ambuja cement eastern ltdmerged Management discussions

AMBUJA CEMENT EASTERN LIMITED ANNUAL REPORT 2005 MANAGEMENT DISCUSSION AND ANALYSIS We have pleasure in presenting to you the 23rd Annual Report together with the Audited statement of accounts of the company for the 18 months period ended 31st December 2005. EXTENSION IN ACCOUNTING YEAR At the outset, we would report that the accounting year of the company for the year 2004-05 was extended by a period of six months ending 31st December 2005 for which necessary approval was obtained from the Registrar of Companies. In consequence of the above, for holding the Annual General Meeting of the members of the company also before 31st March 2006, extension of time was obtained from the Registrar of Companies in accordance with statutory requirements. During the 18 months period under review, the company has made significant strides both in terms of profitability as also in operational parameters. For the 18 months period, the company achieved record profit of Rs. 136.63 crores before taxation. On an year on year basis too, profitability increased by 38% which is remarkable considering that this has been achieved in the face of stiff competition and on the back of a steep increase in cost of inputs, fuel costs as also in the cost of both inbound and outbound logistics. The quantitative data relating to production and sales on a comparative basis is as under: (In Million Tonnes) Description 18 Months Period Year ended Ended 31.12.2005 30th June 2004 Clinker 1.76 1.17 (1.19) Cement Production 2.57 1.62 (1.76) Sale of Cement 2.57 1.62 (1.75) Note : Figures in brackets represent figures for 12 Months ended 30th June 2005. REVIEW OF PERFORMANCE Production As stated earlier, clinker production for the 18 months period recorded a new high of 17.63 lacs MT. On an year on year basis, the production of clinker showed a marginal increase over last years levels. Bhatapara Unit continued to achieve a satisfactory kiln run factor and Sankrail Unit too sustained. its growth both in quantity as also in quality terms. Sankrail Unit recorded the highest levels of production and despatches during the period under review. It also achieved the lowest plant specific power consumption per KWH/MT during the period. At Bhatapara also power consumption was optimized. Going down memory lane, towards the end of the year 1997 when the resuscitation process of the company was set in motion, we have every reason to feel overwhelmed as also humbled by the significant progress that we have achieved within a short span of eight years. Our dedicated group of employees have contributed largely for the success achieved and deserve every accolade for their efforts. Marketing Net sales for 18 months period ended 31st December 2005 was Rs.691.84 crores. On an annualised basis, growth in sales in value terms was 16%. Annualized growth in volume was 8%. Our major markets continue to be in the eastern region with West Bengal being the predominant market. Growth in demand in West Bengal was 10.2% and we have continued to consolidate our position in the state. Prices were by and large stable in most markets for the most part of the year. In between there were however, seasonal upheavals in prices which is a normal phenomenon in the cement industry. Quality Control & Customer Satisfaction Our constant endeavour is to strive for achieving excellence in quality. Fly ash utilization at Sankrail was kept at optimum level without in any way sacrificing quality. The Technical Services Cell continues to act as an invaluable foil to our Marketing efforts and has been largely instrumental in increasing consumer awareness about the product attributes. Mason meetings and training programmes were a regular feature. Engineers Meets involving participation of eminent Architects and experts were held during the period. Other innovative promotional efforts were also carried out on a regular basis to increase the sense of bonding and loyalty of the dealers. More and more Dealers were brought within the ambit of Authorised Stockists Scheme. Dealer Meets and Utsavs were also organised regularly involving participation of Dealers with their families to strengthen bonding. Awards & Accreditations Sankrail Unit also achieved a significant landmark. It was awarded during the period OHSAS: 18001; 1999 certification for Occupational Health & Safety. We feel proud that Sankrail Unit is one of the few units in the country to have achieved this distinction. During the year Bhatapara Unit was awarded the following state level awards by the Government of Chhattisgarh. * First prize for achieving maximum percentage, reduction in electrical energy consumption, (Both for Clinker & Cement production). * Second prize for maximum percentage reduction in thermal energy consumption. The Directors wish to place on record their sincere appreciation to the entire team of employees at Sankrail and Bhatapara and at other locations for their outstanding efforts. Costs & Profitability Costs of major inputs such as Limestone, Gypsum registered a significant increase. Coal procurement was dearer and an upward spiral in the fuel costs also led to increase in outbound freight costs as also in procurement cost of inputs. Despite the over all cost increases, in view of the impressive gains registered in operational parameters and in sales margins, we were in a position to absorb the cost increases substantially. CAPTIVE POWER PLANT AT BHATAPARA The 15 MW captive power plant at Bhatapara was commissioned in May 2005 and the plant is running satisfactorily. The generation cost of power has already registered a decline. In the coming years we foresee significant savings in power costs due to the captive power plant. The total cost of the project was Rs.61 crores approx. and the entire cost was funded from internal accruals. SECOND GRINDING UNIT AT FARAKKA, WEST BENGAL The Directors are pleased to inform that the company is in the process of setting up a green field fly ash Cement grinding Unit at Farakka in West Bengal. Fly ash for the unit will be sourced from the nearby power station and clinker shall be