Nuchem Ltd Management Discussions

NUCHEM LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS The company for last few years has had 4 business segments in its portfolio: MDF panel boards, Thermoset resins & Moulding powders, Effluent Treatment Plants/Projects and Environment Management Services.The management has been constantly reviewing its business portfolio and looking at growth issues in every business. MEDIUM DENSITY FIBRE (NUWUD) BOARD DIVISION: This business has been the main business of the company for nearly 2 decades but has suffered from 1st having to export 25% of its production under industrial licensing conditions and there after since 1996 from massive dumping from 5-6 countries where prices of inputs are far lower than in India.While NUWUD bacame a brand synonymous with quality of MDF in the country but due to low realisations because of dumping prices, it suffered. As the size of industry was small i.e. just 2 plants till very recently no relief was forthcoming from GOI for this industry inspite of it being environment friendly business. In recent years after advent of some more plants the industry could move and get Anti Dumping Duty on import of MDF IN Oct 2009.This will help the industry to stabilise its operations in years ahead. We have over last few years of massive losses due to our inability to increase prices to take care of rising input costs of all raw materials e.g. Wood, Agro fuels and petro based materials like wax, resins etc, not been able to put sufficient money in to R&R of plant whereby our agro fired power plant suffered and went in to major break down in July 2009. While we could repair and restart the plant intermittently by early August 2009 our fuel consumptions remained higher than normal. Further steps taken for replacement of boiler parts have brought them in control in September 2010. We are constrained due to shortage of working capital where efforts are under way to inject fresh Working Capital to realise full potential of MDF. We expect that with buoyant market conditions we will be able to put this business to profitable path in near future. CHEMICAL DIVISION: Chemical division apart from Formaldehyde and Prescol Glue which are internally consumed has Thermoset Moulding Powders used primarily in Electrical Wiring Devices and Melamine tableware etc. In the last few years, the companys volumes had been under threat from small scale moulding powder manufacturers who are exempt from paying central excise duty and consequently enjoy price advantage on companys product.This with ongoing rationalisation of taxes and stricter enforcement should start easing the pressure on us. The Electrical Wiring Devices has progressively started seeing MNCs like Panasonic.Siemens etc coming in to this field where quality of raw materials becomes the main criteria rather than price alone and that should in years to come start giving our moulding powder an edge as it is the only product in the country which is approved by BIS as well as is produced in an ISO certified facility.This should start giving us an advantage which combined with technical support to the customer by the company in use of its product should result in increasing the volumes.These factors should along with booming housing market in mid and low value segments should further give a boost to companys off take in near future.The company has also started marketing its products abroad although in small volumes. During the past two years, the petroleum products including those used by the company i.e. Methanol have seen wildly fluctuating prices and in the year under review while the company could pass on part of cost increases to market but still had to bear part of it internally. The working capital needs of the division have to be further strengthened to push for aggressive growth in its business volumes. ENVIRONMENT MANAGEMENT SERVICES DIVISION: Today, Global Warming and Green and pollution free environment have become the buzz words in industry as well as commercial world and environmental issues such as quality of air, water and ground pollution, waste recycling, solid waste management, industrial and hazardous wastes have become the front rank concerns of policy makers as well as industry and people in general. This has thrown up several new business opportunities for us in the area of testing, providing solutions to the problems. The company has been alive to all such opportunities and has developed a business plan to extend itself beyond testing and certification work of the traditional type to Environment Impact Assessment and Consultancy. These services will not only further strengthen the companys services businesses, but also take it on to a path of growth in the areas of large business opportunities in future. In line with its growth plans, it has accreditation from National Accreditation Board for Testing and Calibration Laboratories (NABL) and various pollution control boards at the state level.These combined with plans to further upgrade the technology in this business and market its services aggressively should help this business grow as one of the fast growing businesses in the years to come. ENVIRONMENT PROJECTS DIVISION: The company over the last 4-5 years has felt that this business has the potential to become a major business of the company and certainly as large as MDF if not larger. However, with slow down of economy in 2008 & 2009, in view of this business needing increasing amounts of money to stay afloat and grow, we had to take a decision to go slow in this business and to use the available resources to ensure that the other 2 businesses of the company with buoyant markets, where we already have brand leadership, are better supported at this juncture to stablise the companys margins. Meanwhile, we are in the process to complete the ongoing projects and further course of action will be decided at appropriate time. FINANCIAL PERFORMANCE The operations have resulted in higher losses during the year under review. The continuing sharp fluctuation in input cost of materials like Wood, Agro fuels and Petroleum products i.e. Methanol/Wax had increased the pressure on margins during the year under review . This combined with break down in our power plant at MDF division resulted in reduction in production and sales of that division.This resulted in large losses to not only MDF but also to chemical operations, from where resin is sold to MDF, which could not be done to the desired levels. The company in last few years had settled the debt of most of the term lenders and had also made efforts to do an OTS with Punjab & Sind Bank but could not do so as decision from the bank was not forhcoming. We could finally get approval for OTS of their debt in December09 and have paid 75% of OTS amounts to them through monetisation of a low yeilding asset of the company. The company is looking at various avenues to raise further resources to not only pay off the balance OTS dues of PSB but also to strengthen its working capital resources. INTERNAL CONTROL SYSTEM: The Company ensures adequate internal control through manualised Policy & Procedures to be followed by the executives at various levels in the organisation. While operating managers ensure compliance within their areas, internal audit carries out audit tests on the selected samples and report non-compliance/weaknesses, if any, through internal audit reports of the respective units/areas. These reports are reviewed by the management and subsequently by the Audit Sub-Committee of the Board. With the objective of improving the systems and removing bottlenecks, if any, periodic systems review is carried out and Policies and Procedure Manuals are continually being revised. The job of internal auditing remains entrusted to M/s. Lodha & Co., a professional firm of Chartered Accountants. HUMAN RESOURCE MANAGEMENT AND INDUSTRIAL RELATIONS: In todays business environment, the human resource is the most important resource in any company. The Management has always considered that our employees are valuable assets of the organisation. The maximum attention is being given for up-gradation of skills of people working in the company including the technical, managerial/ personnel skills of people. Training is the main focus area and continuous efforts are made to train the empolyees on continuous basis.The employees at all levels, inspite of tough times the company is passing through, have stood with the company and efforts are constantly made to ensure their well being. Industrial relations in our units have remained cordial during the year under review. The company has total 551 employees on its roll as on 31.03.2010 as against 617 employees as on 31.03.2009. SAFETY AND ENVIRONMENT PROTECTION: Safety and health has always been on a priority agenda with the Company as is evident from the past records.The safety trainings and refreshment courses are conducted at regular intervals and the persons concerned with Security and safety are sent outside to learn new techniques. Company has been associated with the Haryana Safety Council since its inception. The health of the employees is also a major concern for the Management, qualified doctors and well equipped dispensaries find the place in all divisions of the company to ensure regular health check-ups of employees at all levels. The Company has been compliant of the environment protection norms and all efforts are made to create an environment friendly atmosphere in the company. Tree plantations are taken up in all units as a regular feature. Systems for pollution control in all aspects i.e. Noise, water, air are constantly monitored and upgraded as and when required. CAUTIONARY STATEMENTS: Certain statements in the Management Discussion and Analysis Report may be Forward Looking Statements within the meaning of applicable securities laws or regulations. Many factors may affect the actual results, which could be different from what the management envisages in term of future performance and outlook. Place: Faridabad (Arun Barar) Dated: 12-11-2010 Managing Director