bombay wire ropes ltd Management discussions

B S APPLIANCES LIMITED ANNUAL REPORT 2003-2004 MANAGEMENT DISCUSSION AND ANALYSIS OPERATIONS The home appliances market, especially the Washing machines segment, has remained stagnant for the fifth year in succession. The low demand for the main product and the large number of players including MNCs vying for a share of the stagnant washing machines market has affected the top line of the Company adversely. The fierce price competition and the liberal credit terms offered by the new entrants to gain market shares, has taken a toll on the profitability, as your Company had no option but to match the competition. This has resulted in a severe crunch in working capital, leading to further lower turnover. The stagnant demand for the product and lack of buying sentiments has continued even during the first quarter of 2004-05. During the period under review [April 2003 to March 2004], your Company has achieved a turnover of Rs.1603.59 Lacs and incurred a loss of Rs.4179.21 Lacs. Together with extra-ordinary/non-recurring/exceptional expenses, the Company posted a loss of Rs.7595.14 Lacs. I) Industry Structure and Developments * The Home Appliances segment of consumer durable also known as White goods comprises of Refrigerators, Washing Machines, Air Conditioners (ACs), Microwave Ovens, Vacuum Cleaners and Dishwashers. * With the entry of global giants like Whirlpool, Electrolux, Samsung, LG, Daewoo, the Indian customer now has a plethora of world-class brands to choose from. Among the MNCs, in the consumer durables market, Koreans have been the most aggressive and they have performed better. Greater spending and access to cheap finance have made these companies as formidable competitors. * On the other hand, Indian companies have the disadvantage of high cost finance, slow growth of the market and erosion in the profit due to competition from multinationals. * The Washing Machines market, with sale volumes of 1.1 million units, is broadly segmented into - * Washers * Semi automatic and * Fully automatic machines. * Semi automatics constitute nearly 70% of the total market in volume terms, on account of the lower price relative to fully automatic machines of same capacity. (semi automatics are substantially cheaper than fully automatic machines). * The market can also be segmented on the basis of loading into top and front loading. Top loading machines or vertical axis machines dominate the market and account for 95% of the total sales. Front loading machines are becoming increasingly popular in recent times. The demand for washing machines is restricted mainly to the urban market with the penetration rate of washing machines in the urban market being significantly higher than the rural penetration of 0.5%, on account of lack of clean water and electric power in rural areas. II) Opportunities and Threats Opportunities Threats * Strong brand equity * Flat/Negative market growth in the last 2 years * BPL Washing Machine * Stiff competition from well known for reliability multinationals and trouble free performance * Slow down in replacement demand and growth of front loading automatic machines * Weak financials of the company, over leveraged, unsustainable debt levels * Recent loss of customers due to negligible marketing activity * Low operating levels below break-even point resulting in cash erosion on a continuous basis III) Performance * Even when the operations of the Company were seriously affected due to squeeze on working capital, the operating team has worked on up-grading existing models and developing new models for addressing the market requirements. * The Company has two high-end premium models in automatic segment with best-in-the class aesthetics and performance. In addition,the Company has a well-featured "value for money" automatic model with highly competitive price of below Rs.10,000 level. * In the semi automatic segment, the demand for washers and less than 3kg capacity models has dramatically declined and the margins have shrunk to un-viable levels. The Company has stopped producing washers and 3 kg models. The Company has a strong line up of 5kg and 6kg semi automatic models. * The well-featured models with soak and hot water wash facility called `Dolphin and `Angel Plus have been up-graded aesthetically with clear windows in the washer lid and attractive body colours. * Two value for money models in capacities of 5kg called Swan and 6kg called Flamingo; introduced last year continued to be well received in the market. * In the extremely price conscious Indian market the Company offers superior "value for Money" proposition to the customer by way of enhanced aesthetics/features at competitive prices. IV) Restructuring Initiatives & Future Outlook The operations of the company have been affected due to lack of working capital. The Companys proposal for restructuring its debt, both Term & Working Capital, is under active consideration of its lenders. On successful implementation of restructuring proposal, the Company would be favorably positioned to address the various "threats" mentioned earlier. The Company now has a complete range of Washing Machines both in the Semi- Automatic & Fully Automatic category. The company is also manufacturing the low capacity (170 Ltrs) DC refrigerators in 3 variations. * The expenses have been appreciably brought down to improve operating margins. * Through highly focussed initiatives,the Company is poised to regain the lost market share. V) Risks and concerns * The disproportion are manufacturing capacity at 3 times the demand, and intense competition makes it unviable for the company to continue as a single product company. To overcome this aspect, the company had installed a dedicated refrigerator line to manufacture the entry level of refrigerators in the factory. The production of these refrigerators was successfully launched during the year and it has been well received. * With the strength of R&D, in-house Tool Room, low foreign exchange content and the successful introduction of Non CFC technology, the company considers risks of technology, product changes, foreign exchange and environmental risks as low. * The Company is working with Institutions and Banks for financial restructuring to improve revenue generation. vi) Internal Control System and their Adequacy * The