MANAGEMENT DISCUSSION AND ANALYSIS Economic Overview After achieving unbrcedented growth of over 9% for three successive years between 2005-06 and 2007-08 and recovering swiftly from the economic crisis of 2008-09, the Indian economy has been going through challenging times that culminated in sub 5% growth in two consecutive years 2012-13 and 2013-14. Persistent slowdown in the global economy especially in the Euro area compounded by structural constraints in the domestic economy and inflationary brssures resulted in a protracted slowdown. Though the slowdown was broadbased, what is particularly worrisome is the slowdown in manufacturing growth that has averaged 0.2% per annum in 2012-13 and 2013-14. In 2014-15, the Indian economy is poised to come out of the sub 5% growth rate. Key factors that would aid in this recovery would be political stability after the General Elections which concluded in May 14 and the resultant uptick in business sentiment, thrust of the new government on reviving the manufacturing sector, significant improvement in the Current Account Deficit (CAD) seen over 2013-14 as well as decline in the fiscal deficit as a % of GDP which is in line with the stated medium term policy. Also moderation of inflation seen in the recent quarters would help ease the monetary policy stance and revive confidence of investors. Financial Overview Sales & Profitability Although, the revenue for the year 2013-14 has shown a decline of 11.76% over the brvious year, there is a rise in the EBIDTA and PBT margin on account of the following: • Higher contribution on account of better sales mix, reduction in the material costs and better value addition Order Book The outstanding order book as on September 30, 2014 is at Rs. 1376 Crores. Almost 55% of the order book is comprised of orders in the traditional EPC businesses of Sugar, Co-Generation and Cement Plant Equipment. The remaining 45% comprises of orders in the strategic and niche sectors like Defence, Aerospace, Missiles and Nuclear and products business i.e. Gear. It is therefore a balanced order book with EPC and Manufacturing being equally rebrsented. 2013-14 has been a year where market conditions stayed subdued and it is only in the last quarter i.e. July-September that sentiments have improved owing to the formation of a new and stable government. Going ahead the thrust is going to be on exploring and converting new opportunities especially in the Defence and Aerospace sectors into firm orders. Opening up of the Defence Sector to private players participation by the new government, clear emphasis on indigenization as well as the recent success of the Mars Orbiter Mission in September 2014 are expected to positively impact order booking. As far as the EPC businesses are concerned, focus would be on profitable growth in the domestic market and your company would be selective in booking orders so as not to compromise on quality and inherent profitability. Your company has successfully executed projects in the recent past in Africa, Latin America as well as New Zealand and therefore we are confident that the share of Exports in the overall EPC order book will definitely increase. All probable opportunities are being expeditiously pursued. The recent uptick in market sentiment in the Indian economy would also lead to a lot of allied opportunities in the areas of General Fabrication, EPC work in Defence and Nuclear, Renewable Energy, etc. Your Company is fully geared up to accept these new challenges and further expand its footprint. Key Events - Supply of critical equipment for India's Defence Program. - On track as far as Integration work for India's Nuclear Submarine Program is concerned. - Supply of critical equipment for India's Nuclear Program. - On track to achieve Project completion for Sodium Piping work in the India's Fast Breeder Reactor project. - Supply of critical equipment for the launch vehicle of India's Mars Orbiter Mission. - On track to enhance capacity for Aerospace components for ISRO. - On track to enhance output for India's Missile Program. - Significant progress seen in the long gestation EPC projects in the Sugar & Co-Generation domain including overseas projects. - Successful entry in new markets like New-Zealand and Latin America through supply of Boiler. Segment Review Heavy Engineering Division For the year under consideration, the Sales of the Heavy Engineering Division decreased as compared to the brvious year. The profitability in the manufacturing sector is encouraging and is expected to continue but the profit margins on the project business remains to be tight and extremely competitive. However your company has done better as compared with brvious year due to higher contribution on account of better sales mix, reduction in the material costs and better value addition. Foundry Division Because of heavy competition from smaller players & lower productivity Foundry division has made losses in current year. However company is taking conscious efforts to make the foundry profitable in current year. Precision Instrument Division Sales of division have grown however the profitability margin have gone down in current year. However the company is taking efforts and initiatives to improve the productivity to effectively use the available infrastructure and capital and in house design & engineering effort to improve the margins. Risk Management Your Company follows a conservative Risk Management policy. Whilst the broad framework of the Risk remains more or less same, the priorities do change in line with the changing business profile, economic scenario etc. The business profile of your company is evolving in line with the current market trends and conditions wherein going ahead there would be a fine balance between project execution in the EPC domain as well as niche manufacturing. Established brsence in the Sugar & Co-Generation business, Cement Equipment manufacturing as well as supply of critical manufactured components for Aerospace, Defence and Nuclear sectors enables us to understand the dynamics and cyclicality of such businesses and largely mitigate all associated risks. With a function dedicated to Contract Performance and a constituted body in the form of a Risk Management Committee, your company assures all its shareholders of a conservative and prudent Risk Mitigation framework. Project Management and Contract Performance Execution excellence is the key to profitable growth and your Company's management clearly realizes this golden rule. Your Company has made