MANAGEMENT DISCUSSION AND ANALYSIS 2014 - 15 Short Historical Background HBL was started as a small scale industry in 1977. The vision was to organize India's engineering talent, into a research based manufacturing company and also succeed as an exporter in products with engineering intensity. The first domain chosen for technology development was specialized batteries. Over the years HBL has developed technology in-house for a wide range of specialized batteries for aviation, defence, railways, telecom and industry, and is now globally recognized in this field. The second domain chosen for technology development was industrial electronics. The target markets chosen were "adjacent"; known to HBL because the customers already used HBL batteries. Initially focused on power electronics to charge batteries, this later grew into products for rail signaling, solar PV related applications, BLDC motors. (An early failure was Rectifiers for Telecom cell towers.) The company s position in this domain will need a few more years to become established, but the signs are all encouraging. As India reformed, other opportunities that did not need in-house technology arose; these were taken up in line with the HBL value of "entrebrneurial opportunism", as long as they were in the domain of Engineering. Defence projects and Spun Concrete are two such engineering businesses where in-house technology development was not the key. Spun Concrete products is now a good business, but defence projects are yet to start. Reasons Behind FY 11 - FY 14 Crisis It is common even for established companies to report fluctuating results. While HBL results also fluctuated, the fiscal years FY 11 to FY 14 were crisis years. The crisis arose from three independent negatives occurring at the same time: • Demand for Telecom Tower Batteries declined sharply due to various reasons (it picked up only in FY 2015). This was the largest contributor to sales. • Demand for Rail Signaling and Defence Projects, on which large investments were made, did not materialize at all. Term debt, used to finance this, led to severe stress on cash flow, with resulting problems which are commonly known. However, the assets on land and buildings are still useful. • Operational Management of the Lead Battery group suffered due to errors in judgment on people appointed to / allowed to continue, in key positions. The company's efforts to grow by strategic investments in other businesses were, as a group, profitable; but the cost of management being thus distracted was also high. In retrospect, the net impact was negative. 1. Management's Response to FY11 - FY 14 Crisis The last line in the Management Discussion and Analysis for 2013 - 2014 had said that : "HBL management has become stronger from our crisis, and results will soon follow". Beginning around April 2014, management had initiated a number of steps (particularly in the Lead Battery Group) : • Improving the calibre of Operations Management by recruitment. • Inventory reduction by more careful production planning and disposal of unusable material. • Better procurement (including some e-auctions). • Obtaining better prices where this was possible. • Emphasis on credit control and on collections. • Operations efficiency to reduce wastage in production. • Design changes in product to reduce cost and improve quality. 2. Interim Progress up to 30.6.2015 These efforts for improving profitability and strengthening the company continue. On several measures, results of these efforts are already visible. • Profit from operations in FY 15 was Rs 40 crs Versus a loss of over Rs. 4 crs in FY 14. • Sales were sustained; Rs 1330 crs Versus Rs 1280 crs. • Interest costs are lower in FY 15 by Rs 5.1 crs, compared to FY 14. • Inventories are lower by Rs 88 crs. By 31st March 2017, our ratios should be on par with engineering industry average. • Term debt is lower by Rs 38 crs. By 31 st, March 2017,Term Debt should be a very small percentage of Net Worth. • White collar Manpower lower by 12% • Sales in Q1 FY 15 were Rs 304 crs Versus Rs 285 crs for Q1 of FY 14 • Profit in Q1 of FY 15 was Rs 6.7 crs Versus loss of Rs 17.34 crs for Q1 of FY 14 3. Re-Organisation of the Company HBL's organization structure is being changed gradually to reflect two needs : succession planning for the medium term, and increased attention to operational efficiency in the short term. The company is being organized into Groups, and this transition will be completed by March, 2017. Operating Groups will have Divisions; and Divisions will have Business Units. The Groups and Divisions currently envisaged are shown below; but minor changes may occur. 4. Growth Opportunities and Investments The company has opportunities for rapid growth in the following domains. • Lead Batteries, both Domestic and Exports (FY 17). Imported equipment for scaling up production capacity of Lead Batteries has been ordered to brpare for this. • Nickel Cadmium Aircraft Batteries (exports) (FY 18). Facilities are being established at the Visakhapatnam Special Economic Zone, and in HBL America. • Rail Electronic Signaling Systems (FY 17). Additional Investments are minor. • Defence Make In India opportunities (FY18). Several large opportunities are being pursued, and even if a few fructify, growth will be rewarding. Significant amount of Capital may be needed in FY 17 & FY 18. • Industrial Electronics for Solar PV Systems (FY 18). Additional Investments are minor. 