MANAGEMENT DISCUSSION AND ANALYSIS

The overall operations of the company brsent a contrasting picture with the Cement and Power performing satisfactorily and the Engineering Division continuing to be impacted significantly.

Major features of the company's performance for the year under review are as follows:

• Cement prices which were languishing at prices at times much below the cost had started correcting itself to some extent from the second half of the year under review. But the higher input costs arising on account of the Union Budget effects has to some extent further increased the cost of production.

• The demand for cement however remains stationary and in some regions there was also a reduction in the volumes.

• Imported Coal prices were competitive and the value of the Indian Rupee vis-a vis the United States Dollar is more or less stable for most part of the year. This contributed to the lower cost of production. In the last month of the year under review the Green Energy cess was increased by Rs 100 and coupled with the higher excise duty element, and the subsequent retrospective provision of a percentage of royalty payment to the trusts created by the Central and State Government , have since increased the cost of production.

• The company commissioned the 18 MW Thermal power plant at Muktyala in the last quarter of the year. The surplus power is also being sold to the APTRANSCO.

• Thanks to the normal monsoon, Hydel production was satisfactory.

• Operations of the solar plant continue to be satisfactory. The Renewable Energy Certificates issued is also contributing to the efficiency of the plant though the realizations of the REC remains tardy.

• Engineering continues to be severely impacted by the stagnation of the economy and it is expected to show some marginal improvements only from the second half of the current fiscal.

The company's performance, the division wise analysis of the operations is discussed as under:

Cement Division:

• The very low realizations gave way to a moderate increase in the second half of the fiscal under review but the same were neutralized to a major extent by increase in various statutory levies.

• All the imported grades of coal were cheaper than the brvious year and was available throughout the year. Prices were low on account of the reduced material cost and the stable Indian Rupee.

• Availability of quality power was ensured throughout the year.

• Gratifying Exports volume of cement in spite of low contribution.

• The incentives in the form of Power Rebate and VAT Subsidy commenced realization in the last quarter resulting in reduced stress on liquidity.

Overview:

The cement industry in India is globally competitive as the industry continues to witness positive trends such as cost control, continuous technology up gradation and simultaneously looking at increased construction activities.

Major cement manufacturers in India are also increasingly using alternate fuels, especially bioenergy, waste fuel to fire their kilns. This is not only helping to bring down production costs of cement companies, but is also proving effective in reducing emissions and saving fossil fuels.

Stress is always laid on increasing the profitability of the operations by optimisation of the costs rather than depending on the vagaries of the price fluctuations of the finished products.

Challenges:

Contrary to expectations, cement demand failed to pick up even in the post monsoon season due to continuing weak demand from infrastructure and real estate sector, and shortage of labor due to festive season. Delays in environmental clearances for industrial and infrastructure projects and sand unavailability contributed to the slow growth,

Going forward, the pricing flexibility for the industry will remain weak.

The only option available for the cement units is to improve the efficiency of operations keeping in mind the demand shall remain muted.

Outlook:

With the new government announcing plans for dedicated freight corridors and 100 "smart cities", cement makers  are anticipating robust demand and have planned huge capacity expansion.

After a year in which hopes raised by elections came crashing soon after, cement makers are looking for deliverance from state spending in the year ahead. 2014 was a year of consolidation for the sector, even as companies continued to struggle with weak demand, excess capacity and falling prices. The year began with hopes that demand could rise if infrastructure growth picked up. But those dreams belied and now, the industry expects the environment to see a change for the better only in 2015.

Risks:

The cement units, in general , have to encounter the following risks:

• Continuing stagnancy of the demand in the absence of real infrastructure development would render many small units unviable and become the cynosure for any consolidation.

• Dependence on the Indian coal industry, given the brsent scenario , makes them vulnerable and make them depend on Imported coal whose levies keep on rising by the day. Quality of the Indian coal continues to oscillate between good and bad. Units are able to plan their requirement because of these uncertainties.

