MANAGEMENT DISCUSSION AND ANALYSIS The global recovery was mostly muted due to subdued recovery in some major developed economies of the world and China. The economic slowdown experienced in India since Fiscal 2011 seems to be requiring more time to improve than anticipated. The new government's efforts to usher in policy momentum conducive for revival of economic and industrial growth have improved business confidence and sentiments. However, as a result of guarded optimism which seems to be guiding over all business and industrial activity, there has been no visible momentum reflecting revival of demand, growth or investment cycle in the economy in Fiscal 2015. The demand for capital goods was subdued, if not nonexistent, in Fiscal 2015, driven by a wait and watch strategy in investment by business and industry faced as they were with falling capacity utilization and market growth. The positive business confidence and optimism failed to translate into significant capex allocations which could revive the capital goods sector. The devaluation of the Japanese yen and the Euro also affected realizations for Indian manufacturers. In order to drive maximum capacity and operational efficiencies, power intensive industries such as steel, aluminum, copper, cement, engineering, sugar, chemicals depend on Captive Power Plants (CPP) in which the Company has a significant market brsence. However, many CPP operated at suboptimal level in Fiscal 2015 due to fuel linkage issues and infrastructure bottlenecks thus seriously affecting growth or expansion. As in the last two to three years the domestic market for generators continued to be stagnant in Fiscal 2015. Consistent debrssion in demand over the last three years have led to intense competition and consequently unrelenting pricing brssures. We are one of the leading manufacturers of AC Generators for a diverse range of prime movers with output capacities ranging from 1 MW to 200 MW for steam and gas and up to 35 MW for hydro and up to 20 MW diesel and gas engines and customized rating for wind turbines, catering to both conventional and renewable fuel based power plants. In the backdrop of the challenging conditions as described above, the Company's performance has been encouraging. The manufacturing order booking grew by 18% in Fiscal 2015 to Rs. 4,318.79 lakhs from Rs. 3,664.30 lakhs as compared to Fiscal 2014 of which, the order booking from domestic sector was Rs. 1,792.73 lakhs (42%) as compared to exports (including deemed exports) at Rs. 2,526.06 lakhs being (58%). While the order booking in the first two quarters of Fiscal 2015 was healthy at Rs. 2,641.53 lakhs, the third and fourth quarter order booking was Rs. 1,677.26 lakhs. Steam and Hydro contributed to 44.44% and 25.71% respectively of order book for Fiscal 2015 while gas contributed to 9.36% and a beginning has been made in Traction generators. As of March 31, 2015 (Fiscal 2015) 2,671 generators with an aggregate output capacity of over 20,558 MW and have been supplied to 73 countries. During Fiscal 2015 we have added 5 new customers OEM's in steam and wind segments. We have entered the traction generators market in which initial orders as qualification orders and once such orders are successfully completed, a significant potential is awaiting the Company in this segment with substantial orders on a long-term basis. It is hoped that some portion of the serial production orders will be received in Fiscal 2016. On standalone basis, the Net sales from our manufacturing business increased by Rs. 4,773.06 Lakhs or 15.48%, to Rs. 35,609.12 Lakhs in Fiscal 2015 from Rs.30,836.06 Lakhs in Fiscal 2014. The generator business contributed to 84.39% of Fiscal 2015 revenues of the Company. Reflecting the debrssed demand in the domestic markets, domestic sales has been sliding over the last 3 years contributing 33.47% of sales in fiscal 2015 as compared to 51.43% in Fiscal 2014 (& 62% in Fiscal 2013), while exports and deemed exports contributed to 66.53% of sales for Fiscal 2015 as compared to 49% in Fiscal 2014 (& 38% in Fiscal 2013). Growing supplies to reputed original equipment manufacturers (OEM's) who are global leaders in power equipments has strengthened our overseas markets and will continue to drive our exports both in the medium and long-term. While we have initiated required steps to strengthen our brsence in the USA and Japan, steps are being taken to establish brsence in other key markets to grow overseas markets. Steam and Hydro contributed to 49% and 28.70% respectively of the revenue for Fiscal 2015 while gas contributed to 10.60%. The contribution of Gas generators has increased from 7.1% in Fiscal 2014 (& 2.5% in Fiscal 2013) to 10.60% in