MANAGEMENT DISCUSSION AND ANALYSIS REPORT A. INDUSTRY STRUCTURE AND DEVELOPMENT Overview The Company is engaged in the business of manufacturing Ductile Iron (DI) Pipes, Ductile Iron Fittings (DIF) and Cast Iron (CI) Pipes. The Company is the first to set up a Ductile Iron Pipe Plant in India. Today it is India's leading pipeline solution provider. It has a strong brand brsence around the Globe. Since 1994, the Company has maintained its edge over its competitors. Industry Outlook India has become the second largest urban system in the world. Nearly thirty percent of the total Indian population, now lives in urban areas and by 2030, an estimated 40 percent of Indians will live in cities. India has intermittent drinking water supplies and poor transmission and distribution networks for water. Now there is new emphasis on pipes in rural water supply as well. Industry sources estimate that the Indian water supply and distribution market is worth approximately $330 million. According to a recent government assessment, the water requirement for domestic and industrial use will increase from the current 80 billion cubic meters (bcm) to 120 bcm by 2025. The overall water market is growing at 15-20 percent annually, with the industrial and drinking water segments demonstrating even higher growth rates. Nationwide infrastructural and real estate development, urbanisation, irrigation to drive agricultural growth have been identified as major factors facilitating the growth of the Pipe Industry in the country over the past few years. Further Government of India is coming up with new projects and investments in the irrigation and real estate sectors. The focus of the Government is on rural water management, which will be fulfilled only when there will be proper transportation of water to the end users. This is one of the major demand drivers in the pipe industry along with expansion of housing sector. Indian Pipe Industry has the brsence of all types of pipes, among which DI Pipe is considered a dominant pipe material mainly due to much high structural strength, mechanical and hydraulic advantages in addition higher durability. Seeing the growing demand and upward trend in the funding of water supply/sanitation projects and a new proactive Government at the helm, the future of the Industry appears to be bright. Demand drivers for DI Pipes The following factors would drive the demand for DI Pipes: 1. Thrust of the Government to provide drinking water and sanitation to 100% of the population and make funds available to achieve it. 2. The 100 smart city project launched by the Government will result in a surge in demand for the products. 3. The need to conserve water and reduce leakage. The need to focus on life cycle cost rather than initial cost; and to consider inconvenience to public in replacement of pipes. 4. The over reliance on ground water for rural water supply has resulted in twin problem of sustainability and water quality and hence there is suggested shift to surface water source for tackling this issue. This will result in substantial increase in requirement of pipes. 5. Expectations and assertions from people all over for a strong water supply and good drainage system. FY 2014-15 vs. FY 2013-14 The Company's Revenue from Operations was reported marginally lower at Rs.2,153.78 Crores during the year under review as compared to Rs.2,186.88 Crores reported in the brvious year. Export sales also decreased by around 23.83% from Rs.989.21 Crores in 2013-14 to Rs.753.46 Crores in 2014-15, due to stiff competition faced by the products of the Company in the overseas markets. The Company's profit after tax (PAT) for the FY 2014-15 was reported at Rs.72.67 Crores as against Rs.100.56 Crores for FY 201314, due to additional Coal levy of Rs.13 Crores being charged to the Profit and higher debrciation of Rs.16 Crores due to change in rates under Schedule II of the Companies Act, 2013. An additional levy at the rate of Rs.295 per ton of Coal extracted has been paid as per the terms of the Ordinance promulgated by Government of India, Ministry of Law & Justice dated 21 October 2014 in pursuance of the Order dated 24 September 2014 issued by Hon'ble Subrme Court of India cancelling the allocation of Parbatpur Coal Block to the Company with effect from 31 March 2015. B. PRODUCT WISE PERFORMANCE Ductile Iron (DI) Pipes The Ductile Iron Pipes Plant, with a total capacity of 2,80,000 TPA produced 2,77,317 MT of DI Pipes during the year 2014-15 compared to 2,81,239 MT in 2013-14. Marginal decrease in production was due to production of more smaller dia pipes and value added products during the year to meet newer requirement of both international and domestic customers. The Company has taken all initiatives for improving productivity further. The main raw materials are Iron Ore and Coke. Iron Ore is mainly procured from Odisha and Coke is captively produced at Haldia. The DI Pipes produced by the Company is sold in India and globally. The sale of DI Pipes contributed to 68% of the total revenues of the Company during the year amounting to Rs.1,422.81 Crores. Cast Iron (CI) Pipes The Cast Iron Pipes Plant, with a total capacity of 1,08,000 TPA produced 32,041 MT of CI Pipes in 2014-15 compared to 25,848 MT in 2013-14. The production was marginally higher. The demand for Cast Iron