MANAGEMENT DISCUSSION AND ANALYSIS REPORT GENERAL REVIEW Grindwell Norton Ltd ("GNO") is one of the subsidiaries of Compagnie de Saint-Gobain ("Saint-Gobain"), a transnational group with its headquarters in Paris and with Sales of Euro 39.6 billion in 2015. Saint-Gobain's businesses fall into four broad sectors of activity: Construction Products, Flat Glass, High Performance Materials and Building Distribution. GNO's businesses are a part of the High Performance Materials sector of activity. In GNO, the businesses are divided into two major segments: 1. Abrasives 2. Ceramics & Plastics BUSINESS ENVIRONMENT In the first half of 2015-16, on a low base, the Index of Industrial Production ("IIP") witnessed an increase, but this could not be sustained. Consequently, for the fifth consecutive year, the IIP grew by less than 3%. Although there are no signs of an imminent revival of industrial growth, continued low inflation, a relatively stable Rupee and the prospects of a good monsoon may combine to provide the trigger for a cyclical upturn. ABRASIVES SEGMENT REVIEW Products & Plants Bonded Abrasives, most commonly in the form of wheels but also in other shapes such as segment, sticks etc., are used for various applications ranging from polishing or lapping to removing high quantities of materials. Bonded Abrasives are used in brcision applications such as lapping, honing, super-finishing, race grinding, thread grinding, fluting, OD grinding, ID grinding, surface grinding etc. They are also used in rough applications such as snagging, cutting-off, burr removal, weld brparation etc. Bonded Abrasives are used by a very large number of users. The variety is very high. GNO makes over 15,000 different products in a year. Super Abrasives are made of diamond (synthetic or natural) or Cubic Boron Nitride and are used in brcision applications. Coated Abrasives products are engineered composites comprising of a backing, a bond system and abrasive grains and are designed for material removal and surface brparation. Coated Abrasives products are available in various shapes like discs, belts, rolls etc. to suit a wide gamut of applications. GNO offers the widest range of cutting-edge Abrasive products to the Indian market, made in India or sourced from other plants of Saint-Gobain. Saint-Gobain, having its own in-house, strong Research and Development ("R&D"), is uniquely positioned in the Abrasives industry, as it can leverage the capability of developing grain technologies suited for Abrasives applications. The Abrasives business has four manufacturing sites: Mora (near Mumbai), Bengaluru, Nagpur and Bated (Himachal Pradesh). All the sites are certified under ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007. Industry The Abrasives industry currently has three major players offering a full range of Abrasives products, one of which is GNO. GNO has a leadership position in several product-market segments. Apart from the three major players in the market, there are a few medium-sized players and a number of small local players. Besides, imports from China are brsent in many categories, particularly, at the low end. Some of the players from Europe and Japan have their agents and/or distributors to service mainly the brcision grinding or polishing or surface brparation segments. In the case of Coated Abrasives, a few important international players have set up conversion facilities and some have also set-up local manufacturing facilities. Also most of the Power Tool players are now focusing on developing their accessories business which includes Thin Wheels and some Coated Abrasives. The market, over a period of time, has become highly price sensitive. Key success factors are quality, cost, service and capability to provide total grinding solutions. Development & Outlook Saint-Gobain is a major player worldwide in Abrasives. It has a strong product portfolio, a strong R&D set-up with projects in both basic and applied areas and global reach, with plants and marketing/sales organizations all over the world. GNO benefits from being a part of such an organization, in terms of access to all developments in products and process technology, sourcing of products and development of exports Low growth of the manufacturing and mining sectors over the last five years has significantly affected the Abrasives business. 2015-16 has been another year of sub 3% growth for these sectors. There was little or no improvement in investment demand and in project activity. Consequently, volume growth was much below the brvious year and below expectations. The growth was mainly on account of new products and new markets (including export markets). While efforts were made to increase product prices, in a competitive and low-growth market, success was limited and the increase was below expectations. The business is yet to recover the significant cost increases of 2013 and 2014. Under these circumstances, the business delivered a reasonable performance with improvements in several areas. "The Next Level" initiative continued to engage the employees at all levels and there was progress on several dimensions. In addition, working capital, in general, and the quality of Receivables and Inventory, in particular, were in good shape. All in all, the Abrasives business strengthened its market and its financial position during the financial year. Looking ahead, while there is still no visibility on an industrial revival in India and while the forecast for the global economy is grim, the outlook for the Abrasive business in 2016-17 is somewhat positive. The business will focus on growing volumes (new products, new markets - domestic and export) and on increasing prices while continuing to focus on operational excellence, implementing