5. BATTERIES GROUP a) Lead Batteries 2 V Division i) Cellular Telecom HBL has been one of the two leading suppliers to this market, and has been serving the total customer base including infrastructure companies, infrastructure integrators, switch manufacturers and operators. The successful spectrum auction in 2015, the advent of 4G, continuing growth in data services through 3G and telecom penetration to rural areas (under universal service obligation) is expected to sustain the growth in telecom demand. This growth is expected to be further aided by the recent decision of the central government to spin off the tower infrastructure of BSNL as a subsidiary, which will provide greater opportunity to private operators to leverage the tower network of BSNL for better access to rural market. The need for micro BTS to support 4G and to eliminate much needed call drops is likely to stimulate additional demand - for both small and large VRLA batteries. ii) Submarine Batteries HBL finally obtained qualification for supplies from the Indian Navy. b) Lead Batteries 12 V Division i) Data Centers Continuing need for power back-up and thus the demand for batteries for data centers is aided by sustained growth in ITES, BFSI, e-retailing and services industries. Together, this provides enough opportunity for HBL to participate in the industrial UPS battery business. A technically superior battery - Pure Lead Tin (PLT) had been developed by HBL, who is the only manufacturer in India. The trend in data centers is for more energy efficient batteries which need to provide very high current for short duration; PLT is the best product for such application. HBL is in the process of establishing PLT in this segment; the size of this opportunity is bigger than the telecom segment. ii) Engine Starting Batteries HBL is making good progress in Diesel Engine (DG) starting battery segment with its speciality PLT batteries in both AGM and Vented version. HBL plans to be a significant player in this segment backed by its growing association with leading DG and Heavy Earth Moving Equipment manufacturers, supplies to telecom tower companies and the replacement market. Widened the export market for PLT battery in battle tank application. Received commercial order from Heavy Vehicle Factory, Avadi for MBT Arjun tanks for the Indian army. Received commercial order from Volvo Renault-France for military trucks. iii) Vehicle Batteries HBL is keen to make an entry into the large and growing 2W replacement market and in the emerging market for e-rickshaws. HBL has completed the development of two wheeler (2W) AGM battery range and batteries for e-rickshaws; these batteries are under field trial. iv) New Lead 12V Battery Markets being developed HBL continues to invest resources, in improving its products and processes and for developing products for niche' application and markets. Some examples are: • Received an order from Siemens for a battery system for exbrss trains in Germany. • Developed high energy density battery for GE Health Care. c) Specialised Batteries Division • A sharp decline in the global oil prices has resulted in significant reduction in capital investments by the Oil companies globally. This has temporarily reduced their demand for Nickel Cadmium Batteries. • HBL has been successful in the market for Metro Coach Batteries in India. Awarded Kochi Metro order for onboard application for supply of Nickel Cadmium Batteries. This adds to HBL's Ni-Cd brsence in Metro applications in India, adding to existing fleet in Delhi, Jaipur & Kolkata metros and Mumbai. • Got large extension order for supply of Ni-Cd Batteries for key SCADA application in Delhi Metro Phase -III extension project & for Kochi Metro from L&T, Siemens, IRCON and Alstom. • Arrangements are under implementation for making Nicad Aircraft Batteries in the USA, for sale there and in other markets. 6. Engineering Group a) Electronics Division FY15 saw several product development projects in Railway Signaling like Train Collision Avoidance System, Electronic Interlock and Digital Axle Counter reach important milestones that will allow them to be commercialized in FY16. Tenders are expected late in FY 16 and sales should commence FY 17. b) Defense Division Consistent with the policy of the new government to encourage indigenous production of critical military equipment, HBL was awarded contracts for development of specialized batteries and propulsion motors for Heavy Weight Torpedos in FY 16. These are engineering challenges and success of these projects, will make HBL one of the few companies in the world with these technologies. The award of these contracts reinforces the perception of HBL as a true engineering company and will have spin off benefits. c) Engineering Division Until now, HBL was supplying only batteries for rolling stock applications in India and abroad. HBL is now moving up the value chain by acquiring capability to supply DC Power Systems that include batteries, ruggedized enclosures, electrical equipment etc. Towards this goal, HBL acquired a critical welding qualification to comply with stringent European standards. This will allow HBL to expand the scope of products and services that can be offered to European customers, and thus build credibility to participate in the huge backlog of demand for electric rail mobility in India itself. HBL has designed and developed a BLDC motor for electric rickshaws. This has been approved by ICAT -Manesar and is competitive in cost with imported Chinese motors. Spun reinforced Concrete Products. A third plant is under erection in Andhra Pradesh and will be in production early in 2016. 7. Overview The financial years 2014 - 15, and 2015 - 16, have been generally recognized as difficult for Indian Engineering Industry, and HBL is not an exception. . Government expenditure on Defence and Railways (to both of which a lot of time & investment were allocated) has been below expected levels; but could improve as early as 2016 - 17, and more likely in 2017 - 18. Exports have been encouraging because HBL's products are not commodities, and to this extent the company's core vision has proven to be robust. In summary, Management sees the two years 2015 - 17 as a period of consolidation, to brpare for rapid and profitable growth from FY 18 onwards. |