I. MACRO-ECONOMIC OVERVIEW
a) Global Economy:
The economic environment facing the steel industry continues to be challenging with
China’s slowdown impacting globally across a range of indicators contributing to
volatility in financial markets, sluggish growth in global trade and low oil and other
commodity prices.
The global steel market is suffering from insufficient investment expenditure and
continued weakness in the manufacturing sector.
In 2016, while we are forecasting another year of contraction in steel demand in China,
slow but steady growth in some other key regions including NAFTA and EU is expected.
Growth for steel demand in all markets except China is expected in 2017.
The World Steel Association (worldsteel) released its Short Range Outlook (SRO) for
2016 and 2017. worldsteel forecasts that global steel demand will decrease by -0.8% to
1,488 Mt in 2016 following a contraction of -3.0% in 2015.In 2017, it is forecast that
world steel demand will return to growth of 0.4% and will reach 1,494 Mt.
Specifically, the mechanical machinery, metal goods and other transport sectors are
weakening, but the automotive sector will maintain its growth momentum supported by strong
demand in many countries.
II. INDIAN ECONOMY
India is the world’s third-largest producer of crude steel (up from eighth in
2003) and is expected to become the second-largest producer by 2016. The growth in the
Indian steel sector has been driven by domestic availability of raw materials such as iron
ore and cost-effective labour. Consequently, the steel sector has been a major contributor
to India’s manufacturing output.
The Indian steel industry is very modern with state-of-the-art steel mills. It has
always strived for continuous modernisation and up-gradation of older plants and higher
energy efficiency levels.
Market Size
Steel Industry:
Production grew by 4.9 per cent year-on-year to at 8 Million Tonnes (MT) in May 2016.
Total steel production in the country is expected to increase by 7 per cent in 2016.
Steel industry and its associated mining and metallurgy sectors have seen a number of
major investments and developments in the recent past.
The Government of India is aiming to scale up steel production in the country to 300 MT
by 2025 from about 90 MT in 2015-16.
The government has launched the National Mineral Exploration Policy (NMEP), which will
help to adopt comprehensive exploration of non-fuel and non-coal mineral resources that
would give a major boost to the economy.
The total outlay for infrastructure in Budget 2016-17 stands at Rs 221,246 crore (US$
32.8 billion), which is expected to generate much needed demand for steel industry.
Huge scope for growth is offered by India’s comparatively low per capita steel
consumption and the expected rise in consumption due to increased infrastructure
construction and the thriving automobile and railways sectors.
Note:! - According to data released by the Brussels based World Steel Association
Auto Industry:
Government of India encourages foreign investment in the automobile sector and allows
100 percent FDI under the automatic route. Some of the major initiatives taken by the
Government inter alia are as follows:
To make automobiles manufacturing the main driver of Make in India initiative, to
promote eco-friendly cars in the country i.e. CNG based vehicle, hybrid vehicle, and
electric vehicle and also made mandatory of 5 percent ethanol blending in petrol.
Has formulated a Scheme for Faster Adoption and Manufacturing of Electric and Hybrid
Vehicles in India, under the National Electric Mobility Mission 2020 to encourage the
progressive induction of reliable, affordable and efficient electric and hybrid vehicles
in the country.
The Indian automotive sector has the potential to generate up to US$ 300 billion in
annual revenue by 2026, create 65 million additional jobs and contribute over 12 percent
to Indias Gross Domestic Product, as per the Automotive Mission Plan 2016-26 prepared
jointly by the Society of Indian Automobile Manufacturers (SIAM) and Government.
SIAM expects market to expand to 6 to 8 percent during FY 2016-17.
III. OPERATIONAL PERFORMANCE AND FINANCIAL REVIEW - INNOVENTIVE INDUSTRIES
LTD. (IIL)
Operational Performance:
IIL is a multi-product engineering company manufacturing precision steel tubes,
membrane panel strips, auto components, oil well drilling couplings, pup joints, high
voltage soft starters and other steel products catering to applications in diverse sectors
such as transportation, power, oil & gas and general engineering, etc.
As you all are aware company is going through many financial challenge, we will hereby
provide a summary of the challenges and opportunities before your Company, against the
backdrop of the current business scenario.
Thankfully, company did get some breathing space in 2014, when it successfully entered
into an agreement for Corporate Debt Restructuring (CDR) with its consortium of financial
lenders that provided some moratorium to interest rate payments.
The Company is putting a concerted effort to generate cash by growing the order book,
squeezing operational efficiencies, pursuing all means to get money out of the legitimate
claims it has made upon its clients and in monetizing non-core assets.
Your Company achieved net sales of 33,486.07 Lacs during FY 2015-16 as compared to
34,083.53 Lacs in the previous year.
The slowdown in auto industry has impacted the demand. However, your Company managed to
maintain sales on the strength of its strategic planning.
Your Company succeeded to keep the cost of production under check through good
procurement policy and continuous cost reduction drive.
