Kirloskar Oil Engines Ltd

KIRLOSKAR OIL ENGINES LIMITED ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS Global Economy The global economy grew at 3.8% in the calendar year 2011 as against 5.2% in 2010, according to the World Economic Outlook released by the International Monetary Fund. The slowdown during 2011 occurred mainly due to emerging and developing economies experiencing slower growth than before which was compounded by increased stringency of monetary policies. The growth is likely to slowdown further to 3.3% during 2012. There is a possibility that the Euro regions may experience a mild recession in 2012. This may emerge as a result of rise in sovereign yields, effects of bank de-leveraging on the real economy and additional fiscal consolidation. Growth in emerging and developing economies is also expected to slow down due to worsening external environment and a weakening internal demand. Indian Economy The Indian economy grew robustly at around 8.4% in the two preceding financial years. In 2011-12, it grew at the rate of 6.9%. The Wholesale Price Index (WPI) remained constant at around 9% during the year. This slowdown is almost entirely, due to the weakening of the country's industrial growth which is expected to grow at 3.9% in Financial Year 2011- 12. However, agriculture, its allied sectors and the services sector, continued to perform well. The expected growth of these sectors would be 2.5% and 9.4% respectively in Financial Year 2011-12. Several global factors contributed to India's economic slowdown. These include Euro region crises, sluggish growth in some industrialized economies and rising global commodity prices. The hardening of international crude oil prices also had a significant impact on the national economy. Resultantly, commodity prices in the domestic markets also saw a steep rise, which, along the tightening of monetary policies to control inflation contributed to an environment of slowing investment in the industrial sector. Future outlook India's Economic Survey for Financial Year 2011-12 projects the country's GDP growth to accelerate to 7.6% in 2012-13 and 8.6% in 2013-14, along with falling inflation and fiscal consolidation. The Global Economic Prospects published by the World Bank more cautiously predict a continued slowdown in the Indian economy, with a 6% growth rate in 2012-13 that will rise to 7.3% over 2013-14. Industry Overview The Company's performance is impacted by industrial growth in key business sectors. India's construction sector was expected to grow at 4.8% during the Financial Year 2011-12 as against 8% during the Financial Year 2010-11. In Financial Year 2011-12, highway construction projects, 4,375 km in total length, were commissioned. The Union Budget has set a target of completing highways totalling 8,800 km in length under the National Highway Development Programme (NHDP) in the Financial Year2012-13. The power sector saw a growth of 8.6% during April 2011 - January 2012 as compared to 5.2% during April 2010 - January 2011. India's energy deficit decreased from 9.6% in 2006-07 to 7.9% during April 2011-December 2011. Peak deficit declined from 13.8% to 10.6% during the same period. Apart from financing related challenges, growth in this sector is expected to be constrained by fuel shortages and issues regarding environmental regulatory clearances. Company Performance During the year under review, the Company achieved sales of Rs. 2,276 crores (including sales of bearings business of Rs. 62 crores) as against Rs. 2,364 crores in the previous year, (including sales of bearings business of Rs. 123 crores), showing a marginal decline of 3.8%. The profit before tax is Rs. 281 crores (including profit on sale of bearings business Rs.48 crores) in 2011 -12 against Rs. 244 crores in the previous year 2010-11. Engines Business operational performance The Company caters to diverse customer needs across three key sectors of the economy viz. agriculture, industry and services. 1. Agriculture Engines Business The agriculture sector witnessed a growth of 2.8 % in 2011. The Indian agriculture market for engines below 20 hp witnessed 21% growth which was due to untimely monsoon and grid power deficit in many regions of rural India. Government subsidy schemes for pump sets also played a vital role in market growth. This was true, especially for portable engines for pump set application below 5 hp. However, the Company's Agriculture Business registered a negative growth of 6% on account of the high price gap with respect to competitors (mainly Indian unorganized sector) and Chinese imports. The Company is in the process of formulating a strategy for growth to respond to these challenges and is committed to improving its market presence. 2. Industrial Engines Business The industrial engines marketgrew by 14% during Financial Year 2011-12. The demand for the Company's products in the industrial engines segment was dampened by the tightening monetary policy of the Reserve Bank of India and rising inflation in building material prices in the country. The Company's share in the domestic market declined to 30% in Financial Year 2011-12 from 52% in the previous fiscal. However, the Company continues to maintain a significant position in the Indian industrial engines market. During the Twelfth Plan, investment in infrastructure is expected to be Rs. 50 lakh crores. The India Infrastructure Finance Company Limited (IIFCL) has put in place a structure for credit enhancement to ease access of credit to infrastructure projects. As mentioned earlier, the government has indicated a target of covering 8,800 kms of roads under the NHDP in Financial Year 2012-13. With these developments, the Indian construction equipment industry is expected to grow by 19 - 20% over the next few years. 