Mahindra Composites Ltd Merged Management Discussions

Overview

Mahindra Composites Limited (MCL) is one of Indias leading players in the field of composites supplying SMC/DMC compounds and components to the electrical switchgear, power distribution, automotive and medical equipment industry. MCL operates out of two plants, one at Mangaon, Dist.Raigad and the other in Pimpri, Pune. The plant at Mangaon has a capacity of 15000MT of SMC/DMC compound manufacturing. The SMC/DMC component manufacturing plant at the same location has 6 compression moulding presses ranging from 100MT to 500MT capacity. There are also 3 RTM stations and hand-layup setup to manufacture components. The plant at Pimpri, Pune houses additional 6 compression moulding presses along with an innovation lab which focuses on product concept, design and engineering.

We sell SMC/DMC compounds to electrical switchgear OEMs like L&T, Schneider, Legrand, Siemens, ABB etc. who in turn sells Product in the Electrical market. The electrical switchgear industry is the key end user of the companys products and accounts for almost 65% of MCLs revenue. To strengthen Companies position in this segment, Company has entered into Technical agreement with Polmix Sri, Italian Company having 5 decades experience of DMC/SMC Compound.

We sell moulded components to the power distribution industry, under the brand name Electra.

We sell moulded body parts with and without painting to auto & tractor OEMs. The component business for both the electrical and automotive market has been developed in the last few years.

The Companys revenue during F14 has grown upto 30% compared with F13.

Industry Outlook

F14 saw the slow down, as it was in F13 in the Electrical Switch Gear Industry except MCB. Market influenced mainly by the slow down in the Construction Industry and new industrial projects getting postponed. This phenomenon is expected to reduce growth of the domestic switchgear market in the coming year. The sales of leading electrical switchgear OEMs has also been impacted. There is also increasing competition in this market with the entry of new manufacturers of SMC/DMC compounds with the latest manufacturing know-how.

Company had undertook a major brand building of its products Electra and Sarover by participating in various exhibitions and Trade shows. The revenue of Electra has grown up by almost 70% during F14.

The automotive market is accepting new applications of composites products but as an industry it also showing down resulting in postponement of development and new launches by OEM.

Performance

In spite of slowdown in our target industry (Electrical Switchgear, Infrastructure & Automotive) Company sale has increased by 30% compared with F13. This was possible due to increasing customer engagement and improving our response in terms of QCD ( quality, cost and delivery).

We have launched new product panel water tank named "Sarovar" in Indian market and bagged first orders in F14. The sale for Sarover during F14 was Rs.143 Lacs.

Given the current and expected slowdown in the approval of infrastructure projects, the GRP Pipe Project had been withdrawn and as a matter of abundant precaution the expected expenses as a result of holding of a project were already provided for in F12.

Strategy, Opportunities & Threats

We will continue to consolidate our core business of SMC/DMC compounds for the switchgear industry by improving our manufacturing efficiency and product reliability with the aim of optimising our margins in this segment as far as possible. The Polmix TLA will further strengthen our position in this segment, primarily due to the European connection of Polmix with Legrand and also L&T is developing next generation MCB along with Polmix in Europe. (The manufacturing of MCB will move to India during F15).

We will continue to focus on expanding our moulded components business. The Electra ranges of products are a key focus area and additionally we have launched panel water tank named "Sarovar" in India . Efforts are also on to increase acceptance of composite parts in the automotive market. The exterior body panel business for the Truck industry is a good platform for growth and we will leverage our expertise to grow in this business. We will continue to scan for and evaluate opportunities that can help us move up the value chain from compounds to components in an accelerated manner. In this regard, we are open to global strategic partnerships that can improve our technical capabilities and expand our product portfolio.

We have also created an innovation lab within the company which keeps on experimenting with new composite products for different end user applications, the details of which are explained in the next section.

Innovation & Technology Development

The seamless carbon fibre wind mill blade which won accolades from ICERP-JEC F12 has been successfully put into production; however the sales have been lower than envisaged due to change in Govt. Policy towards small wind mills during the year.

