MANAGEMENT'S DISCUSSION AND ANALYSIS Forward-Looking Statements This report contains forward-looking statements, which may be identified by their use of 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 statements about the company's strategy for growth, product development, market position, expenditures, and financial results, are forward looking statements. Forward-looking statements are based on certain assumptions and expectations of future events. The company cannot guarantee that these assumptions and expectations are accurate or will be realized. The company's actual results, performance or achievements could thus differ materially from those projected in any such 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. Industry The power sector growth during 2015-16 was 5.6% against 8.43% during 2014-15. The Indian Electrical Equipment (IEE) industry, which includes power generation and transmission & distribution (T&D) equipment, is estimated to be worth Rs.1400 Billion in 2015-16. The transformers sub-segment comprises around 10% of the total IEE industry i.e.,Rs.140 Billion as compared to Rs.105 Billion in the brvious year as per IEEMA. The aggregate installed capacity of transformer industry in the country is around 4.2 lakh MVA as on March 31, 2015 and the industry is operating at an average of around 60% capacity as the government projected demand has not materialized fully. The Government of India planned huge power generation capacity addition for 10th and 11th five year plans (FYP: 2002-07 & 2007-12). However, the capacity addition lagged behind the targets, mainly due to delays in land acquisition, environmental and forest clearance issues, uncertainty over fuel linkage and tightening of credit flow. The domestic transformer manufacturing entities have almost doubled their manufacturing capacity to around 4 lakh MVA at the end of 11th FYP, based on expected addition in power generation capacity. However due to lower capacity additions in generation sector, the transformer manufacturing capacities remained underutilized. The Indian transformer industry was set to grow at a compound annual growth rate (CAGR) of13 - 15% in the 12th Five Year Plan (2012 - 201 7) but it witnessed a decline in growth, profitability and deterioration in debt coverage as many of the government projects were delayed. However the FY 201516 witnessed a reversal in profitability trend with a marginal improvement over FY 2014-15. Opportunities, Concerns and Risks Opportunities The transformer market in India has been stable for quite some years now. The market is expected to witness healthy growth rates and stimulating demand for the coming years. India is expected to add around 300 GW of generation capacity in the next seven years till FY22 including conventional and non-conventional energy sources. A total investment of Rs.13,730 Billion is planned for the power sector for 12th FYP, which is likely to fuel the demand for transformers. The initiatives undertaken by the Indian government along with the need for replacement of transformers installed in the earlier years is expected to drive growth in the Indian transformers market. As a result of increased government spending on electrification and rising power demands, the electrical equipment manufacturers are likely to get benefitted. Programmes such as RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana) and R-APDRP (Revised Accelerated Power Development and Reforms Program) are bolstering the demand for electrical equipment such as switchgears, conductors, capacitors and transformers. Transformers being used in generation, transmission as well as distribution network have experienced healthy growth over the last few years and the market is further set to rise as a result of increased governmental focus towards rural electrification. Renewable energy will need value added products like skid base substation and hence the demand for the same will increase. We have been successful in developing products including transformers & switch gears mounted on skid. We have supplied over 100 of such product during 2015-16. For the first time in the Indian transformer market, the word "Power Quality" is buzzing around. This is good sign, although delayed. The quality transformers manufacturers will be paid for their efforts and compliance. However it is a long way to go, before it materializes. Concerns and Risks The Indian transformer industry is facing some key challenges, which restrict it from growing of its full potential and targets. Some of these challenges include: • CRGO laminated Silicon Steel, which is one of the major raw materials for transformers, is not being manufactured in India causing more FOREX outflow and small manufacturers are charged heavily by mid man as they cannot import directly. • High design cost due to lack of standardization of product specification, design parameters and ratings for generation and distribution equipment across different utilities. • Continued pricing brssure due to the over capacity of existing manufacturers in the market. • Limited test facilities with 2 or 3 players across the country for high voltage testing. • Interdependencies on sub-sectors for the import of critical components. • Chinese companies exploring India with large capacities hence increased competition. • Out dated tendering process thus delay in orders and lack of transparency. • Contract awarding based on L1 bidder by utilities. • Customers delaying taking physical delivery of their transformers due to delays in large projects. This blocks the capacity, hampers production lines and locks up working capital. Business Overview and Outlook Given the capacity expansion plans of state-owned transmission companies, demand is expected for high voltage and extra high voltage power transformers and for distribution large transformers. Further, the focus on non-conventional energy will lead to more wind and solar power generation fuelling the growth for transformers. In addition to the domestic market, your Company has taken steps to foray into the global market through General Electric network to improve its performance and reach. While we remain more optimistic on business environment, pricing brssures will continue. Risk and Internal Controls The CEO/CFO certification provided in the report discusses the adequacy of our internal control systems and procedures. In accordance with provisions of Companies Act 2013 and Listing Agreement, which is effective from 1st October 2014, the Audit Committee is required to evaluate the policy on Internal Financial controls. As of the end of the 2015 fiscal year, management conducted an assessment of the effectiveness of internal financial controls and based on this assessment, management has determined that the Company's internal financial controls as of 31 March 2016 were effective. The Company has in place a mechanism to inform Board Members about the risk assessment and controls at periodical intervals. The Company has an independent Internal Auditor for periodically carrying out audit of the transactions of the Company in order to ensure that recording and reporting are adequate and proper. The Internal Auditors independently evaluate the adequacy of internal controls to ensure that internal controls, checks and balances in the system are adequate, proper and up-to-date. Remedial measures are suggested by them to mitigate the risks identified during the course of the audit assignments and action plans ensure implementation of such suggestions. Safeguarding of assets and protection against unauthorized use are also part of these exercises. Subject to determining any additional appropriate actions arising from items still in process, the board is satisfied that, where significant failings or weaknesses in internal controls were identified during the year, appropriate remedial actions were taken or are being taken. Financial and Operations Performance The financial performance of your Company has improved as compared to the brvious year. However, the same was affected by the combined impact of pricing brssures in the market place, increases in input costs, delays in projects as well as complying with stringent design specifications of the customers. The Company is fully focused on reducing the input costs and is using the expertise of its parent company. Human Resources The Human Resources department has undertaken several initiatives during the year for reducing overhead costs wherever feasible in the form of reducing transport facilities, disposing the company vehicles, reducing trainees and indirect contract workers engaged in Housekeeping, gardening and security. It is continuing its drive towards consolidating the entire workforce under one roof and rationalising the workforce by transferring workers from other sites and reducing the contract workers therein. It has also contributed to improvements in the culture and interpersonal relationship between the workforce and the supervisors and managers in the shop floor. Staff strength was rationalised in its initiative to change over from quantitative to qualitative head count |