MANAGEMENT DISCUSSION & ANALYSIS FORWARD - LOOKING STATEMENTS This report contains forward looking statements identified by words like 'plans', 'expects', 'will', 'anticipates', 'believes', 'intends',' projects', 'estimates' or other words of similar meaning. All statements that address expectations or projections about the future, including, but not limited to the Company's strategy for growth, product development, market position, expenditures and financial results, are forward - looking statements. Since these are based on certain assumptions and expectations of future events, the Company cannot guarantee that these are accurate or will be realised. The Company's actual results, performance or achievements could thus differ materially from those projected in any forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, on the basis of any subsequent developments, information or events. OVERVIEW The Financial Year 2014-15, like the brvious years, continued to remain difficult, challenging and daunting for the overall world economy, domestic economy and the Company, though there are some signs of improvement in some pockets. The US economy showed some improvement signaled through employment data, housing market, etc., which prompted the US Fed to completely phase out the Quantitative Easing measures. The European and Japanese economy continued their painfully low growth trends, with no major signs of improvement, despite the interest rates being maintained at historically low levels, and prompting their central banks to adopt / increase Quantitative Easing measures to historical high levels. China's economy too continued to further slowdown impacting the demand for and prices of commodities the world over and, thus, the economies dependent on commodity exports, and prompting the Chinese central bank to embark on series of interest rate reduction. The world economy was also impacted during the year with sudden fall in the price of crude oil due to the combination of production glut and low demand, adversely impacting the oil producing countries and benefiting the oil importing countries. During the year, the Indian economy showed signs of improvement, especially after the NDA government came to power with absolute majority in the Lok Sabha, which heralded in expectations of speedy reforms, commencement of investment cycle, and end of the era of policy log-jam. The economy was further aided with the steep and sudden fall in the price of crude oil, which benefited the economy on multiple fronts. Various economic parameters improved. Wholesale as well as CPI inflation has come down to comforting levels, current account deficit has seen drastic reduction, fiscal deficit is in check and the interest rates are expected to move southwards. The GDP at constant prices (considering the change in the base year by CSO) grew from 5.1% in 2012-13 to 6.9% in FY 2013-14 and is expected to increase to 7.4% in 2014-15 and over 8% in 201516, with double digits growth in later years. Such growth expectation is on the basis of the reforms measures already initiated and to be initiated, such as, de-regulation of diesel prices, taxing energy products, replacing cooking gas subsidy by direct transfer on national scale, reforms in coal and mining sector, increase of FDI cap in defence, Make in India initiative, Jan Dhan Scheme, Swatch Bharat movement, Skilling India movement, far reaching changes in revenue sharing between Centre and States, implementation of GST, proposal for housing for all by 2022, 100 Smart Cities projects, reforms in Railways, etc. However, various challenges still remain, such as, mounting NPAs of PSU banks, continuation of investment paralysis, high level of corporate debt, high overall fiscal deficit, El Nino effect on monsoon, slow industrial growth, etc. DOMESTIC BUSINESS The continuing slow-down and erratic periodic pattern of the industrial sector growth during the year maintained its adverse impact for the demand for the Company's product. While the demand situation in the automobiles sector improved slightly during the year, it did little to improve the demand for CNG cylinders. The sharp decline in the retail prices of petrol and diesel consequent upon the fall in the crude oil price, on the one hand, and the increase in the pump price of CNG due to increase in the price of natural gas from USD 4.2/MMBTU to USD 5.6/MMBTU, on the other, narrowed the difference in prices of petrol/diesel and CNG, thereby acting as a disincentive for conversion of vehicles from petrol to CNG, thereby adversely impacting the demand for CNG cylinders in the retrofit market. The imposition of Safeguard (Import) Duty of 20% by the Government from August 2014 on imported steel tubes (raw material) up to certain sizes to protect the domestic steel industry added to the woes of the Company and the enhanced duty could not be fully passed on to the customers due to the weak demand. The business situation can improve only on change of key relevant macro parameters, such as, increase in availability of domestic natural gas at reasonable prices, which would enable the government to rollout its City Gas Distribution policy to many more cities and also enable more CNG outlets to be opened, higher allocation