Samruddhi Cement Ltd merged Management Discussions

SAMRUDDHI CEMENT LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW: This is the first year of operation of your Company. The Cement business of Grasim Industries Ltd. (Grasim) was demerged and vested into your Company effective from 1st October, 2009. Therefore, the business operations are only for six month during the current financial year. During the year, Cement demand saw a double digit growth of 11%, one of the highest in the decade, recording total despatches of around 200 million tons. The growth was supported by economic recovery, reduction in excise duty, Governments initiatives viz. National Rural Employment Guarantee and low cost housing. The demand upturn has been generally broad based, with all regions recording double digit growth, except Southern Region which was impacted due to floods and political unrest in Andhra Pradesh during part of the year. BUSINESS PERFORMANCE REVIEW: 2009-10* Unit (from 1st October 2009 to 31st March 2010) Grey Cement Capacity** Mn. TPA 25.65 Production Mn. MT 9.85 Sales Volumes$ Mn. MT 10.03 Average Realisation Rs./MT 3,390 White Cement: Capacity** TPA 560,000 Production MT 276,416 Sales Volumes$$ MT 273,172 Average Realisation Rs./MT 8,499 * This being the first financial year of the Company since incorporation, disclosure of previous year figures is not applicable. ** Production quantity is for six months only, whereas the installed capacity given above is for full year. $ Includes captive consumption for RMC. $$ Includes captive consumption for value added products. Your Company completed its ongoing cement expansion. The 3.1 million TPA grinding capacity at Kotputli, Rajasthan became operational during quarter ended March, 2010. Cement production was 9.85 million tons during the six months ended March, 2010. The sales volumes were 10.03 million tons. The bunching of new capacities created a downward pressure in cement prices across the regions during the quarter ended December, 2009. The decline was more pronounced in the Southern Region. Unavailability of railway wagons in various pockets of the country resulted in under utilisation of capacity. There was partial recovery in cement prices in the last quarter due to renewed construction activity and increase in taxes and energy prices. White Cement division registered an impressive performance and achieved 99% capacity utilisation. The Ready mix concrete division is emerging out of the sluggishness, with recovery in the real estate segment. On the cost front, the business gained from the global softness in energy prices in the first three months. It has petered off in the last quarter. Outlook: Cement demand is expected to remain buoyant with increased domestic consumption, both in the government as well as the private sector. The government has reiterated its commitment to infrastructure spending in the budget. The Planning Commission in its midterm appraisal of the 11th year plan has envisaged an expenditure of Rs. 20.5 trillion on infrastructure during the plan period. Additionally, the broad based economic growth will continue to drive cement demand from semi urban and rural India with their rising prosperity levels. With the economy having recovered from the slow down, revival in organised real estate and corporate capex are also expected to add to the buoyancy in demand. Overall, cement demand is expected to grow at a robust 10% + for the next five years. The surplus supply scenario, however, is expected to create short term pressure. New capacities commissioned during FY10 are in various stages of ramp up while additional capacities continue to be set up. This might lead to a surplus scenario after peak demand in Q1FY11, which may last for 6 to 8 quarters. On the cost front, higher coal prices are likely to exert pressure on margins in FY 11. The Companys focus on higher volume growth, better logistics support, together with cost efficiency, should help in partially mitigating the impact. Your Company continues to focus on achieving greater than industry growth and building sustainable competitive advantage through its reach, service and cost competitiveness. Its distribution network is being further expanded throughout India particularly in rural areas to increase the reach. Customer responsiveness is being further improved with the implementation of online order booking and tracking system. Capex Plan: An overall capital outlay of Rs. 2,375 Crores has been earmarked. This will be spent over the next 2 years on logistics infrastructure, waste heat recovery systems, completion of existing projects and modernization. FINANCIAL REVIEW AND ANALYSIS: (Rs. in Crores) 2009-10 (from 4th September 2009* to 31st March 2010) Net Turnover 4,290.6 Other Operating Income and Other Income 50.0 Profit Before Interest, Depreciation and Tax 1,242.2 PBIDT Margin (%) 28.6 Interest 87.1 Depreciation 213.1 Profit before Tax Expenses 942.0 Total Tax Expenses 324.0 Net Profit 618.0 During the current period ended 31st March 2010, your Company has recorded a net turnover of Rs. 4,291 Crores and net profit of Rs. 618 Crores. It earned a healthy 28.6% PBIDT margin. CASH FLOW ANALYSIS: (Rs. in Crores) 2009-10 (from 4th September 2009* to 31st March 2010) Sources of Cash: Cash from Operations 1,029 Non-operating Cash Flow (Dividend Income) 10 Proceeds from Equity 85 Increase in Debts 409 Decrease in Working Capital 181 Decrease in Cash and Cash equivalent 28 1,742 Uses of Cash: Net Increase in Investments 1,265 Capital Expenditure (net) 376 Interest 101 1,742 * Date of Incorporation Sources of Cash: Cash from