Pipes remains low. The main raw material is Pig Iron, which is sourced from domestic sources. The CI Pipes produced by the Company is sold mainly to the states in Southern India. The sale of CI Pipes contributed Rs.136.75 Crores to the total revenues of the Company during the year. DI Fittings & Accessories DI Fittings & Accessories produced 6,027 MT of DI Fittings in 2014-15 as against 5,992 MT in 2013-14. The Company has enhanced capacity through installation of new facility at Haldia works for improving the performance of the division. It is targeting more value added products and higher exports to niche markets. The sale of DI Fittings and Accessories contributed to Rs.89.66 Crores in the total revenues of the Company during the year. Power Plant 12 MW Power Plant at Haldia has contributed 55.22 million units in FY 2014-15 to SEB grid in place of 35.85 million units in the FY 201314. Generation increased due to higher availability of steam from Coke Oven and Sponge Iron Boilers for higher running days. Captive Coke Oven Plant The Coke Oven Plant, with a total capacity of 2,25,000 TPA at Haldia, produced 1,97,884 MT of Metallurgical Coke in FY 2014-15 against 1,63,203 MT in FY 2013-14, mainly for captive consumption in Blast Furnace at Khardah Works. The primary raw material for producing Coke that is Coking Coal was imported from Australia. Raw Materials Management The Company's manufacturing facilities are sbrad across four locations in India. Presently, the business model consists of fully integrated production facilities which include Sinter Plant, Coke Oven Plant, Blast Furnace, Pig Iron Plant, Sponge Iron Plant and Captive Power Plant. The integrated manufacturing facility model helps the Company to minimise the production cost as the Company strongly believes that cost competitiveness is a key component of success. The Company continuously endeavors to improve the cost competitiveness by adopting various innovative, cost saving measures in the operations. The Company has also been allocated an Iron Ore Mine at Kodolibad in the State of Jharkhand. The Company has already received 1st stage forest clearance and 2nd stage forest clearance is under process and is expected shortly. On receipt of these clearances the mining lease will be executed by Jharkhand Government and mining operation will start thereafter. Once mining operation commences, the basic raw material cost of iron ore being incurred by the Company would reduce substantially. In addition, the Company has also put other projects in the pipeline such as Iron Ore Beneficiation & Pellet Plants for availing further cost benefit. The Company has also acquired a Dolomite mine in District Chandrapura, Maharashtra to ensure the consistent supply of low silica high grade Dolomite for operation of its Plants. To ensure the timely & uninterrupted movement of raw materials, the Company has taken following steps : 1. To mobilise movement of iron ore rakes, the Company has constructed a private railway siding at Barajamda in Chakradharpur division of South-Eastern Railway. The siding has already been commissioned and is operative. 2. A private siding has also been constructed at Durga-Chalk, Haldia for inward & outward movement of raw materials & finished products. Exports The Company has maintained its thrust on exports by entering new markets in Africa, especially North and West Africa. There is strong competition from new players and crisis in the European markets is making things difficult. However, the Company is making all endeavour to maintain its position in the export market. New joints/lining and coatings are being developed and approvals are being obtained for new export markets. A new fittings foundry in Haldia will make the Company strategically better in offering a complete range of products. Engineering Export Promotion Council (EEPC) India, Eastern Region, has given "AWARD FOR EXPORT EXCELLENCE" as recognition for being Star Exporter in the category "Sanitary and Industrial Castings" for the year 2012-13. Quality and Approvals With the continual improvement of Quality, the Company is continuously expanding its business. In last financial year, the Company has started business in many new European Union (EU) countries like Poland, Romania, Hungary etc. The Company is putting up a new stockyard in Bahrain to improve the quality and delivery to the countries of Middle East. The Company continues to be approved by DVGW of Germany, OVGW ofAustria, BSI (UK), IGH (Croatia), UL (USA), FM (USA) etc. The internal epoxy coating of the products of the Company for sewerage is approved by NF of France and successfully marketed in Europe. This has created a lot of excitement in European market as the performance of this coating is superior than those existing in the market. The paints manufactured by the Company's plant are approved by WRAS (UK), ACS (France) and DVGW (Germany) for drinking water application. This is a distinct achievement as very few paints all over the world have such accreditation. C OPPORTUNITIES AND THREATS Opportunities The Indian Pipe Industry has experienced rapid growth in the last several years. The major reasons for the growth of this Industry is increasing demand for pipes in the irrigation sector, oil and gas sector and also the real estate industry. Infrastructure