MANAGEMENT DISCUSSIONS & ANALYSIS REPORT INDUSTRY STRUCTURE AND DEVELOPMENTS The Indian economy has certainly performed creditably compared to the most developed and emerging markets of the world in the past year, growing in excess of 7% in FY16. Macroeconomic conditions are stable, consumer price inflation is well under control and the wholesale price inflation is in negative territory. The latest estimates of the Central Statistical Organisation and the IMF suggest that India's GDP growth in FY17 will be at around 7.5%, which is highest amongst the emerging economies. All this augurs well for the cement industry. The Indian cement industry, with a total capacity of around 400 million tonnes (MT), is the 2nd largest after China, accounting for about 8% of the total global production. Cement is a cyclical commodity with a high correlation with GDP. Cement is indispensable for nation building and has direct linkage with the nation's growth and standard of living. However, despite the economy growing at around 7.6% in FY16, cement production remained subdued, growing at below 5%. The progress made by the economy failed to translate into positive impact on demand revival and improved corporate earnings. Cement demand remained weak primarily due to low consumption by the end-user sectors (housing & construction) and slowdown in industrial and infrastructure development. Two consecutive weak monsoon seasons have left the rural sector under a lot of stress, and investment in infrastructure and industrial projects is also yet to revive. Large unsold inventories held by the real-estate firms are keeping new projects at bay, putting the cement industry under brssure. Thus, the cement industry in India is confronted with large excess capacity, resulting in low capacity utilisation of around 70% on a pan-India basis. The capacity utilisation of plants in South India is, in fact, even less - at under 60%. This gap between demand and supply has put severe brssure on the brvailing market prices of cement. As a result, the cement industry is currently witnessing consolidation due to excess capacity, coupled with rising cost and longer gestation period of building greenfield capacity. Building of greenfield capacity has also slowed down considerably due to the demand-supply gap, challenges in securing limestone mines, land acquisition and also the time taken in getting various government clearances BUSINESS AND FINANCIAL PERFORMANCE REVIEW Capacity Utilisation During the year under review, the cement production capacity of your Company increased from 5 MTPA to 8 MTPA with the commissioning of the new 3 MTPA greenfield plant at Chittapur (Gulbarga, Karnataka) on 26th September 2015. The new plant at Chittapur had registered total volume of 4.26 Lacs MT up to 31st March, 2016. Though the project faced some teething challenges, as is usual with projects of this size and complexity, the plant operations are fast stabilising, and production and sales volumes are being ramped up with the collaborative efforts of the various teams. Product Mix In line with its commitment to environmental sustainability and increased utilisation of waste products like flyash to conserve more energy-intensive natural resources, your Company sustained its strong focus on promoting PPC during the year. Of the total volume sold during the year, 78% came from the PPC manufactured at the existing plants. PPC sale from the new operations is also being scaled up, with improved availability of flyash. Sales During the year, your Company registered volume growth of 8.5%, underlined by cement sale of Rs.44.19 Lacs MT as compared to Rs.40.71 Lacs MT in the brvious year. Net sales revenue of cement stood at Rs.1501.84 Crores as compared to Rs. 1535.34 Crores during the brvious year. Low brvailing prices in the Company's core markets contributed to revenue debrssion despite a creditable volume growth. Operating Costs On the cost front, your Company has continued its intense focus on increasing efficiencies and also exploring all avenues for cost optimization through improved procurement process.The Company has also been working on optimizing the fuel mix to obtain maximum benefits from the dynamic fuel market and also on developing the capabilities to switch to most economical fuel mix and reducing its dependence on coal. During the year, Government has notified District Mineral Foundation levy @ 30% of royalty in case of mining leases executed before 12th January, 2015 and 10% of Royalty in case of mining leases executed on or after 12th January, 2015. Further, the Government has also imposed 2% Cess on Royalty towards National Mineral Exploration Trust (NMET). These levies have resulted in total additional cost of around Rs. 13 Crore for the FY 2015-16. To mitigate the increasing costs, with a sharp focus on improving operational efficiencies, your Company has been able to reduce the power and fuel consumption in its operations through many improvement initiatives taken during the year. The falling commodity prices also helped in reducing the freight and packing costs. Debrciation and finance Cost Debrciation charge and finance cost in FY16 were higher as compared to the brvious year due to the commissioning of the Chittapur project. Tax Expense Tax expense for FY16 was low due to Investment Allowance benefits available under section 32 AC of the Income Tax Act, 1961. Net Profit Net Profit for the year declined from Rs.194.78 crores in the brvious year to Rs.62.24 crores in the year under review, mainly due to low brvailing prices of cement in the addressed markets and additional charge of interest and debrciation due to commissioning of the Chittapur plant. OUTLOOK As the second largest producer of cement in the world, India holds a leadership position in the global cement industry. A vital part of the country's economy, providing employment to more than a million people, directly or indirectly, the Indian cement industry has attracted huge investments from domestic and foreign investors ever since its deregulation in 1982. The potential for the industry's expansion and progress is immense, considering the