• Costs of Diesel and fuels plays a great part in the operations. The brsent low crude prices may not last long and the transport costs would again rise with the rise in these fuel costs.

• All the power units are basically captive in nature.

• The Captive Thermal Power Plant was commissioned in the last Quarter of 2014-15.

• All the units performed creditably during the fiscal year under review.

Overview:

The Indian Power Industry is undergoing significant change that is redefining the industry outlook. Sustained economic growth and purchasing power continues to drive power demand in India. The Government of India focus on Power for all has accelerated capacity addition in the country. At the same time competition intensity is increasing in both the market and supply side.

Power costs occupy a sizeable portion of the total cost of production of both cement and Engineering goods. Hence the company has put in place various steps for the reduction of the energy costs. These efforts include the following:

• Proper and timely calibration of the equipments.

• Installation of VFDs throughout the units

• Proper strengthening of the bunds of the canal where the Hydel units are situated.

• Proper maintenance of the Cooler Boilers in the Waste Heat Recovery Plant

• Prompt sale of REC in the IEX Exchange  

Risks:

• Power Generation in Hydel unit is always at a risk as it depends on sufficient water in the canal. In this year, with a brdiction of a below normal monsoon, one needs to keep his fingers crossed and hope for the bounty from the rain god.

• Any change in the wind pattern could cause fluctuations in the Wind Energy Generation.

•Though the REC benefits are available for the units, the sale and realization of these RECs continues to be slow .

• Carbon Credits accrual though uniform, poses challenge in the realization.

• With the uncertainty brvailing in the domestic coal industry, the thermal unit has to rely on imported coal with its inherent price and exchange fluctuations

Operations of the Engineering unit were greatly hampered by the following factors:

• The stagnant economy had its effect on the operation of the unit with a steep fall in the conversion of enquiries into orders and from orders to schedules.

• To fill up the capacities , low and nil contribution orders were accepted .

• The Pressure Vessels segment did not book sufficient orders in the year.

• Higher input costs were also witnessed.  

Overview:

India on its quest to become a global superpower has made significant strides towards the development of its engineering sector. Coupled with favorable regulatory policies and growth in the manufacturing sector, many foreign players have started to invest in the country. India recently became a permanent member of the Washington Accord (WA) on June 13, 2014. The country now joins an exclusive group of 17 countries who are permanent signatories of the WA, an elite international agreement on engineering studies and mobility of engineers.

Certain factors would seem to suggest that the market believes the worst is over for the industry. However, there is nothing in the current financial performance, nor is there any big change waiting to happen in the next half year, that would justify any such expectation. For one, there is not much improvement in order inflows, which is not surprising given that the macro environment remains challenging. Secondly, almost all major customer industries for the capital goods sector, such as Power, Oil and Gas, Metals and Cement are operating at low capacities without proposals for green field projects

Risks:

The biggest problem for the capital goods companies is the sluggish economic growth. Additionally slower projects execution will percolate to thinning margins and, as a result, earnings will be disappointing. This scenario may well last in the current half year as well.

However there have been very few capital expenditure and expansion announcements in key industries as they seem to be waiting to see more signs of pick up in the economy. All Capital Goods Engineering units are geared up with high capacities thereby incurring huge expenditure and these risks are expected to continue at least till the current half of the fiscal 2015-16.

Another serious risk is the obsolescence of the brsent equipments with the ever changing technology. With the sub optimal utilization, such costs are likely to be huge and would be a burden on the engineering units.

Port and road infrastructure bottlenecks coupled with difference in tax structure across states are impacting India's competitiveness in the global market. The country also lacks of "efficient and cheap trans-shipment facilities between rail hubs and sea ports". This acts a great barrier for the exports from India.

Outlook:

The engineering sector is a growing market. Also, the Union Budget, 2015 has allocated funds for several infrastructure projects which are further expected to provide a boost to the engineering sector. The industry can also look forward to deriving revenues from newer services and from newer geographies.