The formulation R&D team continues its innovation efforts and contributes to protecting margins in a competitive environment. The efforts resulted in generating alternative materials and sources which helped to limit cost increase effect on our margins. Our association with Polmix will improve our R&D capability in compound. We will continue to work with reputed RM suppliers to develop state of art products for our customers.

Outlook F-15

Your Company has taken up a modest target for 18% Growth.

Electrical switch gear OEM has predicated flat sale in F15 except in MCB market. We will try to push this MCB segment and will achieve the increased sale during F15. Also localisation efforts in Electrical switch gear by Schneider, Siemens, ABB will improve our compound sale by engaging and working with these OEMs for the developments.

MCL will also actively work on Automotive market segment and try to improve its share. Volvo order will also go in Production during F15. Company has obtained TS16949 certification during F14, as a part of its strategy to enter aggressively in Automotive segment.

In F15 we will ensure that the "electra" orders in hand are pushed to the market in the power distribution segment. The "Channel Partner" network to sale "Sarovar" will be increased to cover the sales in country and significant revenue will be added during F15.

The Mahindra - CIE Deal

"On 15^th June 2013, Mahindra & Mahindra Limited and CIE Automotive Group of Spain got into an agreement to create one of Indias larger multi-technology automotive component companies.

Step 1:

CIE has purchased controlling stakes in MCAL, Mahindra Composites Limited (MCL) and Mahindra Hinoday Industries Limited (MHIL) and is a majority shareholder after the closure of Open Offer at MCAL & MCL.

Simultaneously, M&M has purchased a stake of 13.5% in CIE. Therefore, M&M continues to be a strategic investor in the auto components business with participation in Mahindra CIE and CIE Spain (parent level).

Effective 29th November 2013, Mahindra Forgings Limited has been renamed as Mahindra CIE Automotive Limited.

Step 2:

MUSCO, MHIL, Mahindra Gears, PIA2 and Mahindra Investment India private limited will merge in to MCAL through an integrated scheme of merger. MCL will merge into MCAL through a separate scheme of merger. This is expected to be completed by October 2014 subject to regulatory approvals.

The structure of the deal is also indicative that M&M is reaffirming its commitment to the automotive components business.

The Rationale for the Deal

Both CIE and M&M have had a strategy to globalize their auto components business interests. This partnership will help both the groups in furthering that aim.

Synergies with Parents

Relationship with CIE Croup

CIE group is a group specialised in providing automotive components and sub-assemblies , to the global automotive industry, working with complementary technologies and a number of different associated processes.

With the active involvement of the CIE group MCL intends to achieve the following synergies:

1. CIE products and customers can be introduced in India.

2. Gaining Market Share in India with existing CIE customers (Western OEMs from global markets) and expanding into all the technologies which CIE operates in viz. Aluminium, Painting, and Plastics.

3. Improving operational efficiencies by using ClEs expertise and enhancing the product offerings.

MCL adheres to the corporate values, principles and established corporate governance practices of the CIE Group.

Relationship with Mahindra Croup

Mahindra & Mahindra; which holds a minority stake in MCAL, is the flagship company of the Mahindra group and one of the leading automotive manufacturers in India. M&M is an anchor customer but there is an arms-length relationship between M&M and MCAL companies. Association with the Mahindra Group aids MCAL in winning new businesses due to higher brand recall and obtaining financial assistance.

Risks and Concerns

Foreign Raw Material suppliers are setting up plants in India and this will reduce Imports. The Company has a planned strategy to develop local sources to reduce the risk of currency fluctuations. However commodity (petro based RM) price variation will continue to be a risk

The Company will invest in new business segments to grow the company and this strategy is accompanied by the inevitable risk of entering new markets with limited knowledge. However these efforts will see the benefits in medium term as we have experienced in electra and Sarovar. The Company will raise finance through long term debts to meet its needs for adding assets to enable growth.