3. Power Generation Engines Business The Company's power generation engines business addresses the telecom and other industrial segments such as retail, banking and IT. At the macro level, the power situation has improved with decline in the peak deficit from 13.8% in 2006-07 to 10.6% during the period April 2011 - December 2011, thereby affecting demand for power generation sets. Telecom operators curtailed expansion plans in India in Financial Year 2011-12. In order to remain competitive amidst an uncertain regulatory landscape, they increased focus on tower sharing arrangements instead of new roll-outs, thereby negatively impacting the demand for DG sets as compared to the previous year. During Financial Year 2011-12, the Company achieved a market share of 23% by value in this segment. The Company is pursuing a sound risk management strategy through product diversification (to include smaller KVA bracket 3000 RPM Gensets) and enhanced focus on government business. 4. Large Engine Business During the year, all engines manufactured and supplied within the Large Engine Business were for Stationary Power Plant application, to provide emergency power using High Speed Diesel (HSD) as fuel. The Company's engines are preferred by customers on account of high proven reliability in such applications. In Financial Year 2011-12, the Company received an order of Rs. 396 Crores from the Nuclear Power Corporation of India Limited (NPCIL) for supply, erection and commissioning of 16 Emergency DG sets each with a power rating of 4.2 MW. This order was received under a global tender and is expected to be completed (up to installation phase) in the next 3.5 years. The Company entered into a license agreement with Daihatsu Diesel Manufacturing Co. Ltd., Japan, for manufacture, marketing and supply of diesel engines in India in the 610KW to 2560 KW range. Daihatsu is an established manufacturer and global supplier of diesel engines for marine and power plant applications. These engines will cater to requirements of the commercial marine segment. 5. Customer Support The presence of an extensive network, comprising 103 trained service dealers and 342 well equipped service outlets, across India illustrates the Company's commitment to customer support. This widespread network enables the Company to provide timely after-sales services to its customers, including those during emergency situations. Customer requests are responded to within 4 to 8 hours of time depending on the distance. While ensuring high service standards at all times through regular audits of its service dealers, customer education is another area of high priority. Towards this end, over 300 customer training events were conducted in Financial Year 2011-12 with the objective of educating customers on engine maintenance. To further strengthen our customer relationship and to satisfactorily meet customer needs, the Company has proactively introduced centralized Annual Maintenance Contracts (AMC) as well as a customer help desk to handle all complaints. 6. Exports The Company has presence in international markets with offices in UAE, South Africa and Kenya, as well as representatives in Indonesia and Nigeria and a strong distribution network throughout the Middle East and Africa. New markets in the Middle East, South East Asia and New Zealand are being explored. Research & Engineering 1. Existing and New product development The Company has continued with the K1080 programme and substituted 4 Cylinder engines in place of 6 Cylinder engines in the 100 to 125 kVApower range. The development of a Portable Diesel Genset has been completed and its planned market launch is currently underway. The Company is entering a new market segment in India with the launch of this product. 2. Emission Norms The Company has successfully complied with BS-III norms for construction equipment, which became mandatory from April 1,2011. The engines are now well received in the market. Quality Assurance Various Quality Assurance processes were effectively implemented in Financial Year 2011-12 to ensure trouble free production ramp up of all the engines/applications conforming to all BS III requirements. Customers are fully satisfied with the quality of products delivered. The Company continued training its suppliers and a few identified Genset OEMs on Six Sigma tools, benefits of which have been realized in terms of reduced PPM levels. The Company remains committed towards developing and improving various supply chain related processes. The Company organized a Supplier Quality Contest in Financial Year 2011-12 to provide a platform for its suppliers to share their quality improvement projects and other best practices. Awards were presented to the winners as a token of recognition of their sustained efforts. Vendor Development & Material Cost Reduction Initiatives The Company is focusing its efforts on vendor training for quality systems and Six Sigma Tools. Selective supplier funding has helped improve their delivery performance. The vendor online payment facility is now fully established. New suppliers were added to develop new engines and applications. Cost control and cost reduction projects continued to be a focus area. Initiatives undertaken in this direction include Value Analysis/Value Engineering (VA / VE), exploration of alternate materials, process improvements and re-engineering. Effective implementation of cost control measures across the supply chain has helped the Company optimize its material cost. Industrial Relations The Company continues to maintain healthy and harmonious industrial relations. In September 2011, the Company signed a wage agreement with the workers union at its Nashik plant. Human Resources 1. Training and Development Programmes With an objective of developing future leadership, the Company has designed leadership development programmes for different managerial levels: - Leadership Development Programme (LDP) was initiated for the second batch of senior level managers. - Middle Management Development Programme (MMDP) for middle level managers was launched and completed. - Assessment Centre for identifying Fast Trackers at the junior level was initiated. An individual development programme has been evolved for all existing Fast Trackers. 