MANAGEMENT DISCUSSION AND ANALYSIS(Within the limits set by the Company’s competitive position)
The core business of MRF is manufacturing, distribution and sale of tyres for variouskinds of vehicles. The management discussion and analysis given below discusses the keyissues for various sectors of the business.
Tyre Industry Structure & Development
The turnover of the Indian tyre Industry is valued at Rs 30,000 crore for the period2010-11. Exports accounted for Rs 3,600 crore. 1192 lakh tyres were produced by 39 tyrecompanies. Ten top companies produce 95% of the total production.
Truck and Bus tyres constitute 65% of the tyre industry turnover. Around 70% of theturnover is sold in the replacement market which is competitive but margins are better.The OE segment cannot be ignored as volumes are high but margins are less as prices aredependent more on the manufacturers of vehicles. In the Passenger Car group, 54% of tyresare sold to OEMs and 42% in the replacement segment. The tyre industry is raw materialintensive and predominantly cross-ply or bias-ply tyres are manufactured. The truck, busand LCV segments continue to be cross-ply based due to poor road conditions, low OEfitment and high initial cost. Passenger tyres are currently 98% radial tyres.Radialisation in the light commercial vehicle group is 18% and in heavy vehicles (truckand bus) the level is 15%.
The tyre companies produce truck tyres and a range of non truck tyres. Segment wise,there has been a 14% increase in the production of heavy commercial vehicles and a 15%increase in light commercial vehicles.
There has been a significant vehicle segment. In the passenger and utility group, therehas been an increase of 14% and 13% respectively over the last year. In two wheelers,scooter segment production witnessed a 31% increase whilst in the motorcycle segment,production increased by 20%. In the farm segment, there was a 38% increase in productionover 2009-10.
The tyre industry provides direct and indirect employment to one million people,including dealers, retreaders and truck operators. The truck operations are controlled by2.6 million small operators.
There are around 5,000 tyre dealers spread throughout the country, most of whom sellmultiple tyre brands.
Opportunities and Threats
The worldwide recession continues throughout the rest of the world mainly in USA andEurope. With strong financial fundamentals, the economic situation in India, thoughvolatile, is far better and conducive to robust growth. With growth all round, foreigninvestors will prefer to invest in India, even in preference to China which relies heavilyon exports to the advanced countries. Foreign tyre companies will enter the Indian marketand invest more. This development will intensify competition and could also cause a glutin the Indian market.
Despite several representations to the Government, the inverted duty issue is yet to beresolved. The duty concessions to importers has led to dumping of cheap and unsuitedtyres. Duty concessions should be extended to the imports of raw materials by the tyremanufacturers. The performance of tyre manufacturers is affected by raw material costslike natural rubber and petroleum products, the prices of which continue to spiral.
The volatility in rubber prices will be a strain on the margins of tyre companies. Apermanent reduction in rubber import duties would ease the pressures of the tyre industry.There is a limit to which cost escalations can be passed on to the consumers and also achallenge to increase the prices of tyres to OEMs.
The threat of imports, especially from China would further increase and can put thedomestic industry under pressure in view of the move to remove the anti-dumping duty.
Segment wise and Product wise performance
During the period 2010-11, MRF achieved a turnover of Rs 10,637.03 crore - a recordturnover and the first increase of47%inthesmallcommercial Rs 10,000 crore mark. This is anincrease of 32% over the previous year. Across the board, there were positive increases,with a 12% increase in volumes in all segments. In the heavy commercial vehicle groupwhich is the largest segment, the increase was 11% over the last year. In the motorcycleand scooter segments, the increases over the previous year were significant at 14% and 24%respectively. The passenger car group registered an increase of 5%. In the farm group,production increased in the tractor (front) group by 8% and 21% in the tractor (rear)categories.
Speciality Coatings
The Directors, considering the Company’s long-term vision for its core business,decided to hive off the Speciality Coatings division of the Company to MRF Corp Limited,which is a 100% subsidiary of MRF Limited w.e.f. 01-04-2011. The Directors expect rapidgrowth in business of the division under the wholly owned subsidiary of the Company.
Conveyor Belting
MRF’s Muscleflex range of conveyor belting continues to be preferred by customersacross segments from power, steel, cement to fertilizers, paper etc.
The quality of MRF’s Muscleflex belting has won the trust of many large Corporateswho have now made it their first choice.
In markets across the world too, Muscleflex conveyor belting has gained preference withlarge mining customers in the most demanding operating conditions.
During the year, the conveyor belting division achieved a growth of 14% over theprevious year.
