texmaco rail engineering ltd share price Management discussions

TEXMACO RAIL AND ENGINEERING LIMITED ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS The Company for a greater part of the year faced a challenging time with forced idle capacity in its Rolling Stock Division with the wagon orders not materializing as per the projections and pronouncements of the Ministry of Railways. The Managements production plan indeed went awry waiting almost endlessly for the release of the orders. Notwithstanding such an unexpected turn of the situation, the company readjusted its working and took extraordinary measures to control its costs and overheads and geared up all its resources for accelerated output concomitant with the release of the orders in the last quarter of the year. With a robust current order book and the growing prospects of the Hydro Mechanical and Steel Casting Divisions, the Company expects appreciable improvement in the capacity utilization during the current year. Heavy Engineering Division: Rolling Stock: Your Directors have to report that despite trying conditions without adequate and timely release of wagon orders by Indian Railways, which was placed only during middle of January 2012 (i.e. after a lapse of almost 16 months), your Company has been able to roll out 3,471 wagons valued approx. Rs. 674 crore (excluding the cost of Free Issue Materials A/c. Indian Railways), comprising 2,954 wagons to Indian Railways and 517 wagons to private customers. During the year, the Company booked orders for a total of 5,837 wagons including private orders. The Indian Railways order on the company during the year 2011-12 was for 4670 nos, which was the highest ever quantity ordered by the Indian Railways on any wagon builder. The Company also secured two prestigious export orders from Bangladesh Railways for 255 wagons valued at Rs. 117.03 crore, and another export order for 70 wagons valued at Rs. 12.43 crore for supply to Africa. The Company has a healthy order book of 6,000 wagons, valued approx. Rs.1,299.93 crore (excluding cost of FIMs A/c. Indian Railways order). As per the Budget announcement for 2012-13, the Railways have planned the highest ever planned outlay of Rs. 60,100 crore during 2012-13, with a freight target of 1025 million tone. The budgeted expenditure for procurement of rolling stock is about 32% higher at Rs. 18,193 crore as against Rs. 13,824 crore last year, which is a significant increase. This will translate in acquisition of higher number of wagons. The Budget has focused on accelerated development of double-deck container flat wagons, autocars, and new Design 25T axle load freight cars for which the company is well positioned to take full advantage. Your Directors are pleased to inform that the Company has been maintaining its leadership in the field of BTAP wagons for transportation of Alumina Powder, and BCCW Wagons for transportation of Cement/Fly Ash. The company has successfully expanded its customer-base with the addition of prestigious public and private corporations during the year. The Company also stands out in meeting the requirement of Bottom Discharge Coal Hopper Wagon (MGR type) for Mega Power Plants. Looking to the fast growth of Automobile Industry in the country, the company expects a substantial demand for auto car wagons. The conceptual design for Double Deck Auto Rake, developed in collaboration with a European company, has already been submitted to the Indian Railways and is expected to be cleared shortly. As for the Container Flat Wagons, the private Container Operators are continuing to go through a tough time due to steep hike in haulage charges by Indian Railways. It is hoped that the Railways will address the issues bearing on the viability of the private Container fleets to find amicable solution in the near future. Dedicated Freight Corridors: The Government of India is actively pursuing and closely monitoring to ensure steady progress of the construction of the Dedicated Freight Corridors. Your Company has a special interest in the Western DFC. The entire Western DFC will be funded substantially by the Japan International Cooperation Agency (JICA), under the Special Terms of Economic Partnership (STEP) Scheme of the Government of Japan, with a tied loan of 30% of the total value of contracts to be sourced from Japan. Your Company is working closely with the Japanese consortium for indigenous participation. Joint Venture with UGL Rail Services Ltd., Australia.: A State-of-the-Art facility, one of the best of its kind, is being set up by your Company in Joint Venture with UGL Rail, Australia for manufacturing Locomotive Bogie Frames, Platforms & Cabs, Head Stocks for Coaches and Wagon components. The progress of the project is satisfactory, and the commissioning is scheduled in October, 2012, with ramp up to full production capacity by March next year. The products will