2. Employee Engagement Activities During the year, the Company conducted various employee engagement activities, including an employee engagement survey, workgroup level action planning and follow up sessions and speak out sessions. These initiatives were aimed at assessing the level of employee satisfaction and taking appropriate corrective actions. The employee satisfaction score in Financial Year 2011-12 showed an improvement over the previous year. 3. Employee Performance Management Initiatives The Company developed an online Performance Management System (PMS) for managers in Financial Year 2011-12, facilitating online quarterly reviews and feedback. The objective of PMS is to develop a performance oriented culture in the Company and also to ensure the alignment of individual goals with corporate goals. Environment, Occupational Health & Safety (EHS) Environment During the Financial Year 2011 -12, the Company undertook the following environment initiatives across all its plants: Pune Plant: - Asbestos roofing was replaced with galvalume sheets - Turbo ventilators were installed for natural ventilation - Alight pipe system was introduced in office areas to reduce electricity consumption Kagal Plant: - Reaction cum sludge dewatering unit installed for effective industrial effluent treatment - A4000 cu m rainwater harvesting pond was constructed - An oil and water separator was installed (for the screw compressor) to avoid soil contamination - 800 trees were planted Nasik Plant: - Rainwater harvesting facility installed - Installation of a light pipe in the assembly and office areas to reduce electricity consumption - Anew paint booth with an innovative concept of down draught ventilation was installed Rajkot Plant: - The plantation area was increased from 35,000 sq. ft. to 39,000 sq. ft. - Turbo ventilators were installed for natural ventilation - Use of natural gas in place of HSD at paint booth oven - EHS certification was obtained for this plant The Company's second annual Corporate Sustainability Report was released in the public domain in January 2012. The report was awarded the highest Application Level Check rating of A+ by the Global Reporting Initiative (GRI), Netherlands, forthe second successive year. Health The Company places utmost importance on the health and wellbeing of its employees. As part of this commitment, lectures on health, fitness, diseases and lifestyle improvement as well as medical check-ups of its employees are regularly organized. During the year, the following initiatives were undertaken to improve the occupational health of the Company's employees: - Acoustic enclosure for all Engine Test beds to reducing occupational noise exposure at the Pune plant - 'Wellness at Door Step' programme (health check up) for employees at the Pune and Kagal plants - Blood donation camp organized for employees at the Kagal plant - Realigning of paint booth to reduce odour and improve work environment at the Rajkot plant Safety - A new process was implemented for the use of a fire-blanket to cover fire prone material while welding / gas cutting at a height. - EHS training programmes were conducted throughout the year. Corporate Social Responsibility (CSR) The Company conducts yearly Community Perception Surveys (CPS) to assess its perception as a Corporate Citizen among communities in the vicinities of its operations. The CPS rating in Financial Year 2011-12 showed a significant improvement over the previous year. The Company has, as a policy, chosen health and education as primary areas of focus for its CSR initiatives. In addition to CSR highlights mentioned in last year's report, the following new initiatives were employed during Financial Year2011-12: - Health awareness programmes on adolescent health and hygiene - Provision of school material to primary school children - Workshop for teachers and students on team building, career guidance - Waste Management workshop - 'Hasat Khelat Paryavaran' events in Pune and Kagal to develop environmental awareness - Livelihood generation training for self-help groups - Life skills training programmes - Vocational training programmes for the youth - Support to the Kirloskar Foundation for their programmes Awards, Recognitions & Certifications During the Financial Year 2011 -12, the Company received the following awards, recognition and certifications: - The Commendation Certificate for Strong Commitment to Excel from CM. This award is a testament to the efforts and commitment of the Company to attain world class standards of performance. - For the second consecutive year, the Engineering Export Promotion Council (EEPC) conferred its award to the Company. This award is sponsored by Ministry of Commerce & Industry, Government of India. - Participated in the national convention on Quality Concept 2011 organized by the Quality Circle Forum of India. The Pune plant received the Par Excellence Award. - The Pune and Kagal plants received the prestigious '12th National Award for Excellence in Energy Management 2011'from the Confederation of Indian Industries (CM). - KAIZEN on DV Cylinder Head won 1 st prize at the national level in 'INDIZEN 2012' contest. - QCFI, Pune Chapter Trophy for the Financial Year 2010-11 for spreading Quality Circle activities across the organization - The Pune and