Kemrock Industries & Exports Ltd Management Discussions

Overview and Outlook

During the year under review, the business sentiments remained subdued, depressed and under pressure largely on account of inflation, shortage of power, weak rupee, weakness in domestic and global industrial activities, high interest rates and low level of capital investments on account of fall in demand. The GDP growth remained at 4.8% in the month of September, 2013. However, in view of the recent union budget, the GDP is likely to improve slightly or remain around the present level.

The population growth, new infrastructure projects, urbanization, increase in middle class population and the green movement will drive composites growth to new horizons in emerging economies.

Business Review:

Composites

This is the Company’s flagship business which accounts considerably of the Company’s topline. The company has developed the product in such a high caliber that it has expanded its reach to new consumers. This product has expressed remarkable performance hitherto, in spite of competitive foreign markets. Although the Company enjoys healthy order book position, several other factors have hampered its growth at present. However, the Company has endeavored its best to strengthen its products in the overseas market and its acceptance is wide-spread. Further, the Company has focused on development of high value added composite products to avail advantage of improving profit margins.

Wind Energy

Imaging the world without the electricity is not at all possible, as it plays an important role in people’s lives. Wind energy is specie of the renewable energy which can be replenished in a short period of time. Wind power is leader in the renewable energy sector and growth rate of wind energy is increasing rapidly in the domestic and international markets. Kemrock has unique advantage of in-house availability of major raw material, resin and glass fabric for manufacture of wind turbine blade. Kemrock is the preferred supplier of wind turbine blade for almost all the major wind energy customers.

Railways

The composite properties make the material resistant to climate factors and hence it tends to supersede conventional materials, most applications of the new type of materials being addressed to transport industry. The industry has also begun to introduce such materials in railway coach, luxury buses and cars. The construction of the first military vehicles using composite materials stands proof of their quality.

The main advantage of composites compared to metals, considering the industrial production processes, is superior management which significantly reduces manufacturing times. It is unlikely for rolling stock made of composites to be rehabilitated but it is definitely more environmentally-friendly and significantly recyclable.

Composite materials can be used in many applications within the railway industry, viz., infrastructure, interior and exterior parts in rolling stocks. For infrastructure, the main advantages are better corrosion resistance as compared to metal. It is for this that the composite poles or signaling equipment effectively has lower maintenance costs, longer lifetime than wood and hence composite sleepers, for instance, last more and bears lower weight than concrete which in turn enables faster and easier installation. In terms of rolling stocks, the main advantages are lower weight and key advantages to save energy. There is increasing consumption and acceptance of fire retardant grade composite material in railway coach, interior laminates, luxury buses etc. due to advantage of fuel economy, low maintenance requirement, fire resistance, properties etc.

Kemrock has introduced Prepreg and Vacuum Bagging System to produce improved quality of high end products.

Pultrusion products

Pultrusion is the only manufacturing process for obtaining high quality composite profile continuously, with high mechanical properties. Pultruded products are composed of high performance fibres (glass, carbon, aramid) embedded in a polymer matrix. The process is characterized by, Complex shape and unlimited length, Low labor content, wide choice of reinforcement and resins, Low scrap rates, High raw material conversion efficiency and Consistent quality.

Pultrusion has rich characteristics such as low weight, chemical resistant, electrical and thermal insulating, temperature resistant, low thermal expansion, anti-magnetic, no sparks, electromagnetic transparent custom colours, corrosion resistant, high mechanical strength, easy to machine, low maintenance and reduced transport costs.

To increase speed of production of pultruded profile in Phenolic resin system, new catalyst system was developed and successfully implemented.

Aerospace

Approximately 50% of the airframe is made from composites; a very bold move in the commercial aircraft industry. Aerospace was the first wide-spread commercial application of Advanced Composites. The aerospace industry has come a long way, from the early days when advanced composites were used for small "inconsequential" non-structural components in an aircraft - to today when entire fuselages and wings are constructed of advanced composite materials. In the new Airbus A380 and the Boeing 787 Dream liner-advanced composites account for 25% to 50% by weight-a scenario unthinkable even 5 years ago.

Aerospace composites are extremely critical since many lives depend on a composite structure performing as it should in an aircraft. Thus, this industry is leading the effort of establishing tough quality systems, including testing at each and every raw material before being used and a material trace can be carried out to the most primary level of the raw material for every composite component.