of natural gas by the Government for the CGD sector by moving the sector higher on the priority list, improvement in investment cycle which will spur industrial growth consistently creating demand for industrial cylinders, increase in demand for automobiles run on CNG, increased thrust of Government on environment and pollution-reduction, etc. Being the market leader with highest market share and with the large installed capacity, established infrastructure and diverse product range, the Company will be the biggest beneficiary on the happening of these macro level improvements. INTERNATIONAL BUSINESS (a) Dubai Operations The Dubai operations which have been under strain since the third quarter of 2011 due to the sudden closure of its dominant Iran market due to economic sanctions imposed upon it continued to remain so. However, with the thawing of the relations between Iran and USA, there are increased expectation of the sanctions getting lifted and the Iran market reopening, which will bode well for the Dubai operations. The new markets in South America, CIS countries, Europe, etc. that have been developed are gaining traction and stability. However, the volumes and the margins continue to be low. The Dubai operations has started dealing in industrial cylinders and cascades and tapping the Gulf market. (b) USA Operations The US operations have done relatively well during the year, in terms of turnover and margins. The order book position has improved and looks encouraging, with larger proportion of high margin orders. The business prospects remain promising due to the expected uptick in the US economy and the encouragement to the natural gas sector prompted by the shale gas discovery (despite the recent challenges due to decline in crude oil price) and improvement in natural gas supply and distribution infrastructure. The Composite Cylinders did not see the expected ramp up in volumes due to the initial technical and other hitches, which have now been overcome. Going forward, this business is expected to grow well and will provide the required diversification, adding significantly to the revenue and margins. However, Composite Cylinder product development costs and other one-time charges dented the financial results at the net level. The US operations obtained the DOT approval during the year after rigorous approval process over 24 months; this will enable marketing of Industrial Cylinders in the US, which will be sourced from India and Dubai. In the consolidated financials, the intangible assets acquired at the time of the acquisition of the US subsidiary in 2008 continue to be amortised over eight years as per the Indian Accounting Standards. (c) China Operations The China operations continue to remain under severe strain due to the intense competition from the local players who are much large in size and product range, exerting demand and pricing brssures. The slowdown in the Chinese economy and the tough operating environment in China, especially for foreign players, also impacted the operations. The Company continued it's thrust on Jumbo Cylinders in niche segments due to better realization and margins and lower competition but several challenges remain. The Composite Cylinders business did not grow as anticipated due to smaller volumes and regulatory issues. As a result, the plants operated at sub-optimal capacity. The China operations now acts as raw material sourcing hub for the India, Dubai and USA operations, which will yield some margins to it, while reducing the overall raw material costs of the other operations (d) Europe Operations The Europe subsidiary has developed the Europe market and clientele and will procure Cylinders from India, Dubai and USA plants. The subsidiary has played crucial and stellar role in Composite Cylinder product development for the US plant by providing in-house expertise. STRENGTHS EKC's continued resilience in successfully weathering all business and operational challenges over long time frame is reflective of its strengths which are summarized below: 1. Strong Management EKC has a strong, able, committed and highly experienced management with over three decades of solid technical, marketing and general management experience in the High Pressure Cylinder industry. The experience of the Company's management team is a key competitive advantage. Top officials of EKC have been associated with the Company fora long period of time which provides depth and continuity of management. 2. Sustained Leadership in Domestic Market EKC is the pioneer in India of High Pressure Seamless Cylinders business since 1978 and is India's largest player with highest market share, mainly on account of its long history in business and adherence to the highest quality standards and the largest production capacity. EKC also benefits from having the first mover advantage. This coupled with strong relationships on the raw material supply chain, quality certifications and a strong safety track record has helped EKC to maintain its leadership position. 