Fiscal 2015. Sale of Diesel and Gas engine generators increased by about 36.5% respectively in Fiscal 2015 while the sale of Hydro generators was lower by 10% in Fiscal 2015. Consistent growth in sales of gas, diesel, wind and other application generators contributed to about 22% revenue in Fiscal 2015 while steam and hydro generators contributed 78%, i.e. lower by 5% than in Fiscal 2014, reflecting reducing dependence on steam (though this segment has grown by 5% in Fiscal 2015) and hydro generators. A large part of generator sales take place through OEM's, with top 10 customers contributing to 70.34% of FY 2015 revenues. Our association with a leading hydro power equipment manufacturer is progressing well reflecting a good potential in this segment as and when the Hydro market grows. We also undertake overseas Turbine Generator island (TG Island) projects for steam turbine power plants with output capacity up to 55 MW using a Japanese turbine combined with our generator through our Japan branch. Net sales from our Project Business (TG island (up to 52MW) increased by Rs. 284.55 Lakhs or 6.21% to Rs. 4,867.40 Lakhs in Fiscal 2015 from Rs. 4,582.85 Lakhs in Fiscal 2014. The apbrciation of the Japanese yen as well as dismal economic and investment climate in India and worldwide resulted in low order intake adversely impacting this business in Fiscal 2015. As of March 31, 2015, the pending order for Manufacturing was Rs. 33,937.50 Lakhs and for projects business in India and Japan was Rs. 6713.66 Lakhs. Our Subsidiary, DF Power Systems Private Limited, is in the business of EPC / Boiler-Turbine Generator island projects (BTG) and the balance of plant portion for steam turbine power plants with output capacity up to 150 MW. Net Sales from EPC Business increased by Rs. 3,583.63 Lakhs or 29.42% to Rs. 15,765.64 Lakhs in Fiscal 2015 from Rs. 12,182.01 Lakhs in Fiscal 2014. The order book as of close of Fiscal 2014 was Rs. 14,370 Lakhs, made up of two orders - from a cement plant in Karnataka and a waste heat recovery plant in Raipur. Both these orders on hand are scheduled for completion in the ongoing year. Fiscal 2015 witnessed serious weakness in order inflow - both BTG / EPC projects and no orders were received during the year. The orders for Thermal Power Market 15MW-150MW, the Company's mainstay was dismal in the year. Though there seemed some market traction starting in Small Power Plants (< 10MW), pricing was an issue and certain large players accepted orders merely in the hope of an improved market in future. The Cement waste Heat recovery based Power Plants, which was seen as an innovative option failed to take off due to softening of oil prices and longer payback periods. The above factors prompted the company to stay away from active bidding for projects and adopt a wait and watch policy. The performance of the two overseas subsidiaries is as stated in the Director's Report. On a consolidated basis, the Net sales increased by Rs. 11,721.21 Lakhs or 24.41% to Rs. 59,744.19 Lakhs in Fiscal 2015 from Rs. 48,022.98 Lakhs in Fiscal 2014. Our profit after tax decreased by Rs. 2,353.65 Lakhs or 103.65% resulting in loss of Rs. 82.84 Lakhs in Fiscal 2015 from a profit of Rs. 2,270.81 Lakhs in Fiscal 2014. Outlook The investment cycle is not showing signs of revival while demand continues to be tepid. It is reported that corporate profits as a percentage of GDP are at a historic low thus lending support to a view that entities with large cash flow abilities are holding back investments if not refusing to invest. The demand supply shortfall, quality and price of power continue to be bottlenecks for industrial growth and if investment by industry is to be fruitful, it is imperative for them to have dependable and cost effective power source. In the current Fiscal, the domestic market continues to remain soft till date for the manufacturing business and a revival if at all, in this market would be sustainable from FY 16 again driven by industrial capex recovery. We hope that the domestic market revives and the capex cycle turns around based on the policy changes being driven by the new government, softening interest rates, coal block auctions and the infrastructure investments. Despite the unfavorable market conditions, we continue to have healthy market share in steam generators (up to 55MW), in diesel generators and hydro generators and are well placed to capitalize on any upswing in domestic as well as overseas demand. Hydro orders from Indian OEM's are expected for projects in South East Asia even though no new projects are likely in India. However, price competitiveness is a challenge in the hydro market with aggressive pricing from European manufacturers