Exports
Facing global recession and a challenging and competitive year, MRF posted a growth of23% over the previous year 2009-10. In the year gone by, continued volatility in rawmaterial prices and increased input costs definitely affected margins.
MRF’s strong distributor network worldwide and brand presence in key marketscontributed to a 7% growth in the heavy commercial vehicle segment.
Outlook
While the demand outlook for tyres appears favourable with a 8 to10% annual growthforecast, the pressure on margins will continue unless the cost issues are addressed. Mosttyre companies are planning capacity expansions especially in the truck radial segment andthis development will fuel competition in this segment and the tyre industry in general.The growth of the tyre industry will also depend upon the expansions in the automobileindustry and the efforts made by the Government to improve the road infrastructure. Also,the Government should study the inverted duty issue and take corrective action byproviding a level playing field for the tyre industry.
Performance of the Company
The sales turnover of the Company during the year has increased from
Rs 8,080.45 crore in 2009-10 to Rs 10637.03 crore in 2010-11, an increase of about 32%.The profit before taxation after including exceptional item stood at Rs 893.65 crore inthe current year as against Rs 534.66 crore in the previous year. The Exceptional item ofRs 404.23 crore represents reversal of excess depreciation of earlier years, due to changein method of depreciation from Written Down Value (WDV) to Straight Line Method (SLM).After making provision for income tax, the net profit stood at Rs 619.42 crore as comparedto Rs 353.98 crore, in the previous year.
Internal Control Systems and their Adequacy
The Company has adequate internal control systems in position and has reasonableassurance on authorising, recording and reporting transactions of its operations in allmaterial respects and in providing protection and safeguard against misuse or loss of theassets of the Company. The
Company has in place documented procedures covering all financial and operationalfunctions commensurate with the size and complexities of the organization.
Some of the salient features of the internal control system in practice are:-
(i) Preparation of Annual Budget for operations and service functions and monitoringthe same with actual performance at regular intervals.
(ii) A robust ERP system connecting all the plants, sales offices and head office,enables integrity of data and seamless flow of information.
(iii) Internal controls have been designed in order to reasonably ensure that assetsare safeguarded and transactions are properly authorized whereby the system attainscapability for prevention and/or timely detection of material errors and irregularities.
(iv) The internal audit department carries out periodic audit of all locations andfunctions based on the plan approved by the Audit Committee. The observations arising outof the audit and the follow up action are periodically reviewed at the Audit CommitteeMeetings.
(v) A detailed presentation is made to the Audit Committee and to the Board ofDirectors on business, operational and financial risks faced by the Company and the planof action to mitigate the same.
(vi) All assets are safeguarded and protected against losses and against unauthorizeduse or disposal and are periodically verified.
Discussion on Financial Performance with respect to Operational Performance
| | (Rs Crore) |
| 2010-11 | 2009-10 |
| Sales | 10637.03 | 8080.45 |
| Other Income | 33.14 | 29.13 |
| Total Income | 10670.17 | 8109.58 |
| Profit Before Taxation | 893.65* | 534.66 |
| Provision For Taxation | 274.23 | 180.68 |
| Net Profit | 619.42 | 353.98 |
* includes an Exceptional item of Rs 404.23 crore which represents reversal ofexcess depreciation of earlier years, due to change in method of depreciation from WrittenDown Value (WDV) to Straight Line Method (SLM).
The operations of the Company primarily relate to the manufacture of rubber productsviz. tyres, tubes, flaps, tread rubber and conveyor belt and this constitutes the majorbusiness segment. Other business operations of the Company consists of manufacturing anddealing in specialty coatings, sports goods etc, which do not contribute significantly tothe total revenue of the Company. However, the Specialty Coatings division has since beensold to MRF Corp Ltd, a wholly owned subsidiary of the Company with effect from 1st April,2011.
The price of natural rubber continued to rise and reached its peak in April 2011.Similarly prices of other raw materials like synthetic rubber, carbon black etc. haveincreased substantially from February 2011. In the past two months, the prices have showna declining trend. The increase has adversely impacted the margins during the year.
Risks and Concerns
Due to inflationary pressures, RBI has revised interest rates several times during thecurrent year, resulting in higher borrowing cost; this is further compounded by frequentincreases in fuel prices. Coupled with slower growth in economy, the Indian automotiveindustry started feeling the pinch of lower off-takes in all segments. On the other hand,many of the global and local players are expanding their tyre manufacturing facilities inIndia to cater to the anticipated growing demand. There is a concern that this may resultin increased supply capacity vis-a-vis lower demand, resulting in intense pressure onmargins. Natural rubber and other major raw materials have seen an unprecedented priceincrease during the last one year. This trend of volatility in the raw material priceswould continue in future. Due to competitive pressures, coupled with cheaper importedtyres, the price increase in raw materials could not be fully passed on to the customersimmediately.