3. Dominance in Export as well as Local Markets EKC Group exports to over 25 countries all over the world including countries in South East Asia, Middle East, Africa, US, Europe, South America and Commonwealth of Independent States Countries. Most of them have the stringent quality standards and value driven norms for the products supplied by EKC. This demonstrates EKC's global competitiveness, world class quality of its products and superior logistical capabilities. The Company has also been able to maintain its dominant share in the domestic market. Revenue from markets outside India now rebrsents almost 67% of the Group's total revenues. 4. High Quality Products The cylinders manufactured by EKC have earned a global reputation for their high standard of quality and compliance with the most stringent specifications laid down by international bodies and local authorities. EKC manufactures cylinders conforming to Indian Standards like IS 7285 (Part 1), IS 7285 (Part 2) and IS 15490 and International standards like ISO: 11439, ISO: 9809-1, NZS: 5454, ISO: 4705D, EN: 1964, ISO: 11120, ECE R-110. 5. Large Capacity and Wide Product Range The Company, along with its subsidiaries, has set up global scale capacities aggregating to more than 1.3 Million cylinders per annum, across various plants in India and overseas manufacturing a wide and versatile range of high brssure seamless cylinders, viz. • Industrial Gas Cylinders (manufactured from tubes) • Industrial Gas Cylinders (manufactured from billets) • CNG Cylinders (manufactured from tubes) • CNG Cylinders (manufactured from plates) • CNG Cylinder Cascades • Jumbo Cylinders • Jumbo Skids • Type II Composite Cylinders • Type IV Composite Cylinders The Company provides cylinders with water capacities that range between 1 litre and 3000 litres and also supplies cylinders in customised sizes, with large range of applications, including Defence. Because EKC has the ability and is flexible to meet any specification, it has a broad customer base across the globe. 6. Supply Chain and Customer Relationships The Company maintains cordial and ethical business relationships with its value chain partners, such as its key raw material suppliers, gas distributors, OEMs and regulatory authorities like the Chief Controller of Explosives, Bureau of Indian Standards and other statutory bodies in India and abroad, and with all its customers. 7. Quick Delivery to Customers EKC has the ability to manufacture and deliver cylinders of different sizes and varied specifications from its multiple operating units. This results in quick delivery to the customers. 8. Investment in New Technologies EKC has made significant investments in newer and alternate technologies which would ultimately enable it to reach leadership status globally. Also, it is the only Company in India to use alternate technologies and raw materials in its new plants. This has enabled EKC to broadbase its raw material supply chain which would lead to lower cost of production and better working capital management as also to broad base its product offerings. The greenfield project at Kandla for plate based CNG cylinders would enable it to cater to the niche OEM segment in India and overseas through supply of light weight and more value added cylinders as and when the demand for such Cylinders materalises. Also, as mentioned above, the US and China subsidiaries have invested in the lighter weight and more brferred Composite Cylinders plants. 9. Group Synergies EKC's brsence in much geography through subsidiaries affords its operations tremendous synergies. EKC China is now acting as raw material sourcing hub for the India, Dubai and US operations as the plants in the three locations source bulk of their raw materials from China. This will enable EKC to source the raw materials for all the operations at lower costs due to larger combined volumes. Similary, EKC Europe will scout business in Europe for the plants in India, Dubai and USA. Inventory management is also optimized with movement of goods from one operation to the other, depending on requirements. The group also benefits from exchange of technical know-how and skills. 10. Investment in Human Talent All employees are important to the Company and it believes that its employees are particularly critical to its business, as they are responsible for understanding customer expectations, ensuring consistent and quality service delivery. The employees are essentially the glue that keeps the entire organization together. The Company intends to continue to invest in developing and grooming its employees. CHALLENGES, RISKS & CONCERNS 1. Raw material intensive industry Seamless steel tubes are the principle raw material used by EKC. The quality of cylinders produced is directy dependent on the quality of raw material used. There are only a few seamless tube manufacturers globally who meet the stringent quality specifications. As the seamless tubes are fully imported by the Company, adequate level of raw material inventory has to be maintained at all times to ensure quick turnaround time for orders received. Any volatility in the prices or increase in the import duty rates or disruption in availability of raw material can impact the profitability of the Company. However, EKC has strong relationships with the existing raw material suppliers and is constantly developing new sources of supplies which will enable the Company to reduce its raw materials cost. Going a step further to reduce supplier risk, EKC has setup facilities using alternate manufacturing process and cheaper raw materials such as billets and plates. Further, as a cost reduction and supply risk mitigation factor, EKC China now sources the raw material for all operations. 