opportunities that are expected to emerge in the infrastructure and constructions sectors in the coming years. The Government thrust on these sectors offers excellent growth prospects for these sectors, which are the key demand drivers of the cement industry. Some of the recent major government initiatives, such as development of 100 smart cities, are expected to provide a major boost to the construction sector. The near normal monsoon brdicted for 2016 is also expected to result in a spurt in housing construction, especially in the rural areas. The government's initiatives focusing on investment in infrastructure are also expected to facilitate faster growth of the economy. Policies such as "Make in India"and increased budgetary allocation for the development of roads, railways, irrigation, ports and urban infrastructure will help cement demand. Other ambitious Government programmes such as "Housing for All by 2022" and "Swachh Bharat Abhiyan" also reflect a huge opportunity for the cement sector. These projects are expected to augment the demand for cement considerably in the years ahead. The housing sector is the biggest demand driver of cement, accounting for about 67% of the total consumption in India. The other major consumers of cement include infrastructure at 13%, commercial construction at 11% and industrial construction at 9%. With the current cement consumption in India at well below the world average, there is large room for growth as the country catches up with its housing and infrastructure needs. OPPORTUNITIES Infrastructure is emerging as a key area of focus for development from the various Government pronouncements and initiatives. Many other schemes being announced, also augur well for the cement sector: Housing for all by 2022: Urbanisation in India is expected to grow at a rapid rate over the next few decades due to the changing demographics and large-scale migration of rural people to cities for livelihood on account of growing scarcity of farming land. A KPMG study estimates that India's urban population is expected to reach about 81 crores by 2050, with more than 1 crore population getting added annually to urban areas, creating huge demand for housing in the cities. Cognizant of the importance of the housing issue in the country, the Central Government has launched a massive campaign to provide housing to all its citizens by the year 2022. Construction of new houses under the programme will generate robust demand for cement in India. Make in India: In order to make India a global manufacturing hub, the Government has embarked upon an ambitious campaign, termed popularly as "Make in India". The Government has identified 25 key sectors, including Automobiles, Chemicals, IT, Pharmaceuticals, Textiles, Ports, Aviation, Railways, Leather, Hospitality & Tourism, in which India can excel in world trade and manufacturing. The programme, aimed at easing the business environment, improving the country's infrastructure and increasing foreign investment in India, envisages the manufacturing sector to grow over 10% on a sustainable basis in the long run. This will require massive construction work for these industries, thereby leading to huge demand creation for cement and other building materials, auguring well for the building material industry. Swachh Bharat Mission: Swachh Bharat Mission is a combrhensive programme to ensure sanitation facilities in rural areas, with the broader goal of eradicating the practice of open defecation by 2019. Swachh Bharat Mission is currently running in all the 607 districts across the country. To give a boost to the programme, the Government has brought it in convergence with the rural housing scheme - Indira Awaas Yojana, and sought financial and technical support from the World Bank, besides asking corporates to undertake the project as part of their corporate social responsibility initiatives. Swachh Bharat Mission is also expected to give a significant boost to the cement industry. Infrastructure: The Government rolled out a new policy paradigm by shifting its focus to increase public expenditure in capital formation, which is central to its road map for economic growth in line with the recommendations of the Economic Survey. Besides the opportunities on the market demand side, your Company continuously scouts for potential opportunities for improvement in the areas of sourcing and consumption of raw materials, energy efficiency and conservation, logistics optimisation, market segmentation based on research, imbibing best practices in manufacturing and other areas, leading to productivity and efficiency improvement. To drive greater momentum in growth, the Company will strengthen focus on the following parameters of performance: ^ Streamlining processes and systems (including digitisation) for further cost efficiencies ^ Expanding market brsence through channel penetration ^ Further strengthening the supply chain to meet business expansion ^ Leveraging marketing and innovation to build strong brands ^ Augmenting infrastructure to meet future requirements ^ Developing a professional and skilled human resource pool RISKS & CONCERNS AND THREATS Risk management is an integral part of the corporate strategy at Orient Cement. Your Company, through its risk management process, makes a serious effort to identify risks to various aspects of its operations, and evolve mitigation plans to deal with any adverse events that pose a risk to the Company. The Company has laid down a well-defined risk management mechanism covering aspects such as risk mapping and trend analysis, risk exposure, potential impact and risk mitigation process. A detailed exercise is carried out to identify, evaluate, manage and monitor both business and non-business risks. The Audit Committee periodically reviews the risks and suggests steps to control and mitigate the same through a well-defined framework. In line with the new regulatory requirements, the Company has formally framed a Risk Management Policy to identify and assess the key risk areas, monitor and report compliance and effectiveness of the policy and procedure. A Governance Risk and Compliance