Your Company adopted following measures to reduce cost: 1. Procurement strategies for
raw material and consumables.
2. Improvement projects, involvement of cross functional teams to bring cost
reductions. 3.Improved operational efficiencies and cost control measures at both Plants
Unit I & II.
A key to sustainability of steel industry in the next few years will be to focus on
efficiency of conversion from raw materials to steel.
Post referral to CDR the company had been functioning at a low capacity with the help
from creditors and advance from export customers, as the CDR package was implemented in
part for want of funds from lenders as projected in the package. Sizeable part of
production (tubes) at present is for Exports and auto components to meet the requirements
of Bajaj Auto.
Financial Review:
The Company delivered a moderate performance in revenues; with a Loss of Rs. 174.92
crores as against a Loss of Rs. 225.16 crores in the previous year, trying to recover from
the adverse events.
a. Profit and loss account
Revenue decreased from 341.96 crores in the year 2014- 15 to 335.21 crores in 2015-16
on account of lower realizable sales value after reduction in steel prices. After
providing tax expense, PAT (Loss) stood at 174.97 crores for 2015-2016 as compared to PAT
(Loss) of 213.48 crores for the previous financial year.
This loss was due to Working Capital constraints and higher interest costs.
Expenditure: Total operational costs were 514.02 crores in 2015-16.
b. Balance sheet
During the year, we have received a VAT refund of 25.61 Cr. in July 16 for FY15 from
the Directorate of Industries, Government of Maharashtra (GoM).
IV SEGMENT WISE BUSINESS PERFORMANCE
a. PRECISION TUBE SEGMENT
In F Y 15-16 revenue for this division was at 80.48 crores. We employ our patented cold
pilgering process and to manufacture CEW/DOM tubes which significantly reduces cost and
improves our margins for these tubes which sell in lower volumes but enjoy higher
realisations.
b. AUTO COMPONENTS SEGMENT
Revenue from this segment grew for the year was at 252.55crore versus 237.18 crore in
FY15. The Company manufactures various products for this segment from its precision steel
tubes, sheets and different raw materials. Bajaj Auto continues to be one of our oldest
clients for this division and continues to stand by our manufacturing capabilities.
c. COLD ROLLED COILS & OTHER PRODUCTS SEGMENT
In FY16 revenue for this division was decreased at 2.18 crore in comparison to 2 1 . 5
5 crore in FY 15. The Company and its subsidiaries manufactures Cold Rolled (CR) Coils,
Cold Rolled Sheets Strips, Metal Wires, Laminates and Stampings, etc. This decrease is due
to sluggish demand for these products.
V RISK AND CONCERNS
Demand for CEW/DOM tubes, Membrane Panel Strips, Coils, Cold Rolled Sheets Strips,
Metal Wires and auto parts have a direct impact on the performance of your Company and any
adverse market condition for these products will result into reduced capacity utilization
and profitability.
Further, depreciation of Rupee vis-a-vis US dollar can lead to an increase in price of
coke and in the price of crude oil, resulting in increased input costs of steel, thereby
putting pressure on profitability.
Some of the key Strengths, Weaknesses, risks and uncertainties affecting the company
are set forth below. Any of these risks has the potential of causing the actual operating
results in future to vary materially from the current results or from anticipated future
results.
Diversified Operations: A diverse range of products manufactured by IIL
finds application in several sectors. The Company services customers in the power,
automobiles, oil & gas, farm equipment and general engineering segments.
Process ‘Engineering’ Expertise: IIL has developed a
proprietary ‘cold pilgering’ process which was granted a patent and valid for 20
years effective April 24, 2009 to manufacture CEW (Cold drawn electric welded) / DOM
(drawn over mandrel) tubes. Utilisation of this process helps in significantly reducing
the requirement of resources like material, labour, electricity when compared to the
conventional draw bench process. Apart from savings in cost, the end product is augmented
in characteristics through better surface finish, higher tensile strength and improved
quality. IIL is employing its process expertise to manufacture a wider range of products.
Customer Base: The Company through its consistent delivery of quality
products has built long standing relationships with a host of companies. Some of its
direct & indirect clients include international companies like Shell, Saudi Aramco,
Arcelor Mittal, as well as leading domestic companies like BHEL, Bajaj Auto, and Thermax
to name a few.
We have availed of Government incentives which help ease the burden of capital outlay
and entered into negotiations with suppliers, banks and customers to effectively manage
our working capital requirements.
Your Company has a very high debt levels due to Delay in project execution on account
of external reasons, hardening of interest rates and extended working capital cycle which
affected the profitability.
The margins on our products vary and requires higher manufacturing complexity enjoy
better margins.
WEAKNESSES
Financial Position: Your Company has a very challenging year with very high debt
levels due to slowdown in infrastructural sector demand and high interest rates. Delay in
project execution due to external reasons, hardening of interest rates and extended
working capital cycle affected the profitability.