2. Competition Although EKC is the market leader in India with majority share, many players have put up high brssure cylinder manufacturing capacities. However, these capacities can only be utilized with growth in demand which is dependent to a large extent on increase in the overall industrial and manufacturing growth, Government policies and impetus from the Government by increasing the supply of gas, covering more cities under the City Gas Distribution policy and improving the gas infrastructure all over the country. Besides, the increasing competition has resulted in an overall margin contraction at the industry level. Despite the challenge posed by the increase in competition,EKC continues to dominate the market place. This is on account of EKC's long standing in the business and goodwill, superior customer reach, wide range of products offered, stronger financial muscle and use of alternate technologies and raw materials. However, a good development on this front is that many marginal and small players have either fully curtailed their operations or reduced them considerably due to the brvalent difficult business environment and conditions over the past few years, in which they were unable to sustain themselves. This bodes well for us as this will reduce the competition going forward. 3. Slow Growth in Sales of CNG Cylinders Because of the regulatory impasse and lack in wide sbrad availability of gas, the overall growth and development of the CNG infrastructure has not been robust in the Country. Only regulatory push can lead to increased usage of CNG which will ultimately result in cost benefit to consumers due to CNG's inherent cost advantage vis-a-vis other auto fuels. Energy content per kilogram of CNG is comparable to that of petroleum based fuels. Usage of CNG in vehicles results in higher mileage per unit due to its superior combustion characteristics. 4. Domestic CNG Growth Dependent on Government Policies and Plans The growth in CNG cylinder market for storage and transportation of CNG would be dependent on Government plans and initiatives to switch over to alternative fuel. However, with natural gas being progressively made available in most parts of the Country and the rising cost of fuels (except for the fall in prices witnessed since the second half of the year), it is expected that the Government policies would be progressive favoring CNG as a fuel. The recent judicial activism at the highest level resulting which the Government has been mandated to have uniform natural gas prices across India is a beneficial development, which will improve the availability of CNG at reasonable cost across India, which will induce consumers to switch over to CNG vehicles. This would lead to an accelerated growth in the CNG cylinder industry. Policy decision by the Government to de-regulate diesel prices will turn some of the demand to CNG. The expected increase in supply of domestic gas due to the gas price hike will add impetus to the demand in the long run. 5. Slowdown in the Industrial Sector and Indian Automobile Industry Negatively Impacts the Company's Growth Industrial gas manufacturers and other manufacturing sectors are major customers for Industrial Cylinders. Any slowdown in manufacturing sector adversely impacts the demand for Industrial Cylinders. OEMs and retrofitters are the major customers of EKC's CNG cylinders in the automobile sector. Any slowdown in cylinder off take from OEMs in India will adversely affect EKC's operations/ production plans. However, demand from other global markets helped in off setting the slowdown in the Indian auto sector. EKC, as a Group, has actively started looking at interesting overseas markets in Euro zone and USA. EKC is gearing itself up to obtain required approvals to comply with technical and statutory requirements of these markets. 6. Volatile Steel Prices Volatility in seamless steel tube prices will affect the demand if the increase in price is passed on to the customers. If the increase in price is not passed on to the customers it may lead to contraction in the margins. 7. Fluctuation in Foreign Currency Any adverse change in the exchange rate between the US Dollar and the Indian rupee has a negative impact on EKC's results of operations and financial condition as the seamless steel tubes (raw material) are fully imported and to the extent of the borrowings denominated in foreign currency. The Company's treasury function actively tracks the movements in foreign currencies and has an internal risk management policy of proactively balancing between hedging of the net exposures and the cost thereof. 