MANAGEMENT'S DISCUSSION AND ANALYSIS Economy and market overview A volatile and difficult global environment proved to be benign for India in certain ways. It provided the much required momentum to the key macro indicators of Indian economy in 2015. A decade low slump in oil prices, a major drain on India's import bill, gave the desired boost to the government reserves. Inflation and current account deficit levels were maintained below the guidance targets. Most of the year was spent in the shadow of an impending rate hike by the US Federal Reserve and awaiting the rate cut measures by the Reserve Bank of India. The jerky movements of the Indian Rupee were largely contained in a range bound manner. The Rupee proved to be one of the better performing currencies among emerging markets. However the drag of the global economy significantly impacted worldwide trade as well as Indian exports. The re-evaluation of the Yuan and the uncertainty brvailing in China, a major fulcrum of growth in the world, also added to the gloomy global environment. The overcapacity in certain emerging markets cast a shadow on the Indian process industries. The performance of core industries was also debrssed leading to capacity underutilization. The stressed balance sheets of companies and the accumulation of non-performing assets in banks continued the downslide in the growth of credit to industries. The improvement in macros didn't result in the expected industrial pick-up in the country. Certain key reforms passed by the government pertaining to FDI, disinvestment as well as the coal mining, telecom, exports and the scheme to improve the health of power distribution companies and the infrastructure had some limited positive impact. The outcome of a few key reforms awaiting a passage in the parliament will be the key to sustaining global investor confidence. Certain bright spots in the industrial horizon included some movement in stalled projects, traction in the renewable energy market, make in India policy initiatives, and the investment to revamp and upgrade the railways by the Indian government. The foreign investors demonstrated their confidence in the country as India emerged as one of the key destinations for foreign direct investment. Operational overview In a market where positive sentiment in the first half gave way to unfulfilled expectations in the second, the Company's steady revenue and performance improvements were a result of rigorous streamlining and efforts towards internal operational excellence. Implementing the five year "Next Level Strategy", the Company entered new markets, forged global partnerships and extensively participated in the shift to renewable energy. Through relentless execution, the Company actively addressed its throughput efficiency; key attention areas for this were lowering material costs and increasing white collar productivity. Growing profits in a shrinking industrial market was the result of increased contribution from power segment. This was catalyzed by utilities seeking to update technologies to enhance performance and reduce losses. Large orders in the year included substations for private and public utilities, along with products like transformers and gas insulated switchgear. The Company also delivered end to end solutions for solar power projects and contribution from renewable energy grew significantly. Following the mantra of penetration, innovation and expansion, the Company made headway with different and technologically advanced solutions in existing sectors like marine, textiles, identifying growth spots in a challenging market. Today, half the solar power generated in India passes through ABB inverters. Investments in the rail segment - national and metro - added to business across divisions. Projects to deliver automation solutions to ports and automotive factories were won despite facing stiff competition from cost-driven Asian counterparts. The Government announced Make in India, Smart cities and Power to all, initiatives in 2015. The solutions to enable and achieve the vision of these initiatives formed the cornerstone of ABB's global flagship event, Automation and Power World, organized in India after five years. This thought-leadership and customer focused event demonstrated that the Company is well positioned to partner India's next level of growth and garnered the attention of government and industry decision makers. In a subdued market, orders remained steady at Rs. 8,100 crore as against Rs. 7,908 crore in the brvious year. Base orders from a wide spectrum of customers formed a large portion with a few large projects. Services led sales resulted in more combrhensive customer engagements. The revenue for 2015 improved to Rs. 8,140 crore as against Rs. 7,733 crore in 2014, reflecting stability of operations in an uncertain market. The order backlog at the end of the year was at Rs. 7,946 crore, providing visibility to the future revenue streams. Profit before tax grew substantially to Rs. 475 crores in 2015 as compared to Rs. 355 crore in the brvious year. Profit after tax posted a growth of 31 percent at Rs. 300 crore for the current year as compared to Rs. 229 crore in the brvious year. Consequently the earnings per share for 2015 stood at Rs. 14.15 per share as compared to Rs. 10.78 in 2014. Service In a market characterized by unutilized capacities, trickling credit to industries and evolving dynamics and customer expectations, the service business posted a double digit growth in revenue and orders for the period under review. By effectively mining opportunities through an existing installed base, service provided the oxygen to the business in