ellenbarrie industrial gases ltd Management discussions

A. OVERVIEW

This operating and financial review is intended to convey the Managements perspective on the financial and operating performance of the Company at the end of Financial Year 201718. This Report should be read in conjunction with the Companys financial statements, the schedules and notes thereto and other information included elsewhere in the Annual Report. The Companys financial statements have been prepared in accordance with Indian Accounting Standards (‘Ind AS) complying with the requirements of the Companies Act, 2013 and guidelines issued by the Securities and Exchange Board of India (‘SEBI). This report is an i integral part of the Directors Report. Aspects on industry structure and developments, outlook, risks, internal control systems and their adequacy, material developments in human resources and industrial relations have been covered in the Directors Report. This section gives significant details on the performance and the risks faced by the Company.

B. OPERATING & FINANCIAL PERFORMANCE

During the year, the Company recorded net profit of Rs. 24,955 thousands (previous year 3,881). The increase is primarily on account of improved realizations, increase in operations and efficiency gain from own operations. The basic and diluted earnings per share for FY 18 were Rs. 2.64 (previous year 0.59).

The analysis of major items of the financial statements is given below :

1. Key Indicators			(Rs. 000)
	FY ‘18	FY ‘17	Change %
Total Revenues	12,31,504	11,60,767	+6.1%
EBITDA	2,05,782	1,80,755	+13.8%
Profit before tax (PBT)	24,955	3,881	+543.0%
Profit after tax (PAT)	24,955	3,881	+543.0%
2. Net sales and other operating income			(Rs. 000)
	FY ‘18	FY ‘17	Change %
Manufacturing Sales	11,25,993	10,24,227	+9.9%
Traded Sales	55,902	88,134	-36.6%
Other operating Revenue	49,609	48,406	+2.5%
Total Revenue	12,31,504	11,60,767	+6.1%

Evolution of Sales activity over the past years

During FY 18 manufacturing sales recorded a growth of +10% while traded activity fell as much as -37%; Over the last 5 years manufacturing sales have shown a CAGR of 21% p.a. while traded goods have declined, signifying the Companys focus on value creation along with sustainable growth.

During FY 18 capacity utilization improved over previous year maintaining a consistent trend of improved operating performance. However, the plant in Vizag recorded reduced activity following a plant shut down for a few months, which has since been rectified and the plant has been stabilized since Q3. Besides, the Company has put in place a growth cum efficiency plan for revamping the Vizag plant over the next financial year which is expected to be in place by end of the next fiscal.

The Company continued its focus towards value addition and reaching out wider geographies. Exports recorded a growth of 30% over FY 17 and in turn, the foreign exchange earnings helped towards risk management of foreign currency borrowings.

3. Direct Expenses

	FY ‘18	FY ‘17	Change %
Materials purchased for trading	52,097	64,755	-19.5%
Cost of materials consumed	1,44,426	73,486	+96.5%
Power expenses	4,75,774	4,99,504	-4.8%
Changes in inventories of finished goods & Stock in Trade	3,288	43,091	-92.4%
	6,75,585	6,80,836	-0.8%

Direct expense during the year declined marginally in the face of increased revenues signifying overall improvement in realisation and savings from internal efficiencies.

In line with decline in trading activity materials purchased for trading declined by 19.5%.

During the year the Company had to depend on semi-finished products from outside sources in order to support the plant during shut downs, accordingly materials consumed increased sharply by 96.5%.

Power expenses declined by 4.8% mainly because of gains from internal efficiencies supporting the overall improvement efforts.

4. Employee Benefit Expenses

	FY ‘18	FY ‘17	Change %
Employee benefit expenses	86,051	77,596	11.0%

During the year, the expense increased, primarily on account of salary revisions, hiring for new positions and its consequential impact on the retirement provisions.

5. Depreciation and amortization expenses

	FY 18	FY ‘17	Change %
Depreciation and Amortization	72,799	70,080	3.8%

The increase in depreciation is mainly due to part year effect of additions to distribution assets capitalizedduring FY 18.

6. Other expenses (excluding power

	FY ‘18	FY ‘17	Change %
Transportation and distribution cost	177,510	139,609	27.1%
Other sales and administrative expenses	96,991	97,848	-0.9%
	274,501	237,457	+15.6%

Sharp increase in other expenses mainly because of transportation and distribution expenses. Transportation expenses were higher by 12% owing to increase in prices of diesel fuel and 15% owing to serving longer distance customers. Other expenses, excluding power and transportation, remained within range.

7. Finance Costs

	FY ‘18	FY ‘17	Change %
Interest on borrowings	103,561	94,382	9.7%
Effective interest on preference shares	20,435	17,514	16.7%
Other finance costs(net)	10,076	10,411	-3.1%
Capitalized borrowing costs	-26,044	-15,513
	1,08,028	1,06,794	+1.2%

During the year finance costs were higher mainly due to increase in rates of USD denominated borrowings. Capitalized borrowing costs are higher towards capital work in progress for various ongoing revamping projects.

8. Fixed Assets

	FY ‘18	FY ‘17	Change %
Property, plant and equipment (gross)	25,01,702	24,25,457	+3.1%
Capital work-in-progress	2,62,829	68,221	+285.3%
Other intangible assets	5,943	5,101	+16.5%
Accumulated Depreciaton	-8,72,766	-8,02,932
	18,97,708	16,95,847	+11.9%

During the year additions to property, plant and equipment were mainly due to additions to distribution assets in order to cater to the increasing activities. Capital work-in-progress at the end of FY 18 consists of ongoing revamping projects for various plants.

