K C P Ltd Management Discussions.

Economic and industry overview Global economy:

In year 2018, the global economy began its journey on a firm footing with estimated global economic growth of 3.6% (Source: World Economic Outlook by International Monetary Fund (IMF)).

During the second half of year 2018, this rate of development gradually declined, owing to impending US-China trade dispute and some slowdown across developed markets.

Emerging and developing markets of Asia maintained their steady progress at 6.4% during year 2018. However, its important to note that Indias economy expanded at 7.1% in year 2018 vis-a-vis 6.7% in year 2017.

India has emerged as the fastest growing major economy in the world and is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy and partnerships.

Indian economy

Indias GDP is estimated to have increased 6.8 per cent in 2018-19. India has retained its position as the third largest startup base in the world with over 4,750 technology start-ups.

The interim Union Budget for 2019-20 was announced by Union Minister for Finance, focuses on supporting the needy farmers, economically less privileged, workers in the unorganized sector and salaried employees, while continuing the Government of Indias push towards better physical and social infrastructure.

Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. Prime Minister of India launched the Make in India initiative with an aim to boost the manufacturing sector of Indian economy, to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors.

The Government of India is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Indias gross domestic product (GDP) is expected to reach US$ 5 trillion by FY25 and achieve upper-middle income status on the back of digitization, globalization, favorable demographics, and reforms.

India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behavior and expenditure pattern, according to one research report; and is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by the year 2040, according to a report

Cement Industry in India

The prospects of the cement industry in India seem to be mixed with their fair share of positives and negatives in 2019.

Cement companies have been grappling with the repercussions of rising crude oil prices and the hike in raw material costs. The balance sheets have been under stress with the potential of generating negative cash flows owing to ongoing expansion and cement being taxed at 28 per cent GST.

On a positive side, the ramifications of these headwinds are likely to be offset to an extent as the costs are declining and prices are picking up. In February 2019, cement prices increased compared to the previous month. This helped the cement industry to boost operating profitability of manufacturers.

While there is still no clarity as to whether these prices can be sustained in upcoming quarters, the demand momentum seems to be positive, particularly in the light of the elections and a government in place.

The major growth drivers for the cement industry include the governments focus on the infrastructure and housing sectors. The government emphasis on railways and ports will also scale up the demand for cement

In the financial year 2019, cement prices had been sedate despite healthy demand growth of about 12-13%.

The increase in prices during the quarter 4 of 2019 and declining fuel prices might bring some relief to the limping bottom lines of cement companies, who reported alarmingly diminished margins and bottom lines.

Demand is expected to moderate in fiscal 2020 as impact of low base is expected to wane.

KCPs Segments Performance

A. Cement:

Though the company could post a volume growth of about 12% in line with the industry average, on price front the growth was negative overall. The negative growth would have been more pronounced but for some spurt in cement prices in last two months of the fiscal.

The coal & fuel prices started going southwards toward the second half of the fiscal 2019, thereby reflecting in marginal reduction of costs in the last quarter of the year.

The benefit of cement prices hike and reduction in coal prices accrued towards the last quarter of the financial year.

The company successfully commissioned in Feb 2019, the brown field expansion of cement plant at our Muktyala site. However certain facilities like Packing plant, fly ash silo are under advanced stage of completion and would be commissioned in the first half of 2019-20.The operating parameters of the new equipment are satisfactory.

The company is adopting suitable strategies to enlarge markets, away from current areas, by setting up split grinding units nearer to such markets. This would help in optimizing the utilization of enhanced capacities.

The performance of cement segment is as under during the year 2018-19:-

Particulars (Amounts are in Rs. lakhs) FY 2018-19 FY 2017-18
Turnover 101785 95506
Segment Profit 4346 11050

B. Engineering:

Engineering is a diverse industry with various segments. A company from this sector can be supplier of equipment to sectors like power, manufacturing, defense, space etc. The balance sheets & bottom lines would be greatly dependent on the mix of the order book from these diverse segments as well as the economic factors affecting these industries including government policies from time to time. Suppliers of equipment are abundant across most of the segments, except for technology intensive executions. Supply of equipments face bottlenecks such as logistics and lack of skilled manpower for manufacture and timely assembly & delivery of equipments. High costs of research & development hinders initiatives for entering into challenging segments.