Committee ("GRCC"), consisting of Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Head-Human Resource, has also been constituted to oversee the risk management process in the Company and to ensure effective roll-out of the risk management programme. The key risks identified by the Company are: Economic Factors: The change in macroeconomic conditions, such as slowdown in GDP, interest rate trends, inflation, draught etc. can have an adverse impact on the Company's performance. To manage these risks, the Company is continuously monitoring the external environment and proactively formulating strategies to minimise the impact on its business. Credit Exposure: Delay in payments from the customers may lead to shortfall in cash flow, and also add to cost with increased working capital. To mitigate this risk, the Company has balanced its business between institutional and retail clients. This reduces the risk of a longer working capital cycle and an unhealthy concentration of debtors. Cost Concerns: With rising inflation, the costs of raw material, power and fuel may impact profitability. The Company is using various means to reduce such impact and also evolve dynamic fuel mix to take full advantage of low pet coke prices and other alternate fuels. The focus on achieving better efficiencies, and reducing coal and power consumption continues to be a way of life. Compliance: The growth in business size, coupled with increasing regulatory enactments, has brought in additional compliance requirements. Non-compliance with statutory provisions may not only lead to monetary penalties but may also impact the reputation of the organisation and the goodwill it has accumulated over the years. The risk is mitigated through regular monitoring and review of changes in the regulatory framework, and also through monitoring of compliances through Compliance Management Software and other mechanisms. Competition Risk: The country's cement industry is brsently facing intense competition on account of supply overhang and low levels of capacity utilization. Increased competition can create brssure on margins, market share etc. To mitigate this risk, the Company is leveraging its expertise and experience, making continuous efforts to enhance the equity of its brand "Birla A1" by focusing on quality, cost, timely delivery and customer service, backed by appropriate advertising and brand promotion. The Company is investing its marketing and promotional efforts to sustain its brand equity in its areas of operation, and to create a strong brand salience in the new markets it is now entering and also to create a strong competitive edge in a highly competitive market environment. Industrial Safety, Employee Health and Safety Risk: Cement industry is labour-intensive and is exposed to health and injury risks due to accidents, human negligence etc. To reinforce the safety culture in the organisation and mitigate this risk, the Company has taken numerous steps and initiatives. The Company already has a robust approach to tackle this risk through regular safety and health awareness campaigns at all its locations. The various measures taken by the Company include development and implementation of critical safety standards across the units and project sites, establishment of processes for safety training across all levels, promotion of a culture of safety not just for staff members but also for contract workers, and adequate insurance coverage. Human Resources Risk: The Company's ability to deliver value is dependent on its ability to attract, retain and nurture talent. Attrition and non-availability of the required talent/resources can affect the performance of the Company. The Company is continuously benchmarking itself to the best HR practices across the industry, and is carrying out necessary improvements to attract and retain talent. For this purpose the Company is regularly reviewing, implementing and monitoring personal development plans for high performers and high potential employees. Cyclical & Political Conditions: Though these risks exist for every industry, currently everyone is expecting these risks to be low to moderate, as the investment growth cycle and political situation appear to be more favourable than what the industry has experienced in recent years. However, the risk of poor monsoon leading to lower rural demand or higher inflation remains an area of concern, notwithstanding the recent brdictions. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY In order to ensure orderly and efficient conduct of business, the Company has put in place necessary internal control systems, considering its business requirements, scale of operations and applicable statutes. The systems include policies and procedures, IT systems, delegation of authority, segregation of duties, internal audit and review framework etc. The Company has designed necessary internal financial controls and systems with regard to adherence to its policies, safeguarding of its assets, brvention and detection of frauds and errors, accuracy and completeness of accounting records, and timely brparation of reliable financial information. The compliance with these controls and systems is periodically reviewed by the Internal Audit function and exceptions are reported. The Company has engaged the services of a professional Chartered Accountancy firm to carry out its internal audit. It also has an in-house Internal Audit department manned by qualified professionals to carry out, coordinate and monitor audit activities, and also follow up on compliance and The Audit Committee of the Board also reviews the performance of actions taken. All material audit observations and follow-up the audit and compliance functions, and reviews the effectiveness actions thereon are reported to the Audit Committee for its review. of controls and compliance with regulatory guidelines. The Company has elaborate systems for Budgetary Control and timely Management Information System (MIS). The Company maintains a system of internal controls designed to provide a high degree of assurance regarding the effectiveness and efficiency of operations, the