MANAGEMENT DISCUSSION AND ANALYSIS 1. Overall economy Happily, there is a renewed optimism about revival of growth momentum based upon huge expectations from the new Government at the centre. While it is too soon to expect results on the ground, we do believe that the Government is moving in the right direction with determination. The 'Make in India' initiative and effort to improve 'ease of doing business' are laudable moves, which should boost industrial development and all round growth of the economy. We are therefore quite hopeful that better days are not too far away. In the meantime, we have taken concrete steps and have made good progress towards expanding our product portfolio, improving our market penetration and increasing our efficiencies to achieve sustainable and profitable growth in all our businesses. 2. Segment-wise business analysis 2.1 Business segment - Electric 2.1.1 Industry Structure & Developments Fans The fan market in India is estimated to be for approximately 56 million fans valued at roughly Rs.5,100 crores. Of this, the organized sector accounts for about 39 million fans worth approximately Rs.4,000 crores. The remaining pie is serviced by the unorganized sector and small scale industries. The fan industry witnessed yet another year of slow growth of 4.5% vis-a-vis 4% in 2014-15. F lot of factors were at play here including a general slowdown in the economy particularly the real estate sector, demand saturation and low IIP numbers. Despite this sluggish growth in the industry, we managed to grow by 14% and increase our market share by 1.5% in 2014-15. Ceiling fans account for roughly 70% of the total domestic demand for fans. Fnd Orient Electric continued its dominance in this segment with 76% of its domestic and 77.6% of its overall sales coming from the ceiling fans segment. However, it is noteworthy that the demand for table, pedestal and wall fans rose at a greater rate than that of ceiling fans in the year gone by. The industry continues to be fiercely competitive with every major player vying for a higher market share. What also deserves a mention is the brmium fans segment has lately been growing at a faster rate due to changes in customer brference with increasing per capita income. Lighting This past year, nothing has bedazzled the lighting industry quite like the success story scripted by LEDs in India. Rs a major contributor in lighting now, the LED lighting category grew at a remarkable rate of 45% and is now valued at about Rs.2,800 crores. Overall, the lighting industry is valued at Rs.10,500 crores and is estimated to have recorded a growth of only around 5%. Based on current trends the Lighting market is expected to grow by 8-9% during 2015-16. The increase in the LED segment has greatly impacted the Compact Fluorescent Lamps (CFLs) business, which witnessed a dip in demand and registered a negative growth of about 18%. This shift is largely attributable to the competitive LED pricing, thanks to growing volumes and technological breakthroughs. LEDs have also begun to replace the high-wattage HID lamps that had until now dominated the industrial, street-lighting and floodlighting domains. The segment of Linear Fluorescent Lamps (FTL) continued to register single digit growth of about 8%. It's currently driven by energy efficient and smaller-diameter slim tubes (T5 Tubes) sold with aesthetically-pleasing luminaires. The market of GLS lamp has maintained a flat or negative growth and is now confined to the big 4-5 players only. Major demand for the same is in small towns and villages which are still in the transition phase of switching from GLS to CFL/LED. LEDs are expected to grow at a CAGR of an estimated 45% over the next 5 years and shall eventually gain almost 60% share in the total lighting market. Energy efficiency, reducing payback periods, continually-declining costs and improving aesthetic fixtures and design flexibility are the main factors driving its growth. As against the Lighting industry's single digit growth, Orient's lighting business registered a healthy revenue growth of 13%. Even its CFL sales grew by 9% despite de-growth in the overall segment. Internal process improvements, flexibility in changing product mix and shifting manufacturing capacities to LED, aided this growth. Appliances Home Appliances industry witnessed an estimated growth of 5%. Amongst the major sub-segments, Room coolers grew by 12% and Mixer Grinders by 10% but Water heater segment is estimated to have de-grown of 15%. 2.1.2 Opportunities & Threats Fans The industry is likely to continue to register a growth of around 4.5% year on year. However, with the emergence of the new middle class segment and high spending in the urban-rural category, continued improvement is expected in demand for brmium and value added categories of fans. We are fairly well positioned to take advantage of this opportunity and plan to introduce some further models in this category. Established players in the organized electric sector like Panasonic and Luminous have recently made an entry into the Fan Industry. These brands are major players in their respective segments and are technologically strong. Hence, this can increase competition in the organized Fans Market. Lighting The growth of Lighting Industry in India is linked to various factors such as increase in number of households