development, urbanization and the subsequent development of residential and industrial construction are facilitating the growth of the Pipe Industry in India. The Government of India is coming up with new projects and investments in the irrigation sector. The focus of the Government on rural water management will be fulfilled only when there will be proper transportation of water to the end-user. Electrosteel Castings, a pioneer in introducing Ductile Iron Pipes in India, with state of the art manufacturing facilities, is well placed to provide pipeline solutions to the nation particularly in field of transportation of water. Threats Increased cost of raw materials, shipping, logistics and the bottlenecks in the logistics, coupled with competitive market, have created brssure on margins. However, with measures towards backward integration, cost reduction and hedging of commodity prices etc., de-bottlenecking of logistic constraints and long term planning for raw material availability, the Company is confident of achieving sustained growth both in turnover and profits. The European Commission has started Anti-Dumping and Anti Subsidy investigation on import of Ductile Iron Pipes manufactured in India, which the Company is stoutly defending. D. RISKSANDCONCERNS This has been dealt with separately in the section on "Risk Management". E. FINANCIAL PERFORMANCE The highlight of the operations for the year ended 31 March 2015 and 31 March 2014 are as under: Other Financial Matters During the year : 1. Net Worth of the Company increased to Rs.1,964.01 Crores as at 31 March 2015 as against Rs.1,879.18 Crores as at 31 March 2014. 2. Gross Fixed Assets including Work in Progress & Capital Advances as at 31 March 2015 increased to Rs.3,028.24 Crores as against Rs. 2,868.74 Crores as at 31 March 2014. F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY The Company's internal control systems are commensurate with the nature of its business and the size and complexity of operations. The Company has adequate internal control systems in all the areas. It ensures the efficiency of the operations, financial reporting and statutory compliances. These systems are routinely reviewed and updated wherever considered necessary. Apart from the internal control system, an Independent Internal Auditor also reviews all activities in a systematic and structured manner. The Audit Committee regularly reviews the observations and suggestions of the Internal Auditors and takes the necessary corrective actions. G. HUMAN RESOURCES AND INDUSTRIAL RELATIONS The Company recognises that its employees are its biggest source of strength and that highly engaged workforce delivers high performance and improved productivity. This has been continuously supported by the evolving human resource management systems and processes of the Company. The Company is providing an impetus for enhancing the capabilities of employees at all level. In addition, the Company is strongly focused towards manpower optimisation. The constructive and cordial relationship between the Management and Unions has resulted in smooth Industrial Relations during the year under review. The Company has been accredited with Social Accountability 8000 certification from BSI. We are sustaining our improvement as well as continuing additional improvement initiatives to maintain TPM excellence. This year "TPM implementation" at the Haldia and Bansberia Works are continued, which we had started in the brvious year. Safety & Health The Company strives for health, safety & environmental sustainability. It is committed to provide a safe, healthy, clean & ergonomic working environment in all spheres of its activities. The Company is maintaining strict adherence in respect of monitoring and review compliance of various laws applicable for health & safety at all work places and project works of the Company. > Providing focus on General Safety, Process Safety and Behavioral Safety through various campaigns & training. > Effectively maintaining established Safety & Health Policy of the Company. > Efficiently conducting various competitions amongst all employees during celebration of Safety Week for further enhancement of safety awareness like Quiz Contest, KYT Contest, Safety-Drama Contest etc. > Monitor and review operational performance, anticipate potential issues and provide support in setting direction for improvements. > Providing training to workmen to maintain the workplace a safe zone. > Due weightage is provided for identification of hazards and risk analysis thereof apart from regular plant safety inspection, implementation of safety committee resolutions etc. Environment Environmental sustainability has become an increasingly important item on our Company agenda. Our various operations across all units have undertaken numerous initiatives to realise for more improvement in the areas. O The Company has established and implemented Environmental Management System across the organisation. O Setting up of a department to conduct environmental monitoring & analysis on regular basis. O Installation of ambient air quality monitoring stations all along the periphery of the factory brmises. O Proper maintenance and effective use of all key resources. O Providing training to all employees for awareness on environmental best practices. O The Company is