Ciba India Ltd merged Management Discussions

CIBA INDIA LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS Industry Structure: The chemical industry in India comprises approximately basic chemicals - 60%, specialty chemicals - 25%, and fine chemicals and pharmaceuticals - 20%. This industry is the 12th largest in the world and 3rd largest in Asia. It constitutes around 15% of Indias manufacturing capacity. Your Company is engaged in the business of manufacturing and trading of specialty chemicals and in commoditized products. The Company serves a number of major industries and markets such as paper, plastics, inks and printing, packaging, paints, petrochemicals, automotive, construction, electronics, water treatment, agriculture, mining, extraction, and home and personal care. Our products improve the quality, functionality and the appearance of plastics, coatings and paper, protect people and objects from UV light, enhance the look and feel of home and personal care products, also provide skin and oral hygiene, and support industries to recycle, clean and save water. Our business segments offer integrated solutions to our customers, following a tailored approach to individual customers needs. The markets for specialty chemicals products are highly competitive and unpredictable with the entry of local and overseas producers. The global economic downturn and the consequent severe recession which started in the second half of the financial year under review, began to take effect in many of our customers markets and its severity has become clear. It is a difficult time for the chemical industry and the priority is to ensure that the businesses survive the downturn in the best possible shape. Operating Results: Sales turnover for the financial year under review was up by 8% to Rs. 5063 million, as against a turnover of Rs. 4682 million of the previous year. Domestic turnover has increased by 4% to Rs. 4148 million from Rs. 3976 million. Exports have increased by 30% to Rs. 915 million from Rs. 706 million. Profit after tax stood at Rs. 191 million as against Rs. 193 million of the previous year. On the backdrop of the global economic downturn witnessed since the second half of the financial year under review, the severe recession and competitive business environment, the performance of your Company is considered satisfactory. Business Segment Performance: The business segments comprise the Specialty Chemicals Segment and Other Segments. The Specialty Chemicals Segment includes additives, coating effects chemicals, water treatment and paper treatment chemicals, home & fabric care chemicals and personal care chemicals. Other Segments represents manufacturing under contract and sourcing of products for exports. Sales of additives were down by 6% to Rs. 2032 million from Rs. 2153 million of the previous year. Domestic sales were down by 17% to Rs. 1338 million from Rs. 1609 million whereas exports increased by 27% to Rs. 694 million from Rs. 545 million of the previous year. Lower domestic sales were on account of lower take-off by a major customer due to temporary closure of their EOU production site, product shortage, stiff competition and overall slowdown in the market. Increase in selling prices, wherever possible, partially offset volume loss on sales. New polymer products have shown growth potential. The outlook for the polymer industry seems to be encouraging with additional polymer capacities being lined up by existing customers as well as entry of PSUs in the polymer business. This is expected to open up additional demand and opportunity for polymer additives. With the economic downturn, the automotive and related industries witnessed a slowdown in the second half of 2008-09, resulting in lower demand for lubricant additives. Introduction of new products in the metal working fluid area has somewhat compensated for the lower demand and could partly sustain sales levels. Home and Personal Care business continued the growth momentum in fabric care, colorants and stabilizers, and UV absorbers. This trend is expected to continue with the consistent growth in the Indian FMCC sector. Sales of Coating Effects chemicals have increased by 20% to Rs. 1748 million from Rs. 1462 million of the previous year. Domestic sales have gone up by 17% to Rs. 1548 million from Rs. 1326 million. Exports were up by 47% to Rs. 200 million from Rs. 136 million of the previous year. Business Lines Paints & Coatings and Inks & Printing achieved double digit growth, however, Business Lines Plastics and Electronic Materials witnessed marginal negative growth. Business Line Paints & Coatings took full advantage of the opportunity of the lead free wave in the paint industry by offering environment friendly solutions/products. We expect to further strengthen our position in the architectural and industrial segments. Business Line Inks & Printing has been successful in changing the product mix and good sales in niche areas like ink jet printing and security inks has resulted in profitable sales growth. Business Line Electronic Materials has recorded steady sales during the year. Growth in domestic sales is expected to continue in spite of the global slowdown of the economy. However exports will be lower due to weak global markets. Sales of Water & Paper Treatment chemicals were up by 21% to Rs. 1275 million from Rs. 1058 million of the previous year. Domestic sales have gone up by 21% to Rs. 1262 million from Rs. 1041 million of the previous year. Exports continue to remain insignificant and were down by 19% to Rs.13 