Filament winding (Piping & Tank)

The filament winding technology is accepted world wide as very efficient method to manufacture light weight composite products, meeting high strength requirements particularly to produce pipes and tanks. FRP/GRP pipes offers significant advantage over metallic pipes due to much higher corrosion resistant, lighter weight, ease of installation, much lower maintenance etc. These non-metallic pipes find preferred application in effluent management, water management, chemicals, transportation etc. Similarly, tanks fabricated using filament winding technology is preferred replacement for metallic tanks due to similar advantages.

New high HDT (Heat distortion temperature) Vinyl ester resin was introduced successfully in pipe division for high thermal stability in corrosive application.

Thermo-setting Resins Industry

The Resin market will show a corresponding growth as the Composites market. Unsaturated (thermo set) polyester is expected to remain the main resin and account for 80 percent of all demand because of its low cost and excellent properties. Vinyl esters are expected to grow in importance where higher levels of corrosion and temperature resistance are mandated. Epoxy resin usage is expected to be determined by the fact that they have the highest mechanical properties of all major resin usage is expected to be in applications where enhanced fire, smoke and toxicity reduction is required. Hence, it can be expected that in the Indian market also, phenolic resins for FRP products would be used in specialized applications. The thermo-set resin market for Composites application is estimated to be 120,000 TPA in India, with a CAGR of more than 20 percent p.a. Unsaturated polyester resin market in India is the largest with a share of 80 percent in composites, followed by Epoxy resins and Phenolic resins.

The Company is a leading manufacturer of thermo-set resins and also a leading manufacturer of composites. Being vertically integrated, it is in a unique position to offer customized solutions to other end-use industry as well, thus giving it a competitive edge.

Carbon Fibre

After commissioning Aerospace grade carbon fiber facility during 2010-11, the stabilization of manufacturing facility with focus on consistency in the productivity and improvement in quality was taken up during 2011-12. All the three grades of carbon fiber (3K, 6K, and 12K) were certified by M/s. CEMILAC, Bangalore during September, 2011 and provisional clearance was released for use of three grades of carbon fiber for aeronautical applications. Consistency in the productivity and quality was achieved for poly-acrylonitrite powder, special acrylic fibre and carbon fibre products.

Company is in process of commissioning commercial grade carbon fiber facility by procuring and installing some of the balancing equipments.

Awards and Accolades

Kemrock Industries and Exports Limited has Integrated Management System encompassing quality management, environment management and occupational health and safety management system. Kemrock has also acquired ISO/TS 16949:2009 for Transport department. Department of chemicals and Petrochemicals, Ministry of Chemicals and Fertilizers, Government of India, has conferred second national award to M/s. Kemrock for technology innovation in the field of high-performance vinyl ester resins for composite applications.

SWOT Analysis

Strength

Kemrock is largest manufacturer of new age composites in India; three decades of proven expertise and focus; access to credible intellectual capital; long term technological tie-ups resulting in superior quality and faster time to market; Integrated business model, enabling through control over key input costs and availability; preferred supplier to a world-renowned clientele; state of the art manufacturing unit, fully capable of executing complex client demand having backward and vertical integration and skilled man-power.

Weakness

Operates in a business segment largely driven by infrastructure spending; therefore any slowdown in economy may result in lower demand Stiff resistance on account of consumer affordability and perception.

Opportunities

Defense and Aerospace; Mass Transport; Urban Infrastructure; Power; Renewable Energy; Automobiles and Telecom.

Threats

Probable competition from overseas players.

Human Resources

The Company employed 1615 people as on 30^th September, 2013. The Company believes in the highest standards of people management and personal growth. It instills in each of the members of the Kemrock family a feeling of ownership, responsibility and performance to the par of excellence in each of the operations pertaining to production and servicing. The Company aspires to set the highest standards of internationally benchmarked human resource practices, which would be exemplary for other manufacturers. The industrial relations were cordial and the management acknowledges the support from the employees at all levels. There is continued focus on development of required skill to meet targeted productivity and quality of high-tech products at competitive price

Internal Control System

The internal control system of the company is commensurate with its size and operations and is adequate. The internal controls are being regularly upgraded in line with the changes in the regulatory and control requirements. The internal audit is conducted regularly by the external professionals. The observations of the auditors are reviewed periodically by the audit committee and the appropriate actions are taken by the management.

Risk and concerns

The company is exposed to normal industry risk factors of competition, economic cycle and uncertainties in the international and domestic markets and credit risks. The Company manages these risks, by maintaining a conservative financial profile and by following prudent business and risk management practices.

The statements in the management discussion and analysis report may be seen as forward looking statements. The actual results may differ materially for those expressed or implied in the statement depending on circumstances.