with access to power, growth in electrification of uncovered areas and generally higher infrastructure development. Another development that is driving growth is the change to more energy efficient solutions like CFLs earlier and LEDs now. Of late, LED lighting has witnessed significant growth, with many leading brands rolling out a diverse selection of LED lighting products for residential, commercial and industrial applications. Growing concern on climate change has accelerated intervention from government and nGOs towards energy conservation programs and the use of energy efficient lighting solutions. With rising energy costs and increasing environmental awareness, Indian customers are also demanding a higher value proposition and are looking for better quality, energy efficient lighting products. Simultaneously, the market for LED products is expected to become highly competitive putting brssure on the need to look for consistent cost reductions in short time cycles. In CFL segment there is already a stiff competition for market share amongst brands. Many major brands have reduced prices due to which overall margins in the CFL category are under brssure. Stability of input prices has eased these cost brssures to some extent. On the other hand currency fluctuation plays an important role in costs as some of the inputs are still imported. Home Appliances With corrective steps taken during the year under review, Orient Electric is now well placed in the Home Comfort segment of appliances. Therefore it is important to seriously pursue development of this business which is a potential growth driver. Room Heaters market in India is dominated by 3-4 players where Orient Electric has made a confident entry in 2014-15. Leveraging Orient Electric's brand strength in Heating and Cooling appliances, there is a clear opportunity to grow in these segments. The arrangement to market well known Kenwood appliances provides another exciting opportunity to increase our foot prints in this segment. 2.1.3 Segment review and analysis net Sales turnover of the division increased to Rs.1189.83 crores from Rs.1139 crores in the brvious year, in spite of our conscious decision not to participate in the Tamil nadu scheme, which had last year contributed Rs.108 crores to the division's turnover. Fans ret Sales turnover of the Fans BU increased to Rs.910.65 crores from Rs.818.80 crores in the brvious year. The division achieved highest ever sales in the domestic market with a growth of 14% against the industry growth of around 4.5% only. We expect to continue this momentum and further consolidate our position in this product group. Fan Exports - our export of fans increased from 10.8 lacs in 13-14 to 13.2 lacs in 14-15, posting a positive growth of 22% whereas total fan exports from India increased only by 7% from 19.6 lacs in FY 13-14 to 21 lacs in FY 14-15. Other brands collectively registered a negative growth of 11%. Some of the key achievements in our fan exports were; growth of 22% in Middle East & Rfrica despite political ripples; higher rSR on account of better product mix and conversion of normal TPW fan customers to Salon fans. We also entered new markets in Togo and Iraq for sales acceleration. Special focus was given on international branding as well to improve brand visibility. Resultantly Orient registered a very healthy share of over 63% of India's total export of fans. Lighting net sales turnover for Orient lighting products increased to Rs.206.79 cr in 2014-15 compared to Rs.176.20 cr in the brvious year with improvement in our market shares of CFLs, Consumer Luminaires and LEDs. The focus in the financial year 2015- 16 will be on LED based Consumer Luminaires and LED Lamps. R major thrust would be on increasing manufacturing capacity of LED lamps & luminaries and increasing retail coverage by at least 50% with focus on selected 120 major markets.LED business will be fully supported through the newly created Electronics design and development centre at roida. Rnother major area of growth will be the Professional Luminaires segment where we have started our operations in the year 14-15 and will be consolidating our sales organization in 15-16 with focus on Key Fccounts and customized solutions. Home Appliances Orient Electric's Rppliances SBU achieved a turnover of Rs.71 crs in 2014-15. Home Fppliances products have now been launched in 86 cities with prime focus on 45 Cities. 23 Ruthorized Service Centers were added during the year taking the tally to 115 service centers. 7 new SKUs of Rir Coolers were launched, 5 new SKUs of heating and 4 SKUs of Kitchen Fppliances were added to the range. In October 14, the Rppliances SBU entered into a tie-up with Kenwood a world leading Kitchen Rppliances brand, to market its range of high-end Kitchen Fppliances in India. The products have been well accepted in Modern Retail Stores and also amongst Key dealers in general trade. Kenwood products are catered through 46 Modern retail stores and 80 key dealers. However, our Rppliances business unit faced many challenges during the year in terms changes that we had to make in our product line up and clearing the congestion in distribution channel. R number of corrective steps have been taken to ensure consistency in product quality, distribution and service. The turnover achieved by the business was lower than planned due to these corrections. 