MANAGEMENT DISCUSSION AND ANALYSIS A INDUSTRY OVERVIEW: AIA Engineering Limited (AIAE) manufactures and markets a wide range of High Chromium consumable wear parts (mill internals) which are used in the process of crushing/grinding in the Cement, Mining, Thermal Power and Aggregate Industries. These are core industries from an economic stand-point and are the basic drivers off infrastructural development. The Company employs alloy-casting process for manufacture of the products, which entails designing and choosing the high-chrome alloy composition in relation to the end application. The casting process is followed by brcision heat treatment process to impart the required end properties. Therefore, the Company can generally be classified as a foundry. The Company produces a specific range of high chrome mill internals which are used as wear parts in the Cement, Mining, Utility and Aggregate Industries. Therefore, our market prospects are closely linked to the requirement of wear parts in these industries. AIAE has a global footprint with sales and service support in more than 120 countries. The world economy has further slowed down during the last financial year with commodity prices softening to all-time lows. In addition, the global cement industry has been undergoing structural issues since last few years and has not witnessed new capacity addition except for a few select countries. Also, capacity utilization in developed countries continues to remain static. In India, the Cement industry, having grown its capacity to 300 million tonnes per annum, seems to have entered a phase of consolidation with new capacity addition having slowed down. The GDP growth forecast of 7% in India brsupposes an improved manufacturing base and infrastructural push, which makes domestic business prospect for AIAE better. In Mining segment, as per our internal estimates, the brsent annual requirement of consumable wear parts is in the region of around 3 million tons per annum. Bulk of this is brsently met by forged components, with around 10% being serviced by high chrome wear parts. Although there has been a significant fall in the commodity prices and therefore the prices of metals over last two years, major mines worldwide remain operational. On the brighter side, the prospect of conversion of the conventional wear parts into high chrome use is a sizeable opportunity available to AIAE. So far the domestic mining requirement is concerned, it is a small opportunity window that can expand into a reasonable opportunity as and when an effective mining policy is in place. From a strategic perspective, AIAE's current focus is on the global mining opportunity. In India, in addition to the above two industries, AIAE is also servicing the replacement and new capex requirements of coal fired thermal power plants and is thus directly catering to the Power sector. India is expected to narrow the power deficit in future and hence a sustained growth in this particular segment is brdictable. B. SEGMENTWISE PERFORMANCE: The Company primarily operates in only one segment i.e. manufacturing of High Chrome Mill Internals. In fiscal year 2015-16, 31.11% of its total sales came from India while balance 68.89% came from sales outside India. C. OUTLOOK AND PROSPECTS: From a strategic positioning perspective, a significant contribution in your Company's growth is coming from the mining industry. The growth prospects are primarily emanating out of the large annual replacement market in this industry. Here, we are currently catering to the requirements of four major metal ore types, viz., Iron, Platinum, Gold and Copper, with total emphasis on the replacement market. Again the company is now focusing on certain strategic drivers in the Mining segment over and above the cost reduction due to much lower wear rates owing to high chrome, viz. improved process efficiencies, reduction in the cost of other consumables (other than high-chrome grinding media), significantly reduced environment hazards and consequentially improved environmental benefits, etc. for providing combrhensive solution to the mining industry. This has helped your company in creating a unique positioning which augurs well for the consistent and steady growth in this industry over medium to long term. As the Company is focused on four major ores, the declining fortunes of one commodity do not significantly impact your Company's growth prospects. During last few years, we have steadily increased our brsence in the major mining groups across the globe with a stronger focus on major mining centers like North America, Latin America, Australia, Africa, and the Far East Asia, etc. Over the coming years your company has fairly aggressive growth plans so as to capitalise upon the available opportunity in the mining segment and the vision is to emerge as the leading global solution provider in this segment. While the current focus of the Company in mining segment is outside India, your Company also has a major share of the domestic mining demand and shall be able to capture incremental demand as and when the same arises. In as much as the cement segment is concerned, the near term prospects continue to remain flat, although in India it seems that the average capacity utilisation levels of cement companies have started to go up. It is also expected that with the