MANAGEMENT DISCUSSION & ANALYSIS ECONOMY OVERVIEW Global Economy In 2015, economic activity across geographies remained largely subdued amid increasing financial market volatility, especially in the second half of 2015. Global growth declined from 3.4% in 2014 to 3.1% in 2015. As advanced economies had a modest recovery, on the contrary growth in emerging market and developing economies continued to decline. The US economy was supported by eased out monetary policies and the firming of housing and labour markets. The Euro area saw a strong recovery owing to its domestic demand. Chinese economy witnessed a gradual slowdown, as it moved away from investment and manufacturing toward consumption and services. Although countries like Brazil, Russia, and some countries in the Middle East are in economic distress, they are expected to show gradual improvements in the growth rate. Indian Economy In the midst of uncertain global economy, India remained one of the best-performing economies. According to Central Statistical Organization, India's GDP grew by 7.6% in 2015-16, making it one of the fastest growing major economies in the world. The country's inflation remained under control and fiscal and current account deficits continued to be moderate. The Reserve Bank of India (RBI) reduced interest rates four times this year as inflation eased sharply. Continuing fiscal consolidation has reduced the Government of India's fiscal deficit to close to 4% of GDP. The year witnessed historically lowest price of crude oil which have direct impact on manufacturing cycle. However, this trend is not sustainable for long as CPI inflation is expected to decelerate modestly and is expected to revolve around 5% during FY 201617. The major uncertainties that are likely to throw inflation haywire is unseasonal uneven distribution of rainfall and upturn in commodity price especially crude oil. Even though economy has made progress but still the same is not noticeable in our earnings due to low pick up of infrastructure activity arising from consecutive weak monsoon this year also. Outlook The economic growth will be visible only when series of structural reforms are taken by Central Government & Central intervention with regard to approval process would be brought under fast track to expedite investment activity with emphasis on fiscal and monetary policy. With 7th pay commission in pipeline and RBI rate cut, the same will allow more money with public leading to generation of demand. THE CEMENT INDUSTRY Grey Cement India is the second largest producer of cement in the world. The country's cement industry is a vital part of its economy, providing employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors. India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. If India needs to grow then cement and steel sector has to perform well to augur infrastructure story of 'Make in India' campaign. Driven by huge capacity with high capital cost and low capital utilisation, cement industry has to grow consistently to improve its triple bottom line performance i.e. socio-economic and financial indicators. Industry performance Cement demand growth has largely lagged the expectations during FY16 due to slow pick up in infrastructure projects as well as lack of demand from rural sector. Cement demand merely grew by 3% in FY16, compared to 5.6% in FY15. Low demand, coupled with excess capacity resulted in lower capacity utilization. However, the demand and supply gap will exhaust once infrastructure project starts taking off. Cement production (weight: 2.41%) increased by 4.4 % in April, 2016 over April, 2015. Its cumulative index during April to March, 2015-16 increased by 4.7 % over the corresponding period of the brvious year. The industry has transformed over the years and has developed in various ways. It has started using blended cement, alternate raw material and fuel to pave the path of green sustainable development. Besides, the industry has adopted innovative technology and improved its energy efficiency as well. Industry Outlook FY 17 is expected to witness a spurt in cement demand, primarily driven by Government-backed projects. The concretization of kuccha roads to pucca road in rural and semi-urban areas and introduction of metro projects in developing cities will contribute to the growth of cement industry. Besides, Swachh Bharat Mission entails the construction of toilet in each household. Moreover, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Government's new initiative to develop smart cities as satellite towns of larger cities augurs well for the cement sector The reduction of interest rate by RBI and the Government decision to allow more foreign direct investment in real estate sector will further help the real estate sector to drive cement demand. The demand for cement in real estate sector is sbrad across rural housing (40%), urban housing (25%) and construction/ infrastructure/industrial activities (25%). While the rest 10% demand is contributed by commercial real estate sector. Cement demand is expected to reach 550-600 Million Tonnes Per Annum (Mntpa) by 2025. The housing sector is the biggest demand driver of cement, accounting for about 67% of the total consumption in India. The other major consumers of cement include infrastructure at 13%, commercial construction at 11% and industrial construction at 9%. To meet the rise in demand, cement companies are expected to add 56 million tonnes capacity over the next three years. White Cement White cement is expected to grow at a CAGR of 3.8% in between 2015 and 2020, and its existing global demand stands at 18.9 Mntpa. Though it accounts for only 0.5% of grey cement capacity but it enjoys greater acceptance from cement producers being a consistent margins provider to top and bottom line of the company. Global white