the necessary changes in its organization structure so as to ensure faster and more decisive project execution. One of the key steps taken in this direction is to de-centralize its procurement function and give more autonomy to each individual division. Upgradation of skills through specialized project management training programs, creation of a second line of young project managers as well as a systematic review mechanism are some initiatives which we feel would bring about far reaching improvement in Project Management and execution. Exposure to Retention Monies and Guarantees is an inherent part of the business of your Company which is especially pronounced in the case of long gestation projects. In order to systematically protect your Company's interests and ensure sustainability, the following processes have been adequately strengthened: • Estimation Process - This has been made more robust with a combination of technical and commercial assessment. • Effective Project and Contract Management - Exhaustive monitoring of customers and vendors contractual obligations vis-a-vis our respective contracts with them concomitant to project progress. Liquidity & Financial Prudence Management of liquidity assumes even more importance when the size of the projects being handled goes up. This is to ensure adequate supply of funds for execution of the projects and entails the complete management of net working capital. Your Company is giving significant emphasis on this aspect with specific efforts to track receivables, inventories and payment to supply base. Further, your Company firmly believes that financial prudence is the key to survival in difficult times as well as sustained growth. Foreign Exchange Risk Management Your Company's fundamental policy on the exchange risk management still continues to be conservative where the Company does not enter into any exotic, leveraged or embedded, long term structures of hedging. The only instrument, if used for hedging, is a Forward contract strictly against the underlying asset or liability. Further, your Company has created significant natural hedge between the exports outstanding and import and loan liability in foreign exchange terms. Technology Upgradation The key to sustained competitiveness is the availability of contemporary technologies. Your Company, over the years, has entered into collaboration arrangements with some of the world's renowned technology providers in its core field of activities. In domains like Co-generation, Cement Equipment Manufacturing and Gear Design, your company has benefitted from such technical collaborations. Increased thrust on strategic sectors like Defence would definitely increase the need to have the right technology collaborations and references. In its quest to grow in this domain, your company would ensure the necessary technology Upgradation at appropriate stages. Demand Cyclicality Demand cyclicality is a generic risk applicable almost across the market spectrum especially in the capital Goods Industry. In case of your Company, this risk assumes significance since most of the end users of your Company follow an economic cycle of their own. This results in variation in the revenue drawn from different end user segments from year to year. Your Company's approach to mitigate this risk continues to be: • Technology up-gradation and moving up the value chain. • Diverse yet synergistic revenue model - fine balance between EPC and Manufacturing. • Focus on core & less cyclical industries such as Missiles and Aerospace. • More focus on product business like Gears and Centrifugal Machines. • More focus going ahead on Spares, Refurbishment & Repairs and O&M activities. • Growing focus on overseas business in order to hedge against domestic cyclicality. Internal Control & Audit The internal audit function of the Company can be broadly divided into the following: • Risk Based Internal Audit (RBIA) wherein the focus is given on End to End processes and control points from the point of view of Systems, Processes and awareness of people. • Transaction audit covering all individual transactions on a granular basis to check the accuracy, accounting, propriety and controls. • Audit of various sub processes in SAP. This entails identification of process gaps in SAP and correcting them from time to time. • The findings of the audit are discussed in each audit committee meeting as well as in the internal meetings at a regular interval. Outlook & Conclusion Revenue While the revenues of the company declined by 11.76 % in the year 2013-14 over the brvious year, the Company looks to be poised for profitable growth in the next year because of the following: • Balanced order book as on September 30, 2014, which stands at Rs. 1376 Crores. • Strong business outlook in strategic sectors like Defence & Aerospace. • Marked improvement in the progress of long gestation EPC projects. • Presence in overseas markets and further capitalizing upcoming opportunities. • Likely favourable impact of exchange rate vis-a-vis Exports. • Likely positive impact of general macro-economic conditions in the domestic economy and government's thrust on "Make in India". Further, your Company has strong fundamentals for a sustainable growth: • Well diversified yet synergistic business model. • Strong manufacturing capability. • In house design engineering capability. • Project management capability. • Technology tie-ups in critical areas. This would augur well for your Company's long term sustainable growth. Long term competitiveness Your Company believes that it has taken steps to attain long term growth and competitiveness and has significant resilience to sustain through the periods of economic cyclicality and adversities. The key to this lies in the conservative, synergistic and technology focussed strategies adopted by your Company. Cautionary Statement This management discussion and analysis may contain Forward looking statements within the meaning of the applicable laws, rules and judicial pronouncements, relating to the business strategies, prospects, financial performance etc. The actual results may vary significantly or materially than those contemplated / implied in the analysis for various reasons including but not limited to the Government policy, macro economic situation, Business cycles, Financial & liquidity situation, demand slowdown, performance risk, material costs, interest costs, exchange rates etc. The Company does not undertake to make any declarations / pronouncements of any such eventuality. |