and the weakening of the rupee could be a major concern. Projects requiring large generator are in the pipeline but decisions are on hold. The Company is exploring component business from the large generator segment and has received a breakthrough order in this segment. While we hope that the domestic market recovers for steam generators, we continue to focus on building our existing portfolio of generators for other applications and expect growth in gas and wind generators in Fiscal 2016. Exports will continue to be our focus area in Fiscal 2016. We have a comfortable order book currently for Fiscal 2016 and are hopeful in increasing the same to support good growth in manufacturing business over Fiscal 2015. The traction generators business promises to be of significant volumes and could be a game changer for the Company both in domestic and export markets. The projects business (TG Island) is being realigned to meet business requirements and during this Fiscal 2016 revenues from this segment will continue to be flat. It is expected that the Company will tide over the difficult market conditions in Fiscal 2016 on the back of a revival in manufacturing business. Any substantial improvements in business in the above segments both in India and overseas will contribute to an improved performance. The Company maintains a healthy cash position and continues to remain debt free. Risk Management and Mitigation The Company's business relates to manufacture and sale of generators falling under capital goods sector and is dependent on country's economic growth, investment climate and business confidence as well as the sectors where in the Company's products are used. The focus on exports and ongoing association with leading global leaders has enabled the Company to reduce dependence on the domestic market and accordingly, percentage exports (including deemed exports) in turnover during the year has gone up from 49% in Fiscal 2014 to 66.53% in Fiscal 2015. Some of the major risks being faced by the Company are described herein below 1. Economic slowdown and market concentration A conducive investment climate and interest rate regime, global economic and market conditions drive growth and performance of the industrial sector which forms the Company's customer base. An economic slowdown directly impacts the demand for capital goods, including the products of the Company. Further, over dependence on any market/s may adversely affect the performance of the Company, if the concerned market gets sluggish due to factors stated above. As stated earlier, in the last 3 years, due to the slow-down in the economic activities, the domestic market has declined/remained stagnant which had considerable effect on the demand of the Company's products. In order to reduce the over dependence on the domestic market, the Company focused on marketing its products in the global market and developed certain strategic partnerships and technology agreements. On the back of such initiatives, the contribution of exports to the total turnover has significantly grown. The Company is directing significant resources for extending its footprints in the global market to lessen the risk of over dependence on certain countries/regions. We have consistently grown our export base,by adding new OEM's within existing verticals, increase market share in existing verticals through better pricing, customization etc and diversifying into/introducing new product verticals. 2. Technology and Product concentration Steam turbine generators continue to be a major contributor of our standalone net sales year on year. Advanced technology relating to steam turbine generators or the development of steam turbine generators that prove superior in quality or effectiveness to our generator could affect our dominant market position in this segment. The diverse product verticals catering to steam turbine generators, horizontal hydro generators, vertical hydro generators, diesel engine generators, wind turbine generators, gas engine generators, gas turbine generators, high voltage motors and generators for Geo Thermal and Solar thermal applications enables market brsence across the spectrum of generator market in India and overseas and has reduced dependence on any particular industry or market segment. Even though Steam generators accounted for a significant portion of the revenues, the contribution of hydro, gas and other applications are consistently growing de risking the products mix. 3. Technology Risk Response to and adoption of advanced technology and emerging power generation industry standards and practices on a cost-effective and timely basis is critical to sustaining and growing market reach of the Company. The Company operates in the engineered-to-order capital goods industry where product efficiency, critical product features and overall life cycle costs play an important role. The Company analyses customer brferences and accordingly develops design. The Company's team is engaged continuously in design and development of generators meeting customer requirements from time to time. Projects to develop generators for Special application and for design modification and enhancement are ongoing. Technology absorption continues and orders are being received for large generators. As a part of the technology agreements, the Company receives updation of technology and processed continuously from licensors. 