MANAGEMENT DISCUSSION & ANALYSIS Global economy Global growth remains moderate, with uneven prospects across the main countries and regions. It is projected to be 3.5 percent in 2015, in line with forecasts in the January 2015 World Economic Outlook (WEO) Update. Relative to last year, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. (Source: International Monetary Fund April 2015] Indian economy The Indian economy grew at 7.3 per cent in 2014-15 due to improvement in the performance of both services as well as manufacturing sectors. According to the data release by the Central Statistics Office (CSO), the economic growth was 6.9 per cent in 2013-14 as per the new series of national accounts with base year of 2011-12. The Gross Value Added (GVA), a new concept introduced by CSO to measure the economic activity, rose by 7.2 per cent in 2014-15 compared 6.6 per cent in the brvious fiscal. The manufacturing sector GVA rose by 7.1 per cent during the year as against 5.3 per cent in 2013-14. Similarly, the output of electricity, gas, water supply and other utility services rose by 7.9 per cent as against 4.8 per cent a year ago. The construction activity too registered an increase of 4.8 per cent, up from 2.5 per cent a year ago. Financial, real estate and professional services also showed an improvement by registering a growth of 11.5 per cent as against 7.9 per cent in brvious fiscal. However, the farm and allied sectors grew by a meagre 0.2 per cent compared to 3.7 per cent a year ago. The output of mining and quarrying sector too slipped to 2.4 per cent from 5.4 per cent a year ago. The manufacturing sector recorded a growth rate of 8.4 per cent during the last quarter of last fiscal, up from 4.4 per cent a year ago. The services sector too witnessed marked improvement during the quarter. Global ceramic tiles industry Global ceramic tiles market is expected to reach USD 125.32 billion by 2020, according to a new study by Grand View Research, Inc. Construction industry growth in BRICS coupled with rising demand for new residential structures in emerging markets of China and India due to urbanization is expected to drive market demand for ceramic tiles over the forecast period. Stringent environment regulations pertaining to carbon emissions caused during the production of ceramic tiles has forced market players to increase their R&D expenditure on eco-friendly products, which is likely to open new market avenues in the near future. Demand for ceramic tiles has been driven by the growing construction and infrastructure industry, mainly in the Asian economies of China, India and Indonesia. There has been a discernible shift towards replacing paints, metal slabs, marble floors and other home decorative products with ceramic tiles, which is also expected to boost the market. However, volatility in raw material prices and tightening of regulatory guidelines to address growing environmental concerns have increased the production costs for ceramic tiles manufacturers. Floor tiles are expected to be the fastest growing segment of the ceramic tiles market growing at an estimated CAGR of 9.4% over the next five years. The wall tiles segment is expected to lose its pole position to floor tiles by 2018. Indian ceramic tiles industry The Indian ceramic tiles industry grew by around 13-15% CAGR. The industry is expected to reach a size of Rs. 301 billion by 2016, growing at a 15% CAGR (Source: PWC report, 2013]. The Indian ceramic tiles market was ranked third globally and accounted for over 6% of the total global production. The organised segment makes up approximately 50% of the sector and the top-eight manufacturers constitute over 75% of the organised market. Trends in the ceramic tiles market in India: • As the curtains rise once again on Indian Ceramics 2015, there is no better time than now to reflect and emphasize how branding is a key brrequisite for success in the ceramic industry as in any other, in particular, ceramic tiles. While branding is believed to apply more to B2C companies, B2B companies are not exempt. A good example to evaluate this is the context of tiles which is a classic example of a combination of B2B and B2C segments. A good portion of a tile manufacturer's sales is to institutional builders and dealers (B2B segments) while the rest is direct sales to end consumers (B2C segment). • A major concentration of ceramic producers is in Morbi, Gujarat accounting for nearly 70% of the total production from the Regional Sector. Some of these tile producing units are growing steadily and sustainably and are setting new benchmarks not just in terms of efficiency and quality but also in setting new trends in creative and customised designs, shades, sizes, etc. Some of the well-known brands in the National Sector use Morbi producers as outsourcing or JV partners. • Introduction of nanotechnology: Use of nanotechnology helps enhance shelf life and strength of the tile and can make tiles resistant to dirt and bacteria. These tiles are gaining popularity in areas where hygiene is important such as hospitals, laboratories and food processing plants, among others • Eco-friendly tiles: Usage of eco-friendly tiles is expected to increase as consumers become more environment-conscious. Eco-friendly tiles are usually made from natural and renewable substances • Designer