cement consumption is almost equal to global white cement production. The White Cement market is dominated by China, which consumes 26% of global white cement consumption. It is followed by the Middle East, consuming 21% and rest of Asia (excluding China) accounts for 12% cement consumption. The global white cement capacity in 2015 was around 28.6 Mntpa of which 24% is located in China. India is ranked as one of top five emerging markets of white cement. India's white cement industry is primarily dominated by two players, holding 83% of the existing capacity. JK Cement is ranked as the third-largest producer of white cement in world having 1.2 Mntpa capacity, out of which 0.6 Mntpa is located in Fujairah (U.A.E). GROWTH DRIVERS Infrastructure growth Infrastructure growth in India is still in its early stage. With only 73% of capacity utilisation, the demand stood at 284 Mntpa as against the supply of 384 Mntpa during FY 2015-16. If the rate of growth of consumption remains low at 5-6%, the existing capacity would be sufficient to meet the cement demand for 5 years. The Government efforts to propel the infrastructure sector with higher spending on roads and highways, irrigation and push to 'Housing for All' schemes will boost the cement demand. In the Union budget, total outlay for infrastructure sector is pegged at Rs. 221246 crores in F.Y 16-17. Besides, Rs. 7296 crore has been allocated for the development of smart cities as satellite town of larger cities under Urban Rejuvenation Mission (AMRUT and Mission for Development of 100 Smart Cities). Further, the Government has allocated Rs. 19,000 crore for the rural roads programme called Pradhan Mantri Gram Sadak Yojana. Inflation The inflation is under control and will remain so owing to good monsoon, after two consecutive droughts. The El- Nino situation developed in last two years resulted in drought in most part of India. However, IMD expects that the current year will witness 'above normal' monsoon. This will help to ease inflation and in turn, will create demand for cement. Rate of Interest The Reserve Bank has announced drastic cut in repo rates from 8 % in Jan'14 to 6.5% in Apr'15. The lower borrowing cost will increase buying appetite of consumers to purchase or construct new house. This will accelerate the demand for the real estate including low-cost or affordable housing. INDUSTRY RISKS Economic Risk Cement industry is dependent on macro-economic condition of the country. Government initiatives largely impact this industry's growth. Due to the slowdown in economic or infrastructure development activities, cement demand may get adversely affected, thereby putting a brssure on the selling price of cement. Industry Risk At brsent, the country's cement capacity is 384 Mntpa. In FY 201516 cement demand has increased from 276 Mntpa to 284 Mntpa, thereby registering growth of 3% only, if this rate of growth continues in FY 2016-17 then the gap between demand and supply will increase thereby putting brssure on margins. Another risk, which industry is facing is the consolidation of cement capacity in the hands few large players. This will allow them to run the market on their own whims and putting mid-size player at back end. Infrastructure Risk Infrastructure sector propels overall development of the economy. Any pull back by Government initiative on 'Make in India' campaign or 'Swachh Bharat Abhiyan' will result in de-growth of cement industry. Moreover, too many regulatory approvals and compliances by industry, act as a barrier for infrastructure growth. Raw Material Risk The basic raw material for Portland cement is limestone. The existing miners will have to pay 30% of the royalty as contribution towards the proposed district mineral foundations (DMFs), which is meant to support project-affected people, while those who would get mines through the auction route now would have to pay just 10% of royalty. Besides, with changes in Mines & Mineral (Development and Regulation) Amendment Act, 2015, any lease granted before the commencement of the Act, for captive use is extended up to the period ending on Mar 31, 2030 or till completion of their renewal period, whichever is later. The MMDR Act also allows transfer of captive mining lease not granted through auction. This will open door for deals, which are pending for acquisition. From now onwards, all mining lease will be granted by the process of auction/bidding. The act also gives the right of first refusal to the existing leaseholder at the time of auction by placing the highest bid for mines used for captive purpose. This will increase the cost of basic raw material for existing players. Fuel Risk Cement industry is dependent upon linkage coal for fulfilling its fuel requirement. Some Plants are also using pet coke as replacement of coal. Coal is also used by the industry for captive power generation. However, the price of coal and pet coke is highly volatile and is more or less dependent on international crude price. The major cost for cement production is power and fuel cost. Any increase in coal prices may have adverse impact on cost. Further, levy of clean energy cess of Rs. 200 per tonne on coal/lignite in budget of 2016-17 will increase power and fuel cost. Logistic Risk Efficient and effective utilization of logistics results in managing both input and output resources prudently. With aggressive competition in market to reach end user, more and more cement players are targeting grinding units close to consumption location. Logistics play an important role in reducing cost and improving margin. However, due to less availability of rakes from railways, the only alternative left is dependence on road transport. Therefore, any increase in diesel cost may have adverse impact on logistic cost. Taxation Impact on Industry High taxes remain a major concern