be of top quality, manufactured on world class equipments by a highly skilled workforce. Your Company, along with UGL Rail Services Ltd., further subscribed Rs.20,25,10,000 each in the Capital of the said Joint Venture, taking up the total Partners contribution to Rs. 72,02,20,000 in the Capital of the JV Company. Joint Venture with Touax Rail, a French Group. The Company has signed a Joint Venture Agreement on 16th May 2012, with the French Group Touax Rail, a leading Lease Finance Company of Europe, having vast experience in the business of leasing out freight cars etc. The JV Company has been named as Touax Texmaco Railcar Leasing Private Limited, and will be owned and controlled 50% each by Touax and Texmaco (with Touax holding 2 Shares of nominal value of Rs. 10/- each in excess of holding of the Company) to facilitate consolidation of Accounts of the JV Company in their holding company. To begin with, the JV will have a minimum net worth of Rs.25 crore, the threshold limit for eligibility to qualify for the business, which would be enhanced in due course. The JV would have an early bird advantage of the present policy of the Railways of permitting leasing companies to own and lease wagons to the Industry and other end users on operating lease basis, which was not permitted hitherto. Hydro Mechanical Eqpt, Steel Structures & Process Equipment: After slowdown of activities in the Hydro Power Sector for nearly 4 years, the enquiries for Hydro-mechanical equipments for various new projects have started flowing in, while deferred projects have also started reviving during the latter half of the year. A number of Hydro projects are now in the pipeline in India and neighboring countries namely Nepal & Bhutan, and the prospects of Hydro-mechanical Eqpt orders have brightened up. The Company has secured orders for Hydro-mechanical work in Upper Tamakoshi Hydro electric project, Nepal (456 MW), valued approx. Rs. 90 crore, Rangit Stg-IV Hydro electric Project, Sikkim (120 MW) valued approx. Rs. 37 crore, Farakka Barrage (Replacement/rehabilitation), West Bengal, valued approx. Rs. 8 crore and recently Rongnichhu Hydroelectric Project, Sikkim (96MW) for Rs. 46 Crore. There is opportunity for sizable business at Farakka Barrage where the Govt. of India has decided to replace all the gates in the 12th five year plan. The Notice Inviting the Tender has been published in the first week of May 2012 for the second phase comprising of 33 Nos. Gates, estimated at approx. Rs. 25 Crore. The execution of current projects had some setbacks due to geological surprises, natural calamities and local political problems. As a result, the turnover of the Division stagnated during the year. However, with improved business prospects, the Division is expected to fare better in the current financial year. Besides, the Company has intensified participation in steel bridge and flyover structure tenders, and has in fact been successful in securing a couple of orders of Railway Bridges for Kalindee and IRCON. In the Process Equipment segment, the Company successfully executed the orders for 3 nos. Direct Contact Air Coolers, 3 nos. Evaporative Coolers and 6 nos. Adsorber Vessels with internals of molecular sieves, which were all meant for Air Separation Plants. The overall operations of the Division were at rather low ebb. However, with the integrated steel plants going in for modernization, expansion and production of higher grade steel, there is a good potential for Heavy Pressure Vessels and Buffer Vessels. There are also fair prospects of orders for Horton Spheres and Storage Vessels required in the Oil Sector and Chemical Industry. Steel Foundry Division: In consequence of delayed wagon orders, the production & despatches of Steel Castings during the year were just maintained at the same level as last year, at 17837 Tons and 16951 Tons respectively. In terms of revenue, however, it has achieved a growth of 15% in its turnover at Rs. 209.37 crore as compared to the last year. On the export front, however, your Foundry turned out commendable performance, and its sales has jumped 3-fold compared to the last year with a turnover of Rs. 19.96 crore backed by a significant order-book of over Rs. 25 crore at the end of the year. After successful engagement with Australian, North American & European markets, the focus now is on booming CIS markets. A MOU has been signed with a CIS based company for development and supply of Railway castings to their design and the various formalities are well under way. Yet another highlight of the Foundry operations was in the area of import substitution. The Foundry took the lead in development and getting recognition as an approved indigenous source of supply of Upgraded High Tensile Centre Buffer Coupler in place of imported AAR approved couplers. The Division has won acclaim from Indian Railways for this outstanding achievement