reliability of financial controls and compliance with laws and regulations. A combination of these systems makes the internal control system of the Company robust. Your Company has also implemented SAP ERP during the year to further strengthen the internal controls, segregation of duties and access to system. The Company also has a well-established Risk Management Policy. The Governance Risk and Compliance Committee ("GRCC") of the Company monitors and carries out periodical reviews of the robustness of the Risk Management framework. The Committee brsents a mitigation plan of the risks faced by the Company to the Audit Committee and the Board of Directors. Internal Audit (IA) is entrusted with the responsibility to review and provide independent assurance on overall effectiveness and efficiency of the Risk Management processes. The Company continuously invests in strengthening its internal control processes. These systems provide a reasonable assurance of accuracy of financial and operational information, compliance with applicable statutes and safeguarding of assets. Financial policies, processes, standards and delegation of authority have been cascaded and periodically reinforced within various functions and departments. Procedures to ensure conformance with the policies, standards and delegation of authority have been put in place through control self-assessment and internal audit procedures. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED Human Resource Development is critical in delivering the strategic agenda of the Company. In line with the Company's philosophy of nurturing talent from within, the Company has a robust process towards generating a reservoir of talent and leaders for managing its planned growth in the coming years. Some of the noteworthy HR initiatives and focus areas are: • Continuous improvements through strong performance management system, and strong linkage between performance and rewards have resulted in improving people accountability & achievement orientation, and have created healthy internal competition for superior performance. Your Company has been promoting leadership development through a structured talent management framework, ensuring robust leadership pipeline for all key and critical positions. A systemic and systematic talent review by the senior team has ensured trust and confidence amongst talented employees regarding addressing their growth needs and aspirations. During FY15-16, as part of leadership development initiatives, young and talented employees with growth potential have been hand-picked for developing future senior leaders for the Company through a programme titled "CEO Circle". While undergoing this programme, the identified talented employees will be provided intensive developmental inputs and also assigned "Mentors" from Company's senior leadership team, who will take ownership to develop these talented employees for taking on leadership roles in the coming years. These identified employees will also be put on their Individual Development Plans (IDPs) and assigned Action Learning Projects (ALPs) based on the strategic objectives of the Company. • Manpower optimisation for better productivity through redeployment, restructuring and rationalisation of jobs has been a major focus area for your Company. This has not only enabled meeting resource requirements but has also helped many managers in their career advancement and in assuming challenging opportunities. • Your Company has always laid emphasis on hiring young and talented professionals. Robust plans are in place to draw leadership talent from the pool of young talent available in the Company. • Building and maintaining proactive relations has been the Company's forte, which resulted in cordial industrial relationships throughout the year. Continuous efforts have been made to remove restrictive practices, and provide direction and growth to all strata of employees. Going forward, your Company has to proactively address further strengthening of performance management systems, best practices benchmarking in the areas of talent development, compensation management and career management. This will enable and brpare the Company to address future challenges for growth through effective sustainable competitive advantage by harnessing people potential. As on March 2016, the Company has over 816 employees working towards the goal of making it the most brferred cement company to work for in India. The Company has implemented a new online initiative in February 2016 across all its locations called Sahayog Tg^ffT - SAP Success Factors, which provides a holistic approach to human capital management, integrating end-to-end processes from recruitment to performance management processes, learning and development, talent management and succession planning, workforce analytics and employee self-service, in line with international best HR Practices. The Company is hopeful that this implementation will bring in a major cultural shift at the workplace, faster decision making and improved business results through transforming HR processes. The Company intends making this tool a real business enabler and improve productivity by enabling people to complete their transactions effortlessly, using all the talent management modules. The social collaboration module of this implementation will help the Company in bringing all employees on one platform to connect, share their thoughts, ideas, opinions, and to have structured and meaningful conversations. FORWARD LOOKING/ CAUTIONARY STATEMENT Statement in this "Management Discussion and Analysis" describing the Company's objectives, projections, estimates, expectations or brdictions may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include domestic demand-supply conditions, finished goods prices, feedstock availability and prices, cyclical demand and pricing in the Company's principal markets, changes in Government regulations, tax regimes and economic developments within India. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements on the basis of any subsequent development, information or events or otherwise. |