4. Competition Risk Many large corporations in Europe, America and in South East are competitors to the Company. These large corporations have access to advanced technologies, greater global reach, larger financial resources and may benefit from greater economies of scale and operating efficiencies. Competitors may be able to sell their products at prices lower than the Company's, which may have an adverse effect on the Company's market share and results of operations. This may compel the Company to quote aggressively and impact its margins. With a view to mitigate this risk, the Company provides value proposition to customer with products which meet the benchmark efficiencies at a competitive price and shorter delivery time, without compromising on margins. The Company continues to upgrade it's engineered to order platform and design capabilities by incorporating latest technologies in its products and improvements in the design of generators enabling it to offer more efficient machines. Reduction in production, distribution costs and improvement in operating efficiencies are continuously pursued enabling it to offer competitive prices. The Company prioritizes its supply chain in sourcing good quality raw materials and other inputs at competitive prices with high reliability in meeting delivery timelines. 5. Risk arising from transnational sale of products In view of export of product to several countries in various continents, there is a risk of various types of claims from customers towards under performance of product and third party claims if the laws of that country are not fully conformed to. The Company has strict quality control procedures which ensure that all the products supplied to the customers must meet the contractual parameters. It is ensured that the contracts with customers clearly specify the obligations of the Company. In addition, the Company takes appropriate contractually insurance policies to cover all such risks. Manufacturing facilities, Design & Development We have 3 manufacturing units, all located at Bangalore equipped with advanced automation/machines which help in delivering quality products at competitive prices. One of the facilities is a dedicated large generator manufacturing unit with state of the art machines and equipment. All the manufacturing units are ISO 9001:2008 compliant. The Company's R&D facility which is approved by the Department of Scientific Industrial Research, GOI focuses on adoption of new technology and development of superior designs enhancing performance, quality and reducing costs. The Company's team is engaged continuously in design and development of generators meeting customer requirements from time to time. Projects to develop generators for Special application and for design modification and enhancement are ongoing. Our generators are approved by reputed and leading engineering consultants. Internal Control Systems and their adequacy The Company has established adequate internal control system, commensurate with the nature of its business and size of its operations in order to ensure quality and reliability of underlying processes focused towards achieving operational efficiency, reliability of financial data and safeguarding of assets. Internal controls are evaluated by the external Internal Auditors and supported by Management reviews. All audit observations and follow up actions thereon are initiated for resolution by the finance function and reported to the Audit Committee. Environment, Health and Safety As a leading Generator Manufacturer the Company conducts all its operations in a manner that is protective of the environment, health and safety of employees, customers, suppliers and the community in large and is a zero discharge facility. In fulfilling this commitment, we maintain and continually improve all our process and complying with legal and other requirements, in order to • Ensure safety and Health of our employees, associated stakeholders and focus on how to make the world a better