Nashik Plants received the MEDAENCON award - 'Gurukul' (the Company's training centre) at the Kagal Plant received 'Best Prax Benchmark 2011 Award' in the manufacturing category. Concerns and Threats India's off highway engines market slowed down to 14% in Financial Year 2011-12. The market demand was adversely affected by factors such as poor availability of funds, which in turn hampered growth in the housing segments, delayed closure of highways projects by NHDP, scams related to the mining sector etc. Apart from the overall slowdown in the market, during Financial Year 2011- 12, a major customer of the Company commenced in-house manufacture of diesel engines. To compensate for this loss, the Company has aggressively begun expanding its customer base and applications portfolio. The Company successfully stabilized manufacture and supply of BS-III engines to over 55 applications during the first quarter of the last fiscal. The off highway market continues to be bearish and is likely to regain its buoyancy towards the beginning of the third quarter of the current fiscal. The Company anticipates the inflationary trend to pick-up in the coming months. The Company is gearing up to effectively address the cost pressures and enhance its operational efficiency. The Company's engines and pump sets for the agriculture segment have shown a better performance and low total cost of ownership. This is in comparison to the products of its competitors. Also, the Company's products are priced at an average premium of 35% -40%. However, the Company faces stiff competition from low cost Chinese imports and from unorganized Indian players. Availability of Government subsidies for diesel pump sets in most of the agriculture market plays a vital role in generating a demand for our agriculture pump sets. India's peak power demand continues to grow at approximately 8% annually, the associated power shortage during high peak will raise demand for diesel gensets in the near future. Import of low cost diesel generators has resulted in increased competition from global players in the lower kVArange. The Company's business plans in the telecom business were not realized on account of low level of buying by telecom operators. Non telecom market movement was lower in the first two quarters, however the Company responded to market needs and achieved growth in the third and fourth quarters. On the regulatory front, the Government of India is considering revision of emission norms by June 2013. All engine manufacturers will have to upgrade the design of engines to conform to the new emission standards. The Company is confident that its products will meet the required emission norms. Increased competition in the higher kVA product range from international players venturing into the Indian genset market is expected. The Company is currently in the process of developing engines for higher kVA DG sets and is confident that these will meet customer requirements and will feature enhanced operational and performance parameters. The stationary power plant segment of the large engine business group was adversely affected by high furnace oil prices in Financial Year 2011-12. Generation of power at those prices became uneconomical for the customers. This situation continues to be an area of concern. Prospects for the Current Year For the current financial year, the Company has a cautious outlook on the economy, considering the anticipated rise in crude oil prices and inflationary pressures in the economy, especially in Coke and Steel. The Government of India continues to put great emphasis on infrastructure, especially the urban infrastructure and national highways. The Union Budget 2012-13 envisages 8,800 kms of road constructions with a total outlay of Rs. 25,000 crores. In the power generation segment, the estimated demand and supply gap of around 8%, together with continuing improvement in lifestyles will sustain the business growth. Growth in service and manufacturing sectors is also expected to trigger the demand for generator sets. Besides conventional power generation, the Government of India has announced setting up of new nuclear power plants. The Company has already taken a lead in this area by winning orders worth Rs. 396 crores to supply gensets to the Nuclear Power Corporation of India over the next 3 years. The demand for DV series engines is rising and this product segment is expected to perform better in the current financial year. Cautionary Statement Statements in this report, particularly those which relate to Management Discussion and Analysis, describing the Company's objectives, projections, estimates and expectations may constitute 'forward looking statements' within the meaning of applicable laws and regulations. Actual results may differ materially from those either expressed or implied. Acknowledgements The Directors would like to place on record their appreciation of the contribution made and support provided to the Company by the shareholders, employees, bankers, suppliers and customers. For and on behalf of the Board of Directors ATUL C. KIRLOSKAR Executive Chairman Date : 26 April 2012 Place : Pune.

