MANAGEMENT DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with the Company's financial statements included herein and the notes thereto. The financial statements have been brpared in compliance with the requirements of the Companies Act, 2013 and Generally Accepted Accounting Principles (GAAP) in India. The Company's management accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably brsent the Company's state of affairs and profits for the year. Investors are cautioned that this discussion contains forward looking statements that involve risks and uncertainties. When used in this discussion, words like 'will', 'shall', 'anticipate', 'believe', 'estimate', 'intend', 'expect' and other similar exbrssions as they relate to the Company or its business are intended to identify such forward-looking statements. The Company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results, performances or achievements could differ materially from those exbrssed or implied in such statements. Factors that could cause or contribute to such differences include those described under the heading "Risk factors" in the Company's prospectus filed with the Securities and Exchange Board of India (SEBI) as well as factors discussed elsewhere in this report. Readers are cautioned not to place undue reliance on the forward-looking statements as they speak only as on their date of statement. Information provided in this Management Discussion and Analysis (MD&A) pertains to Aro Granite Industries Limited (the Company) unless otherwise stated. Economy 2014-15 was a year of stagnation for the domestic economy that, over the brvious two years, had weathered a series of domestic and external headwinds. With the Lok Sabha elections in May 2014 there was hope of a new Government coming with absolute majority, driven by the promise that they would drive long awaited structural reforms. Over the course of the year while efforts were made to overcome some of the policy and supply side bottlenecks, realisation has set in that it will take some time for the economy to recover. Land acquisition and environmental & project clearances have become impediment to growth and the Central Government is trying to resolve many of these issues. While there are initial signs of growth a lot more needs to be done to pull the economy out of its current slump. While manufacturing growth has stagnated, services growth has gathered some momentum, increasing from 9.1% in FY2013- 14 to 10.2% in FY2014-15. This has offset the drag on agricultural growth which has fallen from 3.7% a year ago to 0.2% in FY2014- 15 amidst weather disturbances in winter and the late arrival of the monsoon in the summer. Granite Industry Overview Granite is one of the most sougtafter material among all building stone. In the ancient times, granite pillars and beams were used to support huge structures of temples and palaces and were used for making protective walls. Now with the invention of modern tools of better hardness and polishing ability, use of granite has increased on account of its aesthetic value. Granite is in demand due to its amenability for taking mirror like polish, high combrssive strength, longevity and aesthetics. Granite finds application in many areas; accordingly market is segmented among four product categories, namely - Natural stone processing industry - Building Industry - Funerary Industry and - Consumer market The natural stone processing industry uses raw and semi finished products, and the other three segments use finished products. Slabs and raw blocks are sold to the processing industry. The processing industry in turn processes custom made products and various other products and sends these to the other three segments of the market. Around 80% of the natural stone products are consumed by the building industry and more detailed segregation is given below Consumption of Granite is driven by USA, Europe and other developed countries. In recent years USA and Far East has been the biggest contributor in the global demand for finished granite. Export to USA was earlier impacted due to sub-prime crisis, but now USA market has started to grow again. Major competitors for India in international market are Brazil and China. The share of India in the US market remained stagnant at 1415% during 2008-2011, but on the same time share of Brazil and China rose in US market. All the countries are having their own set of competitive advantages. Brazilian granite is considered as one of the best qualityand Brazil is the largest procurer and supplier of granite in the world. More than half the Brazilian production is being exported, mostly to North American market. In terms of weight, around half the Brazilian natural stone export include rough block of granite. China even after being the late comer in the granite industry, has built significant market share in the granite industry. China has limited reserves of granite, but imports rough dimensional block of granite from everywhere in the world for processing and value addition. China imported rough blocks amounting to US Dollar 2.3 Billion and exported processed granite slabs and tiles of total value of around US Dollar 4.13 Billion. Chinese exporters