Solectron EMS India Ltd merged Management Discussions

SOLECTRON EMS INDIA LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS COMPANY BACKGROUND: Solectron EMS India Limited is primarily involved in Electronic Manufacturing Services (EMS) business which includes manufacture of printed circuit board assembly (PCBA), System Assembly and Repair & Return business catering to the Automobile, Communications and Industrial electronics markets Our customers include world and Indian leaders in Telecommunications, Automotive and Industrial Electronics. The strategy is based on intimate customer relationships with competent people, state of the art technology and high quality products and services provided in complex customer business models. INDUSTRY STRUCTURE AND DEVELOPMENT: Broadly, the electronics industry that we presently cater to is categorized under Telecom, Industrial, Defense and Automotive segments. TELECOM: The Indian Telecom market is growing very briskly and this growth is largely driven by mobile telephony. This market comprises of Terminal equipments such as the mobile phones, PDA etc. and the infrastructure equipments such as Base Station, Transmission equipments etc. Since this market is big, the multinational companies like Nokia, Samsung, LG have started manufacturing in India and other large companies have serious plans of starting in India. In addition to the multinational companies, local Indian companies are also developing innovative products for the Indian and world markets. To address this market, many EMS companies have also started Indian operations. The eco system for hardware manufacturing is developing fast with OEMs and EMS companies which are now being followed by the components companies. INDUSTRIAL: Industrial sector is one of the late entrants to the concept of outsourcing their electronic hardware compared to Telecom and IT sectors. This was due to the stringent quality requirements and long product lifecycles. But this is changing rapidly. The large multinationals in this industry segment are focusing on India for their outsourcing requirements due to the design, engineering and testing skills required to manufacture these products. AUTOMOTIVE: Electronic content in the automotive business is increasing and hence this presents an opportunity for EMS companies in India to be a part of the automotive supply chain. This supply chain not only caters to the Indian automotive industry but also to the global requirements. India is fast becoming one of the primary sources for the global automotive industry. DEFENSE: The Indian Defense Budget is increasing year on year both in terms of the total value and also as a percentage of the budget allocation itself. Of the total defense budget, the percentage of expenditure towards Capital head is increasing every year creating a even bigger opportunity for the defense market. Also studies show that an Indian defense market is one of the most attractive defense markets in the world. Till recently, the indigenous defence manufacturing was restricted to Defense Public Sector Units and Ordnance Factories only. However, in the recent past, the Government is encouraging the private industry participation. Due to increasing requirements, the Defense PSUs and the Ordnance Factories are also actively working with the private industry to create new capacities and capabilities. More recently, the Government of India has created a huge opportunity by introducing the defence offset policy. Due to this policy the international suppliers of defense products to India are actively looking for high quality companies in the defense segment. STRATEGIES & BUSINESS OUTLOOK: Our strategy for EMS has been to address opportunities in the High Mix, Low to Medium Volume business for both the export market and to address all the needs of the large OEMs in India. As a strategy, we will avoid addressing the high volume markets of entertainment, consumer and IT market segments. In addition to the above, we see a huge opportunity in the Defense business due to both the increased demand and also the offset policy introduced by the Government of India. Being an Indian company, we are very well positioned to address this opportunity. We have all the infrastructure and plant & machinery and other hard assets required to cater to this segment but have gaps in the understanding of the defense market, stringent quality and specification requirements and the people competencies. Your company is evaluating various strategies to overcome these gaps. We have also made investments in setting up a sales office in the US with experienced and qualified sales team and also developed a Sales representation network both in US and Europe. Although the economic conditions are difficult, we expect to receive new business due to the initiative put in place. The nature of the EMS business is that it is top-line driven with high material content and working capital intensive. The success of this business lies in the velocity of doing business to reduce the cash-to-cash cycle. To achieve this, the focus will be on operational excellence starting with supply chain to collection cycles. HUMAN RESOURCES: Our company has some of the best talent in the country coming from various domains of experience. Great emphasis is given in ensuring that the employees have a rewarding experience working for the company. Special attention is given for training and upgrading of peoples skills, providing excellent working conditions, benchmarking with other large companies while rewarding the employees. The Kaizen and Lean Six Sigma initiatives have been in place and have been institutionalized with all the employees of the company taking active part in the same. This has helped in improving the operational excellence continuously and the company has seen the benefits of this in better customer satisfaction. RISK FACTORS: Eighty percent of our revenues come from few customers. Customers may change production quantities or delay production for a number of reasons outside of our control. If customers experience decrease in demand for their products & services, our sales will also get affected. Multinational OEMs, like Nokia, currently outsourcing from India for their global and Indian markets, may decide to set up their own in-house manufacturing considering the overall volumes. As mentioned earlier, large multinational EMS companies have been setting up operations in India. Some of these new manufacturers may, for entry strategy reasons, quote very aggressively. Also if volumes do not happen as expected, then there may be fierce competition for market share and thereby pressure on margin. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: Our company has placed strong emphasis and effort on the internal control systems. The internal checks and balances are augmented by a formal system of Internal Audit FINANCIAL CONDITION: SHARE CAPITAL: The share capital of the company stands at Rs.74 million. LOANSA: The Unsecured Loans have decreased by Rs. 438.90 million from Rs. 445.89 million as on 31st March 2008 to Rs. 6.99 million as on 31st March 2009 while secured loans were at Rs. 188.30 million as on 31st March 2009 FIXED ASSETS: The Capital expenditure for 2008-09 is Rs. 25.50 million. WORKING CAPITAL: Inventories have come down by Rs. 187.68 million from Rs 501.06 million as on 31st March 2008 to Rs 313.38 million as on 31st March 2009. Receivables have come down by Rs. 259.05 million from Rs. 460.36 million as on 31st March 2008 to Rs. 201.31 million as on 31st March 2009 Current liabilities have come down by Rs.307.00 million from Rs. 508.31 million as on 31st March 2008 to Rs. 201.31 million as on 31st March 2009 CASH FLOWS: Rs. million Cash flows from Operating activities 275.77 Cash outflows in Financing activities (283.09) Cash outflows in Investing activities (23.84) RESULTS OF OPERATIONS: The business operation for 2008-09 resulted in the Company, achieving sales of Rs.2213.54 million as against Rs. 3183.03 million for 2007-08. Two of our customers, a large telecom multinational and a large automotive multinational set up their own manufacturing facilities in India and consolidated both their in-house manufacturing and outsourced operations into their own facilities. The telecom customer in sourced during the second half of 08-09 and the automotive customer in the later part of the year. Due to these in sourcing activities, the revenues dropped from Rs. 3183.03 million to Rs. 2213.54 million during 08-09 and the impact will be felt during the year 09-10 also. The Profit before tax for the year 2008-09 is Rs. 25.09 million as against Rs. 142.23 million for the year 2007-08. For and on behalf of the Board For Solectron EMS India Limited Place: Bangalore Apparao V Mallavarapu Manny Marimuthu Date : 5 June 2009 Managing Director Director MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying financial statements of Solectron EMS India Limited are the responsibility of management and are approved by the Board of Directors of your company. These financial statements have been prepared by management in conformity with Indian generally accepted accounting principles and includes amounts that are based on best estimates and judgments. Management of the company in furtherance of the integrity and objectivity of data in the financial statements has developed and maintains systems of internal accounting controls. Management believes that the systems of internal accounting controls provide reasonable assurance that financial records are reliable and form a proper basis for the preparation of the financial statements and that assets are properly accounted for and safeguarded. The Board of Directors carries out its responsibility for the financial statements principally through its Audit Committee. The Audit Committee reviews the Companys annual financial statements and formulates the appropriate recommendations to the Board of Directors. The Audit Committee has full access to the auditors appointed by the shareholders, with or without the management being present. The auditors appointed by the shareholders, BSR & Co., Chartered Accountants have examined these financial statements, and their report is presented hereafter. Place: Bangalore Desikan K S Apparao V Mallavarapu Date : 5 June 2009 Authorised Signatory Managing Director