MANAGEMENT DISCUSSION AND ANALYSIS Industry Structure and Developments There has been a renewed focus by the Central Government on enhancing infrastructure in the country. The Government now targets to complete new road construction of 30 kilometers per day. New road projects and revival of stalled projects led to the completion of 6,300 kilometers in FY2016. The target for FY2017 is 10,000 kilometers, supported by a budgetary allocation of Rs. 57,000 crore. Improving highway and city road conditions are leading to increasing radicalization of truck tyres. Half the tyres on Indian roads are expected to be radials in the next five years from 25% currently. Retreading a radial tyre consumes ~10% more tread rubber and needs more sophisticated capabilities which can be provided by leading players like your Company. Greater focus on quality and safety brferences is leading customers to move to the organized players within the sector. Implementation of GST is further anticipated add thrust to the organized sector. Currently about one-third of the Indian retreading market is with the unorganized sector. Tax evasion helps the unorganized players offer retreading at 20% lower cost and gain unfair advantage, over organized players. Therefore, post GST the market is likely to see consolidation. Increase in infrastructure and mining activities, better freighter profitability and accelerated transition to a younger fleet with tougher entry restrictions in major cities will spur CV demand. The replacement demand segment, with a time lag, will eventually enhance the market for tyre retreading. Better road networks support logistics services, which leads to increased usage of multi axle trucks in transportation, ultimately leading to an increase in tyre retreading as replacements. Also due to its monetary advantages as well as environmental impact retreading is gaining popularity amongst fleet operators worldwide. As the Indian retreading industry consolidates with larger organized players, many tyre manufacturers have also entered to tap this lucrative market. Eastern Treads Ltd. (ETL) is aiming to build a combrhensive ecosystem across the retreading value chain and continues to expand its network. It is currently brsent across 17 states through 84 dealers servicing to more than 1,500 multi branded retreaters’, 19 exclusive retreaters, and 16 branded Infinity Zones. During the year, your Company opened two in-house model retreading centers in Bangalore and Chennai (called Process Evaluation Centers) to demonstrate product application processes and at the same time enhance its brand image among its key usage markets. Your Company also has ten Company-owned depots and two C&F’s across the country for effectively and aggressively servicing its various distribution channels. Currently, capacity utilization at the manufacturing facility located in Oonnukal, Kerala stands at ~45%, providing adequate scope for volume expansion for the next 2-3 years. Your Company aims to be the leading retreading player in India and has also been opening up export markets worldwide. Overall, macro factors and corporate initiatives are both expected to support long term growth opportunities for your Company. Opportunities and Threats The retreading segment is likely to see enhanced prospects on the back of improving road networks, increased economic activity and opening up of the mining sector. A double digit commercial vehicle sales growth anticipated over the next few years will lead to expanding market size translating to robust medium to long term growth opportunities. A slower than anticipated growth could, however, derail these prospects. Truck tyre radicalization is on the rise and is likely to reach 50% over the next couple of years. Radial tyres can be successfully retreaded multiple times compared to bias-ply tyres and require higher sophistication, which can be provided by leading players like your Company. Therefore, radialisation will positively impact the overall market, enhance the Company’s prospects and increase trust of the customer towards tyre retreading. There are several threats faced by tyre retreaders, primarily being competition. Branded tyre majors and multinational corporations have recently entered the retreading industry. This would heighten competition but at the same time increase awareness about retreading and its benefits, helping grow the market. ETL is the pioneer in manufacturing and marketing of tread rubber used for retreading tyres. It enjoys unique advantages like strong brand image, best in class services capability and a wide range of products. Your Company has also won numerous awards and accolades which are a testament of its performance. Given these attributes, ETL is confident of maintaining a strong position in the market. The retreading industry faces tough competition from unorganized players which offer lower price points as compared to organized players and produce poor quality retreads. Unorganized players further benefit by avoiding statutory taxes, which helps them lower their costs. The Government is looking for the implementation of GST, which will bring in price parity and is positive for organized players like your Company. Segment-wise or product-wise performance The Company manufactures quality tread rubber (br-cured tread rubber, conventional tread), cushion/bonding gum, black vulcanizing cement and tyre repair patches. The contribution of these products to the current year’s turnover is 70%, 8%, 5% and 1% respectively. Outlook Retreading is an established industry in key global markets and is becoming more mainstream in India. With greater acceptance and increasing economic activity, improving road network, higher commercial vehicle sales, the market will further mature. ETL is transitioning from a tread rubber manufacturer to a leading enabler of tyre retreading ecosystem in India. Your Company is creating combrhensive, industry leading capabilities that would deliver long term opportunities in India and globally. High quality products and services and increasing distribution brsence will help to increase customer confidence and enhance market share going forward. Our principal objective is to deliver substantial savings in our customers’ operating costs. Your Company is also focusing on delivering better operational performance driven by value enhancement initiatives and economies of scale coming from volume led growth. ETL’s manufacturing processes are driven by a technically proficient workforce and backed by extensive R&D investments. Also, availability of adequate production capacities means that limited growth capex is required for the next 2-3 years. ETL has invested aggressively in further penetrating the market which will result in medium to long term growth opportunities. Your Company has achieved a national brsence having an extensive network across 17 States and is further expanding its footprint. There are plans to start franchisee networks in overseas markets soon. ETL is currently brsent in the Middle East, Africa, South America, Bangladesh and Bhutan. All these initiatives are expected to give ETL the platform from which to drive success in its retreading operations by delivering optimal