained Leadership in Domestic Market
EKC is India’s largest player with highest market share mainly on account of itslong history in business and adherence to the highest quality standards. EKC also benefitsfrom having the first mover advantage. This coupled with strong relationships on the rawmaterial supply chain, quality certifications and a strong safety track record has helpedEKC to maintain its leadership position.
3. Domination in Export as well as Local Markets
EKC exports to over 20 countries all over the world including countries in South EastAsia, Middle East, Africa, South America and Commonwealth of Independent States (CIS)countries and meets their stringent quality and value driven norms set for the products.This demonstrates EKC’s global competitiveness, world class quality of its productsand superior logistical capabilities. Revenue from international sales now representsalmost 56% of the Company’s total revenues. The Company continues to maintain itsdominant share in the domestic market.
4. High Quality Products
The cylinders manufactured by EKC have earned global reputation for their high standardof quality and compliance with the most stringent specifications laid down byinternational bodies and local authorities. EKC manufactures cylinders conforming tospecific country national standards or International Standards like ISO: 11439, NZS: 5454,ISO: 4705D, EN: 1964, IS: 15490, DOT, ASME, ISO: 11120, ECE R-110.
5. Wide Variety of Products
Your Company manufactures a wide and versatile range of high pressure seamlesscylinders, viz:
• Industrial Gas Cylinders
• CNG Cylinders
• CNG Cylinder Cascades
• Jumbo Cylinders and Skids
In addition to the manufacture of cylinders from steel tubes, which is the norm, theCompany has set up facilities for manufacture of industrial cylinders from billets and CNGcylinders from steel plates. The cylinders manufactured from billets and plates are ofbetter quality.
The Company provides cylinders with water capacities that range between 1 litre and3000 litres and also supplies cylinders in customised sizes. Because EKC is flexible tomeet any specification, it has a broad customer base across the globe.
6. Supply Chain and Customer Relationships
The Company maintains cordial business relationships with its value chain partners,namely, raw material suppliers, gas distributors, retrofitters and customers, withregulatory authorities like The Chief Controller of Explosives, Bureau of Indian Standardsand other statutory bodies in India and abroad.
7. Quick Delivery to Customers
EKC has the ability to manufacture and deliver vessels of different sizes from itsmultiple operating units. This results in quick delivery to the customers.
8. Investment in New Technologies
EKC has made significant investments in newer and alternate technologies which wouldultimately enable it to reach leadership status globally. Also, it would be the onlyCompany in India to use alternate technologies and raw materials in its new plants. Thiswould enable EKC to broad base its raw material supply chain which would lead to lowercost of production and better working capital management as also to broad base its productofferings. The new greenfield project at Kandla for plate based CNG cylinders, which hasbeen commissioned in January 2012 would enable it to cater to the niche OEM segment inIndia and overseas through supply of light weight and more value added cylinders.
9. Investment in Human Talent
All employees are important to the Company and it believes that its employees areparticularly critical to its business, as they are responsible for understanding customerexpectations, ensuring consistent and quality service delivery. The employees areessentially the glue that keeps the entire organization together. The Company intends tocontinue to invest in developing and grooming its employees.
CHALLENGES, RISKS & CONCERNS
1. Raw Material Intensive Industry
Seamless steel tubes are the principle raw material used by EKC. The quality ofcylinders produced is directly dependent on the quality of raw material used. There areonly a few seamless tube manufacturers globally who meet the stringent qualityspecifications. Adequate level of raw material inventory has to be maintained at all timesto ensure quick turnaround time for orders received. Any volatility in the prices ordisruption in availability of raw material can impact the profitability of the Company.However, EKC has strong relationships with the raw material suppliers. Going a stepfurther to reduce supplier risk, EKC has setup facilities using alternate manufacturingprocess and cheaper raw materials such as billets and plates.
2. Competition
Although EKC is the market leader in India with majority share, many players have putup high pressure cylinder manufacturing capacities in India and China. However, thesecapacities can only be utilized with growth in demand which is dependent to a large extenton Government policies and impetus from the Government by increasing the supply of gas,covering more cities under the City Gas Distribution policy and improving the gasinfrastructure all over the country. Besides, the increasing competition has resulted inan overall margin contraction at the industry level. Inspite of the challenge posed by theincrease in competition, EKC would continue to dominate the market place. This would be onaccount of EKC's long standing in the business and goodwill, superior customer reach, widerange of products offered, stronger financial muscle and use of alternate technologies andraw materials.
3. Slow Growth in Sales of CNG Cylinders
Because of the regulatory impasse, the overall growth and development of the CNGinfrastructure has not been robust in the country. Regulatory initiatives can lead toincreased usage of CNG which will ultimately result in cost benefit to consumers due toCNG’s inherent cost advantage vis-a-vis other auto fuels. Also as the energy contentper kilogram of CNG is comparable to that of petroleum based fuels and the usage of CNG invehicles results in higher mileage per unit due to its superior combustioncharacteristics.
4. Domestic CNG Growth Dependent on Government Policies and Plans
The growth in CNG cylinder market for storage and transportation of CNG would bedependent on government plans and initiatives to switch over to alternative fuel. However,with natural gas being made available in many parts of the country over a period of timeand rising cost of fuels, it is expected that the Government policies would be progressivefavoring CNG as a fuel. This would lead to an accelerated growth in the CNG cylinderindustry.
