Andhra Cements Ltd Management Discussions.

(Forming part of the Report of Directors for the Year ended 31st March, 2019)

1. Cement Industry Overview

The Indian Cement Industry is the second largest in the World with an annual production capacity approaching 500 million tons (2018). The Industry has seen significant consolidation in recent times and 50% of the total production capacity is now owned by the largest five Companies. In fact, less than 25 Companies account for almost 90% of the total production capacity. Cement is a critical industry which provides direct and indirect employment to over a million people and forms part of the eight core sectors contributing to the economy sectors which are major consumers of Cement are Housing, Infrastructure and Commercial and Industrial Construction in deceasing order of consumption. Amongst these, the year gone by has seen robust to demand from the infrastructure construction sector driven primarily by the Governments focus on infrastructure development and provision of affordable housing to Indias Citizens. The Central Government backed mega-infrastructure projects like Bharatmala for Roads, Sagarmala for Ports and the development of dedicated railway freight corridors and Smart City projects reported a surge in the award and implementation of new projects. This sector while accounting for only 20% of the demand for cement has driven most of its growth in 2018-19.

Indias cement production grew 13% in 2018-19 over the previous financial year 330 million tons, the first time it has exceeded 300 million tons and outpacing every other core industry growth rate by some distance. Since most of this growth has been driven by public spending on infrastructure, this has also seen an impact on the product mix demanded by customers, with a clear tilt towards OPC versus other blended forms of cement. Housing continues to be a large driver of demand accounting for almost 65% of total consumption of cement in the country. The fact that Indias per capita consumption of cement remains at a mere 230 kg compared to the global average of 580 kg, indicates substantial headroom for growth ahead.

While seeing considerable growth in volumes in 2018-19, the cement industrys profit margins have been impacted by the high energy prices prevailing through most of 2018-19 versus the previous year, raising the cost of power and fuel in the production of cement and overall logistics costs, which are very significant in the cement industry. While there was some moderation in energy prices in the later part of the year, energy prices have again regained their upward trend in the recent months. Axle load revisions by the Ministry of Road and Transport in the year gone by has helped to somewhat moderate the cost of transportation.

Cement prices, which had trended lower in the second half of previous year, fell further during the year, particularly in the South and West of the Country and negatively impacted the financial results of the industry for most of the year. However, some recovery has been noticed towards the end of the year on the back of the very strong surge in demand seen during the year, resulting in higher capacity utilization, more so at the clinker level.

Various Government initiatives in infrastructure and social housing as well as strong budgetary allocation for these projects have boosted cement use and is expected to continue to booster demand for cement in the years ahead. Programmes of Pradhan Mantri Awas Yojana (PMAY), Smart Cities Mission, Pradhan Mantri Gram Sadak Yojana (PMGSY) and Highway projects has provided an immense thrust to use of cement and have propelled the high rate of growth of cement demand in 2018-19.

2. Outlook

India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. Some of the recent major government initiatives such as development of smart cities are expected to provide a major boost to the sector.

In the next 10 years, India could become the main exporter of clinker and gray cement to the Middle East, Africa, and other developing nations of the world. Cement plants near the ports, for instance the plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants in the interior of the country.

A large number of foreign players are also expected to enter the cement sector, owing to the profit margins and steady demand. In future, domestic cement companies could go for global listings either through the FCCB route or the GDR route.

With help from the government in terms of friendlier laws, lower taxation, and increased infrastructure spending, the sector will grow and take Indias economy forward along with it.

3. Opportunities and Threats

GDP growth for the year 2019-20 was originally projected at 7.4%, which is not revised to 7.2%. However, there are several uncertainities which can have an impact in the projected GDP. The outlook of oil prices continue to be hazy both on upside and downside. It is expected that the demand for cement would grow at around 8% for the financial year 2019-20. Our plants are fully equipped and supported with grinding units at strategic locations. Our company will be able to take full advantage of the economic momentum in the coming years.

The Companys products have always been perceived to possess superior quality standards in the market and the company has been enjoying a high level customer satisfaction index. Hence, products will be sold at placed on higher profitability and revenue. The Company is planning to introduce products catering to specific customers to meet their customized applications and requirements.

The Sanctions imposed on countries from where India is imposing maximum crude would adversely affect the fuel price, which would have negative impact on our manufacturing and transportation cost. The Mines and Minerals (Development & Regulation) Amendment

Act, 2015, (MMDR) has made the Limestone as a notified mineral. Pursuant to the amendment act, grant of mining lease for all notified minerals shall be through public auction process by the respective State Governments. Since, several State Governments do not have the required geological data of availability of the reserves and they are not able to proceed with the auction. This is delaying the process of getting fresh mining leases allotted.

4. Risks and Concerns

The Indian Cement Industry is materially dependent for growth on the development of Infrastructure. Infrastructure development in the Country being predominantly in the hands of Government, any decline in Government spends adversely impacts the well being of cement. In addition, Government buying cannot always be divorced from an oligopolistic situation where prices tend to be dictated by the buyer. Access to insufficient quantities of sand adds a further discordant note to the overall scenario as the genesis of concrete or mortar which is the basic raw material for any building activity is contingent upon cement being mixed with sand. Certain India States seem perpetually stretched in making availability sufficient quantities of natural sand for the sector. A solution could probably lie in entering the area of artificial sand. That would benefit the cement industry.