various marketing programmes and The Next Level initiatives. Risks & Concerns (i) Industry & Market: The Abrasives business caters to a number of industries such as Steel, Automobiles, Auto Components,General Metal Fabrication and Woodworking. The dependence on any single industry segment is less than 15%. Demand for Abrasive products can get affected if all sub-segments of the industry perform badly at the same time (as has been the case in the last few years). Normally, this happens in an economic slowdown. There are a number of large customers serviced directly and there are several dealers to service small and medium customers. The largest customer, accounts for less than 3% of the total sales and the largest dealer, accounts for less than 3% of the total sales. In order to minimize the impact of a domestic downturn, GNO has been putting in efforts to develop export markets and will continue to do so. Export sales are not concentrated in any single country, but are sbrad over several countries. (ii) Technology: Abrasives have been used over a very long period of time and technological changes in terms of applications are gradual. GNO Abrasives is well positioned to anticipate and take advantage of these technological changes as Saint-Gobain is a World Leader in Abrasives with a very strong R&D Centre in the USA with regional R&D centres located elsewhere (including a new Centre in India). Both basic and applied research takes place at these R&D centers. GNO has full access to all the research and technology developments. (iii) Competition: The Abrasives Market has clearly been evolving from two major players to multi-players. The competitive landscape has become much more dynamic. With the economies in Europe growing very slowly, the attention of many global major players has turned towards India and China. Some of them are setting up their manufacturing operations in India and many of them are expanding their current infrastructure. On the other hand, cheap imports from China and increased participation in the markets by Power Tool players will make the market more challenging. To meet the growing challenges in the market, the business will have to continue to invest in technology, provide superior solutions and at the same time focus on improving cost competitiveness by improving operational efficiencies. CERAMICS & PLASTICS SEGMENT The main businesses in this segment are: (i) Silicon Carbide; (ii) High Performance Refractories; (iii) Performance Plastics. (i) SILICON CARBIDE ("SiC") Product & Plant Silicon Carbide grains are used primarily as raw material in the manufacture of Abrasives, Refractories and for stone polishing. SiC is manufactured at the plant located at Tirupati in Andhra Pradesh. SiC is also manufactured by the Company's subsidiary, Saint-Gobain Ceramic Materials Bhutan Private Limited, at its plant near Phuentsholing in Bhutan. Both the plants are certified under ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007. Industry In the domestic market there are three main players (including GNO) in the SiC business. GNO is the market leader. This market is also catered to by imports, mainly from China and, more recently, from Vietnam. The key requirements for success in the industry are quality and cost competitiveness. Entry barriers are high by way of capital investment and technology. Development & Outlook The Silicon Carbide business had a very disappointing year. Domestic demand for SiC continued to be stable, but weak. The business lost market share to imports (primarily from Vietnam). Exports also saw a significant decline. This was partly due to weak European demand and also due to the weakness of the Euro. The debrciation of the Euro also had an impact on export margins. The availability of low priced imports from Vietnam and China put increasing downward brssure on domestic prices. On the supply side, production at your Company's Tirupati Plant was affected by the disruption in power supply from Andhra Pradesh Gas Power Corporation Limited (on account of reduced availability of gas). Consequently, production, sales and prices witnessed a sharp fall and caused operating profit and margin to decline. Although from an external perspective, the outlook for the business in 2016-17 is uncertain, the worst seems to be over. The supply situation should improve, demand and prices are unlikely to fall further and the Euro has gained strength in recent weeks. All this should mean that the business results should improve in 2016-17. The focus in 2016-17 will be on price and cost management. In the medium term, the business needs to find an economically viable source of crude to grow. Risks & Concerns The major short term risk is posed by aggressive pricing by competitors from China and Vietnam. Regarding input costs, electricity costs across India are expected to rise, making it unviable to produce SiC crude at Tirupati. (ii) HIGH PERFORMANCE REFRACTORIES ("HPR") Products / Plants Refractories are used for processing ferrous and non-ferrous metals, as kiln furniture to fire ceramic wares, as filtering media, as wear resistance material and also as body protection plates. GNO manufactures mostly silicon carbide refractories and high alumina monolithics. GNO offers complete solution with expertise in design, engineering and manufacturing refractory systems for most of the demanding, high temperature and wear applications.HPR has two plants: one is located at Bengaluru and the other at Halol, near Vadodara in Gujarat. Both the plants are certified under ISO 9001: 2000, ISO 14001: 2004 and OHSAS 18001:1999. Industry GNO's High Performance Refractories Business caters to specialized refractory and ceramic product applications that straddle across industry segments