tiles and introduction of 3D tiles: Tiles are now becoming a style statement and are used for bedroom and living room walls as well. 3D tiles are also being used for outdoor cladding, wall cladding and elevations, among others • Shift towards vitrified tiles: Vitrified tiles, comprising nearly 50% of the ceramic tiles market, have witnessed robust growth over the past five years with increasing demand due to durability and easy maintenance Outlook The Indian ceramic tiles industry is likely to invest further in enhancing production capacities and production is likely to grow at a 12.7% CAGR to cross the 1,000 million sq. m-mark by 2015. Business segment review Tiles Overview This segment consists of four products - ceramic floor, wall tiles, vitrified tiles and naturoc tiles. The Company's annual tiles production capacity stood at 16 million sq. m as on 31 March 2015. Key highlights, 2014-15 • Launched 280 SKUs covering mass and brmium products • Focused on wall digital tiles Outlook The division expects to expand its product basket through the launch of new, fast-moving products. It also intends to climb the realisations ladder by focusing on higher sales of value-added tiles. Marble Overview NITCO's Silvassa unit processes imported marble blocks using state-of-the-art technology. The Company's marble is of superior quality and design and finds usage as both an interior as well as an exterior flooring solution. This segment grew by 15% in terms of turnover in 2014-15. Key highlights, 2014-15 - Launched 10 new products - Reinforced processes by reducing material consumption Products - Natural marble: The design collection is inspired by natural blends and a keen understanding of consumer aesthetics to manufacture products with the best of textures, tones and technology. NITCO offers marbles of different colours (white, beige, red, brown, black and grey) and are procured from the world's leading quarries. - Onyx marble: Onyx is a variety of chalcedony. The colours of its bands range from white to almost every colour (save some shades, such as purple or blue). Commonly, specimens of onyx contain bands of black and/or white. NITCO's collection includes many products such as Bianco Onyx, Onyx Esmeraldo and Golden Noir Onyx, among others. - Engineered marble: Engineered marble consists of a range of agglomerated marble and quartz. A unique feature of these engineered stones is that they are maintenance-free and diverse in terms of designs, patterns and colours. Outlook - New products with our attractive designs and various sizes are expected to contribute at least 20% of our divisional revenues in 2015-16 - Our broad intent is to provide different varieties of coloured material to branch out our product portfolio and reinforce customer convenience Real estate development Overview Overall, 2014-15 was a subdued year for the Indian real estate industry. Rising inflation combined with high borrowing rates as well as slow growth in incomes and jobs impacted consumer spending on real estate. Moreover, banks' reluctance to lend to the sector and drying-up of other sources of finance such as FDI and PE investments, resulted in increase in debt costs for developers. There is a ray of optimism in the realty sector since SEBI has approved the setting up of real estate investment trusts (REITs], a move that may offer a new source of financing to India's cash-strapped property developers. REITs are listed entities that mainly invest in income-producing real estate assets, the earnings of which are mostly distributed to their shareholders. Information and technology Overview At NITCO, embracing the latest technology provides us an edge over competitors, enhances productivity, helps expand business operations and facilitates on-boarding newer customers. Key Highlights of FY 2014 - 15 : - Successfully upgraded the SAP ERP version from ECC 5.0 to ECC 6.0 with EHP 7 and migrated SAP to the new server and storage infrastructure facility. The new version offered new features and all latest statutory compliance measures, and also improved the processing speed of SAP operations. - SAP Process enhancements were implemented in the areas of Sales Order management, inventory allocation and dispatch planning, and freight management. Automated and simplified various business processes which helped to improve the process efficiencies and improved the speed of execution and removed person dependent steps., - Major project was undertaken to deploy Smartphone based App for the frontline Sales team, to offer Sales Force Automation ( SFA) and CRM. The project was designed to measure sales person productivity through their Journey Plan cycles and Daily Call Report logging and providing are the sales & customer related information in real time to the sales executive. The project is planned to go live in FY 2015-16. Human capital Overview NITCO has earned a reputation as a people- friendly organization that cares for its employees. Over the years the company has strengthened its competitive edge by reinforcing its human resource capabilities. The organization provides an exciting working environment marked by teamwork, meritocracy and an emphasis on knowledge accrual As on 31 March 2015, NITCO had 1037 employees on its payroll. NITCO enjoys cordial employee /industrial relations across all manufacturing units