The Industry seems continually hamstrung in reining in energy and logistics costs. Present price trends of such key energy inputs, as fossil fuel in the form of coal and pet coke are unfavourable. While this has afforded industry the required stimulus to step up conservation through research, the process is, by its very nature, time consuming. Increases in the cost of the other fossil fuel, high speed diesel and hurt logistics cost since cement has to be transported in bulk.

5. Financial and Operational Performance Financial Performance

During the year under review the Company recorded a net loss of Rs 18011 lakhs. Financial performance of the Company, in brief, is as under:

( Rs in lakhs)
Current Year Previous Year
2018-19 2017-18
Net Sales 32124 48422
Other Income 180 463
PBIDT 1509 5951
Finance Cost 10844 12739
Depreciation 4747 4476
Profit/(Loss) before (14082) (11264)
exceptional Items
Exceptional Item (3974) 4071
( Rs in lakhs)
Current Year Previous Year
2018-19 2017-18
Profit/(Loss) before Tax (18056) (7193)
Deferred Tax 43 84
Net Profit / (Loss) (18013) (7109)
Other Comprehensive 2 (4)
I ncome
Total Comprehensive (18011) (7113)
I ncome

Operational Performance

Your Company is primarily engaged in manufacture and sale of Cement including Ordinary Portland Cement, Portland Pozolana Cement, and Portland Slag Cement. In the domestic market the company operates through a net work of dealers and agents for sale of its products. Its major markets include Andhra Pradesh, Telangana, Tamilnadu, Orissa, Karnataka and other nearby states.

Companys business going forward

With the Government aspiring to boost investment in infrastructure, including on the construction of New Capital City of Andhra Pradesh and the projects of Telangana State, the business perceives an accretion in the demand pull for cement during the current year. There would, of course, be a more complex competition landscape to reckon with given the manufacturing capacity additions in the Businesss serviced areas.

6. Internal Control Systems and their adequacy

The Company has adequate system of Internal Financial Controls in place. It had adopted policies and procedures regarding financial and operating functions for ensuring the orderly and efficient conduct of its business including adherence to Companys assets, prevention & detection of frauds and errors and timely preparation of reliable financial information. The Internal Control Systems are commensurate with the size of operations of the Company and are manned by qualified and experienced personnel.

In addition to internal controls, the internal audit function has also been set up by a firm of Chartered Accountants, who conducts audit on the basis of the Accounting Standards and Annual Audit Plan. The process includes review and evaluation of effectiveness of the existing processes, controls and compliances. It also ensures adherence to Internal control policies and systems and mitigation of the operational risks perceived for each area under audit. The Internal Audit Report(s) are reviewed by the Audit Committee.

6. Human Resources/Industrial Relations

The Company recognizes its human resources as the most valued asset. The Company has appointed specialized professionals in the fields of engineering, finance, administration and technical and non-technical staff to take care of its operations and allied activities.

Necessary training was imparted to the staff for operations and maintenance of Machinery by specialist from related fields including the equipment suppliers from time to time.

During the period the Industrial Relations continued to be cordial.

7. Details of Significant Changes in Key financial ratios

Sl. Particulars 31.03.2019 31.03.2018 Formula adopted
1 Debtors Turnover Ratio (Days) 26.44 20.47 365 Days/(Net Revenue/ Average Trade Receivables)
2 Inventory Turnover Ratio (Days) 24.38 21.33 365 Days/ Net Reveue/Average Inventories)
3 Interest Coverage Ratio (0.67) 0.44 (Profit before Tax +Interest)/(Interest + Interest Capitalised)
4 Current Ratio 0.14 0.38 Current Assets/(Total Current Liabilities-Security Deposits payable on demand-Current maturities of Long Term Debt)
5 Debt-equity Ratio -* -* Total Debt/Total Equity
6 Operating Profit Margin Ratio (0.08) 0.21 EBITDA/Net Revenue
7 Net Profit Margin Ratio (0.56) (0.15) Net Profit/Net Revenue
8 Return on Networth -** -** Total Comprehensive Income/Average Networth

* Since Equity is negative, ratio cannot be calculated.

** Since Networth is negative, ratio cannot be calculated.

a. EBITDA denotes Profit before Interest+Tax+Depreciation. b. Increase in Debtor Turnover Ratio is on account of reduction in sales. c. Reduction in Interest Coverage Ratio is due to reduction in Sales and Profit. d. Current Ratio is reduced as current liability has increased due to reduction in Sales and Profit.

8. Future Outlook

GDP growth for the year 2019-20 was originally projected at 7.4%, which is now revised to 7.2%. However, there are several uncertainities which can have an impact in the projected GDP. The outlook of oil prices continue to be hazy both on upside and downside. It is expected that the demand for cement would grow at around 8% for the financial year 2019-20. Our plants are fully equipped and supported with grinding units at strategic locations. Our company will be able to take full advantage of the economic momentum in the coming years.

Cautionary Statement

Certain statements made in this Report detailing to the Companys objectives, projections, outlook, estimates and expectations may be ‘forward looking statements within the applicable laws and regulations. As these statements are based on certain assumptions and expectations of future events over which the Company exercises no control, the Company cannot guarantee their accuracy. The actual results may differ materially from such estimates, projections, etc. Significant factors that could make a difference to the Companys operations include domestic and international economic conditions affecting demand, supply and price conditions in the industry, changes in government regulations, tax regimes and other statutes, over which the Company does not have any direct control.