Torrent Cables Ltd Management Discussions

ECONOMY AND POWER SECTOR

1. ECONOMY

Indian economy has emerged as one of the fastest growing economies in FY 14-15 with a promising economic outlook on the back of controlled inflation and revival of economic growth. Persistent correction in crude oil prices together with softness in the global prices of commodities, particularly coal and seasonal softening of food prices eased the inflationary pressures during FY 14-15. GDP also showed signs of recovery from 6.9% in FY 2013-14 to 7.4% in FY 2014-15 (at 2011-12 base). As per a report recently released by the United Nations (UN ESCAP report titled, Economic and Social Survey of Asia and the Pacific 2015), Indian economy is likely to clock 8.1 percent growth in the current financial year, spurred by strong consumer spending amid low inflation, infrastructure projects and governments reform measures.

Overall growth in the Index of Industrial Production (IIP) was 5.0 per cent during February 2015 as compared to a contraction of 2.0 per cent in February 2014. During April-February, 2014-15, IIP growth was 2.8 per cent as compared to (-) 0.1 per cent in the corresponding period of previous year. The positive growth in mining, manufacturing and electricity sectors have contributed to the IIP growth. The growth has also got boosted because of low base across sectors.

However, eight core infrastructure industries moderated to 1.4 per cent growth in February 2015 as compared to growth of 6.1 per cent in February 2014. During April-February, 2014-15, these sectors grew by 3.8 per cent as compared to 4.2 per cent growth in the same period last year.

Current Account Deficit came down to 1.2% of GDP in FY 14-15 from 1.7% in FY 13-14 owing to lower oil prices and higher services exports that offset the dip in merchandise shipments. These factors together with huge inflow of FDI and FII in the equity and bond markets kept the rupee- dollar equation stable during the year.

Reaffirming Governments commitment to fiscal consolidation, fiscal deficit for FY 2014-15 is estimated at 4.1 % of GDP against 4.5% in FY 2013-14 mainly on the expectation of better collection of tax revenues and non-debt receipts. Since fiscal deficit is primarily financed by commercial banks, financial & non-financial institutions, with contraction of deficit there will be more room for private investment and capital inflows, positively affecting the industry and leading to higher GDP growth rate. This will also ease inflationary pressure providing comfort to RBI for easing monetary policy.

Standard & Poors upgradation of Indias outlook from negative to stable and that of Moodys from stable to positive can be construed as increasing probability that actions by policy makers will enhance the countrys economic strength and, in turn, financial strength over coming years.

POWER CABLE INDUSTRY OUTLOOK

Power sector is the fulcrum of economic development in any country. Power cable industrys fate is closely linked to that of industrial growth in general and power sector in particular. Cables are the crucial infrastructure backbone of an economy, the critical elements that wire up the length and breadth of the country as power networks.

Improving economic and industrial outlook is, no doubt, a harbinger of better times for power cables industry. Having said that the other reality is that barring few successes , the power sector in India continues to lag behind in comparison to other infrastructure segments. Power sector is yet to see significant improvement.

However, the proposed Electricity (Amendment) Bill 2014 is expected to promote competition and efficiency in operation and improve the quality of supply of electricity. Some of other measures of the Government such as identification of power sector as a key focus sector to promote sustained industrial growth with emphasis on Make in India; Governments focus to achieve "Power for All"; auction and allotment of coal blocks; subsidy scheme to pull the stranded gas based power plants out of the woods etc. are slated to help ailing power sector to recover and grow.

In line with the above indicative improvements, power cable industry, too, is showing signs of improvement. Date published by IEEMA, the industry association for electrical and electronic equipment manufacturers, shows 13% growth in HV and EHV cable manufacturing in 2014-15 over the previous year. The growth reported for LV cables is 30% for the same period.

COMPANY BUSINESS, OPERATIONS AND OUTLOOK

Going by the customer or user segment, cable market can be broadly categorised into telecommunication cables, house wires & cable and power cables. Telecommunication cables are used, as the term indicates, for use in telecommunication network to carry signals. House or building wire or cables are mainly for use in the electrical network within buildings. This sector requires many products for myriad applications.

Power cables are mainly for conveying electricity in the power transmission and distribution network. These are generally classified in three broad categories depending on voltage grade. Low Voltage (LV) or Low Tension (LT) cables are those rated up to 1.1 kv and are used in distribution network, main supplies, public or industrial premises lighting installation etc. The LT cables are used for tertiary distribution of power mainly from substations to buildings. The High Voltage (HV) or High Tension (HT) are those rated from 3.3 kv to 33 kv and are primarily used as underground cables in power distribution network. Extra High Voltage (EHV) cables are those rated above 33 kv.

PRODUCT SEGMENT

Your Company operates in LT , HT and EHV ower Cables and control cable segment. Currently, it is engaged in manufacturing of cross linked Polyethylene Low Tension (XLPE LT) cables & Poly Vinyl Chloride (PVC) cables, cross linked Polyethylene High Tension (XLPE HT) cables. Around 75% (previous year 62%) of Companys revenues have been from HT/EHV cables and 25% (previous year 38%) from LT and control cables during FY 2014-15.

CUSTOMER SEGMENT

The customer profile includes several State Electricity Boards/state owned utilities, private sector utilities and private companies (EPC contractors, corporate clients & business dealers). Your Company was the first company in the cable industry to get ISO 9001: 2000 certifications.

Your company is a niche operator. It mainly focusses on quality conscious customers who include private and select public sector power transmission and distribution utilities, major industrial houses and large private sector EPC contracting companies. With its reputation for product quality and timely delivery, the Company is viewed by its customers as a preferred supplier. The Companys continuing focus on optimization, scrap reduction and cost control goes a long way in remaining cost competitive besides being known for its quality products and timely deliveries.