and regional sales offices. Key highlights, 2014-15 - All the frontline sales staff across the regions in Tiles Division was imparted a structured 2 day functional training to enhance their selling skills. - The double - shift operation at Silvasa unit of Marble Division was executed with timely hiring of additional skilled Manpower. - The variable pay earning potential of sales personnel was enhanced by revising the sales incentive scheme. - Hiring of trainees from reputed institutes with Masters in management and with Bachelors in engineering degree was continued this year also as part of NITCO's New Leader's Development Program. - In-house functional training on all aspects of Tile Manufacturing at Alibaug was carried out at regular intervals. - Employee engagement programs in the form of cricket & carom tournaments, blood donation camps, celebration of festivals, and CSR activities were undertaken throughout the year under the aegis of 'Nitcotine', the in-house committee which organises employee engagement activities. - Product knowledge training was organized at regular intervals at the Alibaug plant with an emphasis on honing the skills of sales, marketing and business development personnel. - Manpower deployment across critical functions was reviewed with the objective to enhance employee productivity. - Successfully completed the surveillance audit of IMS certification for the year 2014-15 for ISO 9001, 14001 and OHSAS 18001 standards. Awareness programs for employees were conducted to uphold the sense of commitment with respect to environment and safety standards Financial review Despite a challenging environment, NITCO managed to increase its gross turnover to Rs. 902.61 crore in 2014-15 from Rs. 841.91 crore in 2013-14. The turnover of tiles business also increased from Rs. 730.78 crore in 2013-14 to Rs. 763.85 crore in 2014-15 and marble from Rs. 110.52 crore in 2013-14 to Rs. 129.79 crore in 2014 -15. In case of Real Estate business, sales value stood at Rs. 8.96 crore as against Rs. 0.61 crore in the brvious year Due to sluggish economic scenario in India and debrssed Real Estate market, the company could not get the desirable price for its Real Estate assets and hence the sale has been deferred. Expense analysis Total Expenses: Total expenses excluding debrciation and finance cost increased by 7.18% from Rs. 787.17 crore in 2013-14 to Rs. 843.69 crore in 2014-15, due to higher sales achieved in 2014-15. Power and fuel Power and fuel costs have been increasing by leaps and bounds over last few years. The primary reason for this increase is steep rising Regasified Liquefied Natural Gas (RLNG) price. RLNG cost per MMBTU was Rs 568 in March 2012, Rs. 768 in March 2013, Rs 962 in March 2014 and Rs. 1048 in March 2015. Despite increase in RLNG prices during the year, the power and fuel cost reduced by 1.27% as the Company shifted to alternate fuel. Towards end of the last quarter the Company made arrangements for installation of Coal Gas plant at its Alibaug Factory. This is expected to reduce the cost of fuel during FY 2015-16. EBITDA Due to increase in sales and strict control on costs EBITDA losses came down from Rs. 25.55 crore in 2013-14 to Rs. 15.81 crore in 2014-15. Borrowing cost Interest cost has decreased on account of non provision of unpaid interest to CDR lenders whose accounts had been turned into NPA during FY 2014-15. Had the interest as per Loan Agreements been provided for as per terms of CDR sanctions on accrual basis, the interest for year ended 31st March 2015 would have been higher by Rs. 107.40 crore, loss for the year ended 31st March 2015 would have been higher by Rs. 107.40 crore and bank liability would have been higher by Rs. 107.40 crore as on 31st March 2015. Write off of Investments in overseas subsidiary in Turkey and china The Company had incorporated wholly owned subsidiaries in Turkey for procurement of marble and in China in order to promote export of tiles to third countries. The Company had invested an amount of Rs. 6.97 crore in these subsidiaries by way of Equity and Advances. Due to adverse change in the business environment and as per terms of CDR sanction, the Company had closed down these subsidiaries and balance of Rs. 6.97 crore has been written off as Exceptional Items in the FY 2014-15. Equity share capital The Company's equity share capital is stated at Rs 54.70 crore as of 31 March 2015. Borrowings The debt fund has increased due to funded interest as per approved CDR package and devolvement of letter of credit issued by lenders. Current liability includes the term loan repayable within one year hence increased in comparison to last year. Working Capital a) Inventory has reduced from Rs. 200.35 crore in FY 2013-14 to Rs. 185.05 crore in FY 2014-15; b) Inventory - Real Estate has reduced from Rs. 185.91 crore in FY 2013-14 to Rs. 178.84 crore in FY 2014-15; c) Trade receivables have reduced from Rs. 127.57 crore in FY 2013-14 to Rs. 121.76 crore in FY 2014-15; d) Trade payables have increased from Rs. 147.93 in FY 2013-14 to Rs. 157.88 crore in FY 2014-15. Capital Expenditure The Company did not incur any major capex during the year as the Company opted to increase its capacity through its joint venture and outsourcing arrangements. Gross Block increased by Rs. 4.53 crore. Sick Industrial Companies (Special