Capacity Utilisation: Our business being capital intensive is sensitive to a
drop in capacity utilization which could put significant pressure on our breakeven point.
A significant underutilization may lead to under absorption of fixed costs.
Raw Materials: Our supply contracts have clauses to pass on increase in raw
materials at periodic intervals but any unforeseen or unexpected rise in the price of raw
materials in a short period of time may adversely impact our operations.
OPPORTUNITIES
Research & Development: The in-house R&D setup has helped the
company to develop processes, tools & technology to make its manufacturing process
more efficient and broaden its product range. Further, initiatives are underway to explore
improvements to manufacturing processes of synergistic products and to discover new
applications for existing expertise.
Additionally, some of our newly launched products are unique (e.g. bimetallic tubes)
with specific applications. There is an opportunity for us to alter the product mix to
increase the share of niche, high value products which will result in an improvement in
blended margins at the company level.
New Markets: IIL manufacturing capabilities are highly competitive and it
aims to leverage its process expertise to exploit cost arbitrage in several markets. The
company is currently focused on enhancing and expanding its global reach and distribution
network to allow it to access a wider customer base by entering newer markets and regions.
VI. INTERNAL CONTROLS
The Company has a proper and adequate system of controls in order to ensure that all
assets are safeguarded against loss from unauthorised use or disposal. All transactions
are properly checked, verified, recorded and reported correctly.
Regular Internal Audit checks are carried out to ensure that the responsibilities are
executed effectively and that proper and adequate systems are in place.
The Company has an internal audit system which is conducted by an independent firm of
Chartered Accountants as well as a strong in house internal audit cell so as to cover
various operations on regular basis through the year. Summarised Internal Audit
Observations/ Reports are reviewed by the Audit Committee on a regular basis.
The Internal Control system aims to make sure that the business operations function
efficiently, applicable laws, rules, regulations, policies of the Company are followed and
the reliability of financial reporting. The Finance Department implements and monitors the
internal control environment and compliance with statutory requirements.
VII.HUMAN RESOURCES
Your Company considers human resource to be an important and valuable asset for the
organization and people as its most important resource. Therefore, it constantly strives
to attract and retain best "Talents" for the present and future business needs.
The Company has taken-up the following initiatives:
In order to face the future challenges effectively the Company has initiated a
programme on developing a leadership and management pipeline for the Company.
As a part of identifying the future leaders, the Company through selection process
selects young professionals for the Company and intensive training through internal and
external faculty, to help them to acquire required skills for taking up new role in the
Company.
All employees of Company are considered leaders and encouraged to take responsibility
to do their best that they can while meeting business needs. Our strength lies in our
human pool of resources and our success is largely dependent on them.
The Company therefore, focuses on developing its talent pool and its employee
capability through increased emphasis on learning and skill upgradation job rotation,
multi skilling and inter plant sharing of experiences. Critical skills identification and
ramp up planning continues at the operating level.
The Company continuously reviews its policies/practices with a view to make them more
contemporary and uniform in application and this is an ongoing process. To improve quality
of work life, medical, transport facilities, welfare and recreational facilities have been
reviewed and upgraded. All these efforts had an impact on reducing the attrition levels at
our plants and offices. Cordial industrial relations prevailed across the Company and its
subsidiaries during the year under review.
VIII.SAFETY, HEALTH AND ENVIRONMENT
Your Company believes in "Safety First" and is committed to provide
"Safe Workplace" by addressing safety, health and environment related issues.
Employees are regularly trained to update their awareness and skills. New employees are
being given intensive safety induction training and are being issued with "Safety
Passports" related to their work area. All the statutory requirements related to
safety, health and environment are being complied with. As a proactive approach, the
periodical safety audit is being conducted to identify unsafe conditions and take proper
safety measures.
IX. RISK MANAGEMENT
Your Company recognizes the importance of risk management as a constituent of business
strategy and a key ingredient for long-term sustainability. It strongly believes that
robust processes provide a safety net for our global operations and that customers and
stakeholders can be secure in the knowledge that the sustainability and continuity of its
business is assured.
It has a well-structured risk mitigation framework covering key elements of its global
operations. The Management periodically reviews the risk assessment procedure and risk
mitigation procedures laid down by the Company.
X.CAUTIONARY STATEMENT
Statements in the Management Discussion and Analysis describing the Company’s
objectives, expectations, predictions and assumptions may be ‘forward looking’
within the meaning of applicable Securities Laws and Regulations. Actual results may
differ materially from those expressed herein, important factors that could influence the
Company’s operations include global and domestic economic conditions affecting
demand, supply, price conditions, change in Government’s regulations, tax regimes and
other factors such as litigation and industrial relations.
Through the Governance mechanism in the Company, the Board along with its Committees
undertakes its fiduciary responsibilities to all its stakeholders by ensuring transparency
and independence in its decision making.
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