Global Economic Overview
The global economic recovery continued to be weighed down in FY 2016 by weak aggregate
demand, falling commodity prices (in particular crude oil), sharper than expected slowdown
in the Chinese economy and increasing financial market volatility in some of the major
economies. These developments, coupled with sluggishness in many of the emerging and
developing markets, which constitute more than 70% of the global economy, offset the
slight recovery in the developed economies. World GDP growth slowed to 2.4% in CY2015.
Emerging Market and Developing Economies grew at 3.4%, while the US and the Euro Area grew
at 2.4% and 1.6%, respectively. Japan grew at 0.6%. According to the World Bank, Emerging
Market and Developing Economies (EMDEs) are facing stronger headwinds, including weaker
growth among advanced economies and low commodity prices. Significant divergences persist
between commodity exporters struggling to adjust to depressed prices and commodity
importers showing continued resilience. In addition, UKs impending exit from the European
Union, as a consequence of the Brexit referendum, has also presented a cause of concern
for the global economy. The World Bank revised its world GDP growth forecast for 2016 down
to 2.4%, 0.5 percentage points below the January 2016 forecast. The 2017 GDP forecast
stands at 2.8%. Downside risks have become more pronounced. These include deteriorating
conditions among key commodity exporters, softer-than-expected activity in advanced
economies, rising private sector debt in some large emerging markets, and heightened
policy and geopolitical uncertainties.
Indian Economic Overview
Amidst a challenging global growth scenario and after a prolonged slowdown, the Indian
economy recovered slightly and grew 7.6% in FY2016, compared to 7.2% in FY2015. However,
the slow pace of reforms, lack of impetus for infrastructure projects high interest rates
and tightening of fiscal policies adversely impacted the capital goods sector. Industrial
production / output was also sluggish, the low economic growth appears to have bottomed
out and a gradual increase in economic activity is expected. The medium term to long-term
growth prospects look positive in view of the Governments determination to bring in
reforms. The economy is still suffering from sluggishness in rural demand, caused by
deficient monsoons for two years. Moreover, despite five interest rate cuts since 2015,
credit growth to the corporate sector remains subdued because of stressed asset quality in
the banking sector. Weak exports also weigh on growth: February marked the 15th
consecutive month of decline. World Bank has forecasted the GDP growth of India at 7.6%
for 2016 and 7.7% for 2017. Other key factors crucial to sustaining growth include
physical infrastructure issues such as seamless availability of electricity, creation of
road network and social aspects like health and education.
Strategy & Outlook
In the last few years, several macro headwinds have obstructed the growth of the
industry including flagging sales, increasing capital costs and slowing investments in
manufacturing. This slowdown, which still continues to impact the Indian manufacturing
industry, has undermined our capacity expansions and utilizations, and impacted
performance through FY2016. The momentum in our order has also been affected, in line with
the overall demand and company scenario. The company continues to be faced with a cash
flow mis-match. To counter this situation, the management has continued with its efforts
to bring some new investors on board and use the investment in reducing debt. Discussions
with potential investors have been on going and we are hopeful. The management remains
fully committed to the overall deleveraging plan which will not only enhance our free cash
flows resulting from lower interest payments, but will also optimize the companys capital
structure and create significant shareholder value. The company also continues to focus on
cost reduction and rightsizing initiatives. With the Governments ‘Make in India
campaign global OEMs are expected to increase investments into India, leading to more
opportunities for finding of some strategic investors. In addition, we view the passage of
the GST Bill as a positive development that would bring in operational efficiencies.
Opportunities & Strengths
The Indian machine tools sector offers several opportunities for investment. Given the
current gap between demand and supply, there is a clear need for adding capacities in this
sector. The industry is moving towards increasingly sophisticated CNC machines, driven by
demand from key user segments, such as, automobiles and consumer durables, Aerospace etc.
