MANAGEMENT DISCUSSION AND ANALYSIS RE Cautionary Statement: Members and Investors are cautioned that the discussion in this section of the Annual Report may contain statements that involve risks and uncertainties. Forward-looking statements mentioned may involve risks and uncertainties that could cause results to differ materially from those projected. Consequently, actual results, performance or achievements could thus differ materially from those projected in any such forward looking statements. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The Company assumes no obligation to update or revise any forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors. THE COMPANY The Company is the flagship Listed Company of 3M Company, USA in India. 3M Company, USA holds 75% equity stake in the Company and is a diversified technology and science Company with a global brsence in the following businesses: Industrial; Health Care; Consumer; Safety and Graphics; and Energy and is among the leading manufacturers of products for many of the markets it serves. Most of its products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies. The Company has manufacturing facilities in India at Ahmadabad, Bangalore, Pune and has a R&D Center in Bangalore. As at March 31, 2016, the Company had employee strength of 1,388 personnel. The Company managed its operations in five (5) operating business segments: Industrial; Health Care; Consumer; Safety and Graphics; and Energy. The Company's five business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for deficient sharing of business resources. These segments have worldwide responsibility for virtually all 3M product lines. 3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, converters, distributors and dealers in a wide variety of trades in many countries around the world. The Management of the Company believes that the confidence of wholesalers, retailers, converters, distributors and dealers in 3M and its products is a confidence developed through long association with skilled marketing and sales rebrsentatives and has contributed significantly to 3M India's growth and its position in the marketplace. Global Economic Overview Global growth is projected at 2.3% for 2016 and 2.7% for 2017. Some near term economic indicators have shown improvement leading to the improved future forecast. In USA, domestic activity remains modest and the average GDP growth for 2016 may fall below 2%. Eurozone is slated to grow at 0.5% to 0.6% in the first quarter of this year. In China, growth is expected to be 6.2 to 6.5%. Foreign Exchange rates continue to cause turmoil in the economy. India Economic Overview India has a strong GDP forecast for the next 5 years, indicating a +7% level for the next few years. The IIP has not been at the expected levels of 8% however. Inflation has been under control, and relative to most economies, the exchange rate has not risen as sharply. Some of the key trends in the market are; > Pickup in consumption: We see strong growth in retail, construction and healthcare. With the increasing income in the middle class, we are also seeing a larger use of life style products with Indian consumers. > Increased focus on sustainability: We are seeing a rising focus in the government as well as consumers for air quality and water quality. Several reforms are being introduced by the government to improve the environment, including green initiatives. > Rapid adoption of ecommerce: Ecommerce is helping companies better target their customers, and make themselves more relevant. It is also helping them reach more efficiently into Tier II towns. > Make in India campaigns leading to increased FDI in India: Several industries have benefitted from the Make in India campaign, especially Electronics, Automobiles, Defence and SME sectors. Increased manufacturing in India will also help improve the Tier 1 and Tier 2 supply market in India. > Smart cities: Through this initiative, the government has showcased their focus on providing more urban solutions to the country. The government is working closely with system integrators and partners to plan for a more sustainable future for Indian cities RESULTS OF THE OPERATIONS OF THE COMPANY The Company registered an overall turnover growth of 14.31% at Rs. 212,019.48 Lakhs for the financial year ended March 31, 2016 compared to Rs.185,477.60 Lakhs in the brvious year. The Profit Before Interest and Debrciation was at Rs. 35,906.79 Lakhs compared to Rs. 21,758.98 Lakhs for the brvious year. The operating margin for the current year was at 16.94% compared to 11.73% for the last year. Profit Before Tax was at Rs.30,799.23 Lakhs compared to Rs. 16,456.22 Lakhs for the brvious year. Profit After Taxation was at Rs. 20,092.98 Lakhs compared to Rs.10,834.16 Lakhs for the brvious year. Lower material cost and interest, portfolio