The impact of recent crisis in Euro-zone and other developed countries has resulted in"Rupee depreciation". If this situation continues, it will increase our netforeign currency exposure. The Audit Committee and the Board of Directors have beenapprised of the major business and operational risks identified by the Company and stepsproposed to be taken to mitigate the same. The Company also has a comprehensive riskanalysis and management system, wherein all risk factors are identified and proper actiontaken to mitigate such risks.
Human Resources
Despite the global economy continuing to be in doldrums badly affecting the west andEurope and recession affecting everybody, India is one of the few countries which survivedthe crisis. In India, while growth did slow down to some extent, MRF sustained a steadyhealthy growth pattern and was able to retain and assure its work force that our Companyis a better place to work. Such a conducive atmosphere helped to attract talentedresources for our current requirements and expansion projects.
During the period, MRF revisited its assessment centre for recruitment of itsentry-level supervisory and engineering staff and re-designed assessment centre to augmentthe personality profiling model to suit the changing requirement. During the inductiontraining programme, in addition to the technical training, supervisory skill and talentdevelopment training programme has been made mandatory for all entry level recruits in themanagement positions. Based on the feedback from operatives trained at NTTF and thepositive work culture exhibited by them, MRF continued to train all fresh traineeoperatives at NTTF before the placements in the manufacturing units.
To develop internal talents and to provide career growth opportunity, talents from theexisting units were identifiedthrough a rigorous selection process and after providingintense training on technical, managerial and leadership skills, they were placed invarious leadership positions in the expanded facilities at Ankanpally and Trichy, alongwith other direct recruits.
Visit by technical, manufacturing and engineering personnel to various state of arttyre building machine, accessories and equipment manufacturing facilities abroad has givena great learning experience. Apart from that, learning and development functionconcentrated on relationship building, management and leadership development. Intensivetraining through experiential learning methodology was carried out in many phases for thebenefit of union leaders, opinion makers and departmental managers, especially atTiruvottiyur, Arkonam and Puducherry. For succession development and for future leadershiprequirements, prospective talents were identified and executive development programmes andmanagement development programmes were done at various intervals to prepare them to takeup future leadership positions. In addition to the above, unit specific programmes onprocess, product and technology for operatives were held on regular basis.
Industrial relations across the units were generally harmonious and cordial. During theperiod, Medak, Goa and Puducherry have entered into long term wage settlement with theirunions.
TPM (Total Productive Maintenance) continue to yield benefits. The various initiativesand projects undertaken and increase in the number of kaizens have substantially improvedthe machine availability, utilisation and productivity. During the year, our Kottayam unithas made substantial ground work and steady progress in all activities and the pre-finalaudit team has recommended Kottayam unit for final audit for "the Certification ofTPM Excellence". The total employee strength as on 30.09.2011 is 14,960.
Corporate Social Responsibility
It is a shared and common belief that education is a critical requisite and aneffective catalyst for social and economic change in India. It is a privilege which manychildren cannot access due to economic considerations. Education breaks the cycle ofpoverty and helps improve their quality of life. Awareness on health and environmentalissues and education of the youth of India, benefits entire communities. Our focus oneducation continued during the year. Merit-based academic scholarships were awarded tochildren of Government village schools surrounding our factories.
The MRF Institute of Driver Development (MIDD), a pioneering institute which providestraining to drivers in Light & Heavy commercial vehicles has turned out 345 driversduring the year 2010-11, which includes 136 HMV drivers from refresher course. Theinstitute has also undergone a major change during the year, by replacing its entire rangeof fleet with the latest state of the art vehicles for training drivers. Right from itsinception, the institute epitomised a mission far nobler than merely training drivers. Theobjective set for it was of moulding rural youngsters who were deprived of opportunitiesinto a rare breed of competent and cultured professionals. This would in turn, contributeimmensely to the safety of the road transport industry and the society at large. Generalhealth camps were organised with due emphasis on both curative and preventive aspects ofwellness.
Support for local social organisations is also rendered.
Cautionary Statement
Statements in the Management Discussion and Analysis describing the Company’sobjectives, expectations or predictions may be forward looking within the meaning ofapplicable laws and regulations. Actual results may differ materially from those expressedin the statement. Important factors that could influence the Company’s operationsinclude global and domestic supply and demand conditions affecting selling prices offinished goods, input availability and prices, changes in government regulations, taxlaws, economic developments within the country and other factors such as litigation andindustrial relations.