Premier Explosives Ltd Management Discussions.

1. Macroeconomic review

As per provisional estimates of Ministry of Statistics and Programme Implementation, Gross Domestic Product (GDP) for the year 2018-19, at constant prices (2011-12), was Rs. 140.78 lakh crore showing a growth of 6.8% over Rs. 131.80 lakh crore for 2017-18.1

De-monetisation and GST became things of past now and the economy is adjusted to new reality without negative effects.

Decisive governments have been formed at centre and a few states. This is expected to help focus on policy formulation and implementation.

At global level, neither USA nor China is willing to back down from imposition of tariffs and the dispute may lead to the largest trade war in economic history. India also is affected with its own disputes with US regarding tariff on certain items.

However, during their meeting in June 2019, on the sidelines of the G20 summit in Osaka, Japan, US and China agreed to resume talks on trade and tariffs. This is a welcome respite for global markets.

2. Operating environment

The companys operating environments primary consists of two customer groups, namely, defence and mining / infrastructure. Defence sector is influenced by factors such as relationships with neighbours, tensions at borders, political resolve towards national security, defence budget, modernisation of defence equipment, indigenization, etc. whereas the mining sector is driven by growth in general economy, mining policies, creation of road and power infrastructure, demand for housing, etc.

Premier explosives Limited is a manufacturer and supplier of missile propellants, coloured smoke products, counter measure products like Chaffs / flares, tear gas grenades, pyro devices and allied items to Indian defence establishments. The company is also a supplier of commercial explosives to coal miner like Coal India Ltd, Singareni Collieries Limited, and Neyveli Lignite Limited.

A. Defence explosives – key drivers

a) National Advanced Surface to Air Missile System II (NASAMS-II)

India is in the process of acquiring the NASAMS-II from the US to create multilayered shields over Delhi and Mumbai.

This is expected to create demand for solid propellants for missiles.

b) Open General Export License scheme ‘

‘Open General Export License scheme about to be launched by Government of India is expected to boost defence exports from India by reduction of the process of taking permission from the government. It is expected the initiative would help defence products becoming qualitatively better, diversified and internationally competitive.

Your company has already obtained orders for development and manufacture of solid propellants from Israel and OGEL would help the company to increase its footprints across the globe.

c) Increasing defence exports

Defence exports increased to Rs. 10,745 crores in 2018-19 from Rs. 4,682 crores in 2017-18. It is expected to move up exponentially with higher export focus of defence ministry and with the open general export licence plan.

New Defence Ministers export focus is expected to open up opportunities for your company in the coming years.

d) ‘Roadmap of DRDO

‘Roadmap of DRDO encapsulating its target for next ten years has been released by Raksha Mantri in June 2019. The newly appointed Defence Minister is expected to drive cutting-edge, state-of-the-art technologies and collaboration with academia and industry to focus on flagship national defence programmes.

Your company has been closely working with DRDO for the past many years and the Roadmap wil help the company to align itself with DRDOs initiatives.

e) Bill passed in US Senate to bring India on a par with NATO allies

In July 2019, US Senator has passed a legislative provision that brings India at par with Americas Nato allies and countries like Israel and South Korea for increasing defence cooperation.

The move signals a big shift in Indo-US relations and will make it possible for the US to fulfil Indias operational requirements in quick time.

The Major Defence Partner status, when granted, allows US to move on sales of highly sensitive military items to India.

f) Indias missile programmes and your companys contribution therein

Your company has been working with various defence entities towards indigenisation of national missile programs. Following table gives details of missiles for which PEL has been supplying solid propellants.

Missile Type Stage Order from End user PELs contribution
Akash Tactical, Surface to Air Production Bharat Dynamics Limited (BDL) Indian Air Force and Indian Army Supplied 2000+ booster grains and 450+ sustainer grains
LRSAM Tactical, Surface to Air Development DRDO Indian Navy 100% requirements of solid propellants
MRSAM Tactical, Surface to Air Production from 2019 DRDO / BDL Indian Army 100% requirements of solid propellants
Astra Tactical, Air to Air Development DRDO Indian Air Force 100% requirements of solid propellants
Agni IV Ballistic Production Advanced Systems Laboratory Strategic Forces Command Pyrogen igniter
Brahmos Cruise Air launched Anti-ship, Land attack Production HEMRL Indian Air Force, Indian Navy and Indian Army Transfer of technology is under induction

g) PELs other defence and space products

In addition to missile area, PEL has been working with defence and space entities in the national indigenisation effort with the following products:

Product Type Order from Status
Strap on motor for satellite launcher Solid propellant ISRO One motor supplied and successfully test-fired. Expecting further order
Mines Munition device that detonates by way of pressure when a target steps on it or drives over it DRDO Under DGQA and Indian Army trials
Chaff Counter measure Indian Air Force Executed one order in 2018 and received another in 2019 Entered into Memorandum of Agreement with Indian Air Force for development and manufacture under ‘Make in India
I R flare Counter measure Indian Air Force Order received, technology obtained and about to commence production
Smoke flare Signalling device Indian Navy, Para Military Force Supplies going on
Pyro cartridges Initiators for missiles and other projectiles ISRO Bharat Dynamics Limited Supplies going on
Water cannon disruptor Neutralising IEDs Para Military Force Supplies going on
Mob control device Tear gas grenades and shells Para Military Force, State Police Supplies going on

B. Commercial explosives – key drivers

a) Pan-India production of explosives2

Product UoM 2016-17 2017-18* Growth
SMS explosives tons 8,02,238.11 8,37,593.47 4%
Cartridge explosives tons 4,09,488.87 4,75,930.79 16%
Boostex and PETN tons 9,079.65 9,165.40 1%
Safety fuse mn mtr 53.26 58.952 11%
Detonating fuse mn mtr 612.83 675.038 10%
Detonators mn no 1,120.73 985.17 -12%

* 2018-19 details yet to be available

b) Production of coal in India3

All India Production of coal during 2018-19 was 730.354 MT, 8.1% higher than 675.40 MT in 2017-18.

Coal India Limited (CIL) and its subsidiaries produced 606.887 MT of coal in 2018-19 compared to 567.36 MT in 2017-18, a growth of 7%.

Singareni Collieries Company Limited (SCCL), the main source for supply of coal to the southern region, produced 64.404 MT of coal in 2018-19 compared to 62.01 MT in 2017-18, a growth of 4%.

Despite increase in domestic production, India needed to import 235.24 MT in 2018-19 which is 13% higher than 208.27 MT imports in 2017-18.

c) National mineral policy 2019

In March 2019, union cabinet approved National mineral policy 2019 which aims to augment mineral output by 200 per cent in seven years. It also focuses on raising the share of mining in the countrys GDP through large scale exploration with priority to deep-sea minerals, and by assisting in getting the necessary clearances.4

Salient features of the policy include5:

- Ease M&A of mining entities

- Enhance private sector role in exploration

- Allow transfer of mining leases & creation of dedicated mineral corridors

- Grant industry status to mining

- Boost finance for mining & acquisition of foreign mineral assets by private sector

- Harmonise tax, mining levy & royalty rates to global benchmarks

The new policy is expected to increase mining output and thus generate demand for explosives.

d) Coal dominance to continue to power

As per the analysis of Central Electricity Authority (CEA) released in July 2019, coal would account for half of Indias power generation in 2030. Intermittent nature of renewable power from solar and wind sources is the reason for dependence on coal to meet power requirements.

3. Outlook

Greenfield project at Katepally is in advanced stage of completion. Your company can manufacture solid propellants, RDX, HMX, Mines and Warheads at this plant.

Cost of this plant is funded from the amounts raised by QIP and Preferential Allotment, without availing any debt.

4. Segment-wise performance

The companys primary business is manufacture of ‘high energy materials as a single business segment.

5. Financial analysis

Generally accepted accounting principles:

The financial statements are prepared under the historical cost convention on an accrual basis.

Performance:

Current years net operating revenue was Rs. 24093.35 lakhs compared to Rs. 26590.85 lakhs during 2017-18. Profit before tax was Rs. 1631.65 lakhs compared to Rs. 1343.94 lakhs last year.

Profit after tax at Rs. 1172.55 lakhs improved by 34% over previous years Rs. 873.41 lakhs. Thus the resultant EPS of Rs. 11.00 was higher by 31% over Rs. 8.42 for the year 2017-18. During the year, Companys profitability improved despite the decline in the top-line on the back of higher margin products in defence and increase in pricing of certain commercial products.