Operations: Cash from operations was Rs. 1,029 Crores during the six months of operation. Increase in Debts: Term Loans of Rs.450 Crores were raised to fund capacity expansion. Short term loan of Rs. 42 Crores were repaid. Proceeds from Equity: 17 Crores equity shares of Rs.5 each were issued at par to Grasim, the Holding Company. Decrease in Working Capital: Reduction in trade receivables and inventories and increase in trade payables led to decrease in working capital. Uses of Cash: Net Increase in Investments: Your Company invested Rs. 1,234 Crores in the debt scheme of various mutual funds. An investment of Rs.3.9 Crores was made in equity share capital of Bhaskarpara Coal Company Ltd., a joint venture of the Company. Further, a sum of Rs.27 Crores was advanced to Harish Cement Ltd., a subsidiary of the Company. Capital Expenditure (Net): Your Company have spent Rs. 376 Crores towards the completion of expansion projects and normal modernisation. RISKS AND CONCERNS: Upon transfer of Cement business from Grasim (Holding Company), your Company has adopted its risk management policy. The risk management policy inter alia provides for risk identification, assessment, reporting and mitigation procedure. The risk management framework actively supports the Board in its strategic decision making. An analysis of the Companys key business risks and mitigation plans is as follows: Competitor Risk: The market is highly competitive with no fiscal barriers and entry of large MNCs into the country with inorganic growth strategies. Your Company continues to focus on increasing its market share and taking marketing initiatives that help create differentiation and provide optimum service to its customers. Human Resource Risk: Your Companys ability to deliver value is shaped by its ability to attract, train, motivate, empower and retain the best professional talents. Your Company continuously benchmarks HR policies and practices with the best in the industry and carries out the necessary improvements to attract and retain the best talent. Foreign Exchange Risk: Your Companys policy is to hedge all long-term foreign exchange risk as well as short-term exposures within the defined parameters. The long-term foreign exchange liability is fully hedged and hedges are on held to maturity basis. Interest Rate Risk: The Company is exposed to interest rate fluctuations on its borrowings. It uses a judicious mix of fixed and floating rate debts within the stipulated parameters to mitigate the interest rate risk and whenever required, uses hedging tools to minimise interest rate risk. Commodity Price Risk: Your Company is exposed to the risk of price fluctuation on raw materials, energy sources as well as finished goods. However, considering the normal correlation in the prices of raw materials and finished goods, the risk is reduced. Setting up of captive power plants helps control the effect of rise in energy cost, a major cost element for cement manufacturing. Forward integration in value added products e.g., ready mix concrete in cement, wall care putty in white cement, help reduce the impact of price fluctuation in finished goods. Input Availability Risk: Availability of natural resource for current needs and future growth requirements is a key risk. Indian coal availability continues to be insufficient to meet the current and growing demand in the country. To meet the shortfall, your Company procures coal from various sources including imports, open market purchases and pet coke. One coal block has also been allocated by Government of India to our joint venture with other corporates. This coal block will, however, meet only a small part of our requirement on becoming operational. Your Company has intensified its efforts to increase use of various alternative fuels. Waste heat recovery systems are being planned to reduce energy consumption. Your Company has sufficient limestone reserves at its existing facilities. Prospecting and acquiring leases of new limestone mines are being undertaken on a regular basis to ensure future growth. INTERNAL CONTROL SYSTEM: The Company has appropriate internal control systems for business processes, with regards to efficiency of operations, financial reporting, compliance with applicable laws and regulations, etc. Clearly defined roles and responsibilities down the line for all managerial positions have also been institutionalised. All operating parameters are monitored and controlled. Regular internal audits and checks ensure that responsibilities are executed effectively. The Audit Committee of the Board of Directors reviews the adequacy and effectiveness of internal control systems and suggests improvement for strengthening them, from time to time. CONCLUSION: Your Company has decided to amalgamate with UltraTech Cement Ltd., another subsidiary of Grasim with effect from 1st July, 2010 under a scheme of amalgamation, subject to receipt of requisite approvals. The merger will create largest Cement Company in India creating a platform that will help in pursuing aggressive growth going forward. CAUTIONARY STATEMENT: Statement in this Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be forward looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include global and Indian demand supply conditions, finished goods prices, feedstock availability and prices, cyclical demand and pricing in the Companys principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which the Company conducts businesses and other factors such as litigation and labour negotiations. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events or otherwise.