like primary and secondary metal (ferrous / non-ferrous) production, Heat Treatment, Waste to Energy Conversion, Abrasives, Porcelain and Sanitary-ware. Specialized ceramic product based solutions are also used for Armour applications (protection of human and vehicular bodies) and applications that require resistance to wear. Development & Outlook 2015-16 was a difficult year for the business as investment in many sectors remained muted and because the foundry segment (secondary steel making) remained in the doldrums for most of the year. Several growth opportunities (mostly in export markets) have, however, been identified and developed and 2016-17 is expected to be a better year for the business. Risks & Concerns The lack of new investments will adversely impact growth. Product acceptance and competitive pricing will be critical in export markets. (iii) PERFORMANCE PLASTICS ("PPL") Product, Plant & Industry The Performance Plastics business produces and markets more than 800 standard and custom-made polymer products through three business segments: Engineered Components ("ENC"), Fluid Systems ("FLS") and Composites. Each demonstrates innovation, responsiveness to customer needs and polymer expertise. The major product lines in PPL are Bearings, Seals, Tubing & Hoses, Films, Fabrics and Foams. The major markets addressed are Automotive, Oil & Gas, Life Sciences, Construction, Energy and General Industrial. GNO has a plant for ENC and FLS situated at Bengaluru. This plant is certified under ISO 9001: 2008, ISO 14001: 2004, OHSAS 18001:1999 and TS1694. Development & Outlook The major growth drivers are: > New products and new markets > Success in new applications > Broad-basing of existing applications and markets > Specification driven approvals at customers The PPL business had a good year helped by strong growth in Automotive and Life Sciences segments. The Oil & Gas segment, which saw strong growth in the brvious year, declined as the year progressed. One of the key markets for the Plastics business is the automotive passenger vehicle market which witnessed growth in 2015-16.The focus has been on defending our high share in conventional applications, while trying to grow with new applications. The main aim of the business in 2016-17 would be to strengthen its position in existing markets while accelerating growth in new markets in the industrial, life sciences and construction segments. On the operations front, plans are being made to accelerate localization initiatives and to improve the cost position of the business in key growth segments. The key for growth of the PPL business is to have a well-trained, technical sale and application engineering organizations with good market coverage in order to identify and develop new applications and deliver high growth. Building such teams will continue to be a key priority for the business. Risks & Concerns Demand stagnation in key markets like Automotive and Oil & Gas is a major risk. Debrciation of the Rupee is also a risk as the business is import-intensive. Aggressive pricing action by competition (including low-cost Chinese imports) in certain segments is another risk. Risks & Concerns - Others 1. Financial GNO's financial management has always been governed by prudent policies, based on conservative principles. GNO's foreign currency exposure on account of imports and exports are appropriately hedged. GNO has a well-defined and structured treasury operation, with the emphasis being on security. 2. Legal & Statutory (i) Contingent Liabilities: Details of Contingent Liabilities are in the Notes forming part of the financial statements. (ii) Statutory Compliance: GNO ensures statutory compliance of all applicable laws and is committed to timely payment of all statutory dues. HUMAN RESOURCE During the year the focus has been on implementation of HR initiatives in order to promote Employee engagement and People development (for example, "RAINBOW" and "REFLECTIONS" programmes aimed at improving people management and leadership development skills). GNO continued to invest in training people in Environment, Health and Safety and World Class Manufacturing and to provide an environment in which employees can give their best and realize their full potential. OVERALL PERFORMANCE For the fifth consecutive year, growth of the Index of Industrial Production was under 3%. Against this backdrop, during the year under review, your Company's sales and operating profit registered a modest increase of 3% and 2% respectively. INTERNAL CONTROL SYSTEM GNO has an effective internal control environment which ensures that the businesses and operations are managed efficiently and effectively, assets are safeguarded, regulatory requirements are complied with and transactions are recorded after appropriate authorisations. The Company's strong and independent internal audit function performs regular audits. The internal controls are constantly upgraded based on internal audit recommendations. Every quarter the significant audit findings, the corrective steps recommended and their implementation status are brsented to the Audit Committee. SEGMENT FINANCIALS GNO has identified two segments in line with the Accounting Standards on Segment Reporting. The segments are Abrasives and Ceramics & Plastics. CAUTIONARY STATEMENT The Management Discussion and Analysis Report contains a few forward looking statement based on the information and data available with the Company and assumptions with regard to the economic environment, the government policies etc. The Company cannot guarantee the validity of assumptions and performance of the Company in the future. Hence, it is cautioned that the actual results may differ from those indicated, exbrssed or implied in this Report. |