KIRLOSKAR OIL ENGINES LIMITED (FORMERLY KNOWN AS KIRLOSKAR ENGINES INDIA LIMITED) ANNUAL REPORT 2010-2011 MANAGEMENT DISCUSSION AND ANALYSIS The operations of the Company comprise of Engines and Bearings business and operational performance review is carried out separately for these segments. Industry Overview While global economies are still recovering, Indian economy has comparatively shown a faster recovery. In the year under review, the Indian export sector has shown a growth of approx 50% in volume terms and 37% in value terms over the previous financial year. The engineering sector has significantly contributed to the growth in exports. Growth of investment in agriculture and industries such as retail, hospitality, hospitals, IT, banking and infrastructure is evident in the current financial year. This generated a good demand for our engines, pump sets and generating sets. However due to continual increase in prices of crude oil, customers could also prefer alternate fuels for engines. The growth of telecom Industry in India peaked in 2008-09. This was followed by a period during which the telecom companies separated the activity of telecom towers management into a separate business. The previous financial year saw consolidation of the tower management businesses. As a result of the consolidation, saturation of telecom density in the urban areas and less than expected growth in the rural areas, the demand for generating sets went down considerably. Other than the telecom industry, demand for generating sets for power generation has shown a steady growth. The competition for generating sets below 30kV Arrange has further intensified during the year under review. Company Performance During the year under review, your Company achieved sales of Rs. 2,363 Crs. (Previous Year Rs. 2,219 Crs.) resulting in increase in sales by 6.5 % over previous year. The profit before tax is at Rs. 244 Crs. (Previous Year Rs. 263 Crs.) after providing for depreciation of Rs. 85 Crs. (Previous Year Rs. 84 Crs.) Business wise analysis is presented below: BUSINESS WISE OPERATIONAL PERFORMANCE Your Company caters to the diverse needs of the customers from all the three sectors of economy namely Agriculture, Industrial and Services. A. ENGINE BUSINESS 1. Agriculture & Off Highway Engine Business While agriculture sector grew by 5.4% due to progressive governmental policies during the year under review, the Indian agriculture market for engines below 20HP shrunk by 15% in numbers, due to the delay in onset of monsoon and monsoon continuing through the sowing period. The market share was enhanced in the agriculture segment from 17% to 21% despite the drop in total market volume. A total of more than 76,000 engines were sold in the Agricultural market, out of which 30,000 were portable pump sets which were launched in the year 2008, despite facing competition from cheaper Indian and Chinese alternatives. High head portable pump sets were introduced for the agriculture market. The growth of India's construction equipment industry is directly linked to the growth of the country's economy, since it is driven by increased investments in the infrastructure and related sectors. Construction equipment industry (primarily comprising of backhoe, crane and excavators etc., used in the Off Highway segment) has shown a growth of 20% during the year under review. In the Off Highway Market, the Company grew by 21% driven by robust domestic demand. Besides this, bulk supplies were started to new customers acquired in the previous financial year. Such supplies accounted for 10% of the total supply to the Off Highway Markets. The proactive measures resulted in enhancing its market share in the domestic market. Your Company successfully geared up for the BS-III emission norms now applicable for Construction Equipment Vehicles [CEV], by migrating over 55 applications from BS-II to BS-III. Overseas agriculture & Off Highway market also experienced revival in demand; especially in the West Asia & African markets. During the year under review, acquisition of a major OEM customer in South African mining market strengthened our market position. Internationally, Agriculture & Off Highway markets recovered during the year under review. The marketing strategy will address the demand in the focus markets and will also enable the Company and its business partners to tap the potential business in this market. 2. Power Generation Engine Business The power generation business of the Company addresses the telecom and other industrial segments such as retail, banking, IT and telecom markets. During the year under review the domestic power generation market, except the telecom segment, experienced a revival in demand. Overall market, other than the telecom segment, grew by around 15%. Your Company continuously innovates to bring down the life cycle cost of the products thereby providing value for money to our customers. The newly designed DV series of engines in the range of 320 kVAto 625 kVA were successfully launched in the domestic market. Our Research & Development is working on extending the range to 750 kVA. New products were developed in the range of up to 160 kVA, which run on alternate energy sources like natural gas and bio gas. The global economic meltdown seems to be easing up in the overseas markets served by the Company. Increased efforts in the overseas markets in the industrial segments resulted in acquisition of new customers, in Africa, Middle-East & South East Asia and the Indian sub continent. Company has increased its presence in key geographical locations in countries such as UAE, Nigeria, South Africa & Kenya. 3. Customer Support Business Your Company has a widespread network of trained service dealers and well equipped service outlets all over India. The network enables us to respond to customer calls upto 50 km range within 4 hours and beyond 50 km range within 8 hours. Growth was achieved in Agriculture Spares segment by increasing the number of parts distributors and increasing focus on availability of parts. New initiatives and constant up-gradation of systems and procedures helped the Company in securing customer confidence and also gaining over 21% growth in spare parts sale over the previous year and also additional revenue generation through annual maintenance contracts with cellular operators as well as domestic customers. 