in meeting a critical requirement and has been awarded an order for 1800 sets of Coupler Assembly. Also noteworthy is the development and supply of Tight Lock Railway Coach Coupler castings for field trial to a internationally renowned coupler manufacturer, which are giving excellent performance on Duronto Trains. The bulk orders are expected to follow. Besides, the Division has initiated discussions with a major global player having significant presence in India for development of intricate and hi- tech castings to be used on heavy trucks and loaders for mining industry. Upon successful development, the Foundry will have opportunities to supply castings in this segment across the globe. Agro Machinery Division: The performance of the Division substantially depends on the Government Subsidy Schemes in the States with major markets for Power Tillers such as West Bengal, Assam, Orissa and Karnataka. The non-release of the subsidy schemes by the States impacted the performance of the Division. Furthermore, the import of Diesel Engine for Power Tiller from Siam Kubota Corporation stood totally suspended from October 2011 till March 2012 due to devastating flood that gripped Thailand. The Division under the circumstances, managed to despatch 552 Nos. Power Tillers during the year. The Division has introduced Power Reaper - harvesting machine in the market which is well accepted by the farming community. The machine will be submitted shortly to SRFMTTI, Anantapur (A.P.), for testing to make it eligible for sale under all Government Assisted Programs. With enhanced budgetary allocation for Agricultural Machinery in the current financial year, the Division expects to improve its performance. Exports: Your Directors are delighted to report that based on the Foundrys consistently good export performance for the last 4 years, the Ministry of Commerce, Government of India has awarded the prestigious Export House Status to the Company. The exports of the Company during the year stood at approx. Rs.74.54 crore including deemed exports. The Company has performed well in the Australian, American, European, South-East Asian and African Markets. R & D Activities: The Company is focused on development of new technology for improvement of its production methodology and reduction of cost by use of alternative materials etc. During the year the Company has developed a new welding technique of controlled MIG tack welding which reduces the time and also improves the weld quality. After 3D computer simulation of robotic welding of underframes, the Company has made an investment in a twin-robot welding machine which is currently being installed for start-up scheduled in 2nd quarter of the year. A special welding technique of controlled metal transfer was developed for making root runs with acceptable root bead geometry. This welding technique is being exploited in structural fabrication with considerable saving in fabrication time. In Steel Foundry, half-bead welding technique for weld repairs in castings now takes full advantage of re-crystallization of as-deposited weld metal. A desk top design and animation of a carousel for dressing of casting underpinned the benefits of this technology. Evaluation of the merits of a mechanized shuttle system for wet fluorescent magnetic particle inspection of side-frame and bolster castings with synchronized digital image capture of black light images led to the decision for installing a NDT system in Foundry. IT Services: During the year, the Company introduced the latest and most advanced system of Oracle R12 for its operations. The users of Procurement, Stores, and Finance functions are progressively attaining higher degree of efficiency while working with the R12 system. Considering the benefits - in terms of cost and quality, the Management is in the process of extending the R12 solution for entire Manufacturing operations. In another significant initiative, the real-time communication network bandwidth is being extended to cover all the Plants of the Company. The Management looks forward to significant operational gains from its IT initiatives. Human Relations: Your Company has maintained its reputation in the industry as a model employer for its unique track record of industrial harmony over several decades. There is a healthy and constructive co-operation between the workmen and management leading to productivity gains and improvement in quality, which have become the core strength of the Company. On 6th September, 2011, your Company entered into a historic Tripartite Wage Agreement with the Unions for a period of 4 years. In terms thereof, whereas the Management agreed to grant substantial increase in wages to its workmen, the Unions in turn assured the Management of their whole hearted co-operation to raise measurable productivity through effective and efficient utilization of working hours. The Unions also