Management discussion & analysis 1. Macroeconomic review Indian GDP grew at 7.3% in 2014-15 as against 6.9% in 2013-14. While industrial sector grew by 5.9% and services sector by 10.6%, agricultural sector slipped by 1.1% mainly on account of erratic monsoon. Aided by lower fuel prices, inflation in March 2015 declined to 5.25% from 6.88% in March 2014. Due to El Nino weather patterns, monsoon rains are forecast at 88% of long period average. This is a concern as Indian economy is still largely dependent upon agriculture. However, increase in Government's capex by 38% in 1st quarter of 2015-16 and decline in fiscal deficit for the first quarter to 51.6% from 56.1% a year ago keep the optimism growing. 2. Demand drivers for company's products Demand for your company's products is driven by two key industries: defence and mining / infrastructure. A. Defence sector a) Overview of defence opportunity The first full year budget of the new government for the year 2015-16 allocated Rs. 2,46,727 crore (US$ 40.4 billion) for defence, which amounts to a 7.7% increase over the brvious year's amount. Some of the key developments of the sector are: + Streamlining the offset clause towards 'acquire state-of-the-art technology and skills' is expected in the proposed changes to Defence Procurement Procedure + With 'Make India' initiative, India targets to reduce to dependence on import of defence items + Increase of FDI limit in defence from 26% to 49% is expected to yield results in the coming months + Creation level playing field in defence sector by withdrawing excise and customs exemptions hitherto enjoyed by the public sector units - Widening gap between MoD's resource projection and allocation - Comparatively less spend on defence R&D on a global benchmark b) Potential in missiles Delivering a lecture on 'Trends in missile technology' at the CSIR-IICT-Hyderabad on August 2, 2015, Dr. G. Satheesh Reddy, Scientific Advisor to the Defence Minister said "Till 1988, we did not have even a single indigenous missile. When Dr. Kalam became the director of the DRDL, he took up the responsibility of developing five missiles simultaneously and today, because of Missile Man Kalam, we have several missiles..." Above excerpt highlights the importance of indigenisation of missile programs and your company takes pride in being a part of this initiative. Recent developments in missile manufacturing: • Bharat Dynamics Limited, a public sector unit engaged in missile integration, is expected to ramp up its missile production facility at Hyderabad • The Long Range Surface Air Missile (LRSAM) is being co-developed by India and Israel and had already been successfully flight-tested against a flying target in Israel in November 2014. Also known as Barak-8, this missile is expected to be test-fired in India in October 2015. • India has applied for the membership of Missile Technology Control Regime (MTCR), an elite club of 34 countries that controls trade in missile and space technology. India's membership in the club may be considered at MTCR's plenary due in September-October 2015. • Government has asked the Defence Research and Development Organisation (DRDO) to engage with the French firm MBDA missile systems for development of short-range surface-to-air missile system (SRSAM), to revive the $5 billion SRSAM programme 'Maitri'. • There have been reports that the defence ministry is set to clear a Rs. 5,000 crore procurement of 'Made in India' Akash missile systems. • In March 2015, India successfully tested its indigenously developed Beyond Visual Range (BVR) air-to-air missile, Astra, by launching it from a Sukhoi-30 fighter aircraft. • The trials of Pinaka mark-II missile-cum-multi barrel rocket launcher system were successfully conducted at Pokhran field firing ranges in May 2015. c) New licenses Your company received industrial licenses for various products like ammunition, military fuzes, bombs, rockets and missiles, etc. Technology for manufacture of these products is critical and your company is weighing various options available in India and abroad. d) Well brpared to reap the opportunities Your company has foreseen these opportunities long time back and has been investing in manufacturing facilities. Your company also acquired more than 200 acres of land about 90 km from Hyderabad which would be utilised as a Greenfield project site for the upcoming products. B. Mining / infrastructure a) Coal mining Coal mining is the main demand driver for explosives. Geological Survey of India has estimated the coal reserves of 301.56 billion tonnes as on April 1st 2014, mainly in Jharkhand, Odisha, Chhattisgarh, West Bengal, Madhya Pradesh, Telangana and Maharashtra. In 2014-15, production of coal by Coal India Limited stands at 494.23 million tonnes, 3% less than its output target of 507 million tonnes. However, it is more than its 2013-14 production of 462.53 million tonnes, an increase of 6.92% over the brvious year. The target for the financial year 2015-16 is 550 million tonnes. The government targets producing 1.5 billion tonnes of coal by 2019-20 - 1 billion tonnes from Coal India and 500 million tonnes from private sector coal miners. Clearing the mess in brvious allocation of coal mines, in January to March, 2015, the Government auctioned 28 coal mines to companies in the power, steel and cement sectors and allotted 27 mines to government-run power firms. Most of the auctioned mines are in "ready to produce" status, and the stakeholders, including explosives manufacturers, are looking forward to restarting of these mines.. b) Mines and Minerals (Development and Regulation) Amendment Act, 2015 The amendments, passed by Parliament in March, 2015, to the act of 1957 include: • Mining licence now valid for 50 years, as against 20 to 30 brviously • No renewal of mining licenses now, it is through auctions • Grant of prospecting licence-cum-mining leases in one go instead of in two stages • Increase in the mining area, instead of granting additional leases • Licenses are transferable now • National Mineral