FY 2014-15 has been a challenge in the first two quarters due to demand stagnation and order/delivery deferments by customers. Situation started turning around from Q-3 registering 75% of H-1 sales in Q-3 itself and 88% in Q-4 ending the year with 26% increase in annual sales over previous year. Outlook for FY 2016-17 is bright with all time high order book position as on 31st March 2015. Nevertheless, improving its margins would remain a challenge in the face of slower than expected industrial/power sector demand pick-up and production capacity far outstripping the demand.

OPPORTUNITIES AND THREATS

The major drivers for power cable demand are:

- Addition to power generation capacity and power generation

- Industrial growth

- Need for undergrounding existing and upcoming power transmission and distribution network, driven by the need to unlock real estate value, ever growing concern for safety & amenities in densely populated areas and preservation of aesthetic values in many localities.

Opportunities are set to improve with certain initiatives of the current Government underway;

• Approval of Integrated Power Development Scheme (IPDS) of Rs. 32,612 Crores for urban area involving strengthening of the sub-transmission & distribution network, metering of power supply and IT enablement of distribution networks across the country and thereby enabling completion of targets laid down under Restructured Accelerated Power Develoment and Reforms Programme (RAPDRP) for 12th & 13th Plans;

• Launch of Deen Dayal Upadhyaya Gram Jyoti Yojana of Rs. 43,033 Crores for rural areas involving division of agriculture & non-agriculture feeders facilitating judicious rostering of supply and augmenting the sub transmission & distribution infrastructure including metering of power supply;

• Increase in budget allocation to the transmission & distribution segment by 26% to Rs 6350 Crores as compared to FY 2014-15 to lower T&D losses and improve power supply in rural areas;

• Identification of power sector by the Government as a key sector of focus to promote sustained industrial growth with emphasis on Make in India. The economic growth of the country together with the Governments focus to attain Power For All.

RISKS AND CONCERNS (THREATS)

Following the industry practice, orders taken by the Company are with firm price. Whereas most of input material prices are linked to international prices and foreign exchange rates. Therefore, any unexpected significant adverse movement in metal prices and/or exchange rates may impair the margins.

Credit risk is another potential risk especially in view of the liquidity crunch faced by the customers due to slowed down business cycle and clamp down on bank credit.

To overcome these risks, the Company keeps a close watch on copper and aluminium prices at international level and tries its best to hedge prices of such materials, so as to achieve best pricing and sourcing of material avoiding heavy fluctuations of pricing. Moreover, for firm price orders with long delivery schedules, as far as possible, price quotes are padded up with additional margins to cover adverse variation in input prices.

With stable Rupee/USD exchange rates, foreign exchange risk is contained. Even otherwise, the Company tries to minimize this risk by forward booking of foreign exchange whenever opportunity is available.

As for credit risk, the Company keeps a close watch on the creditworthiness of the potential customers and focuses on accepting orders from reputed clients even on lower margins to sustain operations .

To systematically manage various risks, the Company has a enterprise wide risk management policy and framework whereby risks are identified vis--vis the risk appetite of the Company alongwith possible mitigation measures. These are reviewed periodically by the Board of Directors.

INTERNAL CONTROL SYSTEM

The Company has a well set budgetary control and cost monitoring system providing comprehensive MIS on health of its operations. Performance is consistently reviewed with budget. Regular management reviews cover all aspects of its business operations and financial performance.

The Company has well placed internal audit mechanism. A reputed and independent firm of Chartered Accountants, has been working as Internal Auditors of the Company. They conduct continuous audit, in order to ensure compliance and adherence to the management policies, systems and procedures and report on internal controls and efficacy.

The Internal Auditors reports are consistently reviewed by the management and by the Audit Committee on quarterly basis. The Companys internal control is adequate commensurate with the size of the Company and the nature of our business especially with regards to purchases of inventory and fixed assets and the sale of goods and services.

There has not been any material observation/major weakness in the internal control system, reported by statutory or internal auditors of the company.

FINANCIAL PERFORMANCE vs. OPERATIONAL PERFORMANCE

Capacity utilization during the year stood at 78% compared to 67% last year.

The Company earned Cash Profit of Rs. 11.32 crore as compared to Rs. 11.74 crore in the previous year. Total revenue was at Rs.274.88 crore as compared to Rs. 220.92 crore in previous year. The net profit of the Company was at Rs. 3.37 crore as compared to Rs.4.32 crore in the previous year.

The working of the Company was adversely affected during the year due to stiffer competition caused by demand contraction and excess production capacity in the Cable Industry, which affected the volume sales and price realization resulting into compressed margins.

Forward planning on a continuous basis, focus on controlling overheads and control on scrap generation continues to be in main focus for controlling the cost during the FY 2014-15.

HUMAN RESOURCE

The total employee strength of the Company at the end of the year was 359 as compared to 343, last year. The company is expanding its marketing footprint by induction of resources in new territories to target new regional markets in India.

Wage settlement agreement with the workersunion for 3 years (with effect from 1st January, 2015 to 31st December, 2017) was executed on 18th April, 2015.

As a practice, training and development programmes are conducted throughout the year. This helps in overall improvement in the quality / output and personality development of the employees. Such programmes are planned considering the individual skill levels and required future capabilities. The Company considers employees as its most value asset.

The industrial relations remained cordial during the year under review.

Cautionary Statement:

Statement in the Directors Report and Management Discussion and Analysis, describing the industry and Company prospects/outlook, estimates/projections, may be forward looking statements within the meaning of applicable securities, laws and regulations. Actual results / performance of the comapny may vary from those expressed or implied depending upon economic conditions, government policies and other incidental and / or related factors.