agreed for Multi- discipline working (at least 3 trades) by the workmen. The Company aims to align HR practices with business goals, motivate people for higher performance and build a competitive working environment. It launched various training scheme for upgrading the skill and knowledge of its employees in different operational areas. Various programs & workshops were conducted during the year, which included Personality Grooming, Communication Skill, Health & Safety, House Keeping, Energy Management, Productivity Improvement, Total Quality Management, and Customer Satisfaction etc. The Companys special program of providing an educational window for B. Tech 3-year course to its employees in collaboration with BITS, Pilani (at BITS-Texmaco Centre of Excellence within the premises of the Company) is yielding excellent results in strengthening the organization. Your Directors commend the dedication and deep commitment of the workmen, staff and officers in building the corporate image through sustained pursuit of excellence. Employees Stock Option Scheme (ESOS): Details of Employees Stock Option granted pursuant to Employees Stock Option Scheme 2007 (ESOS 2007), as also the disclosure in compliance with Clause 12 of the Securities and Exchange Board of India (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 are set out in the Annexure A to this Report. During the year, the Committee of Directors of the Company at its Meeting held on 9th March, 2012 has allotted 2,43,500 Equity Shares of the Company to its eligible employees, pursuant to exercise of 2,43,500 Options by the eligible employees under ESOS 2007 and consequently the Paid up Share Capital of the Company stands increased from Rs. 18,17,83,090/- to Rs. 18,20,26,590/- w.e.f 9th March, 2012. Under ESOS 2007, there were 3,65,000 Options outstanding as on effective date i.e. 1st April, 2010 of demerger of Heavy Engineering and Steel Foundry businesses of Texmaco Limited to the Company, out of which employees had exercised 2,43,500 Options and the Scheme thereafter, stands closed on the balance Options being not exercised and surrendered by certain eligible employees. Opportunity & Threats: It augurs well for the Company that all its business segments are critical to the economic growth of the country and have been accorded high priority in the resource allocation by the Planning Commission. The Rail Transport is recognised as the lifeline of the nation, and there is a massive long- term plan for the development of the Rail Infrastructure. The Dedicated Freight Corridor (DFC) Planned by the Government of India is one of the biggest national projects on the anvil, and the full momentum will gather with completion of the acquisition of the land in progress and the finalisation of the multi-lateral and/or bi-lateral international soft loans. Meanwhile, your Company is re-jigging itself to be in a state of readiness for successful participation in the bidding process for the new design, high pay-load freight cars and high powered locomotives to be used on the DFC. The renewed emphasis by the Government on the Hydro Power Sector in our power starved country is very promising. A number of new Hydro Power projects are getting cleared. There is also a big demand emerging from the neighbouring countries having rich water resources. However, in spite of strong positive indicators, there is a serious concern over delay in implementation of Dedicated Freight Corridor (DFC) and other high-end Railway Projects. The procrastination in implementation of the long term procurement policy for wagons is also a perennial problem in efficient operation and capacity utilization of the Wagon Industry. The continuing plight of the container freight car operators is also causing disappointment with an otherwise progressive policy initiative of the Railways. Last but not the least, the current dismal global economic scenario and the sharp depreciation in the Rupee value are casting long shadows on the general industry outlook. Corporate Social Responsibility: At TEXRAIL, Corporate Social Responsibility (CSR) means continuous improvement in the quality of life of the workmen/staff associated with the Company and the people living in its neighbourhood. Education, health care, hygiene and environment management are areas of priority. The Company has residential estate inhabiting more than 500 families with provision of all the amenities e.g. clubs, swimming pool, parks, playgrounds, gym, air conditioned auditorium, etc. for social, recreational and educational activities for the benefit of its workmen/staff and residents. The Company is committed to its mission to serve the poorer sections of the society through better education and training to promote self employment. Texmaco Neighbourhood Welfare Society Trust provides financial assistance to the poor & needy for their health, education, social needs etc.