Management Discussions And Analysis Report
MANAGEMENT DISCUSSIONS AND ANALYSIS REPORT
Precision Pipes and Profiles Company Limited (PPAP) is one of the principalmanufacturers and OEM supplier of Profiles and Extrusions in India. PPAP is engaged inmanufacturing of Specialized Profiles and Extrusions items, used by Auto and Refrigerationindustry majors. Auto division is primarily focused on Outer Belt Moulding, Inner BeltMoulding, Windshield Moulding, Roof Moulding, Quarter Window Moulding, A-Pillar Garnish,B-Pillar Garnish and Skirt Air Damper etc. Refrigeration division primarily manufacturesTrim, Door Profile and Freezer Profile for Refrigeration Industry and other (Misc.)division manufactures U.K. Adapter, French Adapter, Schuko Adapter, Dressing & Cap,Cabler Spoon, Extruded Track and Copper Conductor to Electrical & ConstructionIndustries.
PPAP is OEM suppliers and the client list includes Maruti Udyog Limited, Honda SIEL,General Motors and Toyota Kirloskar Motors Limited, Mahindra and Mahindra, Tata MotorsLimited and Nissan Motors. The company has a technical collaboration with Tokai Kogyo Co.Ltd (TKCL), Japan and Nissen Chemitech corporation, Japan to manufacture automobileproducts. In the white goods industry, the company supplies customized profiles to Godrej,Voltas, Videocon and Carrier Refrigerators. PPAP derives around 90% of the turnover fromautomobile customers.
Industry Structure & Development
The Indian auto component industry is one of the front runners for grabbing the globalauto components outsourcing market. The automotive industry continued its strong growthmomentum during FY10-11 with sales growing at 26%. The passenger vehicles segmentoutperformed the sector with healthy growth of 29% driven by ballooning spending power,easier financing and a wider choice of models in an economy growing at nearly 8%-9%annually.
As per CRISIL Research, India is most likely to be one of the fastest growingautomobile markets, and perhaps the third largest, in terms of domestic market volumes, by2020. The growth trajectory in automobiles in India was high, in double digits, during thepast decade partly because of the acceleration in economic growth, and partly, because offavorable factors such as increasing finance penetration and rising consumer aspirations.The same factors are likely to continue to drive more than 10 per cent growth in cars,utility vehicles, light commercial vehicles, and scooters over the next 10 years. As perSIAM estimates, the sector is expected to grow at 15%-16% in FY-12 despite being impactedby factors like high inflation, rising raw material, increase in interest rates and fuelprices.
During 2010-11, the domestic market witnessed a slew of new launches by almost all theOEMs. Cruze by General Motors, Aria by Tata Motors,Alto K-10 by Maruti Suzuki and the much awaited and acclaimedEtios from Toyota to name a few, apart from launches in small commercialvehicles. Tata Nano, the small car wonder which could not live up to themarket expectations due to the safety issues saw the volumes zoom to levels of 10,000 carsin Mar 2011 on the back of renewed marketing efforts by the company.
Awards and Recognition
PPAP once again achieved recognition of its excellence. Your company was awarded byMaruti Suzuki India Limited (MSIL) during their annual supplier convention on 3rd and 4thMay 2010, held in Hong Kong under the categories of "Overall Excellence Gold Award,Incoming quality improvement certificate and Quality awareness shield".
Your company was also awarded by Honda SIEL Cars India Ltd and Toyota Global Supplierconvention 2010 under the categories of "Best Cost Co-operation in New Model, BestNew Model Start Up Award, and Silver Award For Deliveries, and Regional Contribution Awardfor Supplies in India" respectively.
Opportunities and Threats
The growth of auto ancillary industry is depends upon the automobile industry.Competition in this industry is high. It is expected that Indian automobile industry willachieve mass motorization status by 2014. India is being recognized as potential emergingauto market. Unlike the USA, the Indian passenger vehicle market is dominated by cars(79%). Two-third of auto components production is consumed directly by OEMs. India is thefourth largest car market in Asia-recently crossed the 1 million mark.
The strength of your company is technologically superior Product. Your Companycontinues to invest in up gradation and expansion of its manufacturing capacities. Thein-house R&D Department has been consistently developing quality products and is alsostriving for achieving cost efficiencies. Your Company receives strong support from itsForeign Technical Collaborators not only in the form of sharing of new technology but alsoby receiving assistance in upgrading manufacturing and other processes which results intechnologically superior products with sustainable quality.
These advantages need to be leveraged in a manner to attain the twin objective ofensuring availability of best quality product at lower cost to the consumers on the onehand and developing and assimilating the latest technology in the industry on the otherhand.
Even with this rapid growth, the Indian automotive industrys contribution inglobal terms is very low. Key factors influencing the global car manufacturers have aripple effect on the domestic automobile industry in different parts of the world as wellas the auto ancillary industry which supplies parts to the auto industry. Internationallyconsumer preferences are determining the current styles, reliability, and performancestandards of vehicles. Government regulations in relation to trade, safety, andenvironment etc also make it necessary for modernization and changes in designs andproduction methods. Movement rise in oil prices also has an impact on demand for largecars in India.
India continues to be an attractive destination for the global automotive players. Tocounter the threat of growing global competition, the Company has planned to bridge thequality gap between its products and foreign offerings, while maintaining its low costproduct development/sourcing advantage.
Further tightening of liquidity position, reduction in exposure to vehicle financing bybanks/NBFCs, hardening of consumer interest rates, steep rise in international crudeprices would have an adverse impact in the domestic automobile market.
