MANAGEMENT DISCUSSION AND ANALYSIS
INDUSTRY STRUCTURE AND DEVELOPMENTS
The Company is engaged in the business of manufacturing and sale of Telecommunicationcables, other types of wires & cables, FRP rods/ Glass rovings, etc. and Engineering,Procurement and Construction (EPC) business.
The Indian market for copper telecom cable viz. JFTC has been passing through a verydifficult phase in the last few years. The number of fixed line telephone subscribers inIndia is witnessing stagnant or declining trend whereas wireless services continue to growat a phenomenal pace leading to anemic demand coupled with unremunerative prices for JFTC.The fluctuation in the price of copper and the volatile exchange rate are the otherchallenges faced by the vendors in the industry. The volatility of copper pricing has beenescalating consistently in the last three years. Keeping a steady price for copperproducts has become a challenge for every cabling vendor.
Transmission in the networks is becoming more and more digital and the need forbroadband access has resulted in OFC increasingly becoming the transmission medium ofchoice. Year 2011 witnessed drafting and introduction of various new policies such asNational Telecom Policy 2011 (NTP-11), the Spectrum Act, merger and acquisitionguidelines, national broadband plan, and national optical fiber network (NOFN). Year 2012will witness rollout of massive broadband networks, national optical fibre network, andstrengthening of network particularly in rural and tier-B areas. India is envisaged tobecome one of the fastest growing OFC market in the world.
The EPC Division of the Company currently concentrates on four business verticals viz.Telecom, Power, Gas distribution Pipeline and Sewage Projects. In Telecom it providessolutions in trenching and laying of optical fibre cables, installation and commissioningof telecom equipments, FTTH installation, civil work and foundation of towers andmaintenance of network. In the power domain the services are offered to the powertransmission and distribution sector with a focus primarily in the power distributionnetworks including those in rural India, renovation and augmentation of existingdistribution systems, underground transmission, feeder segregation, installation of HighVoltage Distribution System (HVDS) and Low Voltage Distribution Systems (LVDS),distribution lines, substation and transmission lines, capacitor banks, lighting projects,and end to end LED solutions, etc. In Gas the Company provides last mile connectivity forcity domestic gas distribution projects. The Company has also recently forayed in CitySewage Projects which are proposed to be executed through trenchless technology.
There is no material change in the industry structure as was reported last year.
BUSINESS REVIEW AND OUTLOOK
The Indian telecom industry witnessed unprecedented growth for several years. Of late,however, the sector has been losing its sheen. Telecom operators who have been battlingcut-throat competition, dwindling margins, falling net profits and spectrum scarcity since2009, have had to bear the brunt of the 2G spectrum controversy. Moreover, 3G services didnot take off as expected.
At the end of the financial year 2011-12, the government has ensured their interest tosettle the controversies surrounding the telecom sector. The draft National Telecom Policylays down an inclusive market oriented agenda for the growth of telecommunicationsservices in India over the next decade. The proposed changes to the licensing frameworkreflect the government's intention to propel the Indian telecomm sector to new growthhorizons.
On the backdrop of the government's initiatives of bringing broadband to every Indianhousehold, and a target of 175 million broadband users by 2017, the telecom cable segmentis at the point of inflexion.
The XIth Five Year Plan aims at a sustainable GDP growth rate of 9% butthere is general consensus that infrastructure inadequacies would constitute a significantconstraint in realizing this development potential. To overcome this constraint, anambitious programme of infrastructure investment, involving both public and privatesector, is being developed by the Government. To exploit the emerging opportunities, theCompany's EPC Division's strategy is focused on expanding its participation intelecommunications, power and oil & gas distribution verticals given the growthpotential by providing high quality services to customers and grow business by leveragingon its strength and synergies.
The Company's sales turnover on account of Telecommunication cables, comprising ofJFTC, OFC, Quad cables etc. increased from Rs.8106.93 lacs in the previous year toRs.9586.44 lacs, during the year under review, mainly due to increase in demand fromprivate operators and supplies to Railways.
As a strategy, the Company is concentrating more on export markets, for which thenecessary platform and credentials have already been established in the last few years andthe company is confident of increasing its export sales in the next year.