4. Large Engine Business During the year under review, engines were supplied for main propulsion application and for stationary power plant application. In the stationary power plant market segment, high fuel oil prices adversely affected new Commissioning of previously supplied engines on the naval vessel frigates built at Mazagaon docks was successful. Four generating sets, each of 3.6 MW rating, are successfully installed at the Kalpakkam Nuclear Power Plant, which are awaiting final commissioning. 5. Kagal Plant During the year under review, in the fourth year of operation, the production of engines increased by 53% and production of generating sets increased by 15% over the previous year. Generating sets of400 kVAand 500 kVA using the new DV series engines were successfully manufactured. 15 Nos. of 500 kVA generating sets were supplied by our OEMs for powering the opening and closing ceremonies of the Common Wealth games at New Delhi. Company successfully added 46 engine application codes to fulfill the needs of the Customers in Off Highway and Power Generation businesses. 2600 rpm portable pump sets were successfully manufactured within the existing set up. Productivity improvements and measures for increasing flexibility in manufacturing processes were introduced to meet the fluctuating market demands. 6. Pune Plant During the year under review, your Company has renovated and upgraded its manufacturing facilities. The plant renovation activity was completed successfully without affecting deliveries to customers. Due to this renovation, improvement is expected in labour and plant productivity. The plant undertook proto, pilot and production batch proving of DV series of Engines. The Pune plant provided 106 new application codes including proto and pilot of BS-III compliant R1040, 4R810, 6R1080 and HA medium Engines. SL90 Engines with FM &UL certification were successfully handed over for commercial production. During the year under review, 12 innovative low cost automation projects were completed and the plant achieved more than 8500 nos. of Kaizens. The Quality circle from Pune plant was selected for excellent category in Quality Circle Contest at National level. It also bagged Silver trophy at international Quality Circle contest. 7. Rajkot Plant During the year under review, the manufacturing capacity for engines was increased to 10,000 engines/month. The plant achieved BIS certification for 5HP to 8HP engines with N-series pumps BEARINGS BUSINESS The automobile industry continued to be buoyant and provided opportunities for growth in the business. During the year under review, the automobile sector grew at an average of 9%. The sales of the bearings division for the year under review amounted to Rs. 123 Crores, an increase of 15% over the previous year. Market share increased to 36% of the OEM market and to 41% in the after market. The after-market segment has grown significantly due to increase in vehicle population. The Company has made adequate investment in technology, infrastructure and quality, which will enhance customer satisfaction. C. RESEARCH AND ENGINEERING 1. New Products and Product Development Your Company strives to fill the product gaps by continuously developing new products and upgrading existing products. The solutions are being constantly optimized to minimize inputs and maximize outputs. The Company has successfully launched K-1080 engine covering 140 to 160 kVA. Two models of DV range are successfully handed over for commercial production to cover product ranges from 320 kVA to 625 kVA. Variants with speed of 1800 rpm are also under development. New variant of portable pump set at 2600 rpm handed over to production to meet higher head requirements. New applications have been developed for R-810 series engines which have been introduced in production. An investment of more than Rs. 20 Crores was made in upgrading Research and Development facilities in view of upcoming stringent emission norms. 2. Emission BS-III norms for construction equipment are effective from 1st April 2011. The company has developed cost effective and user-friendly solution and all the engines have been certified for these norms and proto samples were supplied to customers. 3. Alternate Fuels During the year under review, the Company has developed CNG Generating sets up to 160kVA which have been successfully installed at different sites. Company is actively pursuing the development of engines with bio-fuels like bio-gas and straight vegetable oils (SVO) in the range below20HP. D. INDUSTRIAL RELATIONS The Company continues to maintain and improve its healthy and harmonious Industrial Relations. Kirloskar Oil Engines Limited was selected jointly by Maratha Chamber of Commerce, Industries and Agriculture (MCCIA) and Rotary Club of Poona West, for their newly introduced 'BEST EMPLOYEES RESPONSE AWARD' in large industry category, Pune. Your Company's achievement of signing the 6th consecutive wage settlement in time and without losing even a single production man day in last 50 years (Considering Pre and Post Demerger period) was recognized by a major publication. This is a unique achievement for any manufacturing company in India. Our Employees' health is of prime importance to the Company. Medical check- up of employees is carried out regularly. Company regularly conducts lectures on health, fitness, common ailments and diseases and life style improvement with a view to enhance employee awareness. Development of employees is an important focus area for the company. Employees are encouraged to participate in programmes such as Out-Bound Training, team building, and also various sporting and cultural activities within and outside the Company. E. ENVIRONMENT, OCCUPATIONAL HEALTH & SAFETY (EHS) Environment The Company continues to be recognized for its commitment