Alfa-Laval India Pvt Ltd Management Discussions

ALFA LAVAL (INDIA) LIMITED ANNUAL REPORT 2011 MANAGEMENT DISCUSSION AND ANALYSIS Industry structure & Development: The end of 2010 and the beginning of 2011 saw some glimpses of stability in the world economy after one of the worst financial crisis of this age. However, things started deteriorating quickly with the onset of civil unrest in many nations in Africa and the Middle East and the deepening sovereign debt crisis in Europe which had a cascading effect on the rest of the globe including India. Though the Indian economy continued to outperform most emerging markets during the fiscal year 2010-11 retaining its position as amongst the fastest growing economies, as the year 2011 rolled out, the price pressures on oil and commodities together with the persistently high inflation and standstill economic reforms evidently decelerated the investment activities thereby slowing down the growth rate which is considered reasonable under the circumstances. The slow down had its effect on the performance of the manufacturing sector which n i turn dented the industrial production. The farm sector development has been good with adequate rainfall across the country and could probably help lessening the impact of lower GDP projections. With the global market environment and the domestic investment climate far from conducive, the performance of capital goods took a beating in view of the slackening pace of implementation of new projects eventhough they could be seen in the channel. This had an impact on the Companys order profile eventhough the Company could, as a whole, improve upon its order intake year on year. However, considering the investments on the anvil, the capital goods sector could have a significant role which could set off a resurgence of the manufacturing sector especially with the proposed unveiling of the National Manufacturing Policy. The Companys wide spectrum of products and process solutions should provide the Company a good platform to evolve a suitable business pattern to sustain the steady rate of growth in this period of uncertainty while the continuous technological advances of the Companys Principals as a part of its efforts to offer products more suited to the needs of the customer could boost the prospects as and when the economy turns for the better. Opportunities: Equipment Division: Equipment Division, responsible for the sale of high speed separators, heat exchangers, decanters, self cleaning filters and flow equipment caters to the requirements of highly diversified industries in the domestic market. The Division also accounts for the export of the above products to the Principals. While the year 2011 witnessed good progress both on the domestic and export fronts, strategies towards regaining market share and creating new business opportunities directly and indirectly have been put in place with a view to stimulate further growth which would follow through in the current year. Process Technology Division: The Process Technology Division of the Company leverages the three core technologies of separation, heat exchange and fluid handling with the Company specific Drying and Evaporation technology, local fabrication expertise and project engineering skills to offer products and engineered solutions to varied industries. The slackening pace of implementation of new projects and expansions that set in 2010 continued through 2011. The Company could, however, sustain its business on the back of some major orders from the food industry. The wide spectrum of industries that this Segment caters to, indicates towards retaining todays level of business under the current business environment. Parts and Service: Parts and Service division which caters to the customers of both the above Segments continues to focus on service while driving towards improving the availability of spare parts. The Company has a well established sales and service network providing closest proximity to the customers and consequently good response time to their demands. The focus on service business does also support the Companys efforts to persuade its customers for upgradation/replacement for optimum performance of their processes thereby paving the way for the installation of the latest and cost efficient solutions and associated models of products. The Company is also constantly enhancing the technical competence of its service force to render prompt and quality service besides looking o t provide value added services to boost its business potential. Segmentwise performance: Equipment Division: The order intake of the Equipment Division in the domestic market developed well thereby pushing along the sales revenues for the year 2011. With a significant increase in the flow of orders from the Principals and the Parts & Service business also looking up. the sales revenues of the Equipment Division moved up by about 39% over the previous year. The order book of the Division at the end of the year was reasonably good. Total revenue of the Equipment Division for the year ended 31st December, 2011 was Rs.5,381.07 M representing about 46.62% of the total revenues. This segment earned a profit before unallocated expenses and tax of Rs.831.96 M. The capital employed for this segment was Rs.2,125.41 M. Process Technology Division: In the light of the uncertain business environment, the order intake for the year under review was sluggish with some of the market segments facing tough challenges. The tracking of the large installed base continued to aid the Parts and Service business. In this scenario, the spill over of deliveries of the previous year helped in augmentation of the sales revenues for the year 2011 by about 45% year on year. With the order intake for the year 2011 not growing, the order book of the Division at the end of the year dropped down. Total revenue of the Process Technology Division for the year ended 31st December, 2011 was Rs.6,160.67 M representing about 53.38% of the total revenues. This segment earned a profit before unallocated expenses and tax of Rs.901.99 M. The capital employed for this segment was Rs.1,013.16 M. Outlook: The market potential for the Companys offerings both by way of products and process solutions seems positive and the strategies for enhancing the market share through introduction of newer and efficient models of products, new applications and multiple channel selling are in place for the challenges ahead. It is known that the gap between demand and supply is widening which calls for scaling up the productivity through capital investments. However, with the uncertain business environment, enjoined by the lack of major policy reforms and high interest rates, there is a clog in the investment activities resulting into lower business opportunities for the Company. In such a scenario, it is difficult to predict the outlook for the current year though the Company is looking ahead for a successful performance to be derived from its strengths barring unforeseen contingencies. Risk and Concern: While the stakes in the Projects business continue to be high considering the long gestation period it also brings along the inherent risks like variations in input