Binani Cement Ltd Management Discussions.
1. REVIEW OF OPERATIONS
During the Financial Year under review, your Companys Cement Production and sales stood at 4.33 million MT and 4.31 million MT respectively as compared to 4.50 million MT and 4.47 million MT respectively in the previous year. The Companys total Income was lower at Rs.152,425 Lakhs as against Rs.183,998 Lakhs in the previous year. The Company took several initiatives to improve the efficiency across different functional areas. However, due to lower sales volume/ sales realisation, higher priced input and increase in logistic costs, the resultant Profit before Depreciation, Interest, Taxation and Exceptional Items was at Rs.8,751 Lakhs, lower by about 70%, as compared to Rs.29,347 Lakhs in the previous financial year. Furthermore, the Company is reporting a net loss of Rs.28,897 Lakhs for the year under review as against the net loss of 10,488 Lakhs in the previous year.
Demand for cement is highly correlated with cyclical activities like construction and infrastructure development. The poor demand of cement continued in 2015-16 and the production was hampered on account of Cash Flow constraints owing to unwarranted measures initiated by the Rajasthan VAT Authorities, thus the Company could achieve production of 4.33 million MT as compared to 4.50 million MT in the Financial Year 2014-15; lower by about 4%.
As mentioned above the pick-up in Cement demand was not forthcoming due to deceleration of the construction and infrastructural activity in the country. Due to sluggish demand, the gross sales realisation (net of VAT/CST & discount) of the Company has been lower to Rs.4,084/- MT as compared to Rs.4,373/MT in previous financial year. A natural corollary of lower realisation was that the margins were adversely affected.
2. BUSINESS PERFORMANCE AND OUTLOOK
The current global economic and political environment has been a testing time for the liberal, globalized world order of this century. A report by McKinsey Global Institute says that real incomes of about two-thirds of households in 25 advances economies were either flat or fell between 2005 and 2014. Brexit was the most obvious manifestation of this juxtaposition of falling incomes and the political environment and hopefully this will not cannonball into something more than responsible nationalism. Thus, markets that were gradually recovering, have turned extremely volatile and may falter in such a scenario. Amidst this gloomy environment India stands as a haven of stability exhibiting one of the highest growth rates in the global economies. According to the World Bank update of June 2016 Indias economic growth is expected to be at 7.6 percent in 2016-2017, followed by a modest acceleration to 7.7 percent in 2017-2018 and 7.8 percent in 2018-2019.
Better than normal monsoons, (already underway) a revamped performance oriented council of ministers, benign outlook on inflation, softening of stand by the opposition parties vis-a-vis the GST bill, devolution of spending power to states, boost in private consumption on the back of large salary increases in Government sector, and deleveraging of banks and corporates, together put India in an enviable sweet spot amongst the nation states of the world.
Government spending usually has a time lag, and some of the projects announced in recent past, which will see the light of the day in the next 5 years, will be a positive deviant for the cement industry.
Government intends to spend additional 300,000 crores on roads for three projects namely LWE affected areas, SARDP- NE and the Bhartmala project, in addition, to the work already underway for National Highways.
The Smart City project for 100 cities envisage spend of 48,000 crores by the Central Government and an equivalent contribution from the States/Union Territories, thus, making nearly 100,000 crore available for smart city development.
Housing Construction sector had been witnessing a slower growth rate in the past few years. To give an impetus to housing demand the Government passed an important legislation, namely, the Real Estate Regulation and Development Act 2016. Additionally, FDI policy was amended for the sector, RBI and NHB reduced risk weightage of individual housing loans, loan to value ratio was increased for small loans and Government announced 6 crores houses by 2022 under Housing for All scheme.Thus, a revival of Cement demand is a certainty.
The industry has a capacity of approximately 400 million tons per annum and capacity utilization of around 70%. The number of players in industry are around 500, however, top 20 players control 70% of the production. Fragmented industry coupled with mismatch between demand and supply has resulted in consolidation with some of the weaker players being acquired.
Over the past three years 47 million tonnes of capacity has changed hands at an enterprise value of more than 36,000 crores. We feel that strong brands like "Binani" with impeccable quality serving niche markets will be affected positively by this consolidation.
An interesting fact of the recent consolidation in the industry was that Global cement giants, Chinese state owned companies and Private Equity funds were all in the fray for the assets on block. This implies that margins may remain under pressure for some time to come as the incoming players with strong balance sheets may try and garner market share. Furthermore, though GST will give an impetus to the countrys ecosystem as a whole, per-se for the cement industry, the benefits will only accrue if costs for cess/royalty on limestone and electricity duty are eligible for input tax credit. Thus, margin expansion for our company will be on back of determined, diligent and continuous incremental improvisations in operational eking out efficiencies.
3. RISK MANAGEMENT
The Company had identified certain risk areas with regard to the operations of the Company. The Internal Auditors review the steps taken for risk mitigation/minimisation, wherever possible and the status of the same is reviewed by the Audit Committee periodically. The Companys Board is conscious of the need to periodically review the risks mitigation process.
4. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY
The Company has adequate internal control systems and procedures commensurate with its size and nature of business. The objective of such system and procedures is to ensure efficient use and protection of Companys resources, accuracy in financial reporting and due compliances of statutes and corporate policies. The policies and procedures adopted by the Company facilitate the orderly and efficient conduct of its business and adherence to the Companys policies, prevention and detection of frauds and errors, accuracy and completeness of records and the timely preparation of reliable financial information.
Internal Audit is conducted periodically across all locations by an independent firm of Chartered Accountants who verify and report on effectiveness of internal control. The Company monitors and controls all operating parameters on an ongoing basis. The Audit Committee reviews the adequacy and effectiveness of internal control systems and provide guidance for further strengthening them, from time to time.
4. RECOGNITION AND AWARDS
During the year under review the Company was honoured by the National Council of Cement and Building Materials, New Delhi to receive the following awards:
Best Quality Excellence 2014-15
Second Best Environmental Excellence in Limestone Mines 2014-15
Second Best Environmental Excellence in Plant Operation 2014-15
Best Environmental Excellence in Plant operation 2013-14
Second Best Environmental Excellence in Limestone Mines 2013-14
Second Best Quality Excellence 2013-14
5. SAFETY, HEALTH & WORK ENVIRONMENT
The Company always believes in providing conducive work environment with utmost attention and care on safety and health of employees and all other workers operating at the plants. There were no major accidents reported during the Financial Year 2015-16. The Company conducts training & counseling sessions for its workers/ employees on safe manufacturing practices on regular basis.
Training of employees for safety and growth continue to be the Companys top priority at all levels. The Management has incorporated safety as one of the Key Result Areas for each and every employee.
6. HUMAN RESOURCE/INDUSTRIAL RELATIONS
The Company understands that employees are vital and valuable assets. The Company recognises people as the primary source of its competitiveness and continues its focus on people development by leveraging technology and developing a continuously learning human resource base to unleash their potential and fulfill their aspirations. The strategic thrust of Human Resource has been on improvement of the performance of employees through training & development and also to identify outperformers who are having potential for taking higher responsibilities.
The Company had 711 permanent employees on its rolls as on 31stMarch, 2016. The employee relations remained cordial throughout the year. The Board places on record its sincere appreciation for the valuable contribution made by employees across all levels in the organization.