k a wires ltd share price Management discussions

INDUSTRY STRUCTURE AND DEVELOPMENTS OVERVIEW

Your Company is engaged in the business of manufacturing and exporting of world class Zinc wires (99.99% purity) & Aluminium wires used in thermal spray industry (corrosion protection of steel).

INDUSTRY OUTLOOK

Zinc wires, manufactured by K A Wires, are suitable for thermal spraying process (popularly known as metalizing). Thermal spraying is a coating process in which materials (mainly zinc, aluminium or alloy of zinc and aluminium) are sprayed onto the surface of another material (mainly steel).Thermal spraying of zinc alloy wires gives steel objects a solid and long lasting corrosion protection.

Globally competition for quality Zinc Wire is restricted to less than 15 Companies, mostly from USA and Europe.

PRODUCT WISE PERFORMANCE

The Indian wire industry has experienced rapid growth in the last several years. The major reasons for the growth of this Industry are increasing demand for Zinc & Aluminium wire in thermal spray industry.

Compared to galvanizing, thermal spraying process is environmental friendly, energy efficient, cost efficient and ultimately has better corrosion protection capability.

As margins and asset turnover ratio will remain high, the company will enjoy better return ratios (both ROCE and RONW) from FY 2017 onwards.

OPPORTUNITIES

The Indian wire industry has experienced rapid growth in the last several years. The major reasons for the growth of this Industry are increasing demand for Zinc & Aluminium wire in thermal spray industry.

The huge demand supply mismatch of zinc wire in India and present requirements are met through imports mostly from Europe. In terms of quality, companys products are at par or even superior compared to imported one. Most importantly there is no pricing difference between the two.

The barrier to entry for new players is very high. In general the technology used to manufacture zinc wire is a closely guarded secret. The company invested a large amount of time, effort and money to procure & develop the technology to manufacture zinc wire. The company invested even more time and money to streamline the manufacturing process and completed successful trials of product with the customers.

The industry is very well developed in US and Europe. However usage of zinc wire thermal spray is a recent development in India and other Asian countries. In Asia, galvanizing is widespread as the corrosion protection method. However thermal spraying has been proved as better method than galvanizing. Thus developed countries switched to thermal spraying. We firmly believe that Asia will gradually move towards thermal spraying also. This will create more demand of zinc and zinc alloy wires in the future and that is the third reason for optimism about the industry.

Compared to galvanizing, thermal spraying process is environmental friendly, energy efficient, cost efficient and ultimately has better corrosion protection capability.

The company has already set up wholly owned subsidiary in Singapore to tap the export market.

THREATS

The principal threat to the business is the mindset of the people that only Europe / USA can provide quality products and that Indian products are inferior in quality and sell only on price. This perception has been changing in the last few years and the customers of K A Wires realise that quality in product and service is a forte of the Company. This needs to be extended to other customers in other geographies.

Zinc Wire is a very critical component of the manufacturing process of our Customers. Consistence of quality is most critical to their requirement and they do not mind paying a substantial premium for the best quality Zinc Wire. They need to be explained that the best quality Zinc wire comes from India, no longer from Europe or USA.

FINANCIAL PERFORMANCE

The highlight of the operations for the year ended 31st March 2016 and 31st March 2015 are as under:

Rs in thousands

	Financial Year 2015-16	Financial Year 2014-15
Gross Sales	25,90,14	23,57,54
Less: Excise Duty	2,49,99	2,25,73
Net Sales	23,40,15	21,31,81
Add: Other Income	3,40	2,70
Gross Profit
(Earnings before Depreciation, Interest and Tax)	1,77,72	1,48,88
Less: Interest	98,92	85,50
Profit before Depreciation and Tax	78,80	63,38
Less: Depreciation	29,30	21,66
Profit before Tax	49,50	41,72
Provision for Tax	44	-6,43
Profit after Tax	49,06	48,15

HUMAN RESOURCES/INDUSTRIAL RELATIONS

The most important fact of any business is the people who make that business work. Your Company is about people and believes that one can achieve very little without an effective and engaged workforce. Your Company believes that to succeed continually in the domestic as well as in the global market under extreme competitive conditions, the Human Capital of the Company must be at the highest levels of motivation and knowledge. Not only the right people are selected at all levels but the Company also ensures that the human capital is up to date on cutting edge technology, managerial and leadership skills, financial management and logistics through developmental programmes in each of these areas.

Your Company believes in appreciating, recognizing and rewarding talent within the organization. Employees of your Company are a bunch of motivated professional who are ever willing to take up greater challenges at all times. Your Company continues to have harmonious and cordial relations with its employees, workmen and trade unions despite the fact that there is a change in the political scenario and increase in inter/intra union rivalry. These relations have been built over the years on a foundation of mutual trust which has resulted in an atmosphere of improved productivity, quality, enthusiasm and motivation.

OUTLOOK

Being the most quality-conscious and low cost producer of quality Zinc & Aluminium wires in India, coupled with cost control measures, rising demand and focus on exports, your Company is very optimistic of its bright future.

RISK AND CONCERNS

The Company is fully committed to strengthen its risk management capability on continuous basis in order to protect and enhance shareholder value.

ECONOMIC RISK

Due to the increase in the cost of number of inputs and raw materials used by the Company, it is faced with the threat of pressure on margins on sales. To counter this, the Company has taken various steps including increasing efforts on R&D. We maintain a strict hedging policy on our raw material and finished products while tracking the price movements on the London Metal Exchange and MCX.

COMPETITOR RISK

The Company is exposed to the risk of competition, as the market is competitive with the elimination of physical barriers. The Company continues to focus on increasing its market share and taking marketing initiatives that help customers in taking better- informed decisions. The quality improvement efforts have established that brand image of the product as the most preferred brand with the customers.

FOREIGN EXCHANGE RISK

The Company does not have any Foreign Currency Debt. The only Foreign Currency exposure for the Company is the Export Debtor Segment. Since we do not have a long Export Debtor realisation cycle, we do not hedge our foreign currency exposure.

If the Realisation Cycle or the amounts in the Cycle increase substantially, we shall start Hedging the same using PCFC or other hedging tools.

INDUSTRIAL RISK

Every Company is exposed to labour unrest risk, which may lead to production slowdown ultimately resulting in plant shutdown. However due to various efforts from both Management and workmen, labour relations have been good throughout the year.

ENVIRONMENT RISK

The Company is exposed to the risk of Environment and pollution Controls, which is associated with such type of industries. The Company is committed to the conservation of the environment and has adopted the latest technology for pollution control.

The Company is ISO 9001 : 2008 certified and is adhering strictly to the emission norms applicable for the industry. It is continuously updating systems to keep abreast of latest expectations from the authorities and society at large.

PAYMENT RISK

The Company is exposed to the defaults by customers in payments. We are very "credit conservative" and extend credit only to relatively risk-free customers.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Your Company has adequate internal control system in all the areas. It ensures the efficiency of the operations, financial reporting and statutory compliances. Apart from the internal control system, an independent internal auditor also reviews all activities in a systematic and structured manner. The Audit Committee regularly reviews the observations and suggestions of the internal auditor and takes the necessary corrective actions.

ACCOUNTING TREATMENT

We value our inventory at Market Prices to reflect the current state of the business. This is done as the Products manufactured by us are customised to suit the needs of the Customer and are manufactured and packed as per specific requirements.

		For & on behalf of the Board
Place : Kolkata	SANDIP KEJRIWAL	MADHUR AGARWAL
Date : 5th August, 2016	Managing Director	Whole Time Director