towards the environment. * Pune plant is certified for EMS, ISO 14001: 2004 (Environmental Management System), an international certification standard, since 1999. * Pune plant is certified for OHSAS-18001:2007 (Occupational Health & Safety Management System), an international certification standard, since 2009. * Kagal plant is certified for EMS, ISO 14001:2004 (Environmental) & OHSAS- 18001:2007 (Occupational Health & Safety Management System) Integrated Management System, since 2009. * At Kagal 2033 trees have been planted to protect the environment * Nashik Plant is certified for EMS, ISO 14001:2004 (Environmental) & OHSAS-18001:2007 (Occupational Health & Safety Management System) Integrated Management System in Jan, 2010. * ANagar Plant is certified for EMS, ISO 14001:2004 (Environmental) & OHSAS-18001:2007 (Occupational Health & Safety Management System) Integrated Management System in Jun, 2010. * Implementation of Environmental (EMS) & OHSAS (Occupational Health & Safety Management System) is in process at Rajkot Plant. EHS Improvements Your Company's maiden Corporate Sustainability report for the year 2009-10, was released in the public domain on 7th March 2011. Kirloskar Oil Engines Limited is the first engine manufacturing company in India, to release this report and receive highest level check certification of A+ from Global Reporting Initiative (GRI), Netherlands. This rating testifies your Company's position as an environmentally conscious company, integrating business principles with sustainable development. Kirloskar Oil Engines Limited has been honored with Parivartan Leadership Award for Sustainability-2011 in automotive sector. This award, organized by India Carbon Outlook, seeks to recognize Indian companies who have embraced sustainability in their business operations and supply chain. These companies have shown leadership by taking initiatives for making their products, processes and facilities sustainable. In the year under review, following EHS improvement measures were implemented. * Upgradation of paint booth in Pune plant to eliminate air and land pollution due to paint dust * Systematic disposal of waste Glass wool (2.9 MT) & used Asbestos sheets (190 MT) * Installation of transparent roof sheets for enhanced illumination level & use of natural day light in R-HA Machine shop & Tech Center. * Installation of turbo vents for improved ventilation in Pune Plant. * Initiated detailed study on Carbon foot print for all the plants Based on the finding of Electrical Safety Audits conducted by National Safety Council (NSC) at Pune, Kagal, Nashik & Rajkot plants, detailed action plan is under implementation. Following measures were taken to increase awareness amongst employees on EHS: a) Various competitions were conducted b) Experts' lectures and seminars arranged on Energy Conservation (ENCON), EHS at all locations c) Environment Day celebration (No Vehicle Day) F. HUMAN RESOURCES During the year, a number of initiatives were taken in the area of human resource development. The Company conducts Employee Engagement Survey through Gallup India every year. The Gallup Survey for the year 2011 was conducted in January 2011. The findings of the survey are used to develop the concrete action plan for increasing employee engagement. The Performance Management System for managers was reframed and implemented. Job Evaluation exercise was initiated to create a role based level matrix in senior management grades. With a view to develop future leadership pool, 20 managers were nominated for Leadership Development Programme, jointly developed with leading management institute. Similarly, Middle Management Development Programme was initiated in collaboration with Kirloskar Institute of Advanced Management Studies. As a part of the Company's effort to improve skill and competency levels of managers, specially designed need based training programmes were conducted in various functional areas. G. CORPORATE SOCIAL RESPONSIBILITY (CSR) Your Company firmly believes in contributing to the well being of society through its CSR initiatives in the surrounding communities with a clearfocus on Health, Education, Environment and Livelihood at all plant locations. * Sponsored education of children from Akanksha Foundation * Computer Literacy Program for children * Career Guidance Workshops forstudents * Health Awareness Program like De-Addiction, HIV/Aids Awareness, Healthy Diet * Celebrated 'Joy of Giving' Week * Free Health Check up Camps * Tree Plantation * PUC Check up camps * Environment Fair at Community * ENCON Initiatives * Workshops on income Generation for Self Help Groups * Livelihood Advanced Business School Training programmes through CM Yl group & Dr.Reddy's Foundation H. COST CONTROL Cost control and cost reduction measures continued to be focus area. This has helped the Company in partly offsetting Inflationary pressures. Value Engineering, Value Analysis and Process Re-engineering were the major/ initiatives undertaken. Effective control on the costs across the supply chain has helped the Company to optimize the material cost. I. QUALITY ASSURANCE Several key processes were strengthened and also undertaken several initiatives like 'Six sigma programs which are being pursued as a part of continuous improvement process were undertaken. The Company has 139 Green belt holders and 50 certified Black belt holders in the year under review. Supplier Quality improvement is a focus area for the Company. Towards this end, the concept of 'Quality Capacity' was emphasized throughout the Company's supply base and also during the Annual Supplier Conference. The Company provides training to suppliers on quality tools like 'Six Sigma' through six sigma black belt internal trainers certified by CM. The Initiatives like