contracting markets. Tailoring solutions to address both value and volume based issues of customers, from debottlenecking to production optimization, the service business facilitated operational flexibility and innovative asset management. Bundled offerings, integrated solutions combined with conventional portfolio offerings were deployed across multiple industries. The market for servicing of PASS and bay upgrade solutions expanded to newer sectors locations in India. The business not only served as the bridge for sustained customer engagement in a tight market but also addressed changing customer priorities in areas like safety, reliability and quality. Programs like Make in India have put the spotlight back on these areas. The focus on quality and safety driven applications helped transitions like minimum oil to vacuum circuit breakers with substantial contribution from solutions in energy efficiency and power quality, equipment performance management (EPM), and personnel training providing end to end solutions to the customers. During the year, major customers including PGCIL, NTPC, Tata Group, SAIL, Reliance Industries, Vedanta, International Paper and Zuari Cement (Italcementi Group) and Rajasthan Textile Mills also strengthened their service engagement with the Company. Exports Base orders constituted more than 85 percent of exports in 2015. An important breakthrough was the product acceptance of the Company's medium voltage secondary switchgear in Saudi Arabia after a few years of investment and receipt of the first order. This is a significant step in penetrating the Middle East market. The 400 kV substation order from Bangladesh was the first ever export project from India of that rating. On the product side, the business started exporting low voltage IEC Motors. There was good traction from the African market with orders for 420, 245 and 132 kV breakers for a project in Kenya. This was in addition to orders for transformers from Senegal and Uruguay and SafeLink CB from Jordan and Zambia. Systematic efforts by the Company resulted in expansion to untapped markets in Mexico, Azerbaijan, Liberia, Madagascar, Chile, Afghanistan, Ethiopia and DR Congo. Operational excellence ABB's Next Level strategy strives to make an organization which better caters to markets and customers - simplified, accountable and collaborative. Operational excellence initiatives across people and processes was a key driver for sustainable value creation for all stakeholders. These initiatives enabled improved profitability and stabilized revenue in uncertain markets. Relentless efforts in product management, localization and indigenization initiatives and cost take out rendered greater efficiency to the Company. Outlook The global environment is likely to remain challenging and is expected to cast a drag on emerging market economies. These economies will have to work harder to counter the flight of capital, to readjust growth in a new economy and regain investor confidence. In India, the multiple government initiatives are in the right direction and augur well from the medium to long term perspective. A faster pace of implementation of reforms from rationalization of taxes to labor and the slated activities on smart cities is likely to provide a horizon of optimism and boost demand. Large infrastructure projects are imperative to bring about an industrial revival in the core sectors. On ground impact of make in India, digital India, power for all and the smart cities project will go a long way in boosting private sector confidence to kick-start the investment cycle. The Company has continually advanced its abilities and implemented initiatives for operational excellence. This has ensured that the Company is well brpared to deliver on expanding demand following any market turn around. Operational excellence initiatives have created value for customers and demonstrated benefits such as cost take outs in material expenses and improved profitability. The impact of such initiatives will be even more notable with any improvement in volume. Metro projects, rail infrastructure and rolling stock investments coupled with building, food and beverage, automotive and the expansion and modernization of ports and the power generation projects of state utilities could provide the much needed avenues of growth. The Company is well positioned to partner the next level of growth in India. Power Systems Growth in capital expenditure was lower than expected despite growth in GDP and the overall economic environment in the country. Sustained focus on profitable initiatives and emerging areas compensated for the slowdown across core sectors. Notable projects include large orders from private utilities in transmission business as well as significant export orders. Building solar power infrastructure - from generation to evacuation - helped boost overall orders. The segment demonstrated its technical prowess through the erection of the first multi-source microgrid in the heart of Delhi that powered ABB's global flagship customer engagement event - Automation and Power World. Relentless execution ensured smooth commissioning of several major projects, including the first phase of the North-East Agra HVDC link. Major project orders booked during 2015: - 765/400 kV Air Insulated Substation at Rajnandgaon from Adani Transmission Ltd. - 400/220 kV Air Insulated Substation at Morena from Adani Transmission Ltd. - 400/220 kV extension at Vadodara, Maneswar and Mallerkotla from Power Grid Corporation of India Ltd. - 400/220 kV Air Insulated Substation in Bulta, Bangladesh for Power Grid Company Bangladesh Ltd. - 220/110 kV Air Insulated Substation