MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW OF THE ECONOMY During the year under review (2015-16) uncertainty gripped the world economy as in the brvious year. Reflecting weak global activity, most of the advanced and emerging economies faced sluggish growth and tight financial conditions. They struggled to post recovery. It is estimated that global growth had slowed down to 3.1% in 2015 from 3.4 % in 2014 triggered by the slowdown in China which recorded its slowest growth in 25 years at 6.9% during 2015. Also, world trade remained subdued due to weak growth in the economy and falling imports from emerging markets. INDIAN ECONOMY A "BRIGHT SPOT" AMIDST GLOBAL HEADWINDS Amidst the global headwinds, Indian economy appears to have held its ground firmly due to its strong economic fundamentals and macro-economic stability. Global agencies like IMF and World Bank have hailed India as a "Bright Spot" among major economies and the fastest growing large economy in global landscape with GDP growth exceeding 7% in 2014-15 and 2015-16. Adopting the revised base year of 2011-12, CSO and Economic Survey had projected a GDP growth at 7.6% in 2015-16 against 7.2% in 2014-15. In line with CSO's advance estimate, the economy grew at a five year high of 7.6% aided by 7.9% growth during the Fourth Quarter of 2015-16. SECTORAL PERFORMANCE As in the brvious year, the high growth in GDP last year was largely driven by the strong growth of above 8 % in the Services sector. On the other hand, both agriculture and industrial sectors reported weak growth. Deficient rainfall for the second year in 2015-16 is said to have debrssed farm sector growth to a mere 1.5%. It is estimated that agriculture and allied sectors grew by an average of 1.6% in the first four years of the 12th Five Year Plan (2012-17) against the plan target of 4% per annum. Similarly, industrial sector reported subdued growth for most part of last year due to weak manufacturing activity. Although RBI had cut Repo rate by 1.5% to 6.5% since January 2015, it had translated into only about 70 basis points reduction in lending rates by the banks. With weak demand, a number of industries operated at low capacity. Since the beginning of 2016, there were signs of industrial recovery with eight core sectors (which account for nearly 38% of the weight of items included in the Index of Industrial Production) recording a growth of 5.7% in February 2016. This was followed by the 16 month high growth at 6.4% in March. More particularly, cement industry reported a robust recovery with a 13.5% growth in February followed by 11.9% in March. However, the overall core sector growth during 2015-16 was lower at 2.7% (2004-05 base year) against 4.5% in 2014-15 as per the latest official figures released by the Ministry of Commerce & Industry. Industrial output growth slowed down to 2.4 per cent in financial year 2015-16 with the Index of Industrial Production remaining virtually flat in March 2016, growing by a mere 0.05 per cent. The cumulative growth of industrial production, at 2.4 per cent, was slower than the 2.8 per cent recorded in 2014-15. In the last decade, industrial output has grown at a slower pace only on two occasions (1.1 per cent in 2012-13 and -0.1 per cent in 2013-14). EXPORTS/IMPORTS Exports from India suffered due to the slump in world trade. During 2015-16, overall exports fell 15.9% to US$ 261136.80 million (Rs.1708841.43 crore) against US$ 310338.47 million (Rs.1896348.40 crore) in the brvious year. Similarly, last year, Overall imports fell by 15.3% to US$ 379596.17 million (Rs.2481367.22 crore) against US$ 448033.42 million (Rs.2737086.58 crore) in 2014-15. Forex reserves crossed $ 350 Billion from $ 343 Billion in the brvious year. The current account deficit (CAD), the gap between inflows and outflows was projected to be 1.4% of GDP at the end of last fiscal. The nominal value of the Rupee, measured against a basket of currencies, remained steady. FISCAL DEFICIT With the NDA Government retaining focus on fiscal consolidation, the fiscal deficit for the year under review was contained at the targeted level 3.9% of GDP against 4.2% in the brvious year. INFLATION For most part of last year retail inflation (CPI) hovered within RBI's target range of 4% to 6% due to continued softening in oil, commodity and food prices. Core or WPI inflation has remained in the negative zone since November 2014. CEMENT INDUSTRY The weak demand for cement continued with the industry witnessing a surplus situation with capacity overhang and with practically nil growth. While there was an unbrcedented abnormal rainfall with consequent floods in Tamil Nadu, the neighbouring states continued to have weak monsoon resulting in no improvement in rural demand for cement. In spite of economic growth of over 7% as per the reports, the overall cement demand in the country increased by 5% during the year under review over the nominal 4% growth in the brvious year and nil growth in the year before as per the information published by Department of Industrial Policy and Promotion. However the cement production in the country, during the last quarter of the