are most prices competitive but their quality is not considered among the best. India with its huge reserves offers wide variety of colours and shades. India possesses some special colours, one of them is black granite which is unique to it. Black granite has huge demand in USA. India has created its own niche over the last few years. While India's exports grew at a rapid pace between 1994 to 2007, the growth has stagnated over the last few years. Indian Granite Industry India is endowed with abundant resources of a wide variety of granite, comprising over 200 shades. As per a Ministry of Mines report in January 2015 India has an estimated 46,230 million cubic meters of granite resources. Of these resources, 264 million cubic meters, that is less than 1%, falls in the reserves category while the remaining 45,996 million cubic meters that is 99% falls in the resources category. Geological analysis shows that only 3% of the available resources in India are currently being explored. In the world market, there are over 500 varieties of granite of which India supplies about 200 varieties. India with vast varieties of granite and stones is one of the major producer and supplier of natural stone and granite products. Indian granite stone is known for its elegance, aesthetic quality and its durability. In minerals category, besides iron ore, natural stone is the second largest foreign exchange earner for India. Indian granite industry employs more than 1 Million people and generates revenue for various states government. Geographically in India granite is found in many state of the country. Processed Granite demand is more in the global market than Indian market due to it being expensive than other stones, so large part of the Indian granite is exported to other countries. India export granite to more than 90 countries, and export both crude or roughly trimmed and polished or value added granite. Quantity wise Crude or roughly trimmed granite is exported most; however export of polished or other granite is most in value terms. India exported Rs.12,047Cr of granite in Financial year 2014. Even after being the abundant reserves and varieties of colors, Indian industry is facing challenges and not performing well. Indian granite industry is facing policy issues on many fronts. Major problem remain for industry is availability of raw material which is caused by irregular mining policy, and import policy. Granite is a Minor Mineral under the MMDR Act 1957. The grant of various mineral concessions for granite is therefore administered under the Minor Mineral concession Rules of the respective states government. State government has all the power to make rules for leasing and operating of lease. State government used to grant lease on first come and first served basis, and licenses were granted to person close to ruling parties. Over the last few years many granite mines and quarries have closed down due to illegal mining. Apart from delay in granting fresh lease and non- renewals of leases there are various other restriction like declaration of eco-sensitive zones around national parks and wildlife sanctuaries and declaration of revenue land as reserve forest further created shortage of raw material. This resulted in the increase of prices of raw gramote blocks. Rising prices of raw material have forced Indian granite processors to rely on imports. Import of granite dimensional block is restricted due to EXIM policy of India. In EXIM policy import of rough marble dimensional block is kept under restricted list, but import of granite slabs and tiles are kept under the open general license without any value cap. Being no restriction on import of finished product from China, Indian granite processors finds it very difficult to sell their products in india as the prices offered by Chinese players are lower in comparison to Indian players. There are very few ports in the country which handle granite due to which granite companies has to face problems in fulfilling the export orders. Withdrawal of export incentives has further impacted the export competitiveness of Indian granite processors. Another factor that worked against the industry is the steep debrciation of Brazilian Real against US Dollar in the second half of 2014. Brazil itself is a big exporter of raw and processed granite blocks. Their products have become cheaper in the US market, which in turn has impacted the competitiveness of the Indian granite blocks. Our Business Our company is a 100% export oriented, located at Hosur, Tamil Nadu. Our company exports to more than 50 counties. We have received the "Star Export House" certification from ministry of commerce and industry and has been awarded with "Special Export Award" by CAPEXIL for outstanding export performance for 7 years in a row. Our business is classified across 2 segments - Granite Slabs - Granite Tiles Granite Slabs Granite slab unit has installed capacity of 585,000 square meters per annum. For Random Granite slabs we process larger blocks (Slab sizes 150 X 270 cm up) which we sell to wholesalers who in turn sell to fabricators who cut and finish (fabrication process) the slabs into the finished product like Counter Tops, Vanities, Steps & Risers etc. Once the blocks have arrived we trim or "square" them in one of our 8 Mono Wire saw machines, so as to better utilise the full gangsaw trolley. The random slabs are processed in our 12 Gangsaws after which they are taken for grinding in our head grinding line. The next step is to epoxy treat the slabs in our 2 resin lines. This is a very critical step as the epoxy helps to cover up fissures in softer material (especially the ones imported from Brazil) and to give the slabs a better mirror finish in one of our 20 head polishing lines. A final inspection is done before the slabs are packed in pallets and loaded into the containers. There is a good demand across the world for random slabs in 2 and 3cm thickness and in some countries we process higher thickness of 4-7 cm for monument purposes. However world wide the most common use for random slabs is for Kitchen Counter Tops and Vanities (bathroom counters). For slabs we are facing competition from Engineered Stone, which is becoming a brferred product for a lot of architects around the world. Granite Tiles Granite Tiles Unit has capacity of 360,000 square meters. We process granite tiles in many standardised formats. The most popular being 61 X 30.5 X 1cm (2ft X 1ft) 61 X 61 X 1.5cm (2ft X 2ft) and 60 X 40 X 1.2cm (24inches X 16inches). These tiles are processed and finished and are ready for the site installation. Due to price competition and smaller size requirements we use smaller blocks (available at better rates) to process tiles. Once the blocks are recovered they are loaded onto the trolleys and the tops of the blocks trimmed or flattened in our Trimming machines. The same trolley is then fed into one of the 4 Multi Blade Cutting Centers that have two arms that can do the Vertical and Horizontal Cut simultaneously to improve the Rate of Production. Once the block has been cut into Strips, the Strips are loaded into the calibration and grinding line. The Strips are then Epoxy Treated in the resin line to fill up the fissures and to help attain a better mirror finish for the polishing. Once the resin has dried we polish the strips in our 20 head polishing line. The polished strips are then converted to the desired tile sizes in our cross cutting machines before being taken to the Calibration and Chamfering Machine. The Tiles are now finished. They are inspected for quality where we reject the tiles that do not meet our quality standards and segregate them as per colour. These are then packaged in crates and shipped to our customers to various parts of the world. Our major markets for tiles are Germany, Italy, Russia, Japan, Netherlands and most other parts of Europe. We face stiff competition from other natural stones (marble and travertine), engineered stone, ceramics and porcelain tiles, wood, carpets and other floor surface materials. We have an established brand for granite tiles and this is a stable but a slow growing business for us. Company Strengths Aro Granite has over the years become the largest processed granite exporter out of India. We have built our reputation over the years and currently exports to over 50 countries. We have capitalised on the export opportunities by building on our strengths. These include - The processing unit is located in Hosur, in the heart of the granite mining belt - We currently export to over 50 countries - Product quality which is considered one of the best in the Indian Industry - Access to over 100 shades (from Tamil Nadu, Karnataka, Andhra and Telangana along with other southern states, and from International blocks from Brazil, Norway, Finland, Africa, Iran, Ukraine delivered through Chennai Port), giving it a wide range of inventory to satisfy customer needs - Well developed marketing network which has been built over the last 2 years - We are known for our transparent dealings and ethical business practices - HR practices have reduced attrition to a minimum allowing us to maintain a continuity and uniformity in product quality and processing - We are also the first granite company in India to be awarded the Integrated Management Systems (IMS) Certification from TUV Nord (covering QMS 90011:2008 for Quality Standards, EMS 14001:2004 for Environmental Standards and OHSAS 18001:2007 for Health and Safety) Operational Review FY 2014-15 started on a good note. We expanded our distribution network and had added a few more countries for exports. Midway through the year, things started slowing down. The standoff between Russia and Ukraine caused western countries to impose sanctions on Russia, which was emerging as a big market for our products. Our exports to Russia came to a standstill because of those sanctions and we had to focus our energy to recover dues for the goods already exported. We decided to invest in improving the overall operational efficiencies for the future. For this purpose we placed orders for 2 Mono wire machines, 1 Polishing line to replace the first polishing line which completed 15 years and a Gantry crane to Load and Unload blocks. These investments were done largely to de-bottleneck our existing capacity and the effect of these will be seen in the coming years. We are also in the midst of constructing a new 