at Kamuti, Tamil Nadu for Adani Infra India Ltd. - 66 kV & 132 kV Air Insulated Substation at Punjab and Telangana for Solairedirect Energy India Pvt. Ltd. - 220/11 kV AIS Substation for a textile plant at Pipau, Gujarat for Sintex Industries Ltd. - 1x600 MW e-BoP for APGENCO, Raialseema from VA TECH WABAG Ltd. - Instrumentation, Control and Electrification for pumping station at Putchibableshwar from BRN Infrastructures, Hubli - 30 MW Solar PV project from Acme Cleantech Solutions Ltd. Major systems successfully commissioned during 2015 included: - 800 kV North-East-Agra Ultra High Voltage Direct Current transmission link (part commissioning) for Power Grid Corporation Of India Ltd. - 400 kV Gas-insulated Switchgear (GIS) substation at Kolhapur for Power Grid Corporation of India Ltd. - 765/400 kV Champa (part commissioning) for Power Grid Corporation Of India Ltd. - 765/400 kV Air Insulated Substation at Koradi for Adani - 400/132 kV Solapur (part commissioning) for NTPC Ltd. - 400 kV GIS substation at Rewa Road, Uttar Pradesh for Isolux Corsan - 5x20MW Solar PV Project at Rajasthan for Acme Cleantech Solutions Ltd. - 2x800 MW Krishnapatnam e-BoP for APPDCL through Tata Projects Ltd. - 2x600 MW thermal power plant e-BoP at Tuticorin, Tamil Nadu for Coastal Energen Pvt Ltd. Segment outlook The government's ambitious plans for renewables and providing power to all, along with initiatives, like UDAY, to improve the financial conditions of the sector have the potential for large impact. Grid stability solutions like FACTS and HVDC continue to be the focus areas for the transmission and distribution sector and provide major opportunities. The potential of distributed generation technology like microgrids, if aggressively promoted by the government, could be embraced in the urban sector. The approval of the National Smart Grid Mission can trigger the adoption of smart grids in the country and enable us to further expand our horizons. Opportunities from smart cities - such as co-generation, water and sewage treatment, substation automation, instrumentation control and engineering (ICE) packages for solar and water, and expansion in urban transportation are well aligned with the segment's offerings. Power Products: The power products segment continued on the growth path and posted a progression in orders and revenue. In a market hesitant about capital investments and plagued by cost driven imports, the base or short cycle orders continued the order momentum. As a significant achievement, the segment successfully manufactured, tested and dispatched 800 kV HVDC transformer for the North East Agra HVDC project. Adoption of the next generation of switchgears by private and public utilities led to orders for the most recently established factory in Savli. The segment sustained and enhanced its leadership position in 2015. Significant orders received: - 765 kV transformer and shunt reactors for Power Grid Corporation of India Ltd. - Traction transformers for Chittranjan Locomotive Works - PASS high voltage switchgear for Gujarat Energy Transmission Corporation Limited and UP Power Transmission Corporation Ltd. - HV Capacitors for Alstom T&D India Ltd. HVDC project Major products and systems commissioned in 2015: - Commissioning 765 kV transformers in Vindhyachal, Pune & Vadodara Projects, Power Grid Corporation of India Ltd. - Commissioning 36 MVA, 33 kV the first arc furnace transformer at JSW Steel Ltd, Dolvi - Commissioning of 400/245 kV GIS bays in Kolhapur project for Power Grid Corporation of India Ltd. - 800 kV converter transformer manufactured in Vadodara for North East Agra project Growth in power sector will be driven by government investment in transmission, renewables and infrastructure projects. Implementation of UDAY scheme likely to improve demand from the state electricity boards. Capital expenditure cycle of the industry could witness some upliftment due to cascading impact of lower interest rates. Passing of crucial reforms pertaining to land and harmonizing the taxation structure will also help drive growth. However the brssure on pricing at a time of diminishing global trade as well as aggressive competition focusing on dispersed pockets of growth will continue to be two key features in 2016. Discrete Automation and Motion The segment adapted swiftly to the new ground realities and focused on new sectors, such as renewables, transportation and food and beverage to forge ahead. Increased customer engagement, stronger and integrated segment focus contributed to the 20 percent growth in orders in 2015. Increase in revenue, supply chain initiatives, strategic marketing moves, favorable exchange rates and operational efficiencies resulted in improving the profitability of the segment. Efforts to retain its strong market position across offerings bore fruit and the division garnered leadership position in the emerging business of solar power along with good visibility in wind and transportation, which resulted in significant orders from these areas. The channel partner network was further expanded during the year, with significant contribution to revenue. Commissioning of large systems during the year included high current rectifiers at Indonesia Aluminum Ltd, Indonesia, 4x55 kA rectifiers at Hindalco Industries Ltd, Hirakud and body side project at Ford India Pvt Ltd, Sanand. New technology, product range and capacity expansion activities during the year included: - Solar Inverters 1500 VDC -PVS 980I - Upscale UPS ST Frames New version - NXR 355 - 450 range motors - 2.1 MW Wind Generator for Gamesa Wind Turbines Ltd - ACS2000 Diode Front End MV Drive Significant orders received: - Traction