Internal Control Systems and Their Adequacy

In the opinion of the Management, the Company has an adequate internal audit and control systems to ensure that all transactions are authorised, recorded and reported correctly. The internal control systems comprise extensive internal and statutory audits.

The internal audit of our operations is conducted by M&Ms Corporate Management Services (CMS) regularly. This provides reasonable assurance regarding the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

The QHS certifications will ensure continuous improvement in each of these areas. The Company has also achieved TS 16949 certification in F14. Both plants continue to be fully operational under ERP facilitating MIS.

Human Resources and Management Systems

Your Company continues to implement the Mahindra Annual Planning Cycle which facilitates Senior Management reviews and actions in Operation and Strategy.

The Company has a programme called "BINDAAS BOL" (Speak your mind") aimed at encouraging all the employees to contribute their knowledge and experience in areas outside their own immediate duties by making suggestions for improvements.

There is increased participation across all levels in the implementation of initiatives for continuous improvement. A leadership development program has been instituted to develop young leaders to be able to take on higher positions in the growth of the Company.

Your Directors place on record their appreciation for contributions made by employees at all levels and for cordial relations through out the year.

Sustainability

In the assessment of DNV and The Mahindra Way (TMW), MCL has upgraded its Quality and Environment and Health Management Systems and will continue to improve and drive excellence in its internal manufacturing and business processes. Key initiatives also reduced the power and fuel consumption during the year. With an eye on sustainability we will continue to measure and optimise consumption of resources to stay competitive and promote a green planet. In pursuit of this both our plants have been certified for ISO 14001 & OHSAS 18001 standards.

Looking Ahead

With continued support of its parents; the Mahindra and CIE groups, your Company will continue to strive for improved financial performance. The Company also recognizes the long term trend towards growth especially in India, and will continue to look out for and evaluate opportunities in this direction.

	For and on behalf of the Board
	Hemant Luthra
	Chairman
Mumbai: 29th July, 2014.

 

A) MAJOR HIGHLIGHTS	Year ended 31st March, 2014	Change	Year ended 31st March, 2013	Change
Sales & other income	6,641.44		5,040.64	31.76%
Operational profit/(loss) .....	(25.04)		(94.90)	(73.62%)
Interest Received & Abnormal Income	0.05		-	-
Profit before tax .	(24.99)		(94.86)	(73.66%)
Return on capital employed ..	(1.45%)		(6.06%)	(76.07%)
Operating cash flow	313.21		350.96	(10.76%)
B) FINANCIAL POSITION AT A GLANCE
Asset (owned & leased)
Fixed assets (net)	989.13		1,028.29
Investment .	-		-
Non - current assets / (liabilities) (net)..	28.75		23.92
Current assets / (liabilities) (net)	709.17		512.26
	1,727.05		1,564.47
Financed by:
Long term borrowings	184.99		101.25
Net worth	1,542.06		1,463.22
	1,727.05		1,564.47
Represented by:
Share capital	441.53		441.39
ESOP outstanding	9.42		9.62
Retained earnings	1,091.11		1,012.21
	1,542.06		1,463.22
C) DISTRIBUTION OF INCOME
Material consumed	4701.62	70.79%	3,343.91	66.34%
Employee cost	549.95	8.28%	496.93	9.86%
Other expenses	1109.38	16.70%	1,009.73	20.03%
Finance cost	102.52	1.54%	112.43	2.23%
Depreciation	202.96	3.06%	172.50	3.42%
Exceptional item	(96.19)	(1.45%)		0.00%
Provision for taxation	(7.00)	(0.11%)	3.00	0.06%
Current. .	-	-	-	0.00%
Deferred	(7.00)	(0.11%)	3.00	0.06%
Short provision for earlier years	-	-		0.00%
Tax on dividend .	-	-	-	0.00%
	-	-	-	0.00%
Retained earnings	78.20	1.18%	(97.86)	(1.94%)
	6,641.44	100.00%	5,040.64	100.00%

(Figures of previous year have been regrouped to match the current years basis)