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OVERVIEW OF ECONOMY
GLOBAL ECONOMY OVERVIEW
The acceleration in global activity that started in 2016 gathered steam in 2017, reflecting firmerdomestic demand growth in advanced economies and improved performance in other large emerging market economies. Global growth is set to be just over 3.5% in this calendar year 2018, the fastest for seven years, with improved outcomes in both advanced economies and the EMEs. Confidence measures and levels of new orders for businesses remain strong. This long awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth. The continued expansion depends on robust global growth and governments support for right trade policies. However, there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook.
(Source: IMF and OECD).
INDIAN ECONOMY OVERVIEW
Indian economic growth is giving a positive signal for the current and future scenario. It is projected to strengthen to above 7%, gradually recovering from the transitory adverse impact of rolling out the Goods and Services Tax (GST) and measures to choke off the black economy, including demonetisation. Indias GDP grew 7.2% in the third quarter of 2018, surpassing expectations. Reserve Bank of India has estimated GDP growth in a range from 7.4% to 7.9% for the Financial Year 2019-2020.
(Source: OECD and Economic Times)
Fiscal deficit for 2017-18 is revised to INR 5.95 lakh Cr at 3.5% of the GDP which is approximately the same as 2016-17 inspite of transformation in the economy. In addition to initiatives like; "Make in India", "Housing for All", "Digital India" government has also introduced "Sagar Mala" and "Bharat Mala" initiatives which is expected to boost the domestic growth of the country. (Source: IBEF and Trading Economics)
Ductile Iron Pipes Industry Outlook
In terms of consumption, Indias DI pipes industry has posted a ~10% CAGR over the past five years. Increased spending by both Central and State governments to improve water accessibility and sanitation infrastructure has driven industry growth over the past few years. The DI pipes industry is catered by few domestic players with the top three players accounting for over 45% capacity in the industry.
The use of DI pipes has been rapidly growing over the past few years owing to its high tensile strength, corrosion resistance and long service life of 70-90 years. These advantages make DI pipes the most sought piping solution for transporting water and sewage. Recently, the DI pipes industry has seen strong demand from various projects of central and state governments. Increasing population rate, rising FDI in construction and development, high investment in improving gas distribution network and increasing number of housing units are some other key factors that may have positive impact on the market creating additional and replacement demand in the future, according to the Analyst at Ken Research. It is anticipated that demand for DI pipes will continue to increase in India owing to huge investment in water infrastructure, improving sanitation facilities and increasing awareness on using good quality and durable pipes. Urbanizationincreasingtheneedforwatersupplynetworkandconcentrated market space is anticipated to push market growth for DI Pipes. India is the second most populous country in the world but it is leading in terms of lack of water supply and sanitation facilities. The Ministry of Water Resources estimated that by the year 2025, the requirement for water in India will increase to 120 billion cubic meters. This has significantly increased the demand of DI pipes for construction of potable water supply projects, sanitation facilities and water supply infrastructures.
Demand Drivers for Ductile Iron Pipes
The market for DI Pipes is expanding owing to increase in water development infrastructure, increasing awareness on water conservation and aim to become 100% open defecation free nation. In India, only 33% of the total population is having access to improved sanitation. In rural areas (which accounts for 72% of Indias living population), only 22% has better coverage for sanitation. The Government is making various efforts to improve this number. It has allotted over INR 1 lakh Cr for its ambitious water supply and sewerage projects on priority through Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities Mission (under which INR 100 Cr is allocated for each smart city for a period of 5 years).
The major aim of these projects is to make sure that the citizen of India has optimum access to safe and hygienic drinking water. The Government of India has been focusing on providing housing to each and every citizen of India by 2022. Rise in number of houses in the country will increase the need for constructing pipe infrastructure to transport water.
Government introduced Make in India initiative which has brought ease for foreign players to manufacture pipes in India and sell at lower cost, avoiding excise duties and taxes. The Governments continued thrust on water supply & sanitation infrastructureisre flectedin steady increase in its allocations through related schemes over the years.