8. Fluctuations in Interest rate EKC is subject to risks arising from interest rate fluctuations. EKC group borrows funds in the domestic and international markets to meet the long-term and short-term funding requirements for its operations and funding its growth initiatives. FUTURE PERSPECTIVE 1. Capacity expansion to drive growth EKC has over the years successfully undertaken expansion plans at domestic as well as global levels to retain its leadership position in the industry. The Company has also set up plants using alternative technologies and raw materials to stay ahead of the competitors, reduce input costs risks and to offer more product range to customers. The Billet plant at Gandhidham with a capacity of 120,000 per annum will produce cylinder shells through billet -piercing technology with focus on the growing Industrial Cylinder demand. Billets, unlike steel tubes, are available indigenously. Besides, the Company has also set up a Greenfield 250,000 CNG cylinders plant in the Kandla Special Economic Zone (KASEZ) which uses the steel-plate deep drawing process. These cylinders are lighter in weight and are of better quality and command brmium over the tube based cylinders. CNG vehicle manufacturers will show increasing brference for plate cylinders as vehicles fitted with these cylinders have better fuel efficiency. Besides, as discussed above, the US and China subsidiaries have set up Type IV and Type II Composite Cylinders plants respectively which will cater to the discerning segment of the market which brfer these light weight though higher priced cylinders. Due to the world scale capacity set up by the Company, the Company is well poised to tap the markets as and when the demand picks up. 2. Increasing demand for Industrial Cylinders The gas industry relies heavily on cylinders to store and transport gases. EKC is flexible to meet any specification. This has resulted in a broad customer base of companies supplying industrial gases across the globe. The demand for cylinders is directly proportional to the demand for industrial gases. With the expected increase in the economic growth and the improvement in investment scenario pursuant to Make in India, Swatch Bharat and other initiatives of the Government, the outlook for the growth in demand for industrial gases over the next five years is favourable. This is expected to augur well for EKC which has set up high manufacturing capacity of industrial cylinders. And with the commissioning of the billet cylinders plant, the position has further strengthened with large industrial gases companies brferring these cylinders. The obtaining of DOT approval by the US operations will facilitate marketing of Industrial Cylinders in the hitherto untapped US market, which is fairly large. 3. Increasing Natural Gas Availability With the increasing natural gas availability the world over (example, the USA), the natural gas vehicles are being brferred and promoted by Governments of many countries. Coupled with the increasing environment consciousness, the demand for natural gas vehicles and, thus, the cylinders to bottle the gas is set to increase over medium to long term. FINANCIAL PERFORMANCE VIS-A-VIS OPERATIONAL PERFORMANCE The last year has again been very difficult for the Company on account of the continued challenges brsented by the economic environment, local as well as international. The operations resulted in substantial loss, mainly on account of interest on borrowings and provisions made for investments in EKC China and Calcutta Combrssions and Liquefaction Ltd. The expected improvement in the economic and business environment after the new Government came to power earlier during the year did not materialize and the ground scenario for the Company's business remains almost the same. INTERNAL CONTROL SYSTEM The Company believes in formulating adequate and effective Internal Control Systems and implementing the same strictly to ensure that assets and interests of the Company are safeguarded and reliability of accounting data and accuracy are ensured with proper checks and balances. The Internal Control System is improved and modified continuously to meet the changes in business conditions, statutory and accounting requirements. The Company has an internal audit function, which is empowered to examine the adequacy and the compliance with policies, plans and statutory requirements. It is also responsible for assessing and improving the effectiveness of risk management, control and governance process. The management of the Company duly considers and takes appropriate action on the recommendations made by the Statutory Auditors, Internal Auditors and the independent Audit Committee of the Board of Directors. The brvailing system of internal controls and internal audit are considered to be adequate vis-a-vis the business requirements. In order to further strengthen the internal control systems and with a view to automating the various processes of the business, EKC is implementing an Enterprise Wide Resource Planning (ERP) system. HUMAN RESOURCES AND INDUSTRIAL RELATIONS EKC continued to place emphasis on human capital and aims at creating a corporate culture that respects people, develops and trains them to deliver high quality performance and rewards talent and performance with growth opportunities. As of 31st March, 2015, EKC and its subsidiaries employed approximately 372 employees. This comprises of highly qualified and experienced professionals from various fields like engineering, finance and management. Employee Relations continue to be cordial and harmonious. |