2.1.4 Risks & Concerns Fans Rising input costs coupled with likely increase in excise duty will put brssure on the margins. Flthough Orient Electric endeavors to pass on the cost of this increase to the customer, but it may impact demand. Sluggish real estate growth is likely to put even further brssures on the demand. Political unrest in Ffrica and Middle East has adversely impacted our sales in some of our high selling markets and situation is likely to remain same for the current year as well. Lighting Lack of Infrastructure, slump in the reality sector, increase in interest rates and unabated inflation can reduce demand for decorative residential lighting and outdoor luminaires. Rise in some input costs are likely to also put brssure on the margins. Flso, Government regulations on mandatory BIS standards may result in change in manufacturing and sourcing strategies. Home Appliances Seasonality & Weather: High dependence on products which have seasonal and regional impact leads to sales skew in few months of the year. 2.1.5 Outlook Fans Fan division has further strengthened its position as one of the market leaders in the domestic market and continues to be the leader in exports. Continuous improvement in network resulting in deeper penetration, technologically advanced models for emerging segments, focus on South as well as geographical areas which offer higher growth prospects, stronger connect with retailers and better influencing of sales through sell out model are expected to overcome the risks and concerns. Orient Electric also launched a new range of technologically evolved next-gen fans based on BLDC technology (Brushless DC motor) which consume less than 50% energy compared to normal fans. In the international markets, development focus is on markets with high buying potential. Also, a lot of new and brmium products are planned to leverage sales in existing markets and positive growth is expected. A well laid out marketing plan, including aggressive BTL plan to reinforce the brand will help to further consolidate its position in India. Re-branding and continued association with Celebrity Cricketer has helped in the brand getting recalled at retail and consumer levels. Overall the Fan division is well placed to manage the competition, uncertain economic situation and capitalize on the opportunities. Lighting We are one of the few Indian Lighting companies to start in-house production of LED lamps and Luminaires, and have started shifting part of CFL manufacturing and assembly to LED Products. Therefore, company has further utilized the production and assembly capacity of lamps at Faridabad and PCBs at nOIDA. Lower than Industry market returns for CFLs has led to higher consumer acceptance towards our CFLs. We also plan to design and manufacture drivers for various LED products and assembly for three major LED luminaires under Street Lighting category, so as to ensure high reliability and cost leadership. Full capacity utilization for assembly of lamps at Faridabad has been planned along with further efficiency improvements. Our focus in FY 2015-16 will be on LED based Consumer Luminaires and LED Lamps. A major thrust would be on increasing manufacturing capacity of LED lamps & luminaires and increasing retail coverage by at least 50% with focus on selected 120 major markets. LED business will be fully supported through the newly created Electronics design and development centre at noida. Another major area of growth will be the Professional Luminaires segment where we have started our operations in the year 14-15 and will be consolidating our sales organization in 15-16 with focus on Key Accounts and customized solutions. Appliances The Appliances BU has set an aggressive growth target for the year 2015-16. It aims to achieve this by expanding distribution and visibility to around 9,000 retailers and increasing focus on Heating and Cooling category and Mixer Grinders. Creation of channel strengths at the top end of dealerships and leveraging Kenwood would be the main focus. Consistent quality, wider distribution and assured after sales service would be the key areas of our focus. Launch of a new product category of switch gears In March 2015 Orient Electric has launched a range of world class low voltage switchgear to become a 'one-stop-brand' for Home Electrical solutions. Switchgear Industry (residential) in India has grown at 15% CAGR from H1043 Cr in 2011 to H1587 Cr in 2014. In next 4 years, the industry is expected to maintain the growth rate of 15% CAGR. Share of various product sub-segments is expected to remain stable with MCB accounting for 70%, RCCB for 20% and DB for 10%. Our strategy is to position our switchgear products with High-end features. The manufacturing plant for switch gears has been set up at noida with technical knowhow and equipment from world's major Switchgear manufacturer, ETI - Slovenia. This world class plant will be producing 20,000 poles per day, per line at peak capacity. The requisite BIS certifications has been received and the Switchgear BU has started commercial sales from April 2015, initially launching MCBs, RCCBs & DBs in Delhi, Rajasthan, Haryana, Punjab, UP, Mumbai, Maharashtra, Gujarat, & MP initially and gradually sbrading to the other parts of the country. We are excited about the great opportunity for growth provided by this new product category and hope to gradually achieve a respectable share of this large market. 