The Ministry of Drinking Water and Sanitation, which implements the Swachh Bharat Abhiyan, has been allocated INR 200 Bn for 2017-18, which is a marked 21% increase from revised estimates of 2016-17. Over the past ten years, the allocation to the Ministry of Drinking Water and Sanitation has seen an annual average steady increase of 10%. The allocation under PMAY (Pradhan Mantri Awas Yojana; with Government initiatives and increased preference for DI pipes, we expect the DI Pipes market to grow at a healthy pace in the coming years. Increasing investments in water supply and sanitation infrastructure would certainly boost the demand for DI pipes and result in improved order backlog for established DI pipe manufacturers.
Governments Housing for all by 2022 focuses building 2 crore houses for poor including economically weaker sections and lower income groups. Majorly driven by high demand in domestic market. Indian Companies focus on increasing their exports and enhancing production levels & production capacities would aid in sustaining growth of the market. Aiming to build 1 Cr houses by 2019) has been increased by 53% to INR 230bn for 2017-18. Further, in Union Budget 2017, open defecation free villages have been given priority for piped water supply. The Government targets 90% piped water coverage in rural areas by 2020 (was 31% in 2011).
Atal Mission for Rejuvenation and Urban Development (AMRUT) and various other State level projects. The major purposes of AMRUT (Atal Mission for Rejuvenation and Urban Transformation) is to ensure that every household has access to a tap with assured water supply and a sewage connection. Project approval is provided once a year by the Ministry of Urban Development (MoUD) on the basis of the State Annual Action Plans (SAAP) post which, the states have to give project sanctions and approvals. In this way, the AMRUT makes states equal partners in planning and implementation of projects. The total amount of investment envisaged in AMRUT over 2017-2020 is to the tune of INR 573 Bn, out of which ~INR 350 Bn is to be spent on Water Supply and Sewage projects, which will surely be one of the biggest impetus for the growth of DI pipes industry.
Growth Drivers for Ductile Iron Pipes
Infrastructure needs for water supply and sewage opens up wide avenues for DI pipes According to government data, an estimated 62,000 Mn litres of sewage is generated per day in urban areas, while the treatment capacity across the country is only 23,277 Mn litres per day (i.e. 37%). Out of 816 municipal sewage treatment plants (STPs) listed across India, only 522 are functional, which means that only 18,883 Mn litres per day of sewage actually gets treated, implying that 70% of the sewage generated in urban India goes untreated. In case of class-I cities (with a population of >100,000) and class-II towns (population of 50,000 100,000), sewage generation is estimated at 38,255 Mn litres per day, of which only 11,787 Mn litres per day (30%) gets treated. An estimated 75% to 80% of water pollution is from domestic sewage, discharged untreated into local water bodies. Thus sewage treatment, which is currently a thrust area for both the state and central governments, will also generate significant demand for DI pipes.
Irrigation, the next growth driver
According to the National Commission for Integrated Water Resources Development (NCIWRD, 1999), India will require about 450 Mn tonnes of food grains per annum to feed the population of over 1.5 Bn in 2050. To meet this requirement, the country needs to expand its irrigation potential to 160 Mn hectares for all crops by 2050, which stood at ~66mn hectares in 2012-13.
Despite concentrated efforts to tap irrigation potential, there is still a large area which is yet to be provided with irrigation facilities. With total water consumption projected to rise to ~910 BCM by 2025, the focus of the government is to bring down the gross water usage per hectare of the gross irrigated area, which currently at ~1.45m (4.8 feet) is very high compared to developed countries like USA where usage is 90cm per hectare. This overuse is due to low irrigation efficiency at ~25- 35% in most irrigation systems in the country. The irrigation efficiency is low due to the large open sources like tube wells (46%) and canals (24%) used for irrigation.
