T C P Ltd Management Discussions

Economic Scenario

The year 2013 was a year of recovery for the global economy. In the financial year 2013-14, the world economy witnessed two significant changes. The first change being there was a structural shift from the developed world towards the emerging world and the cyclical climb out of a recession. The first change continued in the first half of the financial year, but at a slightly slower pace than before. For example, the growth in China was 7.5%, it’s slowest in the past 23 years. In India too, the growth was slow at a little below 5%, which is far slow when compared to the past 8 years. The second change is that, in the developed economies, what had started as an uneven and patchy recovery began to strengthen. For example, the United States, despite having to cope with the feuding over its budget, seems to have sped up. It has been creating jobs and its housing market improved sharply. In Europe too, there was some improvement, even though it was uneven. Europe and euro are not out of trouble, but the actual phase of their difficulties may be past. The year 2014-15 expects to deliver much better and balanced growth than any year since 2007.

The Indian economy, being an economy that is largely driven by indigenous consumption, lower disposable income of large population had a direct bearing on its growth. In 2013-14, India continued to slide in terms of economic performance, registering an estimated GDP growth of around 5% - its lowest in the past decade. This was largely on account of stagnant economy, leading to lower infusion of investments into infrastructure and core industries – also leading to lower capital expenditure and less job creation. The inflation remained on the higher side, thereby reducing the disposable income and leading to lower consumer spending.

Industry Structure and Developments

Indian chemical sector:

The Indian chemicals industry, which earned revenues in the range of $ 155-160 billion in 2013, is likely to grow at a rate of 11-12 percent in the next two to three years, according to Frost

& Sullivan, a business consulting firm. Owing to reduced industrial output, commodity and bulk chemicals are likely to experience slow growth, while the specialty chemicals segment is expected to show considerable growth.

The specialty chemicals sector is characterised by requirements for high-value products, high-volume requirements with expanding customer base, a product-driven market, and addition of new participants at various levels of the value chain. Overall, the market is likely to grow at a Compound Annual Growth Rate (CAGR) of 13-14 percent. Product customisation and understanding of unique customer needs has been one of the key success levers for the Indian chemical industry. In terms of production value, the specialty chemicals sector forms about 18-20% of the total chemical production in India.

Though increasing regulatory requirements and raw material price fluctuations (India is dependent on imported raw materials) have posed challenges for manufacturers, exports have been increasing at a rate of 8-9 percent. The growth is likely to continue due to a good and established customer base for specialty and niche products.

Indian Power sector:

Since 2000, India’s power consumption has grown at 7% per annum, keeping pace with the GDP growth. India is overwhelmingly dependent on fossil fuels like coal, gas and oil for its power generation. India is already hard pressed to meet the current demand for fossil fuel. Coal contributes 60% of the fossil fuel that India consumes. The country has the fifth largest coal reserves in the world. Yet, it imported 21% of its coal last year, as indigenous production failed to meet demand. Consequently, India’s power utilities enforce regular rolling power cuts. Unlike money, extra coal reserves cannot be printed at will. It has to be first found and then accessed. Opening new coal mines has its own problems. According to former Environment Minister Shri Jairam Ramesh, untapped coal blocks are in dense forests that constitute only 2.5% of the Country’s area. Opening them will further endanger our forests.

India’s greater reliance on fossil fuels makes its economy less energy efficient and more polluting, consequently leaving less per capita energy available for consumers. Further, dependence on fossil fuels increases India’s per capita carbon emissions, which at present is 1.5 Tonnes per annum. The energy density of fossil fuels is very high and requires large investments in mining, transport, power generation and distribution. Only the State and big businesses can make the large investments required to produce power from fossil fuels. To recover investments, it makes sound business sense to sell it for profit rather than for social upliftment purpose.

Biomass has an energy density that is half to a fourth of fossil fuels and its energy conservation technologies are simpler, requiring smaller investments. Power from these sources is cheaper. The wind power industry has witnessed phenomenal growth in India over the past few years. It is expected to become a global investment destination for this energy sector. The future holds tremendous promise for the growth of small wind and hybrid systems. The Government is encouraging companies and individuals by offering tax exemptions for investing in green energy, especially in wind farms. The development of wind power began in India in the 1990’s and the country has made significant improvements over the years. Solar power is emerging as a key renewable source of power in India as the Government is pushing through policies to support its development. The Government is focusing on preventing climate change by encouraging green power and at the same time diversifying energy mix.

The Electricity Act, 2003, recognised power trading as a new segment apart from generation, transmission and distribution. Power trading has since enabled the country as a whole to balance its power surpluses and deficits and has helped to optimally utilise its generation resources.

Opportunities and threats

Chemical business:

There is good demand for Sodium Hydrosulphite both in the domestic and export market. It is expected that many new overseas buyers, who had bought from the company in the current year, would continue to do so in the subsequent years due to the quality of the products and the delivery schedule maintained by the company apart from supplying at a competitive price. It is expected that once the recessionary effect in the domestic markets ease, the domestic demand would also pick up. Once the domestic demand picks-up, the domestic sale of the product would substantially improve.

The threat from the Chinese products will continue to be there. The overseas market has transformed into a price-sensitive market. So, price will continue to be the major determining factor in firming up export orders. The exchange rate is another factor which contributes to fixing competitive price. Our products have good brand image in the overseas market for quality and delivery standards. Our focus would continue to be the United States market. We are also diversifying our product range. The export of Sodium Formaldehyde Sulphoxylate, which was made this year, seems to be a promising product for future.

Power business:

Tamil Nadu’s power demand, which is around 13,000 to 13,500 MW, is expected to go up to 14,500 MW by the end of 2014-15, according to the Tamil Nadu Electricity Minister. The Minister said that the enhanced demand would be met through generation from the existing stations and from projects to be commissioned during the year, besides power purchase. He further said that at present power is being purchased at a rate of Rs.5 per unit of power bought from other states and Rs.5.50 per unit produced within the Tamil Nadu State. Giving the details of the power purchase, the Minister said that under the medium term purchase arrangements, 500 MW was being procured since June 2013. Under the long-term arrangements for 15 years, agreements had been signed to get 3,330 MW. Of this, 1,724 MW is being obtained and the balance would be available from the next year.

Electricity demand is outstripping production and the country is experiencing peak power shortage. It is therefore necessary to look for renewable energy option, including wind power, to meet the national electricity policy target.

Opportunities exist in the Green Energy sector viz, wind, biomass and solar. Tamil Nadu is a leader in wind energy and this has to be replicated in sectors such as solar and biomass. The threats to the Company may be in form of supply of power at lower rates by the TANGEDCO, than the rates at which it is being supplied by the Company, due to the various capacity additions that TANGEDCO proposes to make to the State Grid. The Electricity Minister has said that TANGEDCO proposes to add 2,000 MW to the States’ Grid this year. He also said that the Tamil Nadu State will get an additional 562 MW from the first unit of Kudankulam Nuclear Power Project.

Outlook

The Chemical Industry is poised for appreciable growth both in exports and in domestic markets, in view of appreciation of rupee value and also in view of the Government’s initiatives to boost exports, by levying of anti dumping duty and granting pre/post shipment credits at concessional interest rates. The Duty Drawback entitlement was reduced from 3.5% of FOB value of exports to 2.8% during the year. But fortunately, the Company could compensate the loss arising out of the reduced Duty Drawback by a new incentive known as Focus Product Scheme Licence (FPS) under which our Company’s product was listed in May 2013. This incentive was prevailing already, but it was extended to our product in May 2013 by offering an incentive of 2% of the FOB value of exports. Thus, a total of 4.8% of FOB value of exports is available to the Company as export incentive. The Company would increase its exports by identification of new customers and new markets. The growth of the user industries would indirectly contribute to increased demand for the products and its profitability.

The Biomass power units are beginning to lose its sheen in the State. According to the data provided by the President of the Bio Mass Power Producers Association, Tamil Nadu (BPPA), there are 13 biomass power plants in operation in the Tamil Nadu State, of which 6 are in the southern districts of Sivaganga, Virudhunagar, Theni and Tirunelveli. Their installed capacity is about 122 MW. There are 3 more plants, of 43 MW capacities which are not in operation now. At the peak demand, about one and half year back, the plants cumulatively sold 100 MW. Now they may be selling 20 MW to 25 MW. The Government allowed unconditional intra-State third party sale of power from the plants. Due to the power shortage there was immediate market too for such power. But, the demand for biomass power disappeared overnight when the State Government, in mid-August 2013, temporarily removed the 40% power cut on the HT units during most of the time in a day. As the average cost of biomass power is in the range of Rs.6.50 per unit to Rs.7.50 per unit, due to steep rise in the bio fuel cost, the HT consumers prefer to buy power from the TANGEDCO, whose tariff of energy charges for HT industry is Rs.5.50 per unit. As a result, the biomass power plants have scaled down their production drastically, as the demand has virtually vanished. Offering a viable tariff is the only solution for the units to survive in the business.

Risks and concerns

The task of carrying out manufacturing operations in the Chemical plant and power generation at the Power plant efficiently and ensuring that operational costs and performance are maintained in line with the norms is the major challenge. But, the company has put in place a Risk Management Framework, which provides for identifying, assessing, monitoring and reporting various risks at all levels. Suitable remedial steps are taken to mitigate the effect of the risks.

FINANCIAL PERFORMANCE

Even though the Net sales have increased by about 14% when compared with the previous year, the Net Profit before tax has increased by about 90% when compared with the previous year. This is mainly due to savings on the cost of materials consumed and marginal increase in the selling price. While the cost of materials consumed was 67% of the sales in the previous year, it is only 63% of the sales in the current year. Further, the Company has also made substantial savings on the interest cost. The interest cost which was Rs.13.65 crores in the previous year has reduced to Rs.9.19 crores in the current year, a reduction by about 48%. This is mainly due to substantial reduction in the short term borrowings from banks. The short term borrowings from banks which was Rs.58.26 crores in the previous year has drastically reduced to Rs.26.34 crores in the current year, a reduction by about 121%.

There is an increase of about Rs.20 crores in other expenses. This is mainly due to abnormal increase on account of loss on foreign currency transactions due to unexpected slide in the Rupee value against dollars making imports costlier to that extent. The loss on foreign currency transactions which was Rs.1.33 crores in the previous year increased to Rs.7.42 crores in the current year, an increase by Rs.6.09 crores. The Company’s operating profit has increased from Rs.33.28 crores in the previous year to Rs.47.37 crores in the current year, an increase by about 42%. The Company’s working capital position has improved from Rs.65.63 crores in the previous year to Rs.93.53 crores in the current year. All the divisions of the Company, except Biomass division, have made profits during the year.

Borrowing Profile

The Company’s long term borrowings increased from Rs.26.23 crores as at 31st March 2013 to Rs.28.26 crores as at 31st March 2014, mainly due to increase in the acceptance of fixed deposits. The Company’s short term borrowings have reduced from Rs.61.22 crores as at 31st March 2013 to Rs.29.29 crores as at 31st March 2014. During the year the company has repaid a Short term loan of Rs.20 crores and a long term loan of Rs.20 crores. The current year maturities of long term debt have reduced from Rs.27.94 crores as at 31st March 2013 to Rs.12.91 crores as at 31st March 2014. The secured borrowings have reduced from Rs. 58.26 crores as at 31st March 2013 to Rs.26.34 crores as at 31st March 2014.

Internal control systems and their adequacy

The company has proper and adequate internal control systems commensurate with its size and nature of operations to provide reasonable assurance that all assets are safeguarded, transactions are authorised, recorded and reported properly and that all applicable statutes and corporate policies are duly complied with.

The company has appointed an independent firm of Chartered Accountants, as Internal Auditors, which continuously reviews the adequacy and efficacy of the internal controls. The Internal Auditors submit Internal Audit Reports periodically which is placed before and reviewed by the Audit Committee. The Audit Committee reviews internal audit reports given along with management comments.

Human Resources Development and Industrial Relations

Your company attaches considerable importance to Human Resource Development (HRD) and harmonious Industrial Relations. There are senior and experienced professionals managing the operations of its divisions. The company also has a Graduate Trainee Program under which graduate engineers are recruited and trained for working in the Power plant. The company continues to nurture talent by systematic training programmes and sponsoring for Seminars, which are aimed at knowledge enhancement, improvement of skills, leadership and team building. The overall Industrial relations, during the year, were cordial.

Environmental protection

The Environmental Policy of your company is maintaining clean and green environment and eco friendly atmosphere. Your company has been complying with applicable environmental regulations and preventing pollution in all operations. Your company continues to strive for energy saving and conservation of natural reserves. Your company has been awarded ISO 14000 and ISO 2400 certification for maintaining ecological balances.

CAUTIONARY STATEMENT

This report contains forward looking statements that involve risks and uncertainties including, but not limited to, risks inherent in the Company’s growth strategy, dependence on certain businesses, dependence on availability of qualified and trained manpower, economic conditions, government policies and other factors. Actual results, performance or achievements could differ materially from those expressed or implied in such forward looking statements. This report should be read in conjunction with the financial statements included herein and the notes thereto.