mtz industries ltd Management discussions

MTZ INDUSTRIES LIMITED ANNUAL REPORT 2005-2006 MANAGEMENT DISCUSSION AND ANALYSIS 1. FINANCIAL PERFORMANCE: During the year ended 31st March, 2006, the Companys Income from Operations (excluding inter-divisional transfers) decreased by 8% to Rs. 1104.08 lacs from Rs.1202.00 sacs in the previous year. Operating loss (before non-recurring items) for the year was Rs.21.10 lacs as against an operating profit of Rs.32.71 lacs in the previous year. Performance was affected by a lower value sales mix for Insoluble Sulphur due to a larger proportion of exports, unsatisfactory capacity utilization at the Insoluble Sulphur division as a result of financial constraints, higher consumption of stores and spares at the Insoluble Sulphur plant on account of heavy rains in July 2005 that disrupted plant operations and lower sales of Dispersing Agents for want of working capital. Interest charges for the year declined to Rs.87.68 lacs from Rs. 133.28 lacs in the previous year due to a reduction in interest bearing debt and lower interest rates on certain remaining debt. Similarly, depreciation for the year was substantially loader at Rs.7.62 lacs, compared to Rs.56.46 lass for the previous year primarily on account of the divestiture of plant arid machinery related to the erstwhile Dispersing Agents and Dye Intermediates divisions and consequential reduction in fixed Assets. Net loss (before non-recurring items) was Rs.166.38 lacs in comparison with Rs.206.90 lacs in the previous year. Non-recurring items for the year under report, which are reflected in Other Income, aggregate to Rs. 226.61 lacs and comprise of Insurance Claim received, Profit on Sale of Fixed Assets and Profit on Sale of investments. 2. OPERATIONS AND FUTURE OUTLOOK: INSOLUBLE SULPHUR: Sales of Insoluble Sulphur increased marginally to 1,473 MT during the year under review but sales measured by value decreased 5%. So also did operating profits which could not be maintained. The principal reasons for the decrease in sales turnover and operating profits were a higher content of lower value exports in the sales mix, higher outlays for stores and spares due to flooding at the plant in July 2005 and production inefficiencies caused by plant downtime and working capital shortages. The increase in exports during the year was the result of higher than expected orders from an international customer whose usage volume of Insoluble Sulphur is substantial. While exports are less remunerative than domestic sales, the Company decided to service the said customer fully looking to the large contribution this customer could make to the Companys long term business objectives. In addition to sales opportunities on the export front, the Companys ability to grow domestic sales also increased as the tyre industry in India grew at close to 10% with the commercial vehicle and passenger car tyre segments exhibiting growth rates of 8% and 13% respectively. However, despite witnessing positive market conditions, the divisions output continued to remain sub-optimal and ended marginally below the previous years level. In line with the trend in recent years, maintenance downtime had a negative impact on production volumes and heavy rains during July 2005 further compounded the situation as operations came to a virtual standstill. As stated earlier, the Companys repayment obligations to lenders and creditors have been in excess of operating cash flows for a number of years. This has eroded working capital, impeded investments in upgradation and maintenance of plant and equipment and weighed heavily on plant performance and employee morale. Subsequent to the year end, in June 2006, due to continued pressure on the Companys finances and irregular employee payments as a result, labour unrest forced the division to suspend plant operations. The work suspension remains in force as on date. The suspension of operations has adversely affected the Companys standing with its important customers, both domestically and internationally. However, given that the Company has a long standing presence in the Insoluble Sulphur business, there are only a limited number of manufacturers globally due to technological barriers and growth is expected to remain buoyant in the domestic and export markets, management believes that it should be in a position to revive business once an exhaustive operational and financial restructuring package that addresses the Companys constraints is implemented. DISPERSING AGENTS: As a result of working capita! shortages, the Dispersing Agents business operated at a very low level during the year under report with sales declining 48% to 42 MT. This was despite the division being able to successfully launch the new product it was developing for oil & gas application for the past 18 months. The achievement of this important milestone should enable the Company to capitalize on business opportunities that were hitherto untapped, subject to being able to arrange the requisite working capital. Going forward, demand for the divisions products from the oil & gas industry and international dyestuff customers is expected to remain healthy as oil & gas exploration activity gathers momentum in India and production of Dispersing Agents for Dyestuff application tapers off in Western countries due to environmental legislation. Presently, though, the Dispersing Agents division is not operational since its finishing facility was housed within the insoluble Sulphur complex, which is under work suspension. However, because the business is well placed within its end markets, management is hopeful that it can be scaled up once the Companys larger issues are addressed. RISKS AND CONCERNS: INSOLUBLE SULPHUR: The principal risk factors affecting the Insoluble Sulphur division include the slackening of demand from the tyre industry; the divisions significant dependence on the tyre industry as an end market; the extent of radialization in the automotive industry and its effect on Insoluble Sulphur consumption for use in tyres; threat from imports of Insoluble Sulphur; import duty reduction on Insoluble Sulphur and its impact on sales realization; capacity expansion by competitors; the ability to withstand business downturns; technological changes that could occur in the product; the willingness of customers to accept price increases caused by raw material and other cost pressures; the ability to re-establish business after, an extended period of inactivity; shortages that may emerge in sourcing raw materials such as Sulphu, and carbon disulphide; and issues related to plant maintenance, operational efficiency and the timely availability of working capital. DISPERSING AGENTS: The Dispersing Agents division is exposed to various risk factors such as offtake from the Dyestuff industry; competition from Indian and Far Eastern producers of Dispersing Agents; access to adequate working capital facilities to meet business plans; the loss of customers due to pricing, quality and/or reliability considerations; replacement of Dispersing Agents being supplied to the oil & gas sector with technically superior product from competitors; the capability to develop new products to keep pace with changing market requirements; the ability to restore business with key customers subsequent to non-participation in recent business tendered by them; sudden and steep increases in raw material costs and success in passing these on to end markets; and shortages that could occur in outsourcing Dispersing Agents. 3. MANUFACTURING FACILITIES HELD FOR SALE: The following manufacturing facilities continue to be held for sale as on the date of this Report: * Erstwhile Dispersing Agents division at Dombivli (excluding plant & machinery not required divested during the year) * Erstwhile Dye Intermediates division at Roha (excluding certain fixed assets divested earlier and surplus plant & machinery divested during the year) 4. RUBBER CHEMICALS PROJECT: Management will not be in a position to take a final decision regarding the Rubber Chemicals project until the outcome of restructuring proceedings pursuant to the Companys BIFR reference is known. The demand for Rubber Chemicals in India is slated to grow at a steady rate due to the growth being experienced by the automotive industry and substantial investments in infrastructure projects. Looking to these prospects and the fact that substantial preparatory work has already been donor by the Company, the project could be revived as later date, subject to an improvement in its financial condition. 6. FORWARD-LOOKING STATEMENTS: Any forward-looking statements, contained in the Directory. Report represent your Companys expectations based or, present information and assumptions. These statements are subject to various Uncertainties and actual results could differ materially from those which are expected or projected. 6. INTERNAL CONTROL SYSTEMS: Your Company has in place a system of internal controls to ensure that all its assets are safeguarded and not exposed to risks arising out of disposal or unauthorised use. The Audit Committee of the Board reviews the internal control systems and initiates suitable corrective actions wherever required. During the previous year the Company had discontinued the services of its then existing internal auditor. A new internal auditor will be appointed once manufacturing operations are restored. On behalf of the Board of Directors ARVIND OBEROI Executive Director Place : Mumbai Dated : 27th November, 2006,