prioritization and expense productivity increased the profitability at all levels for the year under review. Export Sales was at Rs.4,672.24 Lakhs for the year ended March 31, 2016 compared to Rs. 3,942.92 Lakhs in the brvious year, an increase of 18.50%. Other Operating Income: The other income was at Rs. 1,721.61 Lakhs for the year 2015-16 when compared to Rs. 1,447.84 Lakhs for the brvious year 2014-15. Cost of Goods sold: The % of cost of raw material consumed as against sales for the year 2015-16 has gone down to 56.68% as against 59.32% for the brvious year 2014-15 mainly on account of increase in productivity, portfolio prioritization etc.,. Employee cost as a % of sales for the year 2015-16 stood at 11.91% (brvious year 13.27%) at Rs. 25,252.77 Lakhs ( brvious year : Rs. 24,616.49 Lakhs), lower by 10.26%. Sales per employee have improved by 20.32% to Rs.152.75 Lakhs (no. of employee's 1,388) in the current year 2015-16 from Rs. 126.95 Lakhs (no. of employees 1,461) for the brvious year 2014-15. Finance Cost: The interest cost for the year 2015-16 was at Rs.218.65 Lakhs compared to Rs. 342.27 Lakhs in the brvious year 2014-15. The interest cost is on account of lease rentals of vehicles and office equipment. Interest earned: The Company earned Rs. 1,335.40 Lakhs on the surplus during the year 2015-16 when compared to Rs. 66.59 Lakhs during the year 2014-15 by keeping the funds in flexi deposits with the Bank. Earnings per Share (EPS): The EPS (Basic and Diluted) of the Company for the year 2015-16 was Rs. 178.36 per share as compared to Rs. 96.17 per share in the brvious year. Share Capital: The Company has only one class of share, i.e. equity share with a face value of Rs. 10 each. The Authorized/Issued/Subscribed and fully paid-up Capital as at March 31, 2016 was Rs. 11,26,50,700 (divided into 1,12,65,070 equity shares of Rs. 10 each). During the year under review, the Company has not issued shares with differential voting rights nor granted stock options nor sweat equity. Reserves & Surplus: Entire profit of Rs.20,092.98 Lakhs is retained in profit and loss account for the year ended March 31, 2016. The Reserves & Surplus was at Rs. 99,737.82 Lakhs including the current year retained profit. Shareholder's Fund: The total shareholder funds increased to Rs. 100,864.33 Lakhs as at March 31, 2016 from Rs. 80,771.35 Lakhs as of the brvious financial year 2014-15 end, rebrsenting a growth of 24.87% mainly on account of retained profits of the current year. Debrciaton: The debrciation charge for the current year is lower at Rs. 4,888.91 Lakhs as against a charge of Rs. 4,960.49 Lakhs of brvious year 2014-15 due to full year amortization of Technical Center (CTC) equipment at Gurgaon. Fixed Assets-Capital Expenditure: The gross Fixed Assets as at March 31, 2016 was Rs.58,461.81 Lakhs as compared to Rs. 58,712.71 Lakhs of brvious financial year 2014-15. The Company has incurred a capital expenditure of Rs. 1,092.46 Lakhs (Net of capital work-in progress and capital advances) during the year 2015-16 (brvious year : Rs. 1,471.70 Lakhs), a decrease of 25.77% year on year. Inventories: Inventory as at March 31, 2016 amounted to Rs. 29,051.15 Lakhs as against Rs. 29,556.55 Lakhs of brvious financial year 2014-15.The inventory ratio has decreased to 88 days as at March 31, 2016 from 98 days of brvious year 2014-15. Trade Receivables: Trade Receivables as at March 31, 2016 amounted to Rs.28,273.89 Lakhs as against Rs. 24,912.02 Lakhs of brvious year 2014-15. The debtor's turnover ratio was at 49 days (brvious year: 49 days). Cash and Bank balances: The total balance of cash and bank balances as at March 31, 2016 was Rs.37,087.50 Lakhs as compared to Rs. 11,390.95 Lakhs as at March 31, 2015. (A) INDUSTRIAL BUSINESS: The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives, adhesives, advanced ceramics, sealants, specialty materials, closure systems for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles. Major industrial products include vinyl, polyester, foil and specialty industrial tapes and adhesives; Scotch® Masking Tape, Scotch® Filament Tape and Scotch® Packaging Tape; packaging equipment; 3M™ VHB™ Bonding Tapes; conductive, low surface energy, sealants, hot melt, spray and structural adhesives; reclosable fasteners; label materials for durable goods; and coated, nonwoven and microstructure surface finishing and grinding abrasives for the industrial market. Other industrial products include fluoroelastomers for seals, tubes and gaskets in engines. Major transportation products include insulation components, including Thins late™ Acoustic Insulation and components for catalytic converters; functional and decorative graphics; abrasion-resistant films; adhesives; sealants; masking tapes; fasteners and tapes for attaching nameplates, trim, moldings, interior panels and