place to live. • Comply with all applicable legal Safety and Health performance of individuals at different levels while considering their career advancement in the organization. • Enhance Safety, Health & Environment (SHE) awareness amongst employees and associated stakeholders through effective communication and training. • Ensure SHE responsibility amongst all the employees in their practices, promote and value their involvement in achieving the goals of this policy. • Fix responsibility of SHE policy and procedures on the contractors, Sub-Contractors, Transporters and all other agencies operating with the Company. • Integrate Health & Safety in all decision-making processes of the company including those dealings with purchase of plant equipment, machinery & materials as well as selection and placement of personnel. • Adopt all the relevant techniques & methods such as risk assessment and safety audits at appropriate intervals of time to assess the status on Quality, Environment and Health & Safety and take relevant remedial measures to overcome problems encountered. The Company's environmental, occupational health and safety management systems fulfill ISO 14001-2204 and OSHAS 180012007 requirements. Human Resources Continuous skill development and enhancement is important for the Company with its focus on export markets. The Company recognizes that its workforce is critical to the Company's success and therefore, is committed to training, skilling and up skilling it/s work force on an ongoing basis which ensures that its work force is able to adopt evolving technologies, processes and techniques. The Company's leadership engages affirmatively in employee development and engagement activities such as involvement in the 'Corporate Responsibility' initiatives, active participation of work force in safety initiatives, quality improvement programs, language skills, leadership development programs, training programs and training under license agreements, on an ongoing basis. During the year, about 47 man days per employee was dedicated for training. Employee relations continue to remain peaceful and cordial. The Company believes in equal opportunity in recruitment and in the course of the employment among employees regardless of color, race, gender, social origin, caste or religion. Efforts are continuously made to create an inclusive working environment for women and to integrate them in organizational functions. The Company firmly believes that every woman employee of the Company has a right to work in an environment free from sexual harassment, intimidation or offensive behaviour and in which issues of harassment will be resolved without fear of reprisal. In this direction a Policy on brvention/prohibition of sexual harassment of woman at Company's workplace ("Policy") is in place to take effective measures to avoid and to eliminate and if necessary to impose punishment for any sexual harassment in the Company's work place integrated with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. The Company continues to reinforce the Code of Business Conduct across functions/workforce. In order to enhance communications and to create a congenial environment, the organizational leadership and the shop-floor employees of the company have invested significant amount of time and effort. The Company's performance in Fiscal 2015 (vis-a-vis Fiscal 2014) on a consolidated basis is summarized as follows • Total income at Rs. 62,194.34 Lakhs was higher by 20.92 % due to increase in sales volume of manufacturing business and Project Business. • Net sales from manufacturing business at Rs. 34, 070.60 Lakhs an increase of 14.69% contributing 54.78% of Total Income. • Net sales from our Project Business including Japan Subsidiary at Rs. 9,907.95 Lakhs increased 61.52% contributing 15.93% of Total Income. • Net Sales from EPC Business at Rs. 15,765.64 Lakhs increased by 29.42% contributing 25.35% of Total Income. • Other Income decreased by Rs. 959.65 Lakhs or 28.14%, primarily due to decrease in foreign exchange gain on account of Euro & JPY devaluation. • Total Expenditure at Rs. 61,598.61 Lakhs increased by 28.61%, due to increased business volumes and providing for bad & doubtful debts. • Consumption of raw material, stores, spare parts and components expenses at Rs. 25,307.73 Lakhs increased by 15.02%, primarily due to increase in sales of manufactured goods. • Purchases for Project Business including Japan Subsidiary at Rs. 4,860.66 Lakhs increased by 172.63%, due to increased business volume. • Purchases for EPC at Rs. 15,157.78 Lakhs increased by 33.21%. • Operating and Other Expenses Rs. 13,004.67 Lakhs increased by 19.78%. • Personnel expenses through salaries, wages