MANAGEMENT DISCUSSION AND ANALYSIS The Management has pleasure in brsenting this report in adherence to the Code of Corporate Governance enacted by the Securities and Exchange Board of India (SEBI) under Clause 49 of the Listing Agreement. 1. INDUSTRY STRUCTURE AND DEVELOPMENTS MIRC Electronics Limited ("MIRC" or 'the Company') is one of the oldest Indian Electronics and Consumer Durables Company having its brsence for more than 34 years and enjoying the patronage of customers with superior technology, innovation and differentiation. India is expected to become the fifth largest consumer electronics market in the world by year 2025. This market is expected to increase to US$ 400 billion by financial year 2020-2021 from US$ 69.6 billion in financial year 2011-2012. Urban markets account for the major share (65 per cent) of total revenues in the consumer durables sector in the country. Demand in urban markets is expected to increase for the products such as LED TVs, laptops, split ACs and beauty and wellness products. In rural markets, consumer electronic goods are likely to witness growing demand in the coming years as the government plans to invest significantly in rural electrification. The Government of India has increased liberalization which has favored foreign direct investments (FDI). Also, policies such as National Electronics Mission and digitization of television and setting up of Electronic Hardware Technology Parks (EHTPs) is expected to boost the growth of this sector. Make in India Policy is a step towards utilizing the country's enormous economic potential. This initiative will transform India into a global manufacturing hub. Consumer durable companies, both domestic and foreign will be keen to setup and enlarge their manufacturing base in India considering the large domestic market, the depth of skills and the ability to scale. The various incentives by way of reduction in customs duty on raw materials will lead to availability of raw material at cheaper rates. The emphasis on the proposed "Digital India" program by ensuring broadband connectivity at village level will fuel additional growth in the digital space. We, at MIRC have also geared ourselves towards achieving the vision of our progressive nation. The initiative will help us in developing a revolutionary product which will set new benchmarks in the industry, supported by better infrastructure we should be able to synergies the supply chain hence assuring price efficiency to the customer. Recent years have seen a remarkable transformation in the way India shops and trades. E-commerce has taken the world of retail by storm and captivated the imagination of an entire generation of entrebrneurs, with e-commerce ventures with various business and commercial models. The explosive growth in the last few years has already catapulted the biggest firms among these ventures past the billion-dollar territory. The sector has grown three times in four years to nearly US$ 12.6 billion in 2013. Various industry estimates project that the sector will further grow five to seven times over the next four to five years. Online retail, while today rebrsenting a small fraction of the e-commerce space is one of the fastest growing segments. It is also the most challenging in fulfilling its fundamental proposition of transcending physical boundaries to deliver a variety of products to the customer's doorstep. Logistics and infrastructure in e-retailing becomes the very backbone of the fulfillment network and the basis on which stringent service level expectations are set and met, and customer mind-space among competing alternatives is won. The big hurdle of infrastructure is the main reason for the current brick and mortar stores to not have penetrated beyond Tier 1. Hence the current generation in these cities and towns faces accessibility problem. Since this TG is net savvy, they brfer to go online to cater to their purchase needs. Most of them surf the net via their Smart Phones. To cater to this TG, E-commerce players are giving their convenience of reach and discounts and making it easier for the customer to buy online. The reviews by existing customers on the E-commerce sites, makes it easier for the buyers to read reviews thus helping them take a decision. Taking the above into consideration, we foresee this market to grow faster than the traditional market and hence want to be a part of the trend, but without disturbing the general trade relations, which we have accomplished over the past 33 years. The four main area of consumer appliance served by the Company are: LED TVs: Era of digitization opens new opportunities for the Indian TV industry. Digitization will lead to complete switchover from analogue cable to Digital Addressable Systems in a phased manner. The number of DTH subscribers in India is expected to increase from 56.5 million to 200 million by 2018. By 2018, the television industry in India is expected to expand to US$ 14.7 billion from US$ 8 billion in 2014. TV innovation is evolving around bigger and bigger screen sizes, improved picture quality from 4K and OLED panels, the emergence of ultra slim and Curved form factors, significantly improved audio reproduction and the strengthening of the various Smart TV platforms. In financial year 2014-2015, 43 per cent of TVs sold in developed western markets had Smart functionality, 12 per cent were 50-inch and above and 3 per cent were 4K Ultra HD. A similar trend is being noticed in Indian markets. Air Conditioners: The size of the Indian Air Conditioner market in financial year 2014-2015 was around USD 1.6 billion. Current penetration of ACs stands at 6.8 per cent. According to a recently published Tech Sci Research report "India Air Conditioners Market Forecast & Opportunities, 2020", the country's air conditioners market is projected to grow at a CAGR of over 10% during 2015-2020. The Indian air conditioning market is divided into two major segments: Commercial Air Conditioners (VRF, Chillers & Others) and Room Air Conditioners (Split and Window air conditioners), among which, residential air conditioners segment witnessed a higher revenue share in financial year 2014-2015. This domination of room air conditioners segment is expected to continue over the next five years. Significant increase in discretionary income and easy financing schemes