procured from Bhatapara Unit. The foundation stone for the unit was laid on 17th December 2005 and we are hopeful that the plant will come into commercial production towards the end of the year 2006. Setting up of the grinding unit will further consolidate our presence in West Bengal and it will also enable us to cater better to the markets in Bihar, Jharkhand apart from North Bengal. The total cost of the project is estimated at Rs.115 crores and this is being funded entirely through internal accruals. With a view to increase the clinker availability from Bhatapara Unit commensurate with the additional requirements, plans are also being finalized for carrying out necessary modifications/ upgradation to the existing facilities at Bhatapara. Having regard to the need to conserve resources to finance the above ambitious expansion programmes launched by the company, the Directors as stated earlier, do not recommend any dividend on the Equity Shares for the period 2004-05. OPEN OFFER TO SHARE HOLDERS Following the change in the shareholding pattern in Ambuja Cement India Limited, in accordance with the requirements of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997, an open offer to acquire the balance shares of the company was made by Holcim Cements Private Limited along with Ambuja Cement India Limited as person acting in concert, in the month of June 2005. In consequence of the above exercise, the non-promoter holdings in the company has reduced to 3.06% against 5.92% at the end of the previous year. ECONOMY AND BUSINESS ENVIRONMENT The Indian economy has recorded a robust growth rate with the industrial sector growing by 9.7%. The prevailing economic indicators point to the possibility of the above growth rates being sustained, if not improved upon, in the near future. The Government continues to focus its attention on infrastructure development and this augurs well for the industry. After many years, the growth in demand in the cement industry has substantially kept pace with the growth in the Economy, thus neutralizing the demand supply mismatch. We anticipate that this momentum shall be sustained in the future also. RISKS AND CONCERNS (i) Demand for cement is inextricably linked to the vagaries of the monsoon as a major source of demand comes from rural India. Failure of the monsoon or the excess of it leading to floods, therefore, has a cascading effect on cement demand. (ii) Any perceptible shift in Government policies resulting into slowdown in infrastructure development will also adversely impact the cement industry. (iii) Wagon availability on a regular and consistent basis was a major concern in the previous year. This led to an increase in distribution costs apart from delaying dispatches. Availability of rolling stock on a regular basis will therefore be a cause for concern in the coming year. Hikes in fuel costs have also pushed up road transportation costs. (iv) Value Added Tax (VAT) was introduced at the state level in many states last year. The Central Government has indicated that the Central Sales Tax will be phased out in the next two years. However until such time VAT is introduced in all the states and the benefits of set off become available fully on inter-state movement of goods and further in the absence of a uniform floor rate, the distortions caused by the VAT regime will continue. (v) Fringe Benefit Tax (FBT) introduced in the last Union Budget is inequitous in the form in which it exists. There does not exist any scope in a tax regime for penalising legitimate business expenditure. It is therefore hoped that either necessary amendments to FBT be made in the ensuing year to iron out the imperfections in its present form or alternatively FBT as a whole should be obliterated from the statute. Given the above scenario, the future prospects of the industry have to be reviewed with cautious optimism. HUMAN RESOURCES The company firmly believes that its dedicated band of employees are its major source of strength. Accordingly our endeavour has been to continue with employee initiatives on a sustained basis so as to maintain motivation and the morale level of the employees. The 6-Sigma initiative which was launched in the previous year has contributed towards innovative exercises being carried out by employees across the organisation leading to reduction in costs apart from leading to improvement in systems and procedure in many areas. Performance Management System (PMS) exercise was launched during the period with a view to, interalia, ensure that the employee goals are in harmony with the corporate goals. On the Industrial Relationship front our relationship with the employees continued to remain cordial as in previous years. INTERNAL CONTROL SYSTEM The company believes that a strong internal control system is a sine-qua- non for maintaining a high level of governance across the organization. With this objective in view, where necessary, control systems have been made more stringent based on the initiatives taken by a dedicated internal audit team. The IT environment is being upgraded on a continuous basis with a view to keep pace with the rapid changes taking place in the external environment. The Audit Committee constituted by the Board meets at regular intervals and discharges the responsibilities entrusted on it in line with the provisions contained in the Companies Act 1956 as also the provisions relating to corporate governance. The ambit of coverage of the Audit Committee has been enlarged further in line with the requirements of revised clause 49 of the Listing Agreement. CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis may be considered as forward looking within the meaning of applicable securities laws and regulations. The actual results may differ materially from the views expressed. Important factors that could influence the Companys operations include demand and supply conditions, availability of inputs and their prices both domestic and global, changes in government regulations, tax laws, the monsoon, economic developments within the country and other factors such as litigation and industrial relations.