returns on investment of its esteemed customers. Risks and Concerns Growth of the Company is fully dependent on the development of the tyre replacement market, which in turn depends on various factors like economic growth, infrastructural development, growth of the automobile industry, transportation trends etc. The Company is exposed to various risks as does any business enterprise. The main ones and the steps undertaken to mitigate these risks are mentioned below: Financial Risk Credit risk on account of material supplied to customers has been reduced with the introduction of cash and carry policy, advance payments and bank guarantees taken from customers. The risk of delayed payment from State Transport Corporations is controlled and managed by continuous follow-up. Fluctuation in Raw Material Price and Other Input Costs Normal fluctuations in raw material prices and other input costs are generally considered while fixing product prices to customers. During the year, prices of key raw materials like natural and synthetic rubber have reduced from their peak levels and this has created brssure to reduce prices. However, other input costs have increased substantially. The unbrcedented fluctuations may impact on profitability. Changes in Government Policies Changes in Government policies may affect the Company’s financial position or investments. Operational Risk Preventive maintenance has been carried out to achieve increased machine availability. Adequate inventory of stocks at each stage of operation is maintained to run production schedules uninterrupted. Product Risk Research and development is being undertaken to deliver better products, service and value to the customers. Internal Control System and their Adequacy Your Company has a proper and adequate system of internal controls, to ensure the safeguarding of assets and their usage, maintenance of proper records, adequacy and reliability of operational information. The internal control is supplemented by an extensive audit by internal and external audit teams and periodic review by the top management, Audit Committee and Board of Directors. Internal audit department evaluates legal and compliance issues and supports in assessment of Internal Control Systems and identification of other important issues as a powerful tool for risk control and governance. The system is designed to adequately ensure the reliability of financial and other records for brparing financial information and other data and for maintaining accountability of our assets. The external auditors have evaluated the system of internal controls in the Company and have reported that the same is adequate and commensurate with the size of the Company and the nature of its business. During the FY2016, revenues have been stable, as lower input costs was passed to customers, in the form of discounts and price reductions. The sharp dip in key raw materials prices resulted in deferment of procurement by our dealers and impacted revenue growth. Additionally, the drastic increase in other input cost has put brssure on profitability. Your Company has managed this challenge by putting its entire effort into cost saving initiatives and moving into more profitable areas of the business. Significant financial highlights in FY2016 are as follows:- Earnings Before interest, Tax, Debrciation and Amortisation (EBITDA) During the fiscal 2015-16, the Company has reported an improved EBIDTA of Rs. 767.69 lakh when compared to the brvious year’s figure of Rs. 386.71 lakh, showing a growth of 99%. The profit before exceptional items has also increased significantly by 273%. Profit Before Tax (PBT) PBT has reported remarkable growth of 113% at Rs. 514.15 lakh, compared with brvious year’s Rs. 241.74 lakh. Profit After Tax (PAT) PAT has improved from Rs. 157.59 lakh to Rs. 341.16 lakh, recording positive growth of 116%. Earnings Per Share (EPS) EPS in the fiscal 2015-16 more than doubled at Rs. 6.52 compared to EPS of Rs. 3.01 in fiscal 14-15. Growth in logistic services, a pillar of economic growth, combined with improved road networks will result in increase in vehicle population. Better tyre cost management is an essential factor to provide cost effective logistic services. As the fleet owners are opting for quality products, which are safe and cost effective in the long run, our brand reputation and product portfolio has enabled us to get better acceptance in the domestic and international markets. Your Company is transitioning from a tread rubber manufacturer to a leading enabler of tyre retreading ecosystem across the entire retreading value chain. With this vision, your Company has started its own tyre retreading units in two metropolitan cities, Bengaluru and Chennai, using high end technology and has also launched franchised tyre service centers to provide tyre retreading solutions and value added services to customers. Your Company has also initiated retreading machinery supply to the franchisees to maintain consistency of inputs used and output achieved. Since tyre retreading is a part of an overall tyre management program and a financially viable option for fleet owners. A combination of sales network of depots and distributors, road transport corporations (RTC’s), export markets, branded Infinity zones and exclusive retreaders that provide high quality and aesthetic products and services using the Eastern brand is being used by your Company to deliver on its long term growth prospects. Human Resource Development and Industrial Relations In a competitive economy, the proper utilization of human resources plays a crucial role. It begins with best practices in recruiting people and moves through learning and development, engagement, employee feedback and rewards and recognition. Towards this, your Company took various initiatives and has maintained healthy and harmonious industrial relations at all locations. The dedication and hard work of productive and dynamic goal oriented team is the key factor to the success of your Company. We believe that hiring the right personnel and proper retaining is key to this success. To keep the Company and its human resource competitive, we organized various training programs and experts were engaged to train the employees at various levels. This active process of learning has allowed employees enhance competence and motivation. The Company had 187 permanent employees on its rolls as on 31st March, 2016. Cautionary Statement Some of the statements in this management discussion and analysis describing the Company’s objectives, projections, estimates and expectations may be „forward looking statements’ within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those exbrssed or implied. Important developments that could affect the Company’s operations include global and domestic supply and demand conditions affecting selling prices of products downtrend in industry, significant changes in political and economic environment in India, tax laws, import duties, litigation and labor and industrial relations. The Company assumes no responsibility in respect of the forward-looking statements, which may undergo changes in future on the basis of subsequent developments, information or events |