government taking lot of initiatives on the infrastructure segment, more particularly the road construction and port infrastructure, it might provide much needed stimulus to the overall construction and industrial segments and it is hoped that from the current fiscal year onwards the positive impact of this stimulus should start coming in. As and when India's cement production will go up your company will be an immediate beneficiary in terms of incremental production going to service the additional requirement. On the global front, while most of the key markets like North America, Latin America, Western and Eastern Europe, Africa, etc. continue to remain sluggish, there are certain specific markets in Asia, Africa and South America, which continue to add capacity or have increased capacity utilization. In China, the Company currently maintains a limited brsence by marketing specific products. On the whole in near term your company continues to believe that the overall production and sales will remain flat in this segment. In as much as the thermal power plants are concerned, the Company continues to enjoy a niche position in this particular segment in India. The Company will strive to maintain a steady growth rate in this particular segment matching with the rate at which the sector grows. D. CAPEX PLAN: The Company's effective capacity reached 340,000 Metric Tonnes after successful commission of Kerala GIDC brownfield expansion project during 2015-16. We are on track for the purpose of implementing second phase of capital expenditure plan at GIDC Kerala involving augmentation of the total capacity by further 100,000 MT, which is expected to be commissioned by October 2017 which will take the total installed capacity to 440,000 MT. The incremental Capex required to be incurred for the second phase is estimated around Rs. 350 crores (from April, 2016) and the same will be funded entirely from internal cash accruals. E. RISKS AND CONCERNS: Given its large exports, the Company is exposed to foreign exchange rate fluctuation risk. The Company closely monitors the currency movements and has a prudent hedging policy to mitigate this risk. Another major concern is with regard to fluctuation in the raw material prices. However, the Company has converted major portion of its contracts from fixed price to fluctuating price regime. Again, the Company is closely monitoring raw material price movements and is regularly buying the raw materials during low price cycles so as to average out the impact of price fluctuations. The Company is exposed to certain operating business risks, similar to most manufacturing companies, which is mitigated by regular monitoring and corrective actions. To protect itself against debtor defaults, which risk has increased due to the state of global economy and commodity price melt down, the Company has taken a combrhensive credit insurance policy. F. INTERNAL CONTROL SYSTEM AND THE ADEQUACY: The Company has proper and adequate systems of internal controls commensurate with its size and nature of operations to provide reasonable assurance that all assets are safeguarded,transactions are authorized, recorded a reported properly and to ascertain operating business risks, which are mitigated by regular monitoring and corrective actions. The internal control systems have been designed so as to ensure that the financial and other records are reliable and reflect a true and fair view of the state of the Company's business. The Company has successfully migrated to the SAP-ERP system which has also helped in further strengthening the internal control system. Again, during the fiscal year 2015-16, your company has combrhensively reviewed and re-designed the internal financial controls across the organisation encompassing all key functional areas as well as covering the entire gamut of entity/operational level controls commensurate with the nature and size of business. A qualified and independent Audit Committee of the Board of Directors actively reviews the adequacy and effectiveness of internal control systems as well as internal financial controls and suggests improvements for strengthening them. Similarly the Internal Auditors are also monitoring the internal control/ internal financial control systems. G) INDUSTRIAL RELATIONS AND HUMAN RESOURCE MANAGEMENT: The Company believes that human resource is the most important asset of the organization. During the year under review, your Company continued its efforts to improve HR related processes, practices and systems to align these to the organizational objectives. Training and development of its employees is ensured through on the job and outside training programs and workshop. The Company continues to attract excellent talent to further its business interests. Industrial relations continue to be cordial. H) CAUTIONARY STATEMENT: Statements made in the Management Discussion a Analysis describing the Company's objectives, projections, estimates, expectations may be "Forward-looking statements" within the meaning of applicable securities, laws a regulations. Actual results could differ from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand supply and price conditions in the domestic a overseas markets in which the Company operates, changes in the government regulations, tax laws a other statutes a other incidental factors. |