million from Rs. 16 million. Sales growth has been driven largely by the paper treatment chemicals due to price increase and the new business gained on new paper machines and projects. The markets faced difficult times with unprecedented price increases in raw materials across all products. Polymers, dyes, fluorescent whitening agents and binders for paper coating were impacted heavily due to the extreme shortage of key raw materials causing a demand supply imbalance. The growth in water treatment chemicals was largely from water solution polymers. The demand for heavy duty polymers increased in specialized applications. Sales to the agriculture sector were impacted due to extreme shortage of chelates causing supply gaps. Detergents and Hygiene sales were lower due to product shortages and supply gaps. Revenue from sourcing activities was Rs. 8 million as against Rs. 9 million of the previous year. Financial Performance with respect to Operational Performance and Cash Flow Analysis: Net sales increased by 8% to Rs. 5063 million compared to Rs. 4682 million of the previous year. Operating profit before tax was down by 5% to Rs. 303 million compared to Rs. 318 million of the previous year, partially due to foreign exchange loss. The net cash flow generated by operating activities was Rs. 76 million compared to Rs. 236 million during the previous year. An amount of Rs. 218 million was generated by investing activities mainly on account of refund of inter corporate deposits and proceeds from sale of investment in subsidiary company. Outlook: The Indian economy has grown at 6.7% of GDP in 2008-09, in the year of global economic downturn and financial meltdown against 9% of GDP in the previous year and 5.5% of GDP projected by economists and global analysts. Notwithstanding several challenges, particularly from the global economy, the Indian economy remained relatively resilient. The global financial crisis did however interrupt the growth momentum in India, despite the strong domestic sources of growth. The industry and services sectors have been affected more by the global economic crisis in relation to the agriculture sector. Compared to the previous year, growth in the infrastructure sector decelerated. Falling global output, employment and global trade affected Indias export performance. Volatility in the inflation outcome witnessed in 2008-09 was unprecedented. Forecasts based on the assessment of the global economic conditions and developments, their impact on the Indian economy as well as domestic cyclical factors, suggest continuation of recessionary conditions and moderation in economic activity in 2009-10. The resounding victory of the government at the recently held general elections promises a stable government at the center and is expected to push forward the economic liberalization process. The economy is expected to grow at the rate of 7-8% depending on the success of the 100-day plan of the new government. Sectors such as construction, cement, steel, automobiles are showing signs of revival. As a part of the global initiative to improve operational efficiency, Project SAP (a new ERP System) went live on August 06, 2008. Innovation and marketing initiatives have helped drive industry and market focus. Customers of your Company are major industry drivers. Business prospects therefore mainly depend upon the development and the performance of such industries. Assuming an upturn in the global and local economic and business conditions, and a relative improvement and stability in the industrial sector, your Company is optimistic about retaining its growth pattern. Opportunities and Threats: The global economic crisis which started from the second half of 2008-09 has severely affected industrial activity and business. The business environment becomes more challenging and competitive, and there is continuous need to introduce innovative and better quality products to suit the needs of the customers. Competition not only poses a threat but also throws open new opportunities. Continuous efforts are made in the areas of product improvement, introduction of innovative products and evolving strategies to meet market demand as well as evaluation of new business opportunities. A challenging business environment, stiff competition in the market place by the entry of overseas and local producers, increase in raw material prices and energy cost, volatility in foreign exchange rates, changes in preferences of consumers, uncertain demand patterns, are perceived as threats. Risks and Concerns: Risks are both internal and external, some of which could be largely anticipated, whereas others could not. Risks are an integral part of any business and the risk profile, to a great extent, depends on the economic and business conditions and the markets and customers we serve. Entry into new markets, product introductions, new projects, business alliances, marketing and distribution channels, manufacturing model, etc., carry inherent risks. The global economic downturn, uncertain demand/supply position, and uncertain increase in raw material prices, are matters of concern. A policy on Risk Assessment and Minimization Measures has been adopted by the Company and the same is reviewed on a periodic basis in order to recognize and reduce exposure to risks wherever possible. The Companys Forex policy offers a natural hedge to currency exposure. Internal Control System: The Internal Audit Department of the Company conducts audits in accordance with the internal audit plan as approved by the Audit Committee of the