The increase in revenue from OFC business at Rs.2809.01 lacs as compared to Rs.2542.54lacs in the previous year is not very significant. The Company has been constantly lookingfor export opportunities in this area.
There may not be any significant improvement in the domestic OFC prices as thebargaining power of buyers and the existence of overcapacity will constrain the ability ofdomestic players to resort to any considerable price hikes in the near future.
Keeping this in view, the Company has taken a strategic decision to participate inturnkey projects which eventually will lead to additional revenue opportunities bycross-marketing its business to the customers besides helping in retention of thecustomers under the changed business environment.
The draft National Telecom Policy when approved should open huge opportunity in thedeployment, operations and maintenance of optical fiber infrastructure which is expectedto increase the OFC requirement.
Despite telecommunication cables market having temporarily shrunk, the Company believesthat in the longer term the proposed new National Telecom Policy and National Broadbandplan will lay a foundation for massive rollout of Optical Fibre Cable network across thecountry boosting demand for your company's product. The biggest challenge for broadbandgrowth in India has been last mile access, i.e. the high-speed connection required betweenthe nearest broadband access Point-of-Presence (PoP) to the home. So far, wireless accesstechnologies have been far more successful in connecting customers in India compared towireline or fixed access technologies. However, since a large chunk (70% or more) ofInternet bandwidth globally is consumed by peer-to-peer file sharing applications, usedmainly for downloads of music, games and video content, the volume of data requires ajudicious mix of both wireless and last mile fibre technologies.
Other Wires & Cables
Also, there was a significant increase in other wires & cables sales from Rs.967.33lacs to Rs.4513.85 lacs in this year, mainly on account of supply of Signaling cables toRailways. With reasonable order backlog at the end of financial year under review, forsupply of Signaling cables, your company's immediate sales prospects appears to be brightin this business.
EPC Contracting/Turnkey Services
Pending the finalization of a new Telecom policy and due to the gloomy businessenvironment in the Telecom sector, there was a dearth of orders for the Company's Telecomdivision during the year under review. The company has been timely executing all thepending projects and is also venturing into other opportunities with better profitability.The company has initiated its first IP1 project for which ground work has been completedand the network rollout will begin by the middle of First quarter of next financial year.More such rollouts are being planned as the Telecom companies are showing considerableinterest in this model. Various government telecom projects like NOFA, Defence project, 4Grollout by private operators are likely to generate big business opportunities in thecoming 3 - 5 years. The company has also ventured into Sewage projects to be laid throughtrenchless technology (HDD method) and expect good volumes through this line also. In thePower division, the company has a reasonably good order book. Most of the projects whichwere targeted and won last year at low margins in order to build credentials for thecompany, are nearing completion and are likely to be over by the First quarter. This wouldgive the EPC Division a bigger platform to participate in a number of forthcoming projectsadding to its topline with improved profitability.
Well experienced employees within the organization have been deployed to ensureeffective monitoring over web enabled software systems. Also the Company has identifiedthe acute shortage of trained manpower for both the roll out and subsequent operation andmaintenance of the OFC/ FTTx networks as a business opportunity and has established aTelecom Training Academy.
In the year 2011-12 your Company's performance has been inadequate. Despite a higherturnover in cables division, the division suffered losses on account of un-remunerativeprices, increased material cost, interest and foreign exchange losses. Also the EPCdivision could not sustain the momentum, as the projects in power sector did not fetch thedesired margins and in the telecom sector no major tenders were opened due to thesituation prevailing in the telecom sector.
The revenue from operations (gross) increased by approx. 28.49% to Rs.26277.30lacs in 2011-12 as compared to Rs.20451.26 lacs in the previous year.
The aggregate other income decreased to Rs.681.96 lacs as against Rs.1081.51lacs compared from the previous year mainly due to lower dividend income on investmentsand lower non operating income.
The Company suffered loss before depreciation of Rs.824.52 lacs as againstprofit before depreciation of Rs.843.37 lacs as compared to previous year mainly due tolower contribution from both the Divisions, lower dividend income and higher finance costsand foreign exchange losses.
The finance costs are higher at Rs.1201.58 lacs (previous year Rs.735.91 lacs)due to higher utilization of working capital limits, and foreign exchange ratefluctuation.