Raw Material Management:
The company believes that efficient functioning of procurement team is imperative for the performance of the company. The commercial function of the Company is continuously focused towards achieving efficiency in the procurement, logistics and utilization of inputs, forecasting of price trends, inventory control and ensures sourcing of right material in the right quality and quantity to facilitate un-interrupted production and enhanced performance in operations. Major emphasis is given on strategic procurement for maintaining appropriate inventory level of all major and essential raw materials like Iron ore, Coking coal, CRC scrap, Ferro silicon, Zinc etc., based on demand supply situation prevailing in the market, besides ensuring un-interrupted supplies. This would improve level of available working capital that could be profitably employed in other areas. Further, concerted efforts are being made towards sourcing of critical material from different geographies and suppliers with desired specifications, without compromising quality to ensure un-interrupted production. Vendor development, import substitution have been the major focus areas of the Company to fortify material security.
Raw material availability and cost:
Cost of raw materials constitute largest share of overall variable cost of the product. Availability and cost of required grade of raw material (iron ore, coal) are impacted by domestic demand-supply gap, Global movement and parity of landed cost considering price, freight, tariff, vendor actions and Policies on mining and tariff.
To mitigate this risk, the Company regularly tracks commodity markets to consider specific actions to stabilize broad base of vendors, contemplates long term/spot/hedging contract options and regularly focuses on relationship management with vendors for regular supply and timely inputs on market insight and future trends. Besides aforesaid commercial actions, the operational team regularly focuses on implementation of various operational efficiency initiatives, process improvements to reduce consumption of essential raw materials to insulate the Company from any adverse impact on account of rising raw material prices.
Raw material outlook: Coking Coal
Coking coal is one of the major components of pig iron and DI pipes.
Coal sourcing is an important factor which impacts the cost efficiencies.
Current coking coal imports, from Australia, amount to 70% of the total requirement. The domestic supply of coking coal is of poor quality due to a high ash content, which varies from 19% to 21% and leads to high costs at the hot metal stage.
India has vast reserves of Iron ore that are chieflymined in the states of Odisha, Chattisgarh, Jharkhand, Karnataka and Goa. The industry is recovering from mining bans imposed in 2012 for illegal mining that made India a net importer of ore from 2012 to 2015 and led to the enforcement of mining limits across the sector in accordance with environment norms. To secure the domestic supply of iron ore for the industry, many expansion plans are in the pipeline, led by state mining giant NMDC which is one of the largest producers that plans to expand from its current capacity of 48 MTPA to 67 MTPA by 2030. In addition to increasing captive ownership of iron ore mines, the government is also looking to provide a pricing formula to ensure more uniform and stable pricing for domestic iron ore.
During FY2018, Indias iron ore production grew by 9.37% which stood at 210 Mn tonnes as compared to 192 Mn tonnes in FY2017. India has around 8% of worlds deposit of iron ore and has become the 3rd largest steel producer in FY17 with the production of finished steel at 83.01 Mn tonnes.
Quality Management System (QMS):
SPL strongly believes that achieving qualitative excellence in all its spheres is a journey and not a destination. The Company is committed to enhancing customer satisfaction and standardizing business processes through the implementation of a Quality Management System. The Companys consistent focus on quality management has enabled it to fulfil evolving customer expectation and it endeavours for continual and sustainable improvement through the implementation of effective quality practices, innovation and standardization. Further, the Company regularly undertakes Quality Circle projects with engagement of its employees resulting in high employee morale and increased productivity across all its operating units. Having aligned its operations with the stringent ISO standards, the Company is also focusing on raising its qualitative benchmark by focusing on implementation of TQM system across the organization.
Safety, Health & Environment (SHE):
At SPL Safety Practices are primarily driven through a well-defined Policy which is a statement of commitment by the management the Company. The Company is committed to giving highest priority to Safety of its plants and personnel in a serene environment. Uniform well-designed Safety Management System is in place to support Companys commitment towards safety. Employees and contract workers are encouraged to adopt safe working habits and behavior to ensure an effective implementation of the Safety Policy and are empowered to notify and stop any unsafe work / act, as may so arise.