Board. Periodic audits are conducted in different operational and functional areas at various locations of the Company, including its subsidiary. The objective of such audits is to ensure adequacy of internal control systems and processes, adherence to the Companys policies and guidelines and compliance with applicable statutes. These audits also determine whether adequate controls are in place to mitigate risks. Internal Audit has a follow up process in place to verify the implementation of recommendations made. Special audits are also conducted as directed by the management/Audit Committee. The Group Auditors of the Parent Company also conduct audit of certain functional and operational areas. Subsequent to the implementation of the Project SAP (ERP System) in August 2008, the Group Auditors of the Parent Company and the local internal audit team conducted a post implementation review audit in February 2009. The Audit Committee of the Board of Directors inter-alia reviews the observations made by the internal auditors on the control mechanism and the adequacy of the internal control system, recommendations for corrective actions and implementation thereof, compliance related matters, operations of the Company, adherence to the laid down processes and guidelines. Manufacturing Operations: Manufacturing operations at the Santa Monica Works, Goa, an ISO 9001-2000 certified site, caters to all the business segments, the major being Plastic Additives. It also manufactures textile chemicals under a toll manufacturing arrangement. The site has consistently maintained high quality standards, with 100% of the product batches passing the quality parameters in the first instance. Most of the targets set for the year for energy conservation have been met. The site has a continuous improvement process in which various alternatives for optimum utilization of the manufacturing facility are evaluated and put to use wherever feasible. As part of Lean Manufacturing, 5S system in pilot areas of the site has already been implemented and audited. This system is being gradually rolled-out in other areas of the site to bring about increased productivity. The site is located on land leased from Syngenta India Limited. The lease arrangement has expired on August 31, 2008. Negotiations with Syngenta for renewal of the lease and on site related issues are not yet concluded, and manufacturing operations are carried on at the site. In this regard, reference is also drawn to paragraph 4 of the Auditors Report read with Note No. 13 in Schedule 20 - Notes to Accounts. Manufacturing operations are also carried on at the Ankleshwar facility of Diamond Dye-Chem Limited, a wholly owned subsidiary of the Company. Human Resources: The Company continues to have harmonious and cordial relations with its employees. Training programs and workshops are conducted on a regular basis to enhance the skills and competency of employees. Communication at all levels is encouraged and employees are kept well informed on key matters. Participation of employees in various workshops and programs is encouraged to strengthen team building. As on March 31, 2009, the total number of employees of the Company was 209. Environmental Protection, Health and Safety (EHS): EHS continues to receive the highest priority in all operational and functional areas at all locations of the Company. The Santa Monica Works, Goa (site), complies with all statutory and local regulations relating to EHS and also globally applicable Ciba group guidelines on EHS. Systematic process safety analysis, audits, periodic safety inspections are carried out and suitable control measures adopted for ensuring safe operations at the site. All the processes, wherever required, are backed up by efficient scrubbing systems to take care of any fugitive emissions into the environment. The site has a full fledged Occupational Health Centre. The site enjoys high standards in safety and has a record of no loss time accidents for the last nine years. Ciba group EHS guidelines and applicable legislations on EHS are complied with at the corporate office located at Chandivali, as also in the areas of supply chain-warehousing, transportation and other logistic activities. Social Responsibility and Community Development Initiatives: As ongoing initiatives, the Santa Monica Works (SMW), Coa, supports a number of community development and social welfare programs, and is committed to maintain healthy and cordial relations with its neighborhood. Underprivileged children of the neighboring Government Primary School are provided uniforms, books, all weather shoes and transportation facilities for their study tours. SMW supports the Polio Eradication Programme of the Central Government in the neighboring villages. Around a dozen, local, unemployed village girls are provided help to get gainful self-employment by sponsoring them for tailoring and embroidery classes. SMW also fosters industry-academia interaction by guiding students from Goa University/colleges and faculties like MBA, MCom, BBA, etc., to undergo internship training and project work for a duration ranging from one to three months. Last year six students were given support for their university summer training/projects at SMW. Cautionary Note: Certain statements in the Management Discussion and Analysis section may be forward looking and are stated as required by applicable laws and regulations. Many factors may affect the actual results, which could be different from what the Directors envisage in terms of the future performance and outlook.