Machine tool manufacturers need to develop capabilities to cater to this demand and
investments in this area could yield long-term benefits.
Your company is engaged in the manufacture of conventional tools and newer products are
now replacing these. The companys original products are Hand Hacksaw Blades, Power
Hacksaw Blades and Tools Bits. These three products till date were the major revenue
source for the company, however other products are now replacing these. The hand hacksaw
blades are being replaced by abrasive cut off discs. Bimetal band saw blades and circular
saw blades are replacing the power hacksaw blades.
Carbide tools are replacing tool bits. Your company could visualize part of this
problem and hence made necessary investments during the last three years to go towards the
manufacture of Reciprocating Saw Blades, Bimetal Strips, Edge Wire and Backing Material.
Unfortunately, the company could not realize the benefits out of this expansion due to a
variety of issues. Moreover due to excess production of Bimetal Strips the prices of these
have dropped by more than 30 to 40% resulting it being more economical to outsource
instead of own manufacturing.
Risk & Concerns
In the recent past, global economic growth has remained volatile and uneven with
several key markets facing economic challenges. However the companys primary risk and
concern is that its assets have been attached by the bank under SARFASI act and in case
the company is unable to locate any investor or get fresh funds in the company the bank
will take over the companys assets and put the same for auction. Other risks include
labour strikes and litigation by various stakeholders such as the landlord, worker unions,
creditors, etc. The companys last expansion into Edge Wire and Backing Material has not
yet seen the start of commercial production and moreover the Bimetal Strip division
continues to face a lot of challenges due to stoppage of technical support from the
foreign partners.
Segment Wise Or Product Wise Performance
Your Company operates in only one segment.
Internal Control Systems and their adequacy
The Company has a proper adequate internal control system to ensure that all the assets
are safe guarded and protected against the loss from unauthorized used or disposition and
that transactions are authorized recorded and reported correctly. The internal control is
supplemented by an extensive internal audit, periodical review by the management and
documented policies, guidelines and procedures. The internal control is designed to ensure
that the financial and other records are reliable for preparing financial statements and
other data and for maintaining accountability of assets.
Financial Performance With Respect To Operational Performance
The company achieved revenue from operation of Rs. 27,00,900/- and a net loss of
Rs.3,98,03,215/- during 2018-19 against a revenue of Rs. 8,84,09,322/- and net loss of Rs.
9,08,11,969/- for the year 2017-18. The company continues to make losses after many years
of profit primarily due to non-operational of its new projects along with a decrease in
sales value. During the last four years, the value of the dollar has gone up from Rs.48/-
to Rs.68/- resulting in 40% increase in the raw material cost. The increase in the custom
duty for raw material last year from 5% to 10% has further impacted the companys
finances. Our reduced spread has made it further difficult to run the unit like ours to
survive. Along with that all the other costs have increased by 15 to 20% during the same
time. In the earlier years this increase was passed on to the customers without any
difficulty due to our reputation in the domestic as well as in the International Markets.
However, in the present circumstances we are not able to increase the selling prices due
to various reasons like unhealthy competition from our competitors from China and
competition from Western countries. Further, we were forced to reduce the prices in order
to face the competition and also to stay in the market owing to the market competition
resulting in the companys spread getting reduced drastically and are even losing money in
some cases. Moreover due to the companys financial situation the company is unable to
purchase new raw material as required and has to make use of existing inventory resulting
in the raw material composition in terms of percentage of sales being very high. Also due
to non-availability of timely funds there was a raw material shortage resulting in the
cancellation of many orders especially the export orders. There has been depreciation of
various currencies especially the Latin American countries export orders were lost as
well. There has been a recession too in most of countries due to a variety of reasons and
most of our customers have ordered less that they have been purchasing in the past.