converters for Chittaranjan Locomotive Works - Solar inverters for Adani Infra India Ltd., Acme Cleantech Solutions Pvt Ltd., Tata Power Solar - Wind generators for Gamesa Renewables Pvt Ltd and Inox Wind Ltd. - Mechanical Power Transmission for Larsen & Toubro Ltd. - Medium voltage drives for DRN Infrastructure and ThyssenKrupp Industries India Pvt. Ltd - Robotics for Fiat India, Maruti Suzuki India Ltd, Mahindra & Mahindra Ltd and Ford India Pvt Ltd Segment outlook Competitors developing new domestic capacities are likely to brssure volume and price realizations. The tight liquidity in the market, especially faced by the small and medium size customers, and delay in project execution due to lack of cash or high cost of funds will continue to impact orders. However, the ongoing strategic thrust on market penetration, channel partner initiatives, customer engagement coupled with addition in capacity and range expansion will support growth momentum. Low Voltage Products Summarized performance: Concerted efforts in developing market share through extending product lines and effective sales channel management, especially in distribution, reinforced the segment's orders in 2015. Overall sales figures reflect a continuous growth in all channels across all product lines. Focus on indigenization and local manufacturing ensured increased utilization of installed capacity. T6 MCCB (molded case circuit breakers), large contactors, pilot devices of DC MCB (direct current miniature circuit breakers) and distribution terminal blocks are examples of products engineered and produced in India for the local and export market. Building Automation's offering has been expanded with the addition of a new product range -"Free@Home", a competitive solution for residential buildings segment. In a bid of continuous improvement of the service level and overall customer satisfaction, several initiatives of "ease of doing business/ process" have been launched by the segment during the year covering logistic, on-time delivery, customer quality perception, customer focused IT, after sales warranty service and sales process improvement. Segment outlook Boost in infrastructure, including energy efficiency solutions, brmium commercial and residential buildings and renewable energy generation, is likely to have a positive impact on the demand for low voltage products. Change in the market trend towards the type-tested (tested for changing standards) boards will support our engagement with system integrators especially pertaining to ArTu K switchgear panels The thrust for the segment continues to be on increased market coverage, localization initiatives, product range expansion and exports. A positive impact is expected from recent project clearances and the demand dynamics in housing sector. The segment will also focus more on sectors like datacenters, pharmaceuticals and food & beverages. Process Automation Summarized performance: A slowdown and muted demand in industrial sector resulted in slower than expected growth. Export opportunities in the SAARC and far-east countries helped orders for 2015. Continuous focus in internal activities and working closely with customers aided faster closure of projects and leveraging the installed base contributed to profitability. The major push on developing a lean organization with a focus on cost take-out has increased operational efficiency and improved results for the segment. Significant orders received in 2015 included: - Electrics and automation for the steel plant in Abul Khair Steel Mills Ltd, Bangladesh - Supply of new and rehabilitation of turbochargers for Diesel Locomotive Works of Indian Railways - Electrics and safety automation products for ONGC sites through Swiber Offshore Construction PTE Ltd. - Supply and installation of DCS for new paint factory for Asian Paints Ltd. Major systems that were successfully commissioned in 2015: - Orient Cements Ltd. - Cement plant electrics, instrumentation and automation - Hongsa Mines, Laos a/c Sandvik Mining and Construction Materials Handling GmbH & Co - Conveyor electrics, instrumentation and automation - Abul Khair Steel Mills Ltd, Bangladesh - Electrics for the Steel Melt Shop - BSRM, Bangladesh - 33 kV GIS for Steel Melt Shop - Ultratech Cement Ltd, Jhajjar & Dankuni - Cement plant grinding unit electrics, instrumentation and automation - Steel Authority of India Ltd., Rourkela Steel Plant - New plate mill electrics, instrumentation and automation Segment outlook The government program of make in India and increased focus on infrastructure and transportation is expected to push demand and the growth trajectory on an upward incline. Efforts underway to resuscitate the mining industry could yield positive outcomes in a limited manner. However the global climate and the commodities landscape will have a deep bearing on the fate of process industries in the domestic market. Concentrated initiatives on emerging geographies and other export markets are expected to bring higher market commitments and subsequent growth in the automation sector. Finance Despite the significant cut in interest rates by the central bank, liquidity in the market remained tight. In addition to limited funding, existing capacity glut translated to even less investment by industries in greenfield and brownfield projects. During the year, the Company issued unsecured, rated, listed, redeemable, non-convertible debentures of Rs. 600 crore on private placement basis. This, along with general reduction in interest rate in the economy helped in reducing interest expenses to Rs. 91 crore, compared to Rs. 105 crore in the brvious year. As of December 31, 2015, the