The Company believes that continuous training is key to the safety of people and premises. Our Company imparts regular and structured Safety training including Behavior Based Safety training to its employees to upgrade their skills, knowledge and competence, in order to perform their SHE functions effectively and in developing effective safety culture. Regular training is also imparted to contract workers, and others to create awareness of the probable hazards in their work area so as to avoid and safeguard against unsafe actions. Safety meeting is conducted every week meticulously where safety observations, near miss and dangerous incidents took place during the previous week will be discussed and accordingly action plan to implement corrective actions to avoid recurrence will be frozen. Further, safety audits are regularly conducted to ensure effective implementation of the SHE Management Guidelines and Emergency Preparedness. These audits are performed by both external safety auditors and experienced in-house auditors.
To imbibe SHE culture among employees, various programs are undertaken across the organization. Safety awareness campaign is organized every year on the occasion of National Safety Day and various safety related competitions are conducted to promote safety awareness across all levels of employees in the organization.
SPL has adopted sound environment management practices for operating its plants. The Company has drawn elaborate environment management plans to minimize the impact from air emissions, noise, water pollution and solid waste generation arising out of its plants. The environmental team of the Company monitors environmental parameters to assess the environmental quality on regular basis through an in-house team and as well as by independent third-party agencies. Updated and sophisticated instruments are used for monitoring environmental quality. The monitoring is done regularly and reports are sent to the respective State Pollution Control Boards. The water and waste water samples are also analyzed at the in-house laboratory as well as external laboratories on a regular basis. Audit is also conducted to review the adherence to the processes and to ensure proper functioning of the environment management.
The Company has implemented the Integrated Management Systems across all its units and the following initiatives were undertaken during FY 2017-18:
Fugitive emission and water management:
Construction of closed shed covering an area of 1700 Sq. meter with concrete floor and compound to facilitate storage fugitive emission and arrest washing out of coal during rains. Construction of 25 m3 capacity rain water harvesting pit near MBF to collect roof top rain water to recharge the rain water in to the ground. Concreting of coal yard to the extent of 12,200 Sq. meter along with construction of drain to control the coal ground loss, fugitive emission and collection of washed out coal without contamination.
Hazardous material management: Focus is given for the safe and environmentally sound storage, handling, transportation and disposition of hazardous materials used in laboratory maintenance and operations. Proactive actions have been taken for the management of hazardous wastes to ensure that such wastes are identified, accumulated, stored, transported, treated, and disposed or recycled in an environmentally sound manner.
Solid waste management: It has been thrust area of the Company to ensure that solid wastes are identified, classified, collected, transported, stored, recycled, treated and/or disposed safely and in a manner protective to human health and the environment.
Further it has been the constant endeavour of the Company to educate its employees to take action in order to comply with environment-related laws, raise their global environmental awareness and encourage their interest in environmental conservation.
Corporate Social Responsibility (CSR):
SPL believes that it is an integral part of the society at large and it has a responsibility to contribute to the general welfare of the society to which it belongs. The Company has been actively engaged in efforts to improve the quality of life in the neighbouring localities.
The focus of the Company has mainly been in the fields of promotion of education, sanitation and hygiene facilities, promotion of healthcare facilities, skill development, women empowerment, rural infrastructural development and animal welfare in order to facilitate an inclusive social development.
Skill development and livelihood support programs in tailoring has been organized for the women of poor and underprivileged sections of the surrounding villages at the Companys Skill Development Center in Rachagunneri.
In support of Beti Bachao and Beti Padhao programme, Computer literacy courses covering basic computer applications to create computer awareness to the village girls have been conducted at Rachagunneri and Ramapuram villages.
Medical camps have been conducted at periodic intervals at the nearby villages including Merlapaka, Chindepalli, Mannasamudram to ensure that basic health care is accessible for the villagers, providing succour to around 500 people.
Provided basic infrastructure facilities like development of roads and providing potable water to the villagers residing in Rachaguneeri village.
Information & Technology (IT):
At SPL, Information Technology is extensively used in all its operations for ensuring effective controls across the Company. IT also helps the Company in providing accurate MIS and prompt information/services to its customers and stakeholders. The Company is always focused on continuous developments on IT front and implementation of enhanced level of information systems security and controls with monitoring systems to address technology risks.
The transition to GST scenario was a major change process and the Company has successfully carried out changes to the business process & IT systems as per the GST framework. GST system in SAP has been implemented along with Digital Compliance System for filing online from SAP, which will ensure accuracy of data entry in the GST portal. ofcoalatMBFtocontrol As part of its regular developmental plans, new system was successfully implemented for migration of mail server from in-house to cloud to ensure un-interrupted mail communication across all locations, as it works on internet and service provider has servers across the globe.
Human Resource Management:
SPL considers human resources as its most important asset. It is the invaluable contribution of the Companys large and energetic team that has primarily resulted in SPLs position of strength in the industry. The Company has implemented various initiatives to create a worker-friendly organization that motivates its employees and improves performance. The Company recognizes the importance of continual professional development and realizes that a knowledgeable and experienced workforce is the key driver to deliver on the expectations of all internal and external customers. In keeping pace with this objective, the Company is committed to grow the knowledge capital of every individual through effective learning and development initiatives. For this the Company has established an extensive training calendar comprising technical, behavioural, cultural, safety, 5S and awareness training which facilitates the team in proficiently managing day-today operational challenges.
Pre and post training tests are conducted as a tool for evaluating effectiveness and this has helped in result oriented learning culture within the organization.
The Company undertakes regular appraisals wherein high performers are recognized. Recognition programs like Employee Excellence Awards and performance-linked incentive scheme are instrumental in encouraging employee participation and involvement.
The Company has zero tolerance towards sexual harassment at workplace. As per the requirement of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and the Rules made thereunder, the Company has constituted Internal Complaints Committee having designated independent member(s) to redress complaints regarding sexual harassment. All employees (permanent, contractual, temporary, trainees, etc.) are covered under this Policy.
Risks/Concern & Its Mitigation:
The Company has in place a robust risk management framework which identifies and evaluates business risks and opportunities. The Company recognizes that these risks need to be managed and mitigated to protect the interest of the stakeholders, to achieve business objectives and enable sustainable growth. The risk management framework is aimed at effectively mitigating the Companys various business and operational risks through strategic actions. Risk management is embedded in all its critical business activities, functions and processes. The risks are reviewed periodically for the change in the frequency and impact of the major risks identifiedsince the last assessment. It also provides control measures for risk and future action plans.
The risks identified by the Company and suggested mitigation measures are described as under.
The intense competition in the domestic DI Pipes market with the entry of new incumbents and capacity expansion of the existing players may negatively impact the business of the Company.
The Company invites healthy competition in the industry as it drives improvements such as cost reductions and quality improvements. The Company is adequately equipped to mitigate the risk of competition through various initiatives viz., enforcing effective market intelligence, widening and deepening customer reach, responsive credit and pricing policy, timely execution of orders in line with customer delivery schedule, periodic evaluation of marketing strategy to bring in appropriate changes to secure major and prestigious orders and maintain market share. Further, Companys persistent focus on upgradation of quality of its product is an added advantage in enhancing its brand reputation and by virtue of having established its foot prints across the southern and western markets, the Company is comfortable in effectively facing the risk of competition.
By virtue of its diverse and complex operations involving emissions and effluents, the Company is open to environmental risk. To mitigate this risk,
Company continuously focuses on establishing appropriate environment management systems to minimize its ecological footprint by reporting effectively . managing and controlling variouse missions and effluents with the help of sophisticated pollution control apparatus, efficient disposal and reuse of solid waste generation, effective water and waste water management on a sustainable basis.
In order to bring efficiency in waste management, water and energy conservation, stack and fugitive emission, along with reduction in noise pollution, the Company has embraced the Environmental Management System (EMS) ISO 14001. Every aspect of pollution generated due to plant activities is monitored in detail and adequate steps are taken to minimise it.
Credit risk arises from the possibility that the counterparty will default on its contractual obligations resulting in financial loss to the Company. To manage this, the Company periodically assesses the financial reliability of customers, taking into account the financial conditions, current economic trends, and analysis of historical bad debts and ageing of accounts receivable. In addition to this, the Company, as part of its credit risk management practices, covers its sales under Bank Guarantees and Letters of Credit to secure its receivables.
Foreign currency Risk:
Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates.
The Companys exposure to the risk of changes in foreign exchange rates relates primarily to External Commercial Borrowings and buyers/suppliers credit on account of procurement through imports. The Company manages its foreign exchange risk through its selective hedging of its exposure to fluctuations by using foreign currency forwards contracts and other hedging derivatives on the basis of risk perception of the management.
Human resources Risk:
In light of Companys steady growth and ambitious plans coupled with criticality of operations, attracting, grooming and retaining the talent pool would be a challenge to the Company, as it is exposed to attrition of skilled manpower. To minimize this risk, the Company regularly focuses on designing robust performance management programs to encourage and reward talent that harmonizes achievement of organizational goals with personal aspirations and milestones. Companys comprehensive talent management framework identifies and develops critical talent crucial for the growth strategy of the Company. The Company has matured human resource management systems and policies in place for recruitment, learning development, performance management and employee deployment, which adequately reduce risk of talent attrition. As a part of the Companys strategic planning process, risk management processes and the risks faced by the Company and the corresponding risk mitigation plans deployed are being revisited at periodic intervals and the Company is on track in respect of its risk mitigation activities.
The Company believes that a robust, comprehensive internal control system is a prerequisite for an organization to function ethically and in commensuration with its abilities and objectives. The Company is responsible for establishing and maintaining adequate and effective internal controls and preparation and presentation of financial statements.
In pursuit of achieving these objectives, the Company has established a strong internal control system, which is comprised of policies, guidelines and procedures adopted by the Company to ensure the orderly and efficient business conduct, including adherence to policies, asset safeguarding, fraud cum error prevention and detection, accounting records accuracy and completeness, and the timely preparation and presentation of reliable financial information and management reports. This internal control system is aimed at providing assurance of Companys operational effectiveness and efficiency, compliance with laws and regulations, safeguarding of assets and reliability of financial and management
The Company is adequately staffed with seasoned and qualified professionals who play an important role in designing, implementing, maintaining and monitoring the internal control environment. An independent firm of Chartered Accountants perform periodic internal audits to provide a reasonable assurance of internal control effectiveness and advice on industry-wide best practices. The Audit Committee, consisting of Independent Directors, reviews important issues raised by the internal and statutory auditors on a regular basis and status of corrective measures to ensure that risks are mitigated appropriately on a timely basis.
Opportunities and risk:
The Government of India has come up with new projects and investments in the rural sector. The focus of the government is on providing safe and adequate drinking water, which will be fulfilledonly when there will be proper transportation of water to the end-user. This, along with expansion of housing sector are instrumental for driving the demand for Ductile Iron Pipes in the country.
Major impetus is being given by the Government on Schemes like National Rural Drinking Water Program, AMRUT, Smart City Mission and Swachh Bharat Abhiyan and others, providing sanitation facilities in all the rural areas, inter-linking of rivers. With these initiatives, the demand for Ductile Iron Pipes may exceed in future due to the fact that Government of India has earmarked huge budget over and above the already committed large investments in water and sanitation infrastructure development schemes.
Increased cost of inputs coupled with ever rising competition in the domestic market with capacity addition by the existing players may pose threat in the form of thinner sales realization and margin contraction. Further, delay in implementation of centrally sponsored schemes/projects, due to political developments and economic slowdown may result in underutilization of capacities.
Given the Governments focus on infrastructural projects in the country, huge investments in water infrastructure development, improving sanitation coverage across the country and increasing number of housing units, our Companys order book position continues to be comfortable and the Company is optimistic of maintaining its growth. The company continues to emphasis on improving operational efficiencies, cost reduction and appropriate changes in the marketing strategy, our company is hopeful of protecting its bottom-line in the medium to long term, despite high volatility in the prices of inputs.
The information and opinion expressed in this report and as well as Directors Report describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include a downtrend in the infrastructure spend in the country, significant political and economic environment in India, volatility in the prices of major raw materials and its availability, tax laws, exchange rate fluctuations, interest and other costs.