Reduction of Business from PSUs due to current market situations. Technology of the
products manufactured has changed for the companys original products namely Hand Hacksaw
Blades, Power Hacksaw Blades and Tools Bits. Grey Market Smuggling from China still
continues. Competition from European countries due to reduction in value of Euro has given
them an advantage to sell in India. Dumping by American Companies has resulted in superior
products available at much lower prices. Almost all customers and suppliers have lost
confidence in the company.
The company had made necessary investment in the last four years to go towards backward
integrations along with addition of some finished products, however, the company could not
realize the benefits out of this expansion due to non-payment of the balance amount to our
foreign vendor/technology partner. The last project for edge wire and backing material the
company could not pay the balance amount to our foreign vendor/technology partner which
has resulted in the last project being non-operational for which we spent excess of Rs.27
crores. Furthermore, the same technology partner had given us the previous two projects
for which we need regular technical inputs along with spare parts has been affected as
well.
During 2008 to 2014 the companys sales had gone up from Rs.10.59 crore to Rs.66.65
crore which is an increase of 629% and the profit had gone from Rs.0.09 crores to Rs.1.58
crore, an increase of 1815%; and the companys net worth increased from Rs.1.22 crore to
Rs.19.12 crore an increase of 1565%. At the same time though our term loan borrowing went
from Rs.1.34 crore to Rs.31.26 crore an increase of 2340% our working capital borrowing
increased only by 396% showing a clear mismatch of working capital growth which is one of
the main reasons for the present situation the company is facing. All our projects were
completed well in time and in certain cases before time as well and the term loan from
bank increased from Rs.1.34 crore in 2008 to Rs.31.26 crore in 2013. However, need based
working capital was not made available in time because of which the company came into
problems. In spite of the company making necessary applications there was considerable
delay and unexplainable delay from the Bank because of which the company has mainly come
into problems.
It is unfortunate that due to non-availability of the required working capital and a
complete lack of proper understanding and timely action owing to various layers on account
of Bank the company has come in the present situation where it is presently classified as
a NPA account. The assets have been taken over lower symbolic possess under the SARFASI
Act and there is a strong possibility that the Banks will take physical possession of
these assets and auction them in the near future. The company has been built over last
many years through a lot of hard work and hard earned money of the shareholders that along
with having in the earlier years caused a lot of income to the Bank and also giving a
various other benefits to the society such as direct employment, business to small scale
units who are dependent on this company along with direct/indirect taxes, etc. The company
had regularly exchanged a lot of correspondence with the bank informing of the actual
situation and the actions that could help the company to come out of the situation and
requesting the Bank for taking the necessary steps and if acted on time the situation
would never have come to the present scenario but instead of taking the required actions
and understanding the long-term needs of the company all the Bank did was take short-term
measures to save the account from becoming a NPA at that particular point of time.
Due to lack of cash the company has apart from not being able to pay the Bank dues has
also not been able to pay the wages, salaries, gratuity, creditors, etc. The company is
further is facing problems with statutory issues where the company has many open advance
licences / EPCG Licences for which payment will be due if exports not done within the
permitted period, unpaid income tax liabilities, property tax, provident fund, sales tax
subsidy, sales tax, excise etc.
Material Developments in Human Resources
The Directors would like to place on record their appreciation and recognition towards
all its employees who continued to stay with the company in spite of its difficult
situation. Recruitment process had to be strengthened due to high attrition rate. The
Directors would also like to mention here that due to the present situation of the company
the relationship with its employees especially the workers is tense as the company has
been unable to pay timely wages, etc.
Caution Statement
The above-mentioned statements are only ‘forward looking statements based on
certain assumptions and expectations. Actual performance could differ materially from
those expressed/projected depending upon changes in various factors. The Company does not
assume any responsibility to any change(s) in forward-looking statements, on the basis of
subsequent developments, information or events etc. Important developments that could
affect the Companys operations include a downward trend in the domestic industry,
competition, rise in input costs, exchange rate fluctuations, and significant changes in
the political and economic environment in India, environmental standards, tax laws,
litigation and labour relations.
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