110,000 Sq ft Warehouse & Showroom, where we will be able to better display our inventory to customers who visit us. This will also help us streamline our Inventory Management Systems and Dispatch Systems. We will also be introducing a new ERP package to streamline our inventory management & resource planning. All this should result in a better and quicker customer experience enhancing our clients overall satisfaction. We have also planned to enter the highly Quality Conscious CUT-to-SIZE market where we will cut our random slabs to the size, dimensions and shapes to the custom orders of our clients. This will enable us to add more product ranges to our current portfolio including Steps & Risers, Custom Counter tops, Window Sills, Larger Format Tiles etc. This should lead to a better rate of Raw material recovery. This project is expectet to start by January 2016 Financial Review During the financial year FY2014-15, company registered a turnover of Rs. 255 Crores against Rs. 251Crores in FY2013-14. The sales of the company remained flat in the year. The year started on a good note but in the second half the sales started slowing down due to the Euro debrciation and the impact of sanctions on Russia, which was emerging as a big market for us. Net Profit of the company declined from Rs. 21 Crores last year to Rs. 17 Crores in this year. Last year the profits included the one time gains from the divestment of Unit 1, and so adjusting for that profits grew by 15.83%. Initiatives We have bought a 11 acre land parcel about 2 kilomiter our existing plant site, where we shifted and started to dump all the slurry accumulated on a 5 acre site adjoining the factory brmises. After clearing up of this land we have started the construction of a new warehouse/showroom there. This will be used to store our finished inventory and help us display and sell a larger range of granite slabs. We are also setting up a CUT-TO-SIZE facility, to meet the customized requirements of our distributors. It will result in better margins and will also help in utilising our inventory better. This will add a few new product ranges to our portfolio including Larger Format Tiles, Steps and Risers, Window Sills and custom Countertops Risk Factors Adverse Regulatory Policies Many granite mines and quarries have closed down over the last few years due to illegal mining, withdrawal of environmental clearances or irregularity in the allotment process. This has caused many designs and colours becoming unavailable. The company has decided not to acquire any mines due to this uncertainty and has built strong relationships with the mine owners to get the first right of refusal for their products. Shortage of Raw Material Closure of many mines has caused big shortage in raw material. This can have a big impact on the overall competitiveness of the industry in the global export markets. The company has started sourcing from new mines in other geographical regions like Rajasthan and Andhra Pradesh. The company has started importing raw blocks from countries like Brazil, Norway and South Africa and gradually building its product range. Currency Apbrciation In 2014, the currency of Brazil debrciated by more than 25% against the US Dollar, whereas the rupee debrciation was very limited. This had made imports of granite from Brazil, which is a largest exporter of granite blocks, cheaper in the US market. This in turn has impacted the demand from India and limited the growth of the industry. If this continues then it will impact the margins of the industry in the long run. The company is trying to find new markets for its products and currently exports to over 50 countries. Change in Consumer Preference Over the last couple of years, the demand for engineered stone has improved at the expense of natural stones, which includes granite. While this demand is limited to certain countries, this trend could accelerate in the coming years and impact the long term demand potential for granite. The company is aware of the trend and tracking the market closely. In the long term it is looking at options to diversify its revenue stream. Since 2012 the granite export industry has moved from a order driven market to a STOCK-AND-SELL market. This has adversely impacted the dynamics of the industry and increased the working capital requirements. The demand has not recovered and the whole industry is facing a challenge. Many small players have closed shop. The company has taken a number of initiatives to differentiate itself in a challenging environment. It is building a 110,000 sq ft warehouse to better store and display its inventory. It has invested in debottlenecking to improve its throughput. Another initiative is to produce CUT-TO-SIZE slabs to meet the demands of end customers. This will allow it to consume smaller size raw blocks and also improve upon its realisations. We are positive on the long term prospects of the industry and positioning ourselves to be the supplier of choice for our customers. Many of the initiatives we have taken will start showing results in the next year, by which time we expect the demand also to recover as exports out of India again become competitive with those from other countries. |