have led to shortened product replacement cycles and evolving life styles where consumer durables, such as ACs are perceived as utility items rather than luxury possessions. Recent innovations like wi-fi air conditioners has added various utility features including a messaging feature through which it can receive recommendations and control settings even when the user is away from home. Washing Machines: Washing Machines are the second largest contributor to the consumer appliances market. It is available from a normal large-sized look to more portable and stylish look such as top loading, front loading, fully automatic, and semi-automatic. New innovative washing machines include bluetooth technology and a messaging feature through which it can receive recommendations and control settings even when the user is away from home. According to 'India Residential Washing Machine Forecast & Opportunities, 2017', the Indian washing machine market is expected to witness healthy growth rates in the coming years. The revenues of this market segment have witnessed an average growth rate of more than 20% year on year. The market revenues are expected to reach US$ 1.5 billion by 2017. Microwave Ovens: Rising disposable income coupled with changing lifestyle will have a favourable impact on the Indian microwave ovens market. The increasing urbanization and decreased number of subsidized gas cylinders for cooking from 12 per year to 9 per year have also helped the sales of microwaves in financial year 2014-2015 overall. Some innovations like in built cooking settings depending on the weight of the food items are likely to have favourable impact on the microwave market. OPPORTUNITIES AND THREATS Opportunities a) India would rise from the twelfth to the fifth largest position in the consumer durables market in the world by 2025; the market is expected to reach US$ 12.5 billion by financial year 2015-2016. b) Currently, there is a huge untapped rural market. Increasing electrification of rural areas and easy availability of credit would aid growth in demand. c) Advancement in technology and higher competition are driving price reductions across various consumer durable product segments such as computers, mobile phones, refrigerators and TVs. d) Focusing on energy-efficient, environment-friendly products and reducing e-waste by promoting product recycling would also aid growth in demand. e) The 'Make in India' policy is the first of its kind for the manufacturing sector as it addresses areas of regulation, infrastructure, skill development, technology, availability of finance, exit mechanism and other pertinent factors related to the growth of the sector. Threats a) The sector faces intense competition from multinational players due to homogeneity in products, low switching costs, a big spend on advertisement and brand display. b) Bargaining power of customers is very high. Use of internet to get all the information enables customers to be powerful. Thus, buyer's switching cost is very less. c) Bargaining power of supplier is very low due to low product differentiation. d) The cheap imports of consumer durable products from countries like China, Thailand etc is a major concern. Statutory levies should also support the "Make in India" by extending concessions with respect to the duty structure. e) E-commerce is changing traditionally accepted economic practices and making competition even fiercer than it has ever been in the past. As the internet opens up larger markets, more and more flexible competitors are entering the market, all offering better priced value propositions in order to steal market share. RISKS & CONCERNS: a) Major challenges facing the Indian electronic manufacturing market are an infrastructure that needs to be improved at the earliest possibility, easing of foreign investment procedures, which are underway and a restructured government tariff that makes domestically manufactured goods cheaper than imported goods with zero tariffs. b) Expenditure on the area of Research & Development is very less which in turn, is hampering the growth of the Indian electronics industry. c) The consumer durables sector faces the challenge of a continuous change in technology and the inability to cope with it. High-end consumers brfer changing their goods along with the up-gradation of technology and manufacturers have to make sure they cater to this requirement. d) Currently, rupee is stable and India possesses higher foreign exchange reserve. However, the trade imbalance could result in higher risk of rupee debrciating. 4. PRODUCT-WISE PERFORMANCE Television: During the year under review, the Company has focused on the large scale value added products and hence, even though the turnover of this segment is down by 21% as compared to brvious year, the Company has able to grow its gross margin in value terms by 7%. Air Conditioner: During the year under review, the turnover of this segment is marginally down by 10%. Washing Machine: During the year under review, despite the turnover of this segment is down by 23% as compared to brvious year, the Company was able to increase its gross margin by 4.7%. The Company has consciously focused on margins and therefore even on a lower volume, the Company has able to achieve a higher profitability. 5. OUTLOOK India's consumer confidence continues to remain highest globally and showed improvement in the fourth quarter of calendar year 2014 (Q4), riding on positive economic environment and lower inflation. The ensuing optimism among consumers and the slowdown in China have combined to help India unseat China at the top of Credit Suisse Research Institute's Emerging Consumer Survey study released recently. The survey conducted across nine emerging economies has seen India jump four ranks. Average household incomes increased 10 per cent in India in 2014 after remaining nearly the same for two years, the study claimed. This revival in consumer sentiment has primarily been driven by urban India. Global corporations view India as a vital market for the future. India has a young demographic and a middle class with rising disposable income. If the country can sustain its current pace of growth for some time and that is likely, then the average household incomes will triple over the next 20 years and India will become the fifth largest consumer economy in the world by 2025, as per a study by the McKinsey Global Institute (MGI). The Government of India has also played a major role in the growth of this segment. It has enacted policies that have attracted foreign direct investment (FDI) and as a result boosted economic growth. The Government of India has allowed 100 per cent FDI in the electronics hardware-manufacturing sector through the automatic route. It has also enabled 51 per cent FDI in multi-brand retail and 100 per cent in single-brand retail to attract more foreign investment into the country. Demand growth is likely to accelerate with rising disposable income, easy access to credit and better climatic conditions in rural areas. Smart cities development will have further impetus for growing demand in consumer electronics. 6. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUENCY The Company has established a matured internal audit process for the Company as a whole covering the corporate office and the branches all over India. Agenda for the audit /scope is finalized and approved by the Audit Committee. The audit is carried out by reputed audit firms across head office, plant, branches. The internal audit department of the Company coordinates with the internal auditors and auditees and ensures proper follow up for closure of audit concerns. The Company has standardized SOPs in place in form of various manuals, policies and procedures for all critical and important activities as recommended by the management. Audit finding are placed in the audit committee and directions of the committee are followed to improve internal control and avoid recurrence of events. There is an evolved risk management strategy with standard operating procedures placed before and approved by the Board and are legitimately followed by the Company for the reporting and compliance purposes. There are certain policies adopted by the Company for maintaining internal control within the organization, which are as follows:- a) Risk Management Policy This policy sets out Company's risk oversee, management of material business risks and internal control. The purpose of this policy is to encourage an appropriate level of risk tolerance throughout the Company; establish procedures to analyze risks within agreed parameters across the Company; establish appropriate risk delegations and corresponding risk management framework across the Company and ensure MIRC has a risk management framework that can noticeably respond the risk profile of the Company. b) Whistle Blower Policy This policy is formulated to provide opportunity to all employees to have access to the Management or the Chairman of the Audit Committee, in case they observe any unethical and improper practice or behaviour or wrongful conduct in the Company and to prohibit any Senior from taking adverse personnel action against such employee. c) Policy on Related Party transactions This policy is framed to ensure compliance of the applicable provisions of the Companies Act, 2013 & rules made there under and Clause 49 of the Listing Agreement as amended or re-enacted from time to time and intended to ensure the proper approval and reporting of transactions between the Company and related parties. Such transactions are appropriate only if they are in best interest of the Company and the shareholders. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE. The Company had a stellar performance in the financial year 2014-2015. After three years of successive losses, the Company has turnaround and was able to report a full year profit of Rs. 81 lacs. This is against the back drop of Rs. 60 crores loss reported in the brceding year. This has been made possible by focusing on profitable products and profitable segments. The gross margins have improved by 8%, from 19% to 27% and through the effective cost control measures the cost structure has been brought down by Rs. 33 crores. The profit would have been much higher but for the management deciding to invest more into the brand, thereby enhancing the brand investment by 57%. With this turnaround the management is confident of growing profitably in the coming years. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED. Human Capital is the most valuable resource of the business at MIRC. People are nurtured, developed, motivated and rewarded for business growth. The demand for Human Capital drives talent management. The Company focuses on attracting the right and competent talent, developing and retaining employees with continuous effort in developing them by providing on the job and need based training. Employee engagement is best fostered here which creates an environment of stimulation, learning and recognition. The Company strive to constantly keep the employees motivated through implementation of HR processes and policies. We also take a proactive role in responding to the grievances of employees to foster a positive and healthy relationship between the Management and employees. The women friendly policies of MIRC ensure that women employees are able to maintain the work-life balance as well as meet the organizational goals and objective. The Management is always working on the development of Human Capital to enhance responsiveness and effectiveness in an ever-changing and dynamic business environment. MIRC has 1225 employees on its payroll as on March 31, 2015. MATERIAL FINANCIAL & COMMERCIAL TRANSACTIONS INVOLVING SENIOR MANAGEMENT:- The Company has in place a Code of Corporate Governance which stipulates that senior management personnel shall make disclosures to the Board of Directors regarding any material financial and/or commercial transactions in which they are interested which may have a potential conflict with the interest of the Company. Cautionary Statement The Statements made in this report describing the Company's projections, expectations and estimations may be forward looking within the meaning of applicable securities laws and regulations. These statements are based on certain assumptions and expectation of future events. The actual results may differ from those exbrssed or implied in this report due to the influence of external and internal factors beyond the control of the Company. On behalf of the Board of Directors Gulu L. Mirchandani Chairman and Managing Director Date : May 07, 2015 Place : Mumbai |