Supplier Quality Task Force were implemented. As a result of the efforts put in, the trend for supplier quality performance, measured in terms of defective parts per million (PPM) is showing continuous improvements. For the last few years Supplier Quality Contest has been conducted. This provides recognition for the efforts put in by suppliers in continuous improvement activities as well as in sharing best practices among supplier partners. The number of customer complaints has reduced by more than 20% for almost the entire product range. J. BUSINESS EXCELLENCE For the second consecutive time, your Company has received the Commendation Certificate from CM EXIM for Strong Commitment to Excel. In the pursuit of organisation excellence, this award is a testament to the efforts & commitment of our employees to attain world class performance. CONCERNS & THREATS With the growth momentum in the domestic market, India is an attractive market for most of the Global players in generating sets business. Entry of low cost manufacturers in the lower end of the market has led to a fierce price competition and entry of global players in the higher range has generated intense competition in that segment. This is likely to put pressure on the margins of the products in the short and medium term. The demand for generating sets from the telecom markets is expected to remain sluggish during the current financial year. In order to overcome market challenges Company is focusing on expanding the business in overseas markets and in new product segments like alternate fuel engines, defense, marine auxiliary generating sets etc. The pump-sets manufactured by your Company have a better performance and lower cost of ownership than the competition. Availability of Government subsidies for diesel pump-sets in some of the Indian Agricultural Markets is critical and can impact the demand for these products. The competitive pressures in the Agricultural Market are on the rise and as a result, margins for these products will be under pressure. Company continues to work towards mitigating this threat through several cost control measures. The inflationary trend which started in the last quarter of the year under review, especially in the Metals Market, is showing no signs of softening. Further due to tightening of the credit policy by RBI, money flow in the retail market is getting restricted. As a result, the demand for the Off Highway equipments is anticipated to taper down in the short term. We will continue to monitor the emerging scenario, pick-up the early warning signals and update business plans. Several Global Players in the Off Highway markets have set up their operations in India. Thus the competitive landscape in the Equipment Market is rapidly changing, as the new entrants are attempting to maximize their share of Indian Market. Your Company has acquired New Customers and developed new applications for its products during the year under review and will continue to design appropriate market strategies. Effective from 1 April 2011, the emission norms applicable for Commercial Equipment Vehicles [CEV] have changed from BS-II to BS-III. If the component industry is unable to ramp up its supplies commensurate with demand, Company may lose market opportunities in the short term. Auto Majors will continue to aggressively book the plant capacity of Suppliers. As such, Company will proactively work towards enhancing Supplier capacities and capabilities. PROSPECTS FOR THE CURRENT YEAR For the current financial year 2011-12, your Company has a cautious outlook on the economy, considering the anticipated rise in crude oil prices, inflationary pressures in the economy and the rising interest rates. Government of India continues to put great emphasis on infrastructure especially the urban infrastructure as well as national highways, by enhancing budgetary allocation as well as setting up of lending mechanism. Several necessary steps to meet the requirements of regulatory change from BS II to BS III emission norms in the off highway sector have been taken. In the Power Generation segment, the demand and supply gap for power and improvement in lifestyle will continue to drive the business. The power deficit will continue to drive the demand. The deficit is expected to be around 10% during the current financial year. This deficit, along with the growth in service and manufacturing sector is expected to trigger growth for generating sets business during the current financial year. Besides conventional power generation, Government of India has announced setting up of new Nuclear Power Plants. Your Company has already taken lead by successfully supplying large Gensets to Kalpakkam Nuclear Power Plant. Sale of newly introduced DV range of generating sets has picked up and is expected to do better. With the projected 8-9% GDP growth, the Company expects to achieve growth of turnover in the range of 15% to 20%. CAUTIONARY STATEMENT Statements in this Report, particularly those which relate to Management Discussion and Analysis, describing the Company's objectives, projections, estimates and expectations may constitute 'forward looking statements' within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied. INTERNAL CONTROLS SYSTEMS AND THEIR ADEQUACY Internal Audit across the organization is carried out by a renowned auditing firm as per the plan approved by the Audit Committee. Senior Management of the Company reviews the internal audit reports regularly and the major findings of the audit report along with the action plan are discussed with the Audit Committee. Internal Controls related to key business processes are validated during the course of audit. During the year, ERP implementation review in respect of various business processes was also carried out.