regularly monitoring the environmental parameters to ensure that the same are kept much below the level of standard norms. O Maintaining Centralised Effluent Treatment Plant where effluents are treated and treated water is being recycled inside the Plant to the maximum possible extent. O Use of three 'R' philosophy i.e. Reduce, Reuse & Recycle is being implemented in our Waste Management System. Waste Minimisation ? Segregation of Waste as Bio-degradable & Non Bio-degradable in designated vats at different locations. ? Mechanised handling of Waste. ? Disposal of saleable Waste. ? Non Saleable Bio-degradable Waste being used for land filling. ? Proper management of Bio-Medical Waste. Corporate Social Responsibility (CSR) Electrosteel is alive to its Corporate Social Responsibility and understands the critical role it plays in ensuring the long term sustainability of a resource based company, and accordingly, it has been giving this a high priority. Corporate sustainability has always meant paying special attention on Environment, People and Society. CSR activity of the Company is governed by its core values of quality, trust & reliability and driven by our aspiration for excellence in the overall performance of our business. The Company undertakes numerous activities for development of the neighborhood of all its plants to improve the quality of life of local people by promoting education, healthcare, sports and cultural events amongst local people. Some important initiatives undertaken as a part of CSR activities, during the year are: a) Our charitable medical centres involving local people, continue to provide services to the needy people of the society. b) Promoting national recognised sports through local clubs. c) Promoting education by doing developmental work in schools. d) Local good & bright students are always felicitated and encouraged. Distribution of education kit amongst poor children. e) Setting up of Drinking water Kiosks in the local area. f) Participating in Cultural Fairs, organising Health Camps in collaboration with NGOs and local Clubs. g) Providing assistance to needy and poor people such as distribution of clothes/shawls etc. h) Providing assistance in promoting Local Art & Cultural festivals. i) Arranging blood donation camps for the benefit of armed force veterans and helping local blood banks. j) Helping in the reconstruction of local sports clubs. Information Technology The Company apbrciates value of Information as an essential ingredient to the success of the business and for providing a competitive advantage. • SAP as ERP system has been implemented over many years to handle the various business processes. Periodic upgrades and implementation of newer features of ERPs and other applications is being done regularly to keep the systems current and to meet emerging business requirements. • Business Analytics for MIS and Decision support System. • The Company has implemented vendor portal solution at group level to enhance collaboration with its business partners. • Process improvements have been done for weighbridge automation and integration with other business applications and processes. • As part of improved employee commitment and bonding, employee portal system has been implemented and available to all group employees for better collaboration. • A Wide Area Network connecting more than 20 diverse geographic locations across India including manufacturing plants, Corporate Office and sales offices. • The Company has implemented email and communication system adopting the principles and technologies of cloud computing. •Redundancy and load sharing has been implemented for critical communication devices to maintain the business continuity. The Company is alert about the threats and has taken sufficient measures to protect data and to stay away from intrusions and cyber-attacks. Process of continuous audit tests and necessary updations to perimeter security measures have been implemented and sustained. H. OUTLOOK The global economy is still struggling to gain momentum and is expected to remain volatile during 2015. However, the Indian economy being a big beneficiary of decrease in oil and energy prices and is poised to clock around 7.5% growth in the year 2015-16. Being the largest and low cost producer of quality Ductile Pipes in India, coupled with cost control measures, rising demand for Company's products in India and with sharp focus on exports, the outlook of the Company looks bright CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis Report describing the Company's estimates, brdictions, expectations may be "forward-looking" within the meaning of applicable securities laws and regulations. Actual results may differ materially from those exbrssed or implied in the statement. Important factors that could influence the Company's operations include global and domestic demand and supply conditions affecting selling prices of finished goods in which the Company operates, input availability and prices, changes in government regulations, tax laws and other statutes, economic developments within the country and the countries within which the Company conducts business and otherfactors such as litigation and industrial relations. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of subsequent developments, information or events |