Company has out-sourced the Internal Audit Function to an experienced firm of Chartered Accountants who carry out the same. The scope and extent of Internal Audit encompasses, audit and review of transactions involving Inventory and Purchases including Sub-contracting, Cash and Bank transactions including bank reconciliations, verification of Accounting records, Central Excise and MODVAT records, General Ledger, Statutory Compliances, Fixed Assets etc. * The Internal Auditors furnish their reports to the Company and in turn an executive summary of observations and Companys comments are made available to the Audit Committee. The Committee reviews the summary of observations with the Auditees comments and gives directions to the Company for initiating necessary corrective action. * The Statutory Auditors review the internal audit reports,the area, scope and coverage and advise the management from time to time. VII) Discussions on financial performance with respect to operational performance: * Financial Objectives: Financial objective of BS Appliances Limited (BSAL) is mainly to ensure availability of need based working capital, thereby increase the volume of activities, which will help to reduce the overall loss suffered by the company. * Review Process: The Company carried out stringent financial reviews at regular intervals. A monthly analysis of Cash flow and working capital requirements were carried out to ensure that the performance matched or exceeded the budget. This ongoing check also ensured adequacy of funds to meet peak/seasonal demands. * Accounting Policies: The Company follows accrual method of accounting. The details of these policies are available elsewhere in the annual report. The company follows conservative accounting policies to ensure that the results of the company are reported credibly to all stakeholders. * Share Capital: Paid up Equity Share Capital of the Company as an 31st March, 2004 is Rs. 15.73 Crores comprising 1,32,47,400 equity shares of Rs.10/- each, fully paid up and 33,12,000 equity shares of Rs. 10/- each, partly paid up to Rs. 7.50 each. The Company has a Preference Share Capital of Rs.40 Crores as on 31st March, 2004 consisting of 40,00,000 shares of Rs. 100/- each. During the financial year ended 31st March, 2004,there was no change in the value of share capital. * Reserves & Surplus: The Reserves of the company has reduced from Rs.32.00 Crores in 2001-03 to Rs. 31.08 Crores in 2003-04. The main component attributable to this change is decrease due to transfer of an amount equal to the excess depreciation on account of revaluation of fixed assets, from revaluation reserves to the extent of Rs.0.92 Crores. * Borrowings: Total borrowings of the Company as on 31st March, 2004 was Rs.152.84 Crores, out of which secured loan was Rs. 152.73 Crores and unsecured loan Rs. 0.11 Crores. * Cost of Borrowing: The financial expenses for the year stood at Rs. 26.04 Crores. * Net Block: Net Block as on 31st March, 2004 stood at Rs. 107.31 Crores as compared to Rs. 113.24 Crores as on 31st March, 2003. * Capital Expenditure: The capital expenditure of the Company for the Financial Year ended 31st March, 2004 was Rs. 30.23 lacs. * Depreciation and Amortization: The details of depreciation and amortisation have been provided in the notes to accounts. No significant changes were made in the depreciation policies. * Extra-ordinary/Non-Recurring/Exceptional Items: The company had taken up a process of detailed review of its inventories, other current assets, capital work in progress and investments in the previous period and to the extent finality was reached in that period, certain amounts were charged off in the profit and loss account of that period. Balance work has also been completed and to state these assets at their reasonably expected realiasable values, certain items were identified and have been charged off in the current period as extra-ordinary/prior period expenditure and the details for the same are furnished in notes to accounts. * Corporate Tax: Since the Company has not generated any taxable income for the period, no provision has been made in the books. * Foreign Exchange Earnings: The Company has earned Rs.6.30 Lacs from exports during the financial year. VIII) People & HR Companys Human Resource (HR) practices have contributed to achieve higher employee productivity and greater efficiency, to attain competitive advantage and achievement of Companys overall objectives and goals. Some of the major HR initiatives undertaken during the year are given below: * To enhance the skills & knowledge of employee, job rotation system was introduced. This has resulted in filling up of several vacant positions internally by re-deployment of competent manpower. * Need based training program is continuously being carried out at factories for Workmen & Supervisory Staff, to increase their knowledge, skills & competencies. * Concerted efforts have been put to reduce cost and inventory, by introduction of Gemba Kaizen initiative. * Implemented Activity Based Costing system for identifying and eliminating non-value-adding activities in the Company. * Process benchmarking with best practices and actions initiated to excel in them. * Implemented world class quality improvement like, TPM and Kaizen. Safety, Health and Environment * The Company continued to provide a safer, healthier work environment by practicing manufacturing processes,which are environment friendly. * A Safety Committee is functioning in the factory, which is educating employees on Safety at workplace, Fire Fighting in association with National Safety Council and the Inspector of Factories. * Safety Audits, were undertaken by internal/external auditors, which has resulted in providing employees with safe working environment. Industrial Relations A cordial and healthy environment was maintained with the following ongoing initiatives to strengthen Employee Relations: * Regular conduct of Open House Meetings to understand the grievances of the employees and to address these grievances collectively with the active involvement of senior level Executives. * Effective functioning of Various Committees, with the active participation of representatives of employees, resulting in sustaining healthy employee relations. * As at 31st March, 2004, the Company had a total strength of 195 employees.