The players in the country mostly work in traditional areas, adopting known practices. Lack of research in to quality products, encourages flooding of equipment from across the borders. Support from government, through their policies like make in India, is helping the domestic sector to some extent.

The industry also has to invest heavily not only into capital costs but deploy large funds as working capital for shop floor operations. The customers would only extend financial support in the form of small advance at the commencement of the execution. Thus, costs of funding add to the owes of the industry.

KCPs Engineering Unit has a good order book in the financial year 2019 with mix from space, oil &gas, minerals, defense etc.

During the financial year 2019, Engineering could complete a few orders, which could add to the bottom-line. Some of these orders could be completed towards the end of the year, thus, resulting in better performance towards the close of the year. Over all the performance of the unit was much better compared to financial year 2018. The performance this segment is as follows:

Particulars (Figures are in lakhs) FY 2018-19 FY 2017-18
Turnover 10520 8622
Segment Profit (293) (993)

Going forward, with the installation of a government at the centre, it is hoped that the country would be on the path of steady growth and with the policies supporting domestic industries, it is expected that the engineering goods would see demand pick up. Further, with the enhancement of pollution norms, it is expected that demand from oil & gas industry would add to the demand.

C. Power:

The performance of power segment is as follows:-

Details

Thermal Plant

Hydel

Waste Heat Recovery

Windmill

Solar

2018-19 2017-18 2018-19 2017-18 2018-19 2017-18 2018-19 2017-18 2018-19 2017-18
Gross Generation -MWH 121276 117175 11984 11174 15149 16203 6882 7863 1610 1743
Segment Profit- in lakhs (264) (263) 84 (583) 619 471 240 298 24 38

Thermal Power Plant:

Thermal power plant had to face continued higher prices of coal in the first 9 months of the year. The prices started easing towards the last quarter of the financial year.

The plant operated at 84% plant load factor during the year and meeting the needs of cement plant at Muktyala.

Hydel:

The monsoon started reasonably well in the beginning of the monsoon season compared to late on set during 2017-18. Consequently the generation of hydel units, was better during first 3 quarters of the year. Towards the end of the year the flow of water in to the canal, where KCP generates power, tapered off leading to negligible generation in the last quarter. However, the overall generation in 2018-19 was better than 2017-18, though could have been better had the monsoon been as predicted for 2018-19.

Waste Heat Recovery:

The power at this unit is generated taking waste discharged at Macherla cement unit as input. The Cement plant operated at almost full capacity and hence there is an improvement in the power generated and consequently better financials.

Wind Power & Solar Power:

These units operate on the inputs derived from the Nature. By the very nature of the source, the inputs for generation of power are reasonably certain, unlike Hydel units, which are completely dependent on monsoon/rains. The performance of the Solar & Wind Power units are delivering their standard performance and generating more or less power on lines of earlier years.

D. Hospitality-Hotel

The Indian hospitality industry has emerged as one of the key industries driving the growth of the services sector and thereby the Indian economy. At the close of 2018, the country saw macroeconomic stability owing to a decline in inflation, current account deficit etc. An overall pick up in economic activities, led to a positive impact on the demand for hotels industry in the country.

Going forward, it is expected the industry to register an overall healthy growth in revenue on back of economic growth and consistently growing middle class along with increasing disposable income. There are various other key factors that drive the market, including Indias attractiveness as a medical tourism destination; steadily growing Meetings, Incentives, Conferences and Exhibitions (MICE) segment; and an increasing fondness among millennial to travel.

It is also expected that the major markets in the industry to sustain the average room rates (ARRs) going forward and grow at an average of 3.5-4.5% per annum. Also, it is also expected that the occupancy to inch up to an average of about 68-70% by the end of FY23 compared with 66.6% in FY18. Accordingly, the hotel industry is hoped to see an increase in room revenue.

KCPs Mercure Hotel at Hyderabad, has been improving occupancy levels and enhancing the revenue from Food & Beverages (F&B) also.

The occupancy rates have increased from 48% on 2017-18 to 54% in 2018-19. The revenue from F&B section registered a growth of 17% on FY 2019 over FY 2018.The Average Room Rent (ARR) also improved from Rs.3700 in FY 2018 to Rs. 3784 in FY 2019.