9. Inventories

	FY ‘18	FY ‘17	Change %
Stock-in-trade (finished goods, stock-in-transit & stock of traded goods)	20,466	23,580	-13.2%
Raw materials	1,638	3,935	-58.4%
Shares and securities	173	347	-50.1%
Stores and spares	11,681	11,231	+4.0%
	33,958	39,093	-13.1%

Level of inventories remained relatively stable during the year, following consistent flow of orders from customers.

10. Trade Receivables

	FY ‘18	FY ‘17	Change %
Trade Receivables(gross)	3,32,306	2,95,805	+12.3%
Provision for bad and doubtful debts	-6,902	-12,402	-44.3%
	3,25,404	2,83,403	+14.8%

Level of trade debtors increased partly because of increased taxes following implementation of GST and mainly because of increase in level of activities, especially because of higher sales to direct industrial customers.

11. Gross Debt and Net Debt

	FY ‘18	FY ‘17	Change %
Gross Debt (current and non-current)	19,50,845	17,90,784	+8.9%
Cash and Bank balances	-27,960	-29,687	-5.8%
Net Debt	19,22,885	17,61,097	+9.2%

Level of Net Debt has increased owing financing of capital expenditure carried out during the year. Besides, gross debt also increased by 1.3% because of translation of foreign currency denominated borrowings.

12. Cash Flow

	FY 18	FY ‘17	Change %
Operating profit before working capital changes	1,98,757	1,71,758	+15.7%
Changes to operating profit due to working capital	-2,08,414	1,69,793
Net cash flow from investing activities	-2,70,464	-81,522	+231.8%
Net cash flow from financing activities	2,80,768	-2,71,707	+203.3%
Net increase / (decrease) in cash and cash equivalents	648	-11,678

Cash flow from operating activities : Operating profit before working capital changes improved by 16% from (Rs. in ‘000) 1,71,758 to 1,98,757 during the year, however overall net cash flow from operating activities have reduced entirely because of change in short term borrowings.

Cash flow from investing activities : In terms of investing activities the Company spent about Rs. (‘000) 76,245 on new assets added during the year and an additional 1,94,608 towards capital work-in-progress.

Cash flow from financing activities : During the year the Company was disbursed a sum of Rs. 450 million towards capital expenditures including the ongoing capital work-in-progress, partly offset by interest payments and scheduled repayment of long term borrowing.

C. RISK & MITIGATION STRATEGIES

Industrial Gas business caters to the need of industrial gas needs of diverse industry segments such as steel & metallurgy, pharmaceutical sectors, hospitals and healthcare sector, oil and gas and petrochemical industries. Industrial Gas are distributed either in liquefied form in cryogenic transport tankers or in high pressure gas cylinders to meet the different volume requirements of customers. The major industrial gas products being Oxygen, Nitrogen and Argon are sourced from Air Separation Plants using distillation process.

In this backdrop the Companys near term outlook and the consequent risk perception and mitigation strategies are discussed hereunder.

i) Outlook

The Company shall continue to focus on enhancing its performance through cost management improvement of its production resources in order to optimally meet requirements of its existing & potential customers. The Company expects to further consolidate its market presence and financial position during the coming financial year.

ii) Risks and Concerns

Your company is exposed to following risk factors with possible mitigating strategies:

- Macroeconomic environment of India and industrial cycles such as regional demand supply imbalances, price swings and input cost variations. This can be addressed through timely readjustment of customer base, product profile and cost structure.

- Regulatory Environment: The Company is subject to several regulatory scrutinizes in states it is present. The company has policies, systems and procedures in place to ensure compliances.

- Financing: Industrial gas business requires substantial investment being a capital intensive business; the company has raised borrowings in foreign currency which is subject to fluctuations. The company management has put in place a risk management policy to respond to volatility in foreign currencies. It is important to note that with Air Water Inc. being a majority shareholder adds to companys strength to address its funding needs.

iii) Internal Control System and their adequacy

The Management recognises the importance of internal financial control as a tool to protect the resources of the company. Accordingly, the management have adopted different policies and procedures for ensuring efficient conduct of its business, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records and timely preparation of reliable financial information. To achieve this, the management has a system of reviewing the existing processes to understand their adequacy, improving processes and controls wherever the risk perception is higher. Apart from engaging internal auditors for periodic reviews the management ensures adequate in-house resources for ensuring appropriate controls.

iv) Statutory compliance

The Chief Executive Officer and Managing Director makes a declaration at Board Meetings regarding compliance withprovisions of various statutes after obtaining confirmation fromrespective units of the Company. The Company Secretary ensures compliance with Company Lawand other corporate lawsapplicable to the Company.

D. ACCOUNTING TREATMENT

The financial statements for the year 2017-18 have been prepared based on the Indian Accounting Standards (IND-AS) as notified under Section 133 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2015.

This being the first year of implementation of the IND-AS, the financial statements for the year ended on March 31,2018 have been prepared in accordance with the Ind-AS, also the financial statements for the year ended on March 31, 2017 have been restated in accordance with IND-AS for comparative information.

Your directors confirm that there are no other material changes and commitments affecting the financial position of the company which have occurred between the end of the financial year of the company and the date of this report.