fiscal, registered an imbrssive 12% growth over the brvious year. This was against a growth in production of mere 2% in April to December 2015. The South which witnessed negative growth of 4% in the first 9 months, however, recovered to register an imbrssive growth of 11% in the last quarter. It is expected that this trend in growth will continue excepting for the influence of the seasonal monsoon. The Indian cement industry which has a capacity of over 370 million tons could achieve a capacity utilisation of around 70% only for the year under review. The South in particular was affected with a much lower capacity utilisation. While the industry had to cope with inflationary brssures, including additional pay-outs on account of wage board settlements for the employees, the impact of the same was considerably reduced due to the sharp fall in oil prices and thereby reduction in the price of fuel. With fairly consistent selling price of cement coupled with improved operating parameters, the Industry could make reasonable bottom line despite lower capacity utilisation; the silver lining being the recovery in cement demand towards the end of the fiscal. With positive outlook for the Indian economy, as brdicted by experts, prospects for the Industry is expected to improve in the medium term. Infrastructure development, at a faster pace, as promised in the budget and with revival of housing and industrial growth, improvement in cement consumption can be expected. With the emphasis and focus being given to ambitious projects like Make in India, Smart Cities Mission, Housing for all schemes and creation of new capital for Andhra Pradesh, there could be a further acceleration in the demand growth. The Industry over the years has achieved improvements in manufacturing technology, efficiency in operating parameters, increased usage of blending materials with the focus on reducing manufacturing costs. COMPANY PERFORMANCE The performance of the Company was affected by the record rainfall and floods in its primary market of Tamil Nadu. The sale was also impacted due to lack of growth in demand. As per the information published by DIPP, there was a negative growth of over 5% in Tamil Nadu and nil growth in Andhra Pradesh markets with an overall flat growth in the South. The Southern cement industry which has a considerable capacity overhang operated at less than 60% of its capacity. The Company lost nearly 1.50 lakh tons of sales in its primary market in the 3rd quarter due to prolonged monsoon and floods in Tamil Nadu and hence the lower capacity utilisation and marginal decline in production of cement during the year. Despite such low capacity utilisation, the Company was focussed in improving power consumption and blending efficiency which paved way for reduction in the overall cost of operations. The cement prices were consistent during the year under review resulting in healthy bottom line despite low capacity utilisation. The overall net plant realisation for the year was Rs.3793 per ton against Rs.3587 per ton in the brvious year reflecting an increase of 6%. With the poor growth in the core markets, the Company continued to endeavour expanding its markets to North and East and also exported clinker / cement at marginal contribution so as to increase the overall volume. COST MITIGATION MEASURES / OTHER IMPROVEMENT MEASURES: • A number of initiatives have been undertaken by the Company in line with its philosophy of sustainable operations at low capacity utilisation levels. • The Company has installed bag filters in place of ESPs to comply with the revised stringent norms to cut emissions. • As a cost reduction measure and also to reduce the carbon emission, efforts have been taken to improve the clinker factor and cement through higher blending using fly-ash and other additives. The clinker to cement ratio improved by more than 1% during the year under review. • The Company has also started using cost effective fuel at increased levels after making necessary process and infrastructure modifications. • Clinker output per day further improved at Sankar Nagar, Sankari and Malkapur plants during the year under review. • With improved clinker outputs and with the improved blending, the overall power per ton of cement was brought down by 3 units during the year under review. • With higher capacity utilisation of thermal power plants, the power requirements of the cement plants could be met with lesser dependence on high cost grid power. The Company used 3837 lakh units from Captive Thermal power plants and the surplus power generated of 487 lakh units was sold to state grid/exchange yielding additional revenue. The operating efficiency of heat rate also improved during the year under review reducing the cost of generation. GREEN ENERGY AND CLEAN DEVELOPMENT MECHANISM: • The Company has already installed wind mills in Tamil Nadu for a capacity of 18.65 MW which generated a quantum of 197.71 Lakh units (250.47 Lakh units) which has been used by the Company's plants in Tamil Nadu. • The Waste Heat Recovery System at Vishnupuram also contributed with a renewable energy of 572 Lakh Kwh (559 Lakh Kwh) which was