carpeting; coated, nonwoven and microstructure finishing and grinding abrasives; structural adhesives; and other specialty materials. In addition, 3M provides paint finishing and detailing products, including a complete system of cleaners, dressings, polishes, waxes and other products. (B) HEALTH CARE BUSINESS: Our Health Care business segment serves markets that include large multi-specialty hospitals and small clinics, dental and orthodontic practitioners, processed food manufacturers and pharmaceutical companies. Our offerings include medical and surgical supplies, medical devices, skin & wound care and infection brvention products & solutions, drug delivery systems, dental and orthodontic products and food safety products. (C) SAFETY AND GRAPHICS BUSINESS: The Safety & Graphics business serves a broad range of markets that serve to increase the safety, security & productivity of people & improves facility design, aesthetics, hygiene, etc. Major product offerings include personal protection products; tragic safety & security products, border security solutions; public safety & identity management solutions; commercial graphics sheeting & systems; architectural surface & lighting solutions; cleaning & protection products for commercial establishments, etc Personal protection products include maintenance-free & reusable respirators, personal protective equipment, head & face protection, body protection, hearing protection & protective eyewear. In traffic safety & security, 3M provides reflective sheeting used on highway signs, vehicle license plates, construction work-zone devices, pavement marking systems, electronic surveillance products, ilms that protect against counterfeiting & reflective materials that are widely used on apparel, footwear & accessories, enhancing visibility in low-light situations. Traic safety & security also provides remote people-monitoring technologies used for offender-monitoring applications. The portfolio also includes RFID tracking technologies & Automatic Number Plate Recognition (ANPR). Major commercial graphics products include ilms, inks, digital signage systems & related products used to produce graphics for vehicles, signs & interior surfaces. Other products include spill-control sorbents; nonwoven abrasive materials for loor maintenance & commercial cleaning; floor matting, housekeeping chemicals, etc (D) CONSUMER BUSINESS: The Consumer segment serves markets that include consumer retail, modern trade, office retail, and the pharmacy channel. The products in this segment include office supply products, stationery products, home care products, protective material products, and consumer health care products. Major consumer products include Scotch® brand products, such as Scotch® Magic™ Tape and Scotch® Glue Stick; Post-it® Products, such as Post-it® Flags, Post-it® Note Pads and Dispensers; home care products, including Scotch-Brite® Scour Pads, Scotch-Brite® Scrub Sponges, Scotch-Brite™ Microfiber Cloth products; for the pharmacy channel - Nescafe™ Adhesive Bandages; and Nexcare® branded first aid product lines. (E) ENERGY BUSINESS: Infrastructure Protection Products Division of 3M offers a combrhensive array of products that ensure effective protection against corrosion for a variety of installations and structures. While 3M™ Scotchkote™ Fusion Bonded Epoxy Powders and Scotchkote™ Liquid Epoxy Coatings offer protection for steel pipelines, associated fittings and structures used in the oil, gas, water, industrial and construction markets, the range of 3M™ Scotchcast™ Powder Resins are ideal for OEM electrical insulation applications. 3M Dynatel Locators combine simple interfaces, large backlit high-resolution graphics, excellent balance and ergonomics with brcision locating capabilities to quickly and accurately identify underground assets. In Renewable Energy 3M is helping to transform the fields of Generation & Conservation of Energy. 3M supports solar & wind energy initiatives through product solutions such as ilms, tapes, coatings, encapsulates and adhesives that help reduce the cost of energy generation. For energy conservation and management needs of customers we provide affordable window film technology that ensures effective health and environment protection Action Plans: Our action plans are well aligned to the market opportunities. > Seeing the pickup in consumption while the IPI remains stagnant, 3M has increased focus on consumption driven businesses. This has yielded strong results for us with 60% of our growth coming from a few top actions in consumption businesses, like adoption of newer business models, and increased spend on digital marketing. We have also focused our geographic penetration plans mainly for consumption driven businesses. > 3M is also tapping on the increased sustainability focus of companies as well as the government through introduction of products and green initiatives. 