There will be multiple factors that will drive the hospitality industry in 2019. Increased connectivity thanks to the UDAN (Ude Desh Ka Aam Nagrik) scheme by the Government of India and additional flight routes and the launch of operations by airliners to international locations from non-metro and tier 2 towns will drive demand for hotels. Government initiatives like Smart City, Swadesh Darshan, and Pilgrimage Rejuvenation and Spiritual Augmentation Drive (PRASAD), friendly e-visa schemes and the likes, will also propel business and religious travel.

Having weathered many adverse situations in the past three years, the prevailing sentiment in the Indian hospitality industry is of confidence. The industry stakeholders feel that they will be able to maintain the growth trend in 2019.

E. Subsidiary-

KCP Vietnam Industries Limited: (KCP VIL)

Company operated with a total crushing capacity of 11,000 TCD (Son Hoa Unit - 10,000 TCD and Dong Xuan Unit - 1,000 TCD). The total cane crushed was 1,143,477 Mts with a recovery rate of 8.66% and the refined sugar produced was 105,232 MTs.

Compared to the previous season, the sugarcane crushed, the quality of the sugar cane and the sugar production are lower. The sugar prices maintained downward trend due to forecast of surplus in the world during 2018, the trend continued in 2019 with the prices dropped further in the international market. Vietnam sugar market followed the trend in the international market.

Son Hoa sugar unit operated at 10,000 TCD capacity with 30 MW Cogeneration Plant to export the power to the national grid.

During the financial year, total power sold to EVN (Electricity of Vietnam) was 96,975 Mwh.

Performance of the subsidiary during FY 2018-19 is as follows:-

Details 2018-19 2017-18
Crushing Capacity (TPD) 11000 11000
Cane Crushed (MTS) 1143477 1215075
Sugar produced (MTS) 105232 114745
Recovery Rate (%) 8.66% 8.71%
Average Sales Realization (Rs/MT) 37507 44715
Turnover (Rs in lakhs) 51984 46152
Profit before tax (Rs in lakhs) 9434 6638

F. Joint Venture Fivescailkcp Ltd

During the year under report, Fives Cail KCP Ltd (FCKCP) had higher order intake. Though a larger revenue was expected, a few projects were on hold due to delay in financial tie up, resulting in lesser executable orders.

The total revenue for the year was slightly lower at Rs. 258.7 Crores compared to Rs. 268.3 Crores in the previous year. Domestic market was very active in the incinerator segment and the JV handled about ten boilers during the year across the country. FCKCP is experimenting on advanced version of incinerators that will be introduced into the market in the year 2019/20.

There were no appreciable export order bookings in the year under review. Sugar industry continues to struggle in India, though ethanol production policy has given a ray of hope to the sugar millers. In spite of closure of sizable number of mills and drought in many states, total sugar production in the country increased. This offers some scope for individual equipment for balancing and power and steam optimization. Further, Sulphur less sugar requirement is generating a few back end refining processes for refined sugar production. FCKCP continues to focus on these segments for sugar equipment orders.

G. New Projects:

Cement Expansion:

The brown field expansion project at Muktyala location has been completed except for some minor facilities like packing plant, fly ash silo etc. The project was funded from the loans drawn from State Bank of India and internal generations.

The commercial operations started in the middle of February 2019.

The parameters of the plant are satisfactory and the operations are smooth. With completion of the expansion, the capacity of cement at Muktyala location is now stands at 3.5 Million tons p.a.

Grinding Unit at Naidu Peta:

Consultants have been appointed for developing the design & drawings of the plant. After necessary clearances from pollution control authorities, the construction will be taken up. Financial closure has been obtained with a loan from Canara Bank.

Details of significant changes in key ratios.

There is no change of 25% or more change in key ratios as compared to the previous financial year.

The change in Return on Net Worth as compared to the immediately previous financial year is discussed in detail in this report.

Cautionary Statement:

Statements in the "Management Discussion and Analysis" describing the Companys objectives, expectations or predictions are as perceived currently. Actual results may differ materially from those expressed in this statement. Important factors that could influence the Companys operations include domestic supply and demand conditions affecting selling prices of finished goods, input prices, changes in government regulations, tax laws, economic developments within the country and other factors such as litigation and industrial relations.

For and on behalf of the Board of Directors

Place: Chennai (V.L. DUTT)
Date: 29th May, 2019 Executive Chairman