5. Slowdown in the Indian Automobile Industry Negatively Impacts theCompany’s Growth
OEMs and retrofitters are the major customers of EKC’s CNG cylinders in theautomobile sector. Any slowdown in cylinder off take from OEMs in India will adverselyaffect EKC’s operations/production plans. However, demand from other global marketshelped in offsetting the slowdown in the Indian auto sector.
6. Volatile Steel Prices
Seamless steel tube (primary raw material) prices have stabilized in the past 2-3years. However, any future volatility in prices will affect the demand if the increase inprice is passed on to the customers. If the increase in price is not passed on to thecustomers it may lead to contraction in the margins.
7. Fluctuation in Foreign Currency
Any adverse change in the exchange rate between the US Dollar and the Indian Rupee hasa negative impact on EKC’s results of operations and financial condition. Most ofEKC’s revenue and costs are either linked to or denominated in US Dollar. Most of theEKC’s borrowings are in US Dollar.
There has been a marked adverse variation in the exchange rate between INR and USD inthe recent months and the fluctuation may continue significantly in future as well.Accordingly, the Company’s operating results have been and will continue to beimpacted by fluctuations in the exchange rate between the Indian Rupee and the US Dollar,as well as exchange rates with other foreign currencies.
The Company’s treasury function actively tracks the movements in foreigncurrencies and has an internal risk management policy of proactively hedging exposures. Asper the internal guidelines, the Company has been partially hedging its net exposures onregular basis through forward cover contracts and options.
8. Fluctuations in Interest Rate
EKC is subject to risks arising from interest rate fluctuations. EKC group borrowsfunds in the domestic and international markets to meet the long-term and short-termfunding requirements for its operations and funding its growth initiatives.
FUTURE PERSPECTIVE
1. Capacity Expansion to Drive Growth
EKC has over the years successfully undertaken expansion plans at domestic as well asglobal levels to retain its leadership position in the industry. The Company has also setup plants using alternative technologies and raw materials to stay ahead of thecompetitors, reduce input costs risks and to offer more product range to customers. TheBillet plant at Gandhidham with a capacity of 120,000 per annum will produce cylindershells through billet-piercing technology with focus on the growing industrial cylinderdemand. Billets, unlike steel tubes, are available indigenously. Besides, the Company hasalso set up a greenfield 250,000 CNG cylinders plant in the Kandla Special Economic Zone(KASEZ) which uses the steel-plate deep drawing process. These cylinders are lighter inweight and are of better quality and command premium over the tube based cylinders. CNGvehicle manufacturers are showing increasing preference to plate cylinders as vehiclesfitted with these cylinders have better fuel efficiency. However, it will take some monthsbefore the volumes for billet and plate cylinders achieve a critical mass.
Due to the world scale capacities set up in India and overseas, the Company is wellpositioned to tap the markets as and when the demand picks up. The capacities have beenset up without much strain on its funding profile as discern from the low gearing.
2. Increasing Demand for Industrial Cylinders
The gas industry relies heavily on cylinders to store and transport gases. EKC isflexible to meet any specification. This has resulted in a broad customer base ofcompanies supplying industrial gases across the globe. The demand for cylinders isdirectly proportional to the demand for industrial gases.
The outlook for the growth in demand for industrial gases over the next five years isfavourable with growth in new segments such as medical care, beverage industry, etc. Thisis expected to augur well for EKC which has set up high manufacturing capacity ofindustrial cylinders. And with the commissioning of the billet cylinders plant, theposition has further strengthened.
3. Increasing Natural Gas Availability
With the increasing natural gas availability the world over (example, the USA), thenatural gas vehicles are being preferred and promoted by Governments of many countries.Coupled with the increasing environment consciousness, the demand for natural gas vehiclesand, thus, the cylinders to bottle the gas is set to increase over medium to long term.
FINANCIAL PERFORMANCE VIS-A-VIS OPERATIONAL PERFORMANCE
The last year has been difficult for the Company on account of the challenges presentedby the economic environment (both local as well as international) resulting in lower salesand profitability The situation got aggravated by the adverse movement of the Rupeeagainst the US Dollar.
EKC sold around 745,000 cylinders during the year 2011-12 as compared to 885,000cylinders during the year 2010-11.
INTERNAL CONTROL SYSTEM
Your Company believes in formulating adequate and effective internal control systemsand implementing the same strictly to ensure that assets and interests of the Company aresafeguarded and reliability of accounting data and accuracy are ensured with proper checksand balances. The Internal control system is improved and modified continuously to meetthe changes in business conditions, statutory and accounting requirements. The Company hasan internal audit function, which is empowered to examine the adequacy and the compliancewith policies, plans and statutory requirements. It is also responsible for assessing andimproving the effectiveness of risk management, control and governance process. Themanagement of the Company duly considers and takes appropriate action on therecommendations made by the statutory auditors, internal auditors and the independentAudit Committee of the Board of Directors.
The prevailing system of internal controls and internal audit are considered to beadequate vis-a-vis the business requirements. In order to further strengthen the internalcontrol systems and with a view to automate the various processes of the business, EKC hasimplemented an Enterprise Wide Resource Planning (ERP) system.
HUMAN RESOURCES AND INDUSTRIAL RELATIONS
EKC continued to place emphasis on human capital and aims at creating a corporateculture that respects people, develops and trains them to deliver high quality performanceand rewards talent and performance with growth opportunities.
As of March 31, 2012, EKC and its subsidiaries employed approximately 1400 employees(previous year 1900 employees). This comprises of highly qualified and experiencedprofessionals from various fields like engineering, finance and management. Employeerelations continue to be cordial and harmonious.