3M has increased focus on sciences that save lives, save resources, save energy and improve productivity deficiently. > 3M targets to have 10% of its sale through ecommerce in the next 5 years. 3M has beaten its own plans for ecommerce in 2015, and is laying a foundation for much faster growth through ecommerce in the coming years, through strategic tie ups. > 3M is known globally to be a leading manufacturer. The Make in India initiative is helping 3M deploy its manufacturing strength within the country. The evolving Electronics, Defence and Automobile manufacturing will help 3M lay a very strong foundation for local manufacturing in the country. > 3M's philosophy for smart cities is to help develop the market for smart cities through collaboration with other relevant stakeholders with similar interests. We are working closely with the government to help India develop smart cities. JRIUNIIIES AND THREATS 3M's globally competitive cost positions and well crafted business strategies have enabled it to retain its leading market positions. Your Company strongly believes in the 3M™ brand equity and its ability to provide its customers with innovative solutions. The Company is operating in a highly competitive market which may exert brssure both on the top line as well as the bottom line of the Company. As the Company's products involve expertise in product development, manufacturing and marketing, are subject to competition from products manufactured and sold by other technologically oriented companies both within India and outside India. In addition, Inflation, rupee debrciation, high commodity prices and hardening interest rates remain key challenges needing focused attention. RISKS AND CONCERNS Provided below are cautionary statements of what we believe to be the most important risk factors applicable to the Company. • The impact of increase in duties on the products of the Company and consequent increase in the cost of goods sold. • The Company's results are affected by competitive conditions and customer brferences. • The Company's growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market. • Prices of inputs are expected to rise significantly. Whilst the Company continues to pursue cost reduction initiatives, increase in price of input materials and rupee debrciation could impact the Company's profitability to the extent that the same are not absorbed by the market through price increases and/or could have a negative impact on the demand in the domestic market. • The operations are subject to risk arising from fluctuations in exchange rates with reference to currencies in which the Company transacts. • The Company's future results may be affected if the Company generates fewer productivity improvements than estimated. • The outcome of contingencies, such as legal and regulatory proceedings. • The effects of changes in tax, and other laws and regulations. OUTLOOK We are optimistic about our future in India. We have built the right processes in the system to ensure we are ready for scale up when the economy achieves the aspirations the government has set for India. Our well entrenched business models will ensure that we grow as well as help the nation grow, through our strong technological platforms, evolving business models, and focus on a sustainable future. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY All key functions and divisions of the Company are independently responsible to monitor risks associated with in their respective areas of operations such as production, supply chain, marketing, finance, accounting, treasury, legal and others areas like health, safety and environment. The Company has identified various risks through an internal self-assessment compliance checklist and has laid out necessary procedures to mitigate the same. The Company has in place adequate systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization and ensuring compliance of corporate policies. The Company, through its own Corporate Internal Audit Department, carries out periodic audits to cover all the offices, factories and key areas of business segments based on the plan approved by the Audit Committee and bring out any deviation to internal control procedures. The Internal Auditor functionally reports to the Audit Committee and administratively to the Managing Director. The observations arising out of audit are periodically reviewed and compliance ensured. The summary of the Internal Audit observations and status of the implementation is submitted to the Audit Committee of the Board of Directors. The status of implementation of the recommendations is reviewed by the Committee on a regular basis and concerns, if any, are reported to the Board. DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS We embarked on an ambitious