prices, adverse development at customers end leading o t project delays, prolonged project management, performance issues, impact on profitability etc. Though every care is taken to mitigate the impact of any adverse element, the inherent nature of projects business cannot be devoid of such elements. Business from certain sectors feature prominently in the Companys business plan and any reversal of business cycle in such sectors could cause an imbalance in the Companys business volumes. Though the Companys products and process solutions are technically well proven and the Company is a leading player in most of the business segments, the competition s i quite handful not only from the local companies forging tie-ups with the technology providers from abroad but also from the international companies through the import route and through their own manufacturing facilities. The increasing options for the customers are leading to a cut-throat competition where the pricing still assumes a lot of significance and wins over technology and in such circumstances retaining market share will be a big challenge for the Company. The Companys exports, major portion of which accounts for supplies to the Principals, now constitute a relevant portion of the total sales turnover. In this scenario, the developments in global economy are always the driving force behind the export performance of the Company. The currency risk is an inherent part of doing exports business and with the usual volatility attached to the exchange rates in line with global developments, the Company is exposed to exchange rate fluctuations despite the Companys well defined and conservative forex management policy. Financial performance vis-a-vis operational performance: I. Financial performance: Total income for the year under review was at Rs.11,950.74 M. The profit before interest, depreciation and tax was Rs.2,044.16 M. After providing Rs.0.62 M for interest, Rs.139.34 M for depreciation and Rs.598.83 M for taxation, the net profit for the year was Rs.1,305.37 M. While the book value of the Companys shares stood increased to Rs.269.64, the earning per share moved up to Rs.71.88 on the back of the rise in profitability. The return on shareholders funds and the return on total capital employed was 26.66% and 38.89% respectively. II. Operational performance: The significant increase in the flow of orders from the Principals and some major orders from the food industry boosted the aggregate order inflow for the year past the ten billion rupee mark while the healthy order backlog at the beginning of the year aided the Company to cross the ten billion rupee milestone in the sales revenues also for the first time in the history of the Company. The Parts and Service business riding on the back of the large installed base, also registered a good growth on both the fronts. With the aggregate order inflow for the year at Rs.11,126.59 M, the order book at the end of the year stood at Rs.7,024.93 M. A sizeable capital expenditure is proposed for the current year mainly for enhancing the efficiencies of the manufacturing facilities besides development of infrastructure to achieve optimum productivity. The Company is also striving for enhancement of efficiency of certain processes given the complexities involved. Besides, other business tools in the direction towards a seamless work environment are also in advanced implementation stage which should help to serve the Companys customers in a more efficient manner. With a view to give more thrust to the various market segments and enhance the competence image in the eyes of the customer some changes were implemented which has now got its roots and efforts are in progress to strengthen the same in line with its strategies for the challenge ahead. Internal control system & their adequacy: The Company has established an adequate system of internal controls commensurate to the size and nature of the Companys business. The internal control system, while ensuring protection of companys assets and adherence to the policies, rules and guidelines, is focussed on processes to ensure integrity of the Companys financial accounting and reporting processes and compliance with the Companys legal obligations besides providing for automatic checks and balances. The ERP system has been finetuned for achieving the desired objective. The Company has a well defined risk management programme for identifying and mitigating risks across all the functions which is reviewed by the Board of Directors of the Company periodically. The Company engages independent internal Auditors who conduct periodical audits to ensure adequacy of internal control systems, adherence to management policies and compliance with the law and regulations of the country. The Reports of such audits are sent to the Management which studies and takes corrective actions where appropriate, and are further placed before the Audit Committee for their review. From time to time, the Company arranges for audit of some of the key business processes and the recommendations coming out of this process are taken for implementation in right earnest. The Company also intends to strengthen the internal audit system to cover not only the transactions but also the key processes. The Audit Committee, chaired by an independent Director conducts periodical meetings with the Management, internal auditors and representatives of the Companys statutory auditors to review the internal audit programme, recommendations of the Statutory Auditors and the Managements responses thereto besides reviewing the financial information and other issues related to the Companys operations. Material development in HR front: During the year under review 197 new employees including 70 Graduate Trainee engineers joined the Company. The Companys overall headcount as at 31st December 2011 was 1230 after taking into account the resignations and retirement. Through the year, the Company focused on competence development across the Managerial cadre engaging them on several training programs for better career growth opportunities within and across the sales companies in Alfa Laval Group. Leadership development program is progressing well for shaping up the current leaders in the Company for the future. The Company is also working on the development of career path aligned to the roles and competencies for optimum and efficient use of the available resources. The industrial relations remained cordial at all locations of the company. During the year under review, wage agreements with the staff union at Pune and with the workmen at Sarole were signed. The Unions continue to interact with the Management to nurture conducive work environment. Cautionary statement: This report contains some forward looking statements based on the data available with the Company and on certain assumptions having regard to the economic conditions, government policies, political developments within and outside the country, factors governing the selling and marketing of its equipment. The Company does not guarantee the accuracy of the assumptions and the projected performance of the Company in future. Actual results may differ from those expressed or implied herein.