"Make in India" - A new initiative to push manufacturing growth: The Prime Minister's new initiative 'Make in India' is a serious attempt of the government, to improve the contribution of manufacturing in India, through 'import substitution' and 'increased exports'. India imports various commodities and equipments from several countries with China at the top position among the top 10 countries in total imports.

We believe that successful implementation, both in terms of 'import substitution' and 'higher exports' will be an important driver for the capital goods players. The Goods and Service Tax has to be enacted at the earliest to at least remove some major impediments in the smooth operation and the development of the economy.

Neither the current performance till date nor any big change waiting to happen in the next half year seems good enough to turn around capital goods sector

New Projects:

In order to unlock and provide value from the lands, the company had proposed for a construction of a Business Grade Four Star Hotel at Hyderabad. The project brsently costing about Rs 8535 lacs had undergone considerable delay from various factors like the introduction of the Hyderabad Metro etc. The project is expected to be commissioned by the current half of the fiscal 2015-16.

The company is looking at various ways and means of adding value and keeping its close proximity to its customers. On these lines, the company has since launched the Building Materials Division at Muktyala with the production of Bricks, Normal and Colored pavers and Hollow Blocks in a very small way. Based on the feedback from the market, more such units would be launched in different areas.

Joint Venture:

Fives Cail KCP Limited:

Risks:

This unit being dependent on the fortunes of the sugar industry is affected by the rise and fall of this industry. Further all risks associated with the sugar also affect the growth of the unit. Due to surplus in both domestic and international sugar markets, sugar prices will continue to remain under brssure in the near term and could deter the sugar producers from going ahead with their expansion plans. This has also given rise to immense competition, with brssure on margins.

Overview:

During the year company operated with a total crushing capacity of 6000 TCD (Son Hoa Unit - 5000 TCD and Dong Xuan Unit - 1000 TCD). The total cane crushed was 838,265 Mts with a recovery rate of 9.74% and the refined sugar produced was 110,239 MTs which includes sugar processed from raw sugar of 27,737 MTs

During the year the sugarcane crop got affected due to severe drought conditions. Hence there is a 15% drop in sugar cane area and sugarcane yield. Though the sugar cane qty is reduced the sugar production was maintained due to higher percentage of recovery. Due to stable market demand, raw sugar was also purchased to convert in to refined sugar to meet the market requirement.

The sugar price continued its down trend due to oversupply in Vietnam and the world, with the sugar prices touching the lowest level in five years. In spite of the adverse factors, the highest figures were achieved in the history of the company in production, recovery, sales turn over and contribution to state budget which elevated the returns compared to last year.

The drought condition continues to brvail during the year and this is likely to affect new plantations and sugarcane yield. Company announced a land brparation incentive of 2 M' VND / Ha for new plantation which is expected to ensure adequate sugarcane area for 2015-16 seasons. The sugar prices are expected to raise in 2015.

Future Prospects:

Company obtained the investment license from Province People's Committee for expanding the Son Hoa factory to 10,000 TCD in two phases (8,000 TCD in 2015-16 and 10,000 TCD in 2017-18) with an investment capital of 52.5 M'USD. 14.787 Ha of land was acquired to implement this project with a power generation facility of 30 MW. Term loan will be tied up shortly and the engineering, procurement and construction activities are in progress to complete the project for 2015-16 season.

Based on the brliminary approval obtained from Province People's Committee to invest on a 60 KLPD Capacity distillery project to produce Fuel Grade Ethanol and Liquor Grade Ethanol. Company acquired the land with an area of 15.15 Ha. Other formalities are under progress to implement this project

Cautionary Statement:

Statements in the "Management Discussion and Analysis" describing the Company's objectives, expectations or brdictions are as perceived currently. Actual results may differ materially from those exbrssed in the statement. Important factors that could influence the Company's operations include domestic supply and demand conditions affecting selling prices of finished goods, input prices, changes in government regulations, tax laws, economic developments within the country and other factors such as litigation and industrial relations.

For and on behalf of the Board of Directors

 (V.L. DUTT)

Chairman and Managing Director

Place: Chennai

Date: 18th May, 2015