SEGMENT WISE PERFORMANCE
The Company is operating mainly into Auto Component business and derives more than 90%of the turnover from automobile customers and remaining from profiles for white goods,electrical and construction industry.
Divisional Contribution in total turnover 2010-2011
|DIVISION ||Sales 2010-11 ||% to total Sales ||Sales 2009-10 ||% to total Sales |
|AUTOMOBILE ||1,87,99,63,025 ||93 ||1,58,51,01,246 ||93 |
|REFRIGERATION ||8,90,73,027 ||4 ||10,15,90,205 ||6 |
|MISCELLANEOUS ||4,98,47,443 ||3 ||1,81,29,653 ||1 |
|TOTAL ||2,01,88,83,495 ||100 ||1,70,48,21,104 ||100 |
The automotive industry remains one of the highest revenue-earning industries in Indiacontributing majorly to Indias GDP, providing direct and indirect employment tomillions of people. The market outlook for the industry remains promising with demandacross the car segments. India continues to consolidate its position on the global frontand now accounts for 5% of global auto production, up from 1.4% at the beginning of 2000.The investment in the industry is expected to be up to USD 17bn in fresh capacity over thenext four years and the investment in automotive components is expected to be USD 12bnover the next six years driven by strong technological capability and availability oftrained manpower at competitive prices. As per Industry estimates, growth rate in the Autosector is expected to moderate to 15%-16% in FY-12 mostly because of high inflation,rising raw material prices, increase in interest rates and fuel prices. However anexpanding middle class population, growing earning power, industrial development andGovernments focus to build infrastructure, the demand for passenger cars andcommercial vehicles shall continue to grow.
With the finalization of the Automotive Mission Plan (AMP) India is expected to becomea preferred destination for design and manufacture of automobile. The AMP proposed a25-point plan that included making India a manufacturing and export hub for small cars,multi-utility vehicles, two and three-wheelers, tractors and components.
Risks and Concerns
The Company is exposed to external and internal risks associated with the business.
The operations of the Company are directly dependent on the growth of Indian automotiveindustry. General economic conditions impact the automotive industry, and, in turn, theoperations of PPAP as well. To counter these risks, the Company continues to broaden itsproduct portfolio, increase customer profile and geographic reach.
The Company is exposed to strong competitive pressures both domestic and overseas. TheCompany is also exposed to financial risk from changes in interest rates, foreign exchangerates and commodity prices. The Company also faces challenges with regard to fast changingtechnology, sustaining cost efficiencies brought into the system and planning capacityexpansion in the wake of changing demand patterns.
Risk management is reviewed by the Audit Committee, which reviews the Companysmanagement activities on a regular basis in addition to monitoring for any new risks thatmay arise due to changes in the external or business environments. We are fully aware ofothers risks and has structured risk management system in place ,while the possibility ofnegative impact due to one or more of such risks can not be totally ruled out, the Companyproactively takes conscious and reasonable steps, making efforts to mitigate thesignificant risks that may affect it. financial performance with respect to operationalperformance.
Total income of the Company increased from Rs. 171.84 Crore in fiscal 2010 to Rs.207.60 Crore in fiscal 2011. The increase in income was on account of increase in sales ofproducts manufactured by the Company.
The Companys Profit before Interest, Depreciation and Tax increased from Rs.39.48 crores in FY 2010 to Rs. 54.22 Crores in the FY 2011. The EBIDTA margin for thefiscal 2010 and 2011 has been 22.97% and 26.12% respectively showing an increase of37.33%. PAT increased to Rs. 27.16 Crores in fiscal 2011 from Rs.13.58 Crores in fiscal2010.
3. Earning Per Share (EPS)
The Company recorded an EPS of Rs. 19.40 per equity share of Rs.10 each on an Equity ofRs.14.00 Crores during 2010-11.
Apart from payment of an interim dividend of Rs. 2/- share, the Board has recommended afinal dividend of Rs. 2.00 per equity share of Rs.10 each, to be appropriated from theprofits of the Company for the financial year 2011.
5. Dividend Payout
The Dividend payout of Rs. 560.00 Lacs amounts to 21 per cent of Profit after Tax inthe financial year ended 31st March, 2011.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
PPAP has in place systems of internal control which are commensurate with its size, andthe nature of its operations. These have been designed to provide reasonable assurancewith regard to recording and providing reliable financial and operational information,complying with applicable statutes, safeguarding assets from unauthorized use or losses,executing transactions with proper authorization and ensuring compliance of corporatepolicies. Further internal audit and management reviews are conducted regularly and thereports are regularly submitted for review to the Audit Committee of the Board ofDirectors.
PPAPs Audit Committee reviews all audit reports submitted by the internalauditors; follows up on the implementation of various recommendations; meets theCompanys statutory auditors to ascertain their views on the adequacy of internalcontrol systems; and keeps the Companys Board of Directors informed of majorobservations from time to time.
HUMAN RESOURCES / INDUSTRIAL RELATIONS
The HR policies and procedures of your Company are geared towards nurturing anddevelopment of Human Capital. Your Company has transparent processes for rewardingperformance and retaining talent. Skill Gap Analysis and other systems are also in placeto identify the training interventions required. Priority is given to succession planningand talent management. Industrial relation at all factories continued to remain cordial.
As on 31st March, 2011 your Company has 917 employees.
Statements in the Management Discussion and Analysis describing the Companysobjectives, projections, estimates, expectations may be "forward-lookingstatements" within the meaning of applicable securities laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould make a difference to the Companys operations include, among others, economicconditions affecting demand/ supply and price conditions in the domestic and overseasmarkets in which the Company operates, changes in the Government regulations, tax laws andother statutes and incidental factors.