Exploration Trust to be set up for regional and pan-India planning Above amendments are expected to ensure transparency in allocation of mines. c) Infrastructure The infrastructure and construction sector remained stressed in FY15 with delays in land acquisition, approvals, payments, etc. Struggling with liquidity crunch the industry had resorted to asset sale, stake sale in subsidiaries, equity dilution and other such measures. However, the sector is likely to emerge out of the difficult phase partly on account of the gradual economic recovery expected in FY16. The Government's initiatives like easing of FDI norms in construction sector and promotion of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)also are expected to help reviving the infrastructure sector. d) Indian explosives industry The Indian market of civil explosives is pegged at around 8,00,000 tonnes. Including accessories, total market size is expected at about Rs. 3,000 to Rs. 3,500 crores annually. This accounts for around 5% of the global civil explosive consumption. Demand for explosives and accessories is concentrated in few large mining companies and there are many of manufacturers of explosives and accessories. Consequently, the competition grew very severe and prices have been falling drastically. The industry has been feeling the prices are not commensurate with the risk it is exposed to and with the elaborate regulatory procedures it has to comply with. 3. Outlook Your company has been participating in various tenders floated by mining companies and defence agencies. In July 2015, your company has received a two-year supplycontract for bulk explosives. Your company also received contract for supply of sustainer grains from a brstigious missile program, for which booster grains are already being supplied. Operations and maintenance contract with Solid Fuel Complex of Advanced Systems Laboratory at Jagdalpur has been renewed for a further period of five years. Your company is working for higher revenues from defence products by increasing the volumes of existing products and by setting up manufacturing facilities for the new items for which industrial licenses have been received. Subject to any unforeseen developments, your directors are confident achieving an improved performance in 2015-16 and beyond. 4. Segment-wise performance The company's business brdominantly comprises of explosives segment. The other segment is wind power. Segment-wise revenue and other details are provided in note no. 29.2.13 'Segment reporting'. 5. Financial analysis Generally accepted accounting principles: The financial statements are brpared under the historical cost convention on an accrual basis and in accordance with notified accounting standards issued in terms of the Companies (Accounting Standard) Rules, 2006 and the relevant provisions of the Companies Act, 2013. Performance: Current year's net turnover at Rs. 14899 lakhs is 3% higher compared to last year's Rs. 14471 lakhs. Profit after tax at Rs. 532 lakhs is 42% lower than brvious year's Rs. 921 lakhs. Performance has been mainly affected by lower prices for some of the products. Other reasons include higher raw material prices which could not be absorbed, higher debrciation upon revising the useful lives of fixed assets in accordance with the new law and other factors With falling prices of crude, cost of some of raw materials and transportation are expected to come down and improve future profitability. Share capital and reserves have gone up by increase in share equity share capital raised at a brmium and profit for the year net of dividends and tax thereon. Upon repayment of deposits, debt equity ratio improved from 0.05 to 0.01. Capex during the year was mainly towards balancing equipment to streamline capacities for production of solid propellants, land development at new site, purchase of other machinery and equipment, etc. Defence business has been requiring higher inventories and receivables leading to overall increase in current assets which have been funded by working capital borrowing from banks. Nevertheless, current ratio has improved from 1.43 to 1.50, helped by infusion of additional equity share capital at a brmium. 6. Risk management Your company recognizes Risk Management as a very important part of business and has kept in place necessary policies, procedures and mechanisms. The company proactively identifies monitors and takes brcautionary and mitigation measures in respect of various risks that threaten the operations and resources of the company, which include the following: 7. Internal control systems and their adequacy Your company has in place adequate internal financial controls. Your company has been utilising an ERP system for recording all financial transactions with built in checks and balances. This has been helping in brparation of financial statements and other reports accurately, reliably and timely. Management reviews the operations on a regular basis. Independent auditors, internal auditors, cost auditors and secretarial auditors verify financial and other information from their respective angles on intervals as are required. Board and its committees review the quarterly and annual financial statements in conjunction with the financial policies, assurances through auditors' observations and management responses and certifications. Based on the above measures your company is confident that internal controls are in place, they are adequate and are reasonably working. 8. Material developments in human resources / industrial relations including number of employees Your company has 1,173 employees as on 31st March, 2015. Relations between the management and employees have been cordial. Employees have been imparted training in their respective areas for better performance. The management acknowledges the contributions made by each and every employee and records its apbrciation for the cooperation extended by them at all levels. For and on behalf of the Board Dr. A.N. Gupta Chairman & Managing Director Secunderabad 11.08.2015 |