Provisions) Act, 1985 & Board For industrial and Financial Reconstruction The net worth of the Company has been fully eroded and being mandatory requirement, a reference was filed under section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 before the Hon'ble Board For Industrial and Financial Reconstruction (BIFR) and the same was registered with BIFR vide their letter dated 12th May 2015. Managing risks at NITCO At NITCO, risk management is a continuous process of identifying, assessing and evaluating risks and taking proactive measures to minimise or eradicate potential losses arising due to an exposure to particular risks. The consistent implementation of this framework is monitored through audits and reviews, resulting in an accurate understanding of the Company's competitive position. In doing so, the Company takes decisions that balance risks and rewards. perception risk Inability to sustain historical growth rates could adversely impact brand perception. Mitigation Due to change in the business model, the Company may not be able to sustain its historical growth rate. However, owing to a dynamic and sustainable business plan, continual innovation towards a prudent sales-mix and improving operational efficiencies, the Company will be able to perform better in absolute terms. Economic risk Indian economy could create a widening chasm between budgeted and actual ground realities. The slowdown of economic scenario of India has direct impact on the Real Estate industry and tiles industry. Mitigation The Company has emerged as a one-stop shop for tile solutions, providing floor as well as wall tiles. Metros and urban cities are majorly hit by an economic deceleration while in recent times a majority of the demand for consumer products is emerging from Tier-II and Tier-III locations, which usually remains largely unaffected by economic slowdowns. Thus, as a brcautionary measure, the Company strengthened its brand name and distribution network in new demand pockets. Foreign Exchange Risk A weaker Indian currency is a threat to importers. Mitigation The Company has shifted its dependence from Chinese imports to indigenous sourcing. A small portion of the Company's turnover is still imported from China as per the requirement of its clients. The Company covers its foreign exchange exposure; selling the products at margin-plus-actual landed cost basis. The Company generally finalises the price negotiation of products with client before actual imports take place. Fuel cost risk Rising RLNG prices could impact profitability. Mitigation Continuously rising gas prices is completely beyond the Company's control. However towards minimising this impact and offsetting the cost increases, the Company has made arrangements for using Coal gas at its Alibag Plant. Competition risk Increasing competition can have an impact on margins. Mitigation Competition from the unorganised sector is expected to decline with rising consolidation, effected by organised players partnering with unbranded players (with low-cost manufacturing expertise) as a part of their cost-efficient expansion strategy. NITCO possesses such a joint venture with New Vardhman Vitrified Private Limited, with a 51% stake. Technology or software obsolescence risk Technology or software obsolescence may result in compromise of quality standards and losing out on the competitive advantage. Mitigation The Company invested in SAP ERP module, scaling up its IT infrastructure across its sales, distribution and manufacturing divisions. Design technology will further be enhanced to further strengthen NITCO's aspirational brand position in the minds of the architect, builder, dealer and community at large. The tangible digital technology and 6 color prism technology are the new and updated technologies used in the brsent year client attrition risk A substantial portion of the Company's total sales comes from retail clients. Hence, client attrition can impact both revenues and prospective growth. Mitigation Providing post-sale services to retail customers and offering guidance programs for institutional customers have been an integral part of Company's initiatives to reinforce relationships. The Company also customises products to cater to specific requirements. Some of its brand-enhancing customers include Reliance, Prestige, Purvankara, Rahejas, Godrej, Oberoi Construction, DLF, L&T and Unitech, Lodha, Supertech, Amrapali among others. Human resource risk Attrition of key executives and personnel could affect the Company's growth prospects. Mitigation NITCO has initiated various measures such as deploying strategic talent management system, training and integration of learning activities. Various HR initiatives were initiated to encourage staff towards enhancing productivity and building the spirit of team work. Dealer attrition risk Dealers rebrsent the Company's face to customers. Reduction in the number of dealers could affect sales and negate brand image. Mitigation The Company has introduced a fast-moving range of tiles, which has revitalised its distribution network. Contingent / Other liabilities risk The contingent / other liabilities mentioned in the notes to accounts if confirmed, may adversely affect the financial position of the company Mitigation The company is taking proper legal / other advices to minimize the risk |