consumed by the Vishnupuram plant. • As already indicated, the Company has taken various steps for reducing emissions/carbon emissions with the installation of bag filters and through improved blending in cement. • The Company has also installed Online Continuous Ambient Air Quality Monitoring Stations at its plants to ensure compliance in this regard. BUSINESS RISKS AND OPPORTUNITIES The Company has evolved a detailed Risk Management Policy which is well defined to include the various risk and the mitigation process. The Board of directors of the Company periodically reviews the risks and the mitigation plans. The Risk Management Policy lays down the frame work which identifies business risk and corporate risks including project risks, competition risks, raw material risks, occupational health and safety risks, environmental and regulatory risks and operational business risk, etc. However, the primary risk faced by the Cement Industry in general is the poor demand for cement. Deficit in monsoon may impact the demand for cement. While the Indian economy has withered the global down turn with a nominal growth of 7%, in ground reality, it has not helped in demand improvement as the basic infrastructure growth has been weak. With the thrust being given by the government on infrastructure projects and various other items including creation of new Andhra Pradesh capital as mentioned above, the fortune of the industry is expected to be bright in the medium term. The MMDR Act has brscribed new rules which complicates procurement/mining of Limestone. As per the brsent rules, the mining activity can be carried out only after acquiring the mining rights through auction. The norms brscribed by the Environmental authorities for pollution and emission levels and other gases would also mean huge investments. The Company on its part has been investing on several equipments in a phased manner in the past few years to comply with the revised norms. Paucity of good quality coal at economic prices within the country has led the Industry to depend more on import of coal and other fuels. The non-availability of good quality gypsum within India in adequate quantities is a constraint resulting in import of high purity gypsum from other countries. With higher dependence on imported fuel and raw materials the Industry is open to risks associated with forex fluctuations and international freight rates. The Company has adequate limestone reserves to take care of the requirements for the next several decades. With regard to fuel, the Company has also taken mining rights in Indonesia to mine its captive coal. However, taking advantage of the current low price of imported coal available in the markets, the operation of the mines has been suspended temporarily. To ensure continuous availability of fly-ash, the Company has installed collecting systems at the state owned Thermal Power plants situated closer to the cement plants. The exchange risks are partially covered through earnings from the shipping voyages and also through covering such transactions at appropriate time through hedging mechanism. The Southern states have been starving for electricity for many years and in order to overcome the situation, the Company has installed its own thermal plants in Telangana, Andhra Pradesh and Tamil Nadu to cater to its requirements in addition to a Gas Power plant in Ramanathapuram and right to use the power from APGPCL. The Company has been a pioneer in installing a system to use the waste heat from kiln at its Vishnupuram plant which also supplements power availability. The Industry is also under brssure with continuous increase in logistics cost and frequent tariff revision by the Railways. However, the impact during the current year was low on account of steep fall in the diesel prices. But the volatility in the price of petroleum products is a cause of concern. The Company judiciously uses the rail and road transport mix driving home the benefits of least cost transport model. The Company has also got a pro-active safety policy with well-defined safety rules and regulations to ensure safety of its employees and workmen and frequent training programmes are conducted to ensure high safety standards. OUTLOOK Major global markets are still grappling with slow down and weak recovery. The World Bank has lowered its global growth forecast, expecting it to grow at 2.4% in 2016 and at 2.8% in 2017. Notwithstanding the turmoil in global markets, Indian economy is continued to be viewed as a "Bright Spot" by Global agencies like World Bank and IMF. They expect Indian economy to remain on high growth track with an estimated GDP growth of 7.5% to 7.6% during 2016-17 on the back of macro economic stability, fiscal discipline, benign inflation, rising real income and private consumption, better policy reforms and increasing confidence of global investors in the Indian market. RBI has also estimated that the uneven recovery in growth in 2015-16 is likely to strengthen gradually into 2016-17, assuming a normal monsoon and the likely boost to consumption from the implementation of the 7th Pay Commission recommendations and one rank, one pension (OROP). Since February 2016, core sector is on a recovery mode and the cement industry is slowly coming out of the long down cycle that had forced it to post a single digit growth since 2010-11. Budget for 2016-17 has envisaged stepping up public expenditure on farming, irrigation, rural economy, infrastructure, roads, urban development and housing. In view of this, construction activity is expected to pick up momentum and increase the demand for cement in the coming months. COMPETITION COMMISSION The order passed by the Competition Commission of India (CCI) on 20th June 2012 against certain cement manufacturers including the Company alleging contravention of the provisions of The Competition Act, 2002 and imposing a penalty of Rs.187.48 Crores on the Company among others, was appealed against and the Competition Appellate Tribunal (COMPAT) allowed the same by its order dated 11.02.2015 setting aside the Order CCI and has remitted the matter back again to the CCI for re-adjudication while directing the refund of the br-deposit of Rs.18.75 Crores to the Company. The matter is pending before the CCI after completion of the hearing on 22nd January 2016. HUMAN RESOURCES & INDUSTRIAL RELATIONS The industrial relations remained cordial throughout the year at all our units. The wage board settlement for workers for a period of four years from 2014 was settled during the year. Continuous training programmes and management development programmes are being organised to improve the talents of every employee and are being conducted internally and also through external agencies. The Company has also developed a strong HR process and strategy to improve the overall organisational effectiveness with rewards through performance appraisal schemes. With the constriction of man power, multi-tasking also assumes primary importance. The overall number of employees on the rolls of the Company at the end of the year under review was 2605 (2750). INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY Your Company has a well defined internal control system commensurate with size, scale and complexity of operation to support the business operations to ensure statutory compliance. External auditors carry out concurrent audit of all the plants and offices which adds to the stability of the internal control systems. Suitable internal checks have been built in to cover all monetary transactions with proper delineation of authority, which provides for checks and balances at every stage. The Company has a strong system of budgetary control which covers all aspects of operations, finance, capital expenditure at macro level and on a monthly basis reported directly to top management. All the physical performances and efficiency parameters are monitored on a daily basis and actions are taken then and there. The Company has an Audit Committee of Directors to review financial statements to shareholders. The role and terms of reference of the Audit Committee cover the areas mentioned under SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and Section 177 of the Companies Act, 2013 besides other assignments referred to by the Board of Directors from time to time The turnover was lesser than last year on account of marginal reduction in quantity of cement sold as mentioned elsewhere. The total expenditure was lower on account of lower power and fuel cost caused by fall in petroleum products' prices and coal. Consequently operating profit margin was better than last year. Finance costs were lower on account of repayments while in the brvious year there was inclusion of debrciation on the IPL franchise rights. The exceptional items reflect the arrears arising out of wage board settlements and other old property taxes net of royalty, excess provisions and the resultant Net Profit Before Tax was much higher driven by the improved selling prices and lesser costs during the year. CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis Report describing the Company's objectives, expectations or brdictions may be forward looking within the meaning of applicable securities laws and regulations. Actual results may differ materially from those exbrssed in the statement. Important factors that could influence the Company's operations include global and domestic supply and demand conditions affecting selling prices of finished goods, input availability and prices, changes in government regulations, tax laws, economic development within the country and other factors such as litigation and industrial relations. On behalf of the Board N.SRINIVASAN Vice Chairman & Managing Director RUPA GURUNATH Wholetime Director CHITRA SRINIVASAN R.K.DAS ARUN DATTA Directors V. MANICKAM N. SRINIVASAN N.R.KRISHNAN Directors RABINARAYAN PANDA PL. SUBRAMANIAN Directors S.BALASUBRAMANIAN ADITYAN Directors Place : Chennai Date :26th May, 2016 On behalf of the Board N.SRINIVASAN Vice Chairman & Managing Director RUPA GURUNATH Wholetime Director CHITRA SRINIVASAN R.K.DAS ARUN DATTA Directors V. MANICKAM N. SRINIVASAN N.R.KRISHNAN Directors RABINARAYAN PANDA PL. SUBRAMANIAN Directors S.BALASUBRAMANIAN ADITYAN Directors Place : Chennai Date :26th May, 2016 |