There was no change in the capital structure during the year. However, thedecrease in Reserves & Surplus by Rs.1303.46 lacs is because of the net loss in thecurrent year.
The additions to the fixed assets of Rs.133.71 lacs during the year mainly consist ofcapital expenditure incurred for modernization and upgradation, installation of balancingequipments and new testing facilities and certain additions to the furniture, officeequipment/ vehicles.
The inventory has increased to Rs.3234.68 lacs as on March 31, 2012 fromRs.1855.71 lacs as at the end of the previous year mainly due to increase inwork-in-progress.
The trade receivables level at Rs.17578.22 lacs as on March 31, 2012 as comparedto Rs.10247.55 lacs as on March 31, 2011 has increased due to higher sales in thetelecommunication cables division in the last quarter and extended credit to customers andretention money withheld by the customers of EPC Division as per the governing terms ofthe contracts awarding to the Company and/or as per evolving industry norms.
For detailed information on the financial performance with respect tooperational performance, a reference may please be made to the financial statements.
OPPORTUNITIES, THREATS & BUSINESS OUTLOOK
India's telecom sector has been the centerpiece of its growth story, contributingsignificantly to the economy. From less than one million subscribers in 1998, the industryhas grown exponentially to connect over 900 million subscribers as of January 2012. Thisrapid growth has been achieved through entrepreneurship, dynamic strategies and experttalent. However, some of that sheen seems to be wearing off now. Last year's 2G scam istaking a serious toll on the sector, which has been battling dwindling margins, decliningrevenues and falling quarter-on-quarter profits since 2009.
Moreover, the operator's heavy investments in acquiring 3G licences are yet to pay offwith service uptake still slow, contrary to operator expectations. The operators also facethe prospect of having to pay heavy penalties for allegedly violating various regulatorydirectives. Clearly, all's not well with the Indian telecom sector. This started becomingapparent by mid-2011.
In the wage of the 2G controversy and the resultant uncertainty, the country's telecomsector remained subdued over the past year. Only a handful of managed services contractsand equipment deals were finalized in 2011. Most operators, not surprisingly, werehesitant to enter into any major partnerships. However, 2012 seems to have started on abetter note.
With the revised National Telecom Policy expected to be announced shortly, the sectorexpects greater clarity on the policy and regulatory fronts going forward.
The Government's ambitious plan to lay a nationwide OFC network to bring the country's1,20,000 villages into the high-speed Internet fold will result in an explosive growth ofOFC business. Optical backhaul networks can support robust access connectivity and trackrising bandwidth demands. This proves to be true for a country like India, where there areclusters of DSL, deployments that need to be connected by fiber backhaul. Hence, the nextlevel of demand for bandwidth for data and video can only be met by fiber.
Fiber to the home (FTTH) is finally emerging into the mainstream and is set totransform the telecom environment worldwide over the next decade. FTTH represents thefirst major upgrade to the access network since the deployment of cellular infrastructurein the 1980s and 1990s, and like cellular, it is likely to have a deep impact on theentire supply chain, including technology venders and network operators.
In access networks, fiber-to-the x (FTTx) network is poised to play a major role tillthe subscribers replace copper altogether, thereby, driving the fiber demand to higherlevels. This should be a positive sign for telecom cable industry. Over the next 15-20years, copper access networks worldwide are expected to be largely replaced by a fibreaccess network, creating massive opportunities for venders, network builders, and serviceproviders.
The overall trend of the technologies is focused on data and converged services, andmaking the solutions more robust. This is bolstered by the fact that there has been aconstant rise in Copper prices in the last few years driven primarily due to the shortageof the supply, thereby shifting the focus of the market to Optical Fibre Cables. Bandwidthis a major constraint in the Indian market which has further fuelled the increase indemand for Optical Fibre Cables.
Telecommunication is a regulated industry and regulatory changes affect both ourcustomers and us. However, as explained above the Government's ambitious targets fortelecommunication expansion should see favourable regulatory environment in India.
The customer base in telecommunication cable industry is relatively concentrated. TheCompany's major customer over the years has been BSNL and MTNL. The Company has, however,been able to retain and expand customers in Private Sector and is striving hard to expandits footprint in the lucrative export market.