for cement industry. Though steel enjoys special privileges of being levied at lower rate, on the other cement is taxed at higher rate making it dearer than other raw material needed for infrastructure and real estate sector. This problem can be overcome by introduction of uniform tax regime under Goods & Service Tax. The Government is taking keen interest in getting cabinet approval on GST act and to get it passed by both the houses of the Parliament. COMPANY OVERVIEW J.K. Cement Ltd is an affiliate of the multi-disciplinary industrial conglomerate J.K. Organization which was founded by Lala Kamlapat Singhania. With over four decades of experience, J.K. Cement has partnered India's multi-sectoral infrastructure needs on the strength of its product excellence, customer orientation and technology leadership. The Company is the third largest white cement manufacturer in the world with 1.20 Mntpa capacity, including 0.6 Mntpa White Cement Plant at Fujairah, U.A.E. Besides, it is the second largest producer of Wall Putty in India with installed capacity of 0.7 Mntpa. Grey Cement Grey cement registered a growth of more than 9% in production volume over last year. North contributed more than 14% in volume, whereas South registered de growth of 2%. This is over and above industry growth of 3% for FY 16. White Cement White Cement registered a growth of more than 2% over last year, whereas White Cement based Wall Putty registered a growth of 22% over the brvious year, resulting in 95% capacity utilization of Wall Putty. As the existing capacity of Wall Putty is almost utilized, capacity expansion of Wall Putty in Katni has been commissioned in May'16 to feed the incremental market demand. Key Highlights, FY 2015-16 • Demand outlook in north has improved. New plants have started achieving higher utilization level. Benefits of grinding units, railway siding and pet coke price softening have been percolating in cost moderations. • Demand and pricing scenario in middle-east for UAE white cement plant is subdued. Power connectivity from Apr'16 is expected to lead normalization of profitability. • Pricing in north has been inexplicably low throughout the year. However, upward trend has started from March onwards. • Accident in southern plant has led to stoppage of work for 15 days resulting in 5% lower dispatches. HUMAN RESOURCES DEVELOPMENT We take our commitment to building a world-class organization by undertaking a Business Process Re-engineering exercise that seeks align our Human Resources Vision with that of JK Cement. We are currently evaluating the areas of focus for taking our organizational capabilities to the next level in brparation for future growth, and will soon embark on a journey to implement the same. The strength of our organization continues to be the value-driven approach towards sustaining the respect that our organization that it receives for being an ethical employer. We continue to evaluate our talent needs and strive to develop the competency and capability of our people across levels. We continue to build on our reputation as a leader and pioneer in White Cement Manufacturing technology and product innovation. Our focus on building our talent as the foundation of future business growth is the driving force behind ongoing efforts to develop as well as induct world-class talent across the industry as well as the globe. We continue to refine our established people processes to keep them abreast of the foremost global practices while keeping our organization contemporary and motivating our employees to align themselves with the organizational objectives. Besides, continuous improvements as a part of ongoing change in management initiatives are aimed at building a future-ready organization. As on March 31, 2016 the strength of J.K Cement is 2745 employees. SUSTAINABILITY REPORT At JK Cement, our endeavour is to highlight how as an organization we are constantly improving upon our environmental footprint and contributing towards more inclusive growth of the society in which we operate, besides delivering on the economic front. We are building a sustainable environment for our future generation by giving back to the nature and society. We want to help all people who are directly or indirectly associated with us. At J.K Cement, our focus is to take initiatives which will help us reduce environmental de-gradation and improve climatic condition in the long run. Moreover, we are also taking steps to optimize resources and improve efficiencies. OCCUPATIONAL HEALTH & SAFETY We believe in 'Zero Harm'. Our vision is to improve health and safety standards of people who are working with us in the capacity as employees, contractors or in any other role. Efforts are taken to minimize activities which may affect the health and safety in working place or adversely impact the life of communities living near our plants. To promote this, we are encouraging the use of renewable resources as well as recycled waste. Further, steps are taken for optimum utilization of plants, with least disposal of harmful gases in environment. INTERNAL CONTROL SYSTEM The Company has in place well defined internal control system to commensurate with the size of the Company and same were operating effectively throughout the year. The Internal audit is being carried out by team of both external as well as in house auditors be at plant location, sales depot or at regional or registered office. In order to maintain its independence and objectivity in observation, Internal Audit department report on the efficacy and adequacy of internal control system to the Chairman of Audit Committee of the Board. These keep check on the existing system as designated process owners are supposed to undertake corrective action in their respective areas and thereby strengthening the internal control system. |