2.2. Business segment - Paper 2.2.1. Industry structure and development Paper industry in India continues to face twin challenges of sharp escalation in cost of all major inputs and simultaneous brssure on realizations. Demand for Writing & Printing Papers is estimated to have remained stagnant during the year with the added problem of increasing imports of photocopying and coated papers. . Domestic demand for Tissue Paper has been reasonably robust. Some waste paper based smaller mills have also lately started producing tissue papers for the economy segment, which has not been an area of our focus. There is a healthy demand from export markets for good quality Tissue Papers. 2.2.2 Opportunities and threats Tissue paper demand in India continues to register double digit growth although the base is relatively small. This trend is expected to gather further momentum with changes in life styles. We are well positioned to take full advantage of this inevitable growth. In addition, export markets offer good opportunity for quality tissue papers. We have already been successful in exporting significant volume of Tissue papers to diverse markets and see a distinct opportunity for growth in this segment. Writing & Printing segment is likely to remain under brssure for some more time. However, no major capacity additions are on the horizon for some time and therefore the current supply / demand imbalance should gradually get corrected during FY 15-16. The biggest threat for the integrated Paper industry in India continues to be the shortage of pulp wood from local sources. While the Industry has been aggressively promoting social and farm forestry, it is not a cost effective long-term solution because of small land holdings and scattered plantations. We are pleased that the new Government has reacted positively to the Industry's suggestion to permit plantations on degraded forest lands on Public Private Partnership (PPP) basis. We are assured that necessary enabling provisions in the governing laws are under serious consideration to facilitate this. We are convinced that this will not only increase green cover and help the paper industry but also benefit the local communities as it is planned to include their welfare as part of the scheme. 2.2.3 Segmental review and analysis Despite these challenges, our paper division could increase the total Paper sales by 7.5% to 73616 MT from 68488 MT last year. Paper production was still higher at 74812 MT. Most of this growth actually came from our Writing & Printing products Tissue paper volume could go up only marginally due to capacity constraints. We launched high bright writing & printing papers during the year. While this did increase our cost of production, it helped us to achieve the growth in volumes in a fairly dull market. We have now signed an agreement with the suppliers of the new sizing chemical used in production of these high bright papers to manage a plant in our brmises to produce this chemical, which will result in significant reduction in the additional cost being brsently incurred. This plant should commence production within FY 15-16. Tissue papers accounted for 29% of our total paper volumes. Significantly, we were able to export 57% of our total Tissue paper sales to a diverse markets where our products have been very well accepted.. Our Caustic volume also increased from 30507 MT to 31902 MT with corresponding increase in sales of Chlorine & HCL also. However price realization from Caustic as well as Chlorine remained under intense brssure due to over-supply. Besides increase in volumes, we have also been able to achieve substantial improvements in our internal efficiencies in raw material yield, chemical recovery, energy conservation and coal consumption. However huge increases in input costs of Pulp wood, Coal and chemicals totally eroded the benefits arising out of higher volumes and better efficiencies. Overall, our Paper division achieved an increase of 11.9.% in net sales turnover to Rs.465.17 cr. from Rs.415.78 cr. last year. Yet because of cost increases caused by external factors, the division recorded a negative PBIDT of 9.33 cr. and a negative PBIT of 33.12 cr. 2.2.4. Risks and concerns - Amlai plant We have lately seen a reduction in input prices of Pulp wood and coal. However, we have to watch out for sustainability of these prices. The tough market condition for Writing & Printing papers remains another area of concern at least in the immediate future. . 