Company's net borrowing was Rs. 26 crore compared to a net borrowing of Rs. 137 crore in the brvious years. In terms of foreign currency exposure - for imports and exports - the Company continued to hedge at the point of commitment to protect the contract margins. Human resources The people strategy was aligned with the Company's global and local focus during the year. This required continuing to provide a stable work environment in an uncertain market and maximizing the potential of the workforce. Through its evolving employee-friendly policies and processes, the Company's human resources encouraged, and demonstrated, dynamism and being open to change. In addition, persistent attention to providing an inclusive environment to promote diversity in gender, age and culture, including opportunities for global mobility, also form a part of the proactive plan to manage talent in key function areas. During the year, ABB has consistently set a clear path to learn and adapt to perform better in the volatile market situation amidst global competition with its workforce initiatives and systems in place to strengthen its position as brferred employer. Industrial relations remained cordial and harmonious across all manufacturing locations. At the close of the year, the company had 5,839 permanent employees, as against 6,165 in the brvious year. Internal Control Systems Internal Controls in the Company have been designed to further the interest of all its stakeholders by providing an environment which is facilitative to conduct its operations. In doing so, the Company's Internal Control environment has evolved over a decade to take care of, inter alia, financial and operational risks. The Company has a holistic Internal Control framework comprising of elements like Country Management Committee, Group Directives and Instructions, Local Management Instructions, Process and Entity Level controls, Enterprise Risk Management, Management Testing Programs and a strong emphasis on integrity and ethics as a part of work culture. A well-organized Group level tool (GRCM) is available to handle testing, Internal Audit Issues, deficiency tracking, etc. Further, the in-house independent Internal Audit team acts as a pillar to support the control objectives. The Company also has a well-functioning Whistle Blower Policy in place to report any misdoing. The Company is aligned with one of the most mature IC framework - COSO 1992, then transitioning to COSO 2013. Based on management's assessment and testing of controls, it is concluded that the Company has proper internal financial controls which are considered adequate and operating effectively. Risk management The Company has a Risk Management Charter and Policy, which provides overall framework for Risk Management (RM) in the Company. The Risk Management Committee assists the Board in risk assessment, formulation and implementation of guidelines, managing of key risks, risk minimization procedures and periodical review. Following the amended Clause 49 of the listing agreement, the Risk Management Committee met on July 23, 2015. The key elements of the company's risk management framework have been captured in the risk management policy which details the process for identifying, escalating, prioritizing, mitigating and monitoring key risk events and action plans. The assessment of the risks covers areas of Strategy, Technology, Finance, Operations & Systems, Legal & Regulatory and Human Resources Risks. There are appropriate assurance and monitoring mechanisms in place to monitor the effectiveness of the risk management framework including the mitigation plans identified by the management for key risks identified through the risk management exercise. The effectiveness of the risk management framework and systems is also periodically evaluated by the risk management committee. The Company's existing framework provides for risk reviews at various levels based on company's organizational structure matrix. Periodic assessment of risks, potential impact relating to business growth, profitability, talent engagement, market position are conducted. Response on key operational risks, based on inputs received from the internal and external assessment, internal audit, performance review etc. are done on a regular basis. The outcome of business review meetings regarding processes and their compliance, as well as observations of the Risk Management Committee and the Board of Directors are continuously incorporated in to Risk Management Framework. Division realignment On January 1, 2016, the Company commenced operating in a streamlined set-up of four divisions: Power Grids, Electrification Products, Discrete Automation and Motion, and Process Automation. The evolving requirements of the utility customers are reflected in the new Power Grids division focusing on power and automation offerings for transmission and distribution delivered from a single source -"power & automation for the grid". The other three divisions will cater to industry and transport & infrastructure - "power & automation for the site" with a combrhensive ABB portfolio. The Company's leading low- and medium-voltage businesses have been combined to form the new Electrification Products division. In order to better address customer requirements and enhance operational efficiency, the Discrete Automation and Motion and Process Automation divisions are being further aligned. Except where the context otherwise requires or where otherwise indicated, the information in the report is brsented to reflect our business prior to this realignment to be consistent with the basis used in brparing our Consolidated Financial Statements. |