Financial position:

During the year, the company converted 1,15,100 warrants into equal number of equity shares of Rs. 10 each at Rs. 408 per share, including a premium of Rs. 398, to promoters (1,00,100 shares) and others (15,000 shares). Thus the equity share capital increased to Rs. 1075.22 lakhs from Rs. 1063.71 lakhs.

Further, the company forfeited 20,000 warrants as the warrant-holders did not pay the balance 75% after paying initial 25% amount. Thus an amount of Rs. 20.40 lakhs has been credited to Capital Reserve.

Key financial ratios:

2018-19 2017-18 Change
Debtors turnover 3.70 2.73

36%

Inventory turnover 7.52 7.45

1%

Interest coverage ratio 3.95 3.61

10%

Current ratio 2.11 2.13

-1%

Term loan / Networth 0.03 0.04

-21%

Operating profit margin (%) 9.73% 7.53%

29%

Net profit margin (%) 4.81% 3.26%

48%

6. Risk management

Your company recognizes Risk Management as a very important part of business and has kept in place necessary policies, procedures and mechanisms. The company proactively identifies monitors and takes precautionary and mitigation measures in respect of various risks that threaten the operations and resources of the company, which include the following:

Risk Description Mitigation
Project risk The company has been executing various projects for enhancement of capacity as well as establishment of manufacturing facilities for new products. These capital projects may be exposed to time and cost overruns. To mitigate these risks, the technocrat management developed in-house design of equipment to the extent possible. The management also closely follows up the execution of projects to meet the deadlines.
Market and Competition risk Commercial explosives business is linked to mining and infrastructure activity which have not been faring well in recent times. Further, there has been intensive competition in the industry with entry of new units. To mitigate this risk, the company is exploring new markets including export markets.
The company is also focusing on defence products which are expected to grow into a reasonably large stream of revenues to add diversity to the product portfolio.
Safety risks Both raw materials and finished goods are high risk items during production and handling. Apart from strict adherence to mandatory safety measures, the company has developed an alternative chemical compound as primary explosive in production of detonators. This alternative chemical is less sensitive to friction and hence is safer than its traditional counterpart.
The company which is already an ISO 9000 compliant for commercial products is now implementing AS 9100 C for defence / aero products.
The company gives utmost priority for the safety of its employees as well as the manufacturing assets. These measures are expected to make the systems function in accordance with safety standards.
Raw material price risks Ammonium nitrate and fuel oil form major part of raw materials in manufacture of explosives and those raw material prices are influenced by international Dynamics. This risk is mitigated by price escalation clauses in supply contracts whereby selling prices are periodically adjusted for the changes in prices of main raw materials. The company also uses a mix of domestic and imported ammonium nitrate taking into account the landed cost of the materials in both the options.
As such risk absorption clauses are not available in supply of other products, the company takes all efforts to control the overall cost

7. Internal financial controls and their adequacy

Your company has established necessary internal financial controls and have got them assessed by professionals in the field during the year.

Your company has been utilising an ERP system for recording all financial transactions with built in checks and balances. This has been helping in preparation of financial statements and other reports accurately, reliably and timely. Management reviews the operations on a regular basis.

Independent auditors, internal auditors, cost auditors and secretarial auditors verify financial and other information from their respective angles on intervals as are required.

Board and its committees review the quarterly and annual financial statements in conjunction with the financial policies, assurances through auditors observations and management responses and certifications.

Based on the above measures your company is confident that internal controls are in place, they are adequate and are reasonably working.

8. Material developments in human resources / industrial relations including number of employees

Your company has 1,075 employees as on March 31, 2019 (1,130 a year ago). Relations between the management and employees have been cordial. Employees have been imparted training in their respective areas for better performance. The management acknowledges the contributions made by each and every employee and records its appreciation for the cooperation extended by them at all levels.

Dr. A.N. Gupta
Secunderabad Chairman & Managing Director
10.08.2019

References:

1. (http://www.mospi.gov.in/sites/default/files/press_release/Press%20Note%20PE%202018-19-31.5.2019-Final.pdf)

2. www.peso.gov.in

3. https://coal.nic.in/content/production-and-supplies

4. //economictimes.indiatimes.com/articleshow/69773377.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

5. //economictimes.indiatimes.com/articleshow/68221785.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst