tata hitachi construction machinery company ltd Management discussions

TELCO CONSTRUCTION EQUIPMENT COMPANY LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL RESULTS: 1. During the year 2008-09, the Company achieved gross revenue of Rs.2130 crores, in spite of the slowdown in the market. A summary of the financials is furnished below: (Rs in crore) 2008-09 2007-08 1. Gross revenue 2130 2718 2. Net revenue 1937 2411 (excluding excise duty) 3. Total expenditure 1761 1915 4. Operating profit 176 496 5. Other income 13 17 6. Profit before interest, 189 513 depreciation & amortization 7. Interest (net after 29 1 capitalization) 8. Depreciation & 24 21 amortization 9. Profit before tax 136 491 10. Provision for taxation 51 167 (current and deferred taxes) 11. Profit after tax 85 324 12. Balance brought forward 388 190 13. Amount available for 473 514 appropriations 14. Interim Dividend 58 59 15. Transferred to General Reserve 9 32 16. Proposed dividend and tax thereon - 35 17. Balance carried to Balance Sheet 406 388 INDUSTRY OVERVIEW: 2. After a few years of sustained growth, the world economy was hit by the sub-prime crisis and slowdown dramatically in the year 2008-09. The Indian economy which was growing at a rate of over 8% for over a period of five years, felt the tremors of the slowdown quite rapidly in the latter half of the year following the bankruptcy of Lehman Brothers in September 2008, causing a drop of almost 3% in the growth rate. The bellwether Index of Industrial production (IIP) showed a marked decline in outputs. Also, the global financial meltdown had a telling effect on the financial sector in the country, and the flow of credit to the customers of the Construction Equipment (CE) industry showed great sluggishness with the impact to the end customers in the form of (a) interest rate hikes, (b) increased margin money requirements, (c) stringent credit checks and (d) a total lack of risk appetite. 3. The impacts of global developments on India contributed to a market contraction of 24% for excavators, and a pronounced fall of over 45% in the demand for backhoe loaders. Also, the whole of the CE industry slowed down dramatically with investments dropping off and postponement or shelving of a number of Infrastructure Projects, due to heightened uncertainty. In addition, many ongoing projects witnessed low level of activities on questions of financial viability, though the stimulus packages announced by the Government gave some respite. The situation affected the Mining sector too, after the fall in the global demand for iron ore and the consequent decline in exports. There was however a sustained activity in the Power and Coal mining sectors, where there was only a marginal fall. 4. The years of sustained growth in the CE industry had encouraged a host of new entrants, including companies from Japan, Korea and China. Some of them had taken the trading route while others set up their own manufacturing facilities in the country. Consequent to the economic lowdown, the slump in demand caught some of these companies with huge inventories and unutilized capacities, forcing them to resort to distress selling, in terms of low prices and easy commercial terms as well. Due to this most of the domestic manufacturers, including the Company, had to restrict production with periodic shut downs and short closures, so as to clear the stockpile of inventories. OPERATING RESULTS AND PROFITS: 5. Despite the adverse effects of the economic slowdown on demand for the Companys products and in the midst of aggressive market practices which prevailed in the industry, the Company registered a total sale of 5,194 units during the year (7,698 machines in the previous year). The total sales revenue for the year amounted to Rs.2,130 crores as against Rs.2,717 crores for the previous year. Though, the sales for the year witnessed a drop of 22%, the Company had retained its market leadership in the CE industry, which shrank by around 25%. OPERATIONS: 6. During the year 2008-09, the Company produced 4949 units (7364 in 2007- 08). Dharwad Works produced 3977 units comprising of mini/midi excavators and backhoe loaders, as against 6096 units in the previous year. EX200 excavators with indigenous aggregates and the 76HP backhoe loaders were successfully rolled out from Dharwad plant during this year. 972 units (1,247 in 2007-08) were produced at Jamshedpur, which included large class excavators, wheel loaders and cranes, besides the aggregates manufactured for assembly at Dharwad. In addition to regular production, Jamshedpur rolled out the prototypes for new models, namely ZX75, ZX210-LCH, ZX370 excavators, TM06 Concrete Mixers and EX1200-D, the improved version of 120T excavators. On 24th March 2009, the Company rolled out its 3000th EX110 excavators and 7000th Tata-315 backhoe loaders. 7. Introduction of new models and improved versions helped the Company widen the range of its products to facilitate a variety of applications. Also, this enabled the Company in addressing and capturing the opportunities in demand, especially in the Mining sector, in the year 2008- 09. This partially offset the drop in turnover caused by the recessionary conditions which mostly affected the markets for smaller machines. The Company still retained its dominance in small and mid-sized excavators during the year. It continued its special thrust in respect of imported products, which helped it in seeding the market with technologically superior products to facilitate manufacturing them in-house subsequently. Revenue from spare parts recorded a growth of 14%, and income from services increased by 70% on the strength of new contracts especially for larger equipment. OUTLOOK: 8. The economic slowdown resulted in a sharp fall in the equipment off-take by the market. While recovery is expected in the second half of the current year 2009-10, the outlook in terms of volumes and financials for the year is likely to remain at the same level of the previous year 2008-09. The ambitious plans of the Government of India for improving infrastructure in the country would still require to be executed albeit with some revision in timelines. The gradual improvement in financing conditions is expected to increase the demand for mini and midi excavators. The Governments focus on rural infrastructure and the increased coal mining activities would boost the demand for backhoe loaders and wheel loaders respectively. Coal being the focus area, the growth of Mining sector is likely to continue and drive the demand for midi/large excavators. With the stepped up marketing efforts, focused teams across industry verticals, improved coverage and support from Dealers, introduction of new fuel-efficient models and solution selling in respect of large equipment, the Company aims at retaining its leadership and reaffirms its vision of achieving a global rank within Top-25 in the CE industry, by the year 2012. HUMAN RESOURCE DEVELOPMENT AND INDUSTRIAL RELATIONS: 9. The recessionary conditions of the economy, which prevailed in the second half of the year 2008-09, posed an immense challenge on the Company to keep the employees engaged. The Company worked on a two pronged strategy, namely, (a) Communication and (b) Involvement. The frequent and open communication sessions helped the employees understand the real issues and the challenges faced by the company. Their involvement in cost reduction programs (like CRISP and FIRE) and other improvement initiatives helped them realize a sense of achievement. The employees solidarity with the Company and the success of its employee engagement processes were reaffirmed during the year by (a) the plant employees who voluntarily agreed to adjust their leave against shutdown (b) the Union, which signed an pioneering agreement relating to wage cut, and (c) the management staff who volunteered to forego mid-year performance bonus through a process of consensus. 10. The slowdown did not deter the Companys efforts on building the employee capabilities, though it extensively used the internal experts for the same. During the year, the attrition rate remained healthy at below 5% level. The satisfaction levels of management staff and non-management employees had improved by 6% and 5% respectively. The number of Kaamyabi awardees increased by 34%, and the number of Ideas per employee improved by 88%. Leadership development remained a focus area and identified leaders continued to be groomed through various leadership development initiatives. The industrial relations remained healthy due to the collaborative approach of the Union and the Company. RISKS AND CONCERNS: 11. During the year 2008-09, the Company recognized the need for having an effective Enterprise Risk Management (ERM) program and also appointed a Chief Risk Officer for the Company. The Company has a structured process under its ERM framework, whereby it has identified its risks and classified them in to Operational, Financial, Strategic and Regulatory risks, which are further analyzed and labeled according to their risk levels. During the year 2008-09, the Company converted its challenges in to opportunities, identified new risks through its learnings from the unexpected global economic slowdown, and rolled out Departmental risk registers, with the causes, analyses and appropriate mitigation plans. The Company remains risk averse and is determined to take all possible steps to mitigate any risk or challenge. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: 12. The Company has adequate systems of internal control and documented procedures in place, covering most of the financial and operating functions. These have been designed to provide reasonable assurance about the existence of proper accounting controls, the economy and efficiency of the operations, the protection of the assets from unauthorized use or losses and the reliability of financial and operational information. The Company has as part of its SOX regime continued its efforts in benchmarking its processes and controls with the best practices adopted by the industry, and introduced new financial and operational controls based on its own reviews and in response to the internal audit reports as well. Cautionay Statement: 13. Certain statements in this report describing the Companys objectives, projections, estimates and expectations may be forward looking statements in nature. The actual performance could differ materially from those expressed or implied. The industrys activities will by and large be dependant on the Governments initiatives, general market conditions and the competitive pressure. The demand for the existing and new products of the Company will largely depend on the priority with which various infrastructure projects of the Government are implemented. Economic conditions determining the supply and demand in the industry, price conditions in the domestic and overseas markets in which the Company operates, changes in the government regulations, tax laws and other statutory and incidental factors may also affect the Companys operations.