and bonuses at Rs. 4,693.72 Lakhs increased by 6.88%, due to increase in salaries of employees and wage settlement with workmen. • Profit before tax and extraordinary items at Rs. 595.74 Lakhs decreased by Rs. 2,939.63 Lakhs or 83.15%. • Profit after tax decreased by Rs. 2,353.65 Lakhs or 103.65% resulting in Loss of Rs. 82.84 Lakhs. • The consolidated net worth stands at Rs. 49,403.98 Lakhs a decrease of Rs. 1351.17 Lakhs over Fiscal 2014. • Total income increased by Rs. 3756.17 Lakhs or 9.77 % to Rs. 42,195.06 Lakhs. - Net sales from manufacturing business at Rs. 35,609.12 Lakhs increased by 15.48% contributing 84.39% of Total Income. - Net sales from Project Business at Rs. 4,867.40 Lakhs increased by 6.21% contributing 11.54% of Total Income. • Other Income contributed 4.07% of total income and decreased by 43.09% to Rs. 1,718.54 Lakhs primarily due to decrease in foreign exchange gains. Interest from banks on deposits Rs. 1,237.59 Lakhs decreased by 5.49%, due to utilization of funds for capital expenditure. • Total expenditure at Rs. 39,894.70 Lakhs increased by 17.72%, due to increased volumes. - Consumption of raw material, stores, spare parts and components expenses at Rs. 24,689.12 Lakhs increased by 12.21%, due to increase in sales of manufactured goods. Exbrssed as a percentage of total income, raw material consumption increased to 58.51% due to increased volumes and product mix. - Purchases for Project Business at Rs. 3,083.60 Lakhs increased by 65.11% due to increased volume. Exbrssed as a percentage of total income, purchases for Project Business increased to 7.31%. - Operating and other expenses at Rs. 8,949.38 Lakhs increased by 9.42%. Exbrssed as a percentage of total income, operating and other expenses remained flat at 21.21% - Power and fuel expenses at Rs. 607.35 Lakhs decreased by 7.96%, to Rs. 607.35 Lakhs on account transition to Grid Power from Diesel generator. - Personnel expenses on account of salaries, wages and bonus at Rs. 3,365.94 Lakhs increased by 6.99%, basically due to increase in salaries of employees and wage settlement with workmen. - Welfare expenses at Rs. 1,332.22 Lakhs increased by 32.96%, due to actuarial valuation of accrued leave. - Repair expenses at Rs. 445.72 Lakhs increased by 63.19%, due to repair and maintenance of machines and other office equipment accounting. - Selling Expenses at Rs. 603.19 Lakhs increased by 30.81%, on account of increased business volumes. - Insurance expenses at Rs. 121.37 Lakhs increased by 14.06%, on account of increased business volumes, increase in fixed assets and product liability policies for export order. - Consultancy & Professional charges at Rs. 413.36 Lakhs increased by 24.26% due to increased consultancy and professional services increased compliance requirements and accreditation charges. - Royalty charges at Rs. 64.22 Lakhs increased by 305.69%, primarily due to sale of product under licensed agreement. - Direction charges including other expenses at Rs. 289.29 Lakhs decreased by 30.76% due to retirement of whole-time directors. - Manufacturing expenses at Rs. 144.25 Lakhs increased by 30.36%. - Interest and finance charges at Rs. 372.00 Lakhs increased by 3.20% due to increase in the working capital utilization. - Debrciation and amortization of technical know-how expense at Rs. 2,800.60 Lakhs increased by 91.83%, due to increased capitalization of fixed assets, additional debrciation charge due to change in the useful life of the asset in terms of the Companies Act, 2013 and amortization of technical know-how as per accounting policy of the Company. • Earnings Before interest, tax, debrciation & amortization (EBITDA) lower by 14.10% at Rs. 5,472.94 Lakhs as compared to Rs. 6,370.93 Lakhs in the brvious year due to lower realizations and increased costs. • Profit after tax at Rs. 1,696.29 Lakhs decreased by Rs. 1,702.57 Lakhs or 50.09%. • Capital expenditure including technology transfer Rs. 8,272,75 incurred primarily towards expanding our manufacturing facility for enhanced product range. • Net working capital was comfortable at Rs. 18107.58 lakhs. • Dividend declared was higher by 15% at Rs. 2.645 per share and the Dividend payout is 62.44% including dividend distribution tax. Forward-Looking Statement Statements in the Management Discussion and Analysis describing the Company's plans, estimates and projections may be 'forward looking statements' within the meaning of applicable securities laws and regulations. Actual results may materially differ from those exbrssed or implied in the report. The Company assumes no responsibility to publicly amend, modify or revise any such statements on the basis of subsequent developments, information or events. |