2.2.5. Outlook - Amlai plant On the positive side, we are encouraged by the continuous improvements in our internal efficiencies and believe that these will lead to significant cost reductions. We are also hopeful about the expected opening up of degraded forest lands for plantations, which will help in the long run to increased availability of pulpwood around our plant and lower landed cost thereof. The down cycle in writing & printing paper segment has lasted too long this time and is due for reversal shortly. Export realisations from Tissue papers should also improve further due to more favourable exchange rate. We are therefore quite hopeful of substantially improved results from Paper business hereafter. (b) Brajrajnagar plant As reported earlier, operations at this plant continue to remain suspended. We have commenced a dialogue with the Odisha Government authorities to explore the possibilities of revival of industrial activity at the site. 3. Company's overall performance and analysis Sales and profit Our gross sales increased to Rs.1796.72 crores this year from Rs.1691.51 crores last year, while net sales increased to H1668.85 crores from Rs.1576.63 crores. We achieved a PBIDT of Rs.45.34 crores and cash profit of Rs.1.56 crores. As mentioned earlier, this is after providing for about Rs.25 crores spent on brand building campaign for Orient Electric. The resultant net loss after tax of Rs.28.65 crores this year against a profit of Rs.4.24 crores last year. We invested Rs.51.79 crores on capital projects during the year. Financial position of the Company continues to be fairly stable with our debt equity ratio at 0.22 and the DSCR of 0.84. We believe that your Company has performed fairly well and has invested a lot of its efforts towards overcoming the challenging circumstances faced in the last few years. We are sure that these efforts will result in accelerated progress hereafter. 4. Internal control systems and their adequacy The Company has established adequate internal control systems, which provide reasonable assurances with regard to safeguarding Company's assets, promoting operational efficiencies and ensuring compliance with various statutory provisions. In addition to its own internal audit department, the company has retained Price Waterhouse & Coopers (PWC) to regularly review internal control systems in business processes and verify compliance with the laid down policies and procedures. Reports of these internal audits are reviewed by the senior management and are also placed before and combrhensively discussed at meetings of the Audit committee. The Audit Committee reviews the adequacy of internal control systems, audit findings and suggestions. The internal audit group also keeps a track of and monitors the progress on implementation of suggestions for improvements. The Company's statutory auditors regularly interact with the Audit Committee to share their findings and the status of further improvement actions under implementation The Company is also taking required steps to change over to IRS accounting standards and has retained KPMG to assist it in this process. 5. Human resource development / Industrial relations The Company has adopted a progressive policy of development of its human resources through continuous training and motivation to achieve greater efficiencies and competencies. Progress made by the company was possible in no small measure by efforts of the entire team. The total number of permanent employees as on 31 March 2015 was 2736. Industrial relations were harmonious at all our units. Safety, welfare and training at all levels of our employees continue to be areas of major focus for the Company. The information in terms of the provisions of Section 134(3) (q) of the Companies Act, 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are as follows: (i) The ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year; (ii) the percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year; (iii) the percentage increase in the median remuneration of employees in the financial year; (iv) the number of permanent employees on the rolls of company; (v) the explanation on the relationship between average increase inremuneration and company performance; (vi) Comparison of the remuneration of the Key Managerial Personnel against the performance of the company; (vii) Variations in the market capitalization of the company, price earnings ratio as at the closing date of the current financial year and brvious financial year and percentage increase over decrease in the market quotations of the shares of the company in comparison to the rate at which the company came out with the last public offer in case of listed companies, and in case net worth of the company as at the close of the current financial year and brvious financial year; (viii) Fverage percentile in case already made in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration; (ix) Comparison of the each remuneration of the Key Managerial Personnel against the performance of the company; (x) The key parameters for any variable component of remuneration availed by the directors; (xi) The ratio of the remuneration of the highest paid director to that of the employees who are not directors but receive remuneration in excess of the highest paid director during the year; (xii) Affirmation that the remuneration is as per the remuneration policy of the company. Prevention of Sexual Harassment In terms of the provision of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, the Company has constituted Committee to deal with the instances of sexual harassment. During the financial year, the company has not received any complaint. 6. Cautionary statement Statements in this report on Management discussion and analysis relating to the Company's objectives, projections, estimates, expectations or brdictions may be forward looking statements within the meaning of applicable security laws or regulations. These statements are based upon certain assumptions and expectations of future events. Fctual results could however differ materially from those exbrssed |