RISKS AND CONCERNS
The risks that may affect the functioning of the Company include, but are not limitedto:
Dependence on limited number of major clients;
Increasing cost of raw materials and logistics;
Volatile forex fluctuations;
Competitive market conditions;
Inverted duty structure;
Compliance and regulatory pressures including changes to tax laws.
Your Company has a defined risk management strategy with senior management identifyingpotential risk, evolving mitigation responses and monitoring the occurrence of risk.
INTERNAL CONTROL FRAMEWORK
The Company's system of financial, operational and compliance control and riskmanagement is embedded in the business process by which the Company pursues itsobjectives. The management is committed to ensuring an effective internal controlenvironment, commensurate with the size and complexity of the business, which providesassurance on the efficiency of the Company's operations and safety/security of its assetsbesides orderly and legitimate conduct of Company's business in the circumstances whichmay reasonably be foreseen. The Company has a defined organization structure, authoritylevels delegated powers, internal procedures, rules and guidelines for conducting businesstransactions.
The Company has engaged a firm of Chartered Accountants for internal auditing, whobesides conducting periodic audits, independently reviews and strengthens the controlmeasures. The Internal Auditors regularly brief the Management and the Audit Committee ontheir findings and also on the steps to be taken with regard to deviations, if any.
ENVIRONMENT & SAFETY
The Company successfully continued with the implementation of occupational health andsafety, quality and environmental protection measures and these are ongoing processes atthe Company's plant and facilities. Various proactive measures have also been adopted andimplemented which, interalia, include adoption of cleaner technologies wherever feasible,conservation of resources through waste reduction and training of employees with a focuson sustainable development by improving standards on safety and environment protection. Asa recognition of these objectives, the entire range of products of the Company continue toremain certified to the requirement of international standard ISO 14001:2004 by the DetNorske Veritas (DNV).
INDUSTRIAL RELATIONS, HUMAN RESOURCE DEVELOPMENT AND CORPORATE SOCIAL RESPONSIBILITIES
The Company sees its relationship with its employees as critical to the future and itsemployee relations agenda focuses on ensuring that employees feel valued, on managingchange constructively, and on creating an environment and culture within which everyemployee can maximize his contribution.
Your Company believes that the competence and commitment of the people are theprinciple drivers of competitive advantage which enhances competitive strength bydifferentiating it from competitors. The industrial relation climate of your Companycontinues to remain harmonious with focus on improving productivity, quality and safety.Efforts are being made to strengthen organisational culture in order to attract and retainthe best talent in the industry. Training needs are identified in systematic manner andregular training programmes are organised both in house and external. The Board recordsits appreciation of the commitment and support of the employees. The Company employed 398number of permanent employees on its Roll as on March 31, 2012.
The Industrial Training Institute established by the Company with the help of M.P.BirlaFoundation Educational Society for providing vocational training to students fromsurrounding villages continues to get encouraging response and students passing out fromthis Institute are either self employed or have been successfully employed in variousindustries nationwide.
The Training Institute, M.P.Birla Telecom Academy has been opened at Manesar, nearGurgaon (Haryana) last year and is currently running two residential courses on rollout ofOFC networks and O&M OFC networks. The training levels are at three levels viz.Activity level, Supervisory level & Engineer level. The Company believes that as apart of the M.P.Birla Group, which is actively associated with various social andphilanthropic activities across India, the opening of the above training institute andimparting of such training will benefit the industry and also improve the quality ofworkmanship in the industry.
The Management Discussion and Analysis Report may contain certain statements that mightbe considered "forward looking statements". These statements are subject tocertain risks and uncertainties. Actual results may differ materially from those expressedor implied in the Statement as important factors could influence the Company's operationssuch as demand supply conditions, Government policies, local, political and economicdevelopment, industrial relations, risks inherent to the Company's growth and such otherfactors. The Company does not undertake any obligation to publicly update, inform orrevise such statements, whether as a result of developments, events or actualmaterialization. Market data and product analysis contained in this report has been takenfrom internal company reports, industry & research publications, but their accuracyand completeness are not guaranteed and their reliability cannot be assured.