project, where we planned to get the entire organization together to create our 'Aspiration' for 3M India. This saw the birth of the "We Will" initiative which got 1300 plus employees together voicing their aspiration for a Bigger, Bolder and Smarter 3M in India. "Customer First" was recognized as the central theme. This was included in our Strategic Plan, and in all our actions across Business / functions. As an outcome this workshop clearly identified the need to accelerate Efficient Growth. There was a visible shift that the Company made in refocusing the Organization to Customer First. We took the entire Organization thru the Change Management process and transferred the ownership for Change during the "We Will" workshop. There were several initiatives including identifying Customer First projects across businesses and functions, forming cross functional/ multi level teams to deep dive into these projects. Leadership programs and other learning interventions captured these themes as well. There was a wide coverage of Customer First deliverables which were mapped for all employees as part of their goals & objectives in the Performance Management system. Productivity was another theme that was driven with a lot of focus and direction. Re purposing of talent, restructuring, revamping the Sales Incentive Plan, in addition to motivating employees through rewards and recognitions programs. The year continued to be extremely challenging in view of the economy. There was a positive sentiment which was further accentuated by the programs that were created as above. The employees took complete ownership and delivered exemplary results across various parameters. We enhanced Productivity thru Price and Lean Six Sigma (LSS) to drive Cost of Goods Sold (COGS) target, we built Stretch COGS Improvement, sharpened Operating Plan delivery with a focus on mix and also improved headcount productivity. There was also a significant and positive movement of the Contribution Income (COI) that built credibility of the Organization, whist boosting the confidence of the team. Employees and teams rose to the occasion to the satisfaction of the leaders. They were inspired and motivated to deliver despite the resource constraints and the external environment combined. The year also witnessed the HR function initiating several large initiatives including Exchange, an inter corporate Hipo capability building program, where 3M took the lead to form a learning consortium. This was a huge success and received phenomenal feedback from the participants. Leadership Edge was another initiative which focused on intense external coaching for our senior leaders. The feedback from the pilot group has been overwhelming. The 3M India CSR initiatives reflects a socially responsible organization that inspires its people to contribute to the communities whose lives we impact. Under the umbrella initiative of 3M Gives, we engage our employees through the program called - EMBRACE. All financial contributions and volunteering efforts are focused around three areas viz., Education, Women Empowerment and Social innovation Every year, 3M observes Global Volunteering Day, when 3Mers around the world engage in volunteering activities. In 2015, more than 300 employees from 10 3M locations in India spent half a day doing community service with the Company's CSR projects. All of you would be aware that Chennai was ravaged by floods in Nov/ Dec 2015. Several lives were lost and properties damaged. The Company formed a very close bond with its employees and their families and supported them during these trying times both emotionally and financially. We continued to build and strengthen the HR Business acceleration with visits and interventions with key Customers. We went beyond just sharing HR Best practices into helping some of the Customers build HR processes as well. This initiative has further strengthened the HR credibility with the business and also helped Business leaders to leverage the benefits and make it a differentiator. This initiative enhanced the credibility of 3M's people practices and the quality of our people, products and services in the minds of the Customers. The Women's leadership Forum moved to a new level a well with its focus on Diversity & Inclusion. Senior women leaders took Reflections workshops which focused on employees careers, to key Customers which earned huge admiration for 3M. Through all this, the Company continued enhancing its discipline on Operational excellence. There was tremendous rigor built into the performance management system and there was enough evidence on the ground to demonstrate the visible change in culture of compliance. On behalf of the Board of Directors Amit Laroya Managing Director DIN: 00098933 B.V. Shankaranarayana Rao Whole-ime Director DIN: 00044840 Place : Bangalore Date : May 27, 2016 |