Atlas Copco India Ltd Management Discussions

ATLAS COPCO (INDIA) LIMITED ANNUAL REPORT 2010 MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC SCENARIO: The highlights of the pre-budget economic survey presented by the Finance Minister of India suggest robust growth and steady fiscal consolidation of the Indian economy in the year 2010-11. The GDP growth rate has been 8.6% during the year and is expected to be around 9% in the next fiscal year. India has made a quick and strong turnaround from the slowdown caused by recent global and domestic challenges. However, sustained inflation with high food and commodity prices and hardening interest rates has been a cause of concern. OPERATIONS: The Company posted revenue of Rs. 169,559 lakhs during the year as against last years revenue of Rs. 128,161 lakhs showing an overall growth of 32% over previous year. Profit before exceptional items and taxes at Rs. 22,339 lakhs shows a substantial improvement of 68% over previous years profit of Rs. 13,303 lakhs. The strong growth in revenue is partly attributable to the continued recovery of the market, which already was noticed by the end of 2009 and to the robust growth of the Indian economy in the domestic market coupled with an extended product offering and increased exports of products and services to the group companies abroad. Improved operational efficiencies in factories and better once realization from customers have helped to improve margins and the profitability as compared to previous year. Strengthening of Rupee against Euro and USD and consequent reduction in the cost of imports has also contributed to the improved profitability. INDUSTRIAL SEGMENT: The Industrial segment develops, manufactures and markets a wide range of air and gas compressors, of both rotary and reciprocating technology, oil injected and oil free, in various powers, pressure ranges and capacities to serve the diverse needs of consumers of compressed air and gas. Included in this segment are also a wide range of pneumatic and electric tools such as grinders, drills, impact wrenches, screw drivers, nut runners etc. The key market segments for air and gas compressors are the general industry covering engineering, automotive, textiles, cement, pharmaceutical, PET blowing, and power generation etc. Pneumatic and electric tools are primarily used in automation of assembly processes and controlled tightening systems. The key market segment for these tools are automotive industry, the general industry and automotive after markets. This segment has achieved revenue of Rs. 108,879 lakhs during the year as compared to previous years revenue of Rs. 77,568 lakhs, an impressive growth of 40% over previous year. The Industrial segment has witnessed growth in volumes and profitability due to surge in demand in Power, Water well sectors and strong recovery in Automobile & general industry. Introduction of custom designed engineered products for Oil and Gas markets also supplemented the growth. The contribution from after market-parts and service continued at the same pace. Introduction of new products and services, better price realization coupled with reduction in costs, and favorable exchange rates in most part of the year helped the segment to improve the bottom line. CONSTRUCTION & MINING SEGMENT: The Construction and Mining segment develops, manufactures and markets rock drilling tools, drilling rigs, construction tools, breakers, blast hole drilling rigs, water well drilling rigs (including rock bits & rock tools), loading equipment, road construction equipment, etc. A wide range of these equipment is manufactured at the Nasik and Hyderabad plants. Some specialized drilling and loading equipment are sourced from other Group companies abroad. Key market segments served by this segment include rock excavation, light construction & demolition, exploration drilling, surface drilling, tunneling, underground mining, road construction etc. This segment achieved revenues of Rs. 57,080 lakhs during the year compared to previous years revenue of Rs. 47,135 lakhs, showing a growth of 21% over previous year. The year has witnessed a strong recovery in the domestic market for all the products of this segment. Export market has also picked up considerably showing a 46% growth over previous year. Significant initiatives have been taken at the manufacturing locations at Nasik and Hyderabad for product up- gradation, quality improvement, cost reduction and import substitution. Expansion of production capacity at Hyderabad is nearing completion, both for factory and administrative office. Similarly, large investments have been done at Nasik in the Air rock plant and Power rock plant for the manufacture of pneumatic and hydraulic crawlers respectively. During 2010, first environment friendly diesel engine driven Blast Hole Drill (IDM 70) machine was produced. OUTLOOK FOR 2011: Indian economy is expected to grow at 9% during the fiscal year 2011-12. Power, textile, metal, infrastructure, automobile industries are expected to invest significant amounts in expansion and up-gradation of existing facilities. Infrastructure projects are expected to develop favorable and to contribute positively to our road construction equipment business. Union budget allocation for infrastructure development is 23% higher than last year in order to give a boost to infrastructure development in railways, ports, housing and highway development. Exports are also expected to grow further in view of the growth indications from US, Europe and other parts of world. However, rising inflation and interest rates is a cause of concern and could be a deterrent to the growth prospects. Political situation in Arabian Gulf and resultant impact on prices of oil could also impact the growth in demand. Your Company, being a dominant player in the market for the products and services it offers for infrastructure and other industries will certainly benefit from this expected growth in the economy. In addition, investment for a new factory for Compressor manufacturing in Pune will contribute in our strive to become a World Class excelling supplier but also ensure further introduction of new products. RISK MANAGEMENT: The Companys internal control processes cover, amongst others, processes for identification, assessment and mitigation of various kinds of risks, which include strategic, operational, financial, environmental and reputation risks. Such risks are reviewed and discussed at various meetings of Business Boards, Product Committees, Management Committee, Facilities Committee and various other forums within the organization, where members of senior management are involved. Companys internal auditors review the internal controls, risk assessment and mitigation procedures, independently as a part of their internal audit process and their observations and findings are presented, reviewed and discussed in the Audit Committee meetings. The Board also reviews the risk assessment and mitigation procedures periodically. The Control Self Assessment database maintained by the Atlas Copco Group documents and monitors the risk assessment and mitigation by each operating unit head. The Atlas Copco Groups principles, guidelines and instructions that are documented in The Way We Do Things provides executives with tools to monitor and follow up the business operations closely and quickly detect the deviations that could develop into risks. The Managers in charge of operating units continuously communicate with employees, customers and other stakeholders both in a formal and an informal way to keep themselves abreast with the developments in the market, products, competition and other areas. INTERNAL CONTROL, AUDIT AND SYSTEMS: The Company has an effective and adequate internal control system, which ensures reliable financial reporting, safeguarding of assets, adherence to management policies and promotion of ethical conduct. These systems are regularly reviewed, modified and improved upon, to conform to changes in the business environment and processes. The Atlas Copco Groups procedures also require a regular internal audit to be conducted for each business unit and experienced people within the Group conduct such audits. In addition, the Board has appointed an Audit Committee of Independent Directors, which regularly reviews the findings of external and internal audits and the adequacy of internal control systems. HUMAN RESOURCES AND INDUSTRIAL RELATIONS: The Company added 174 employees during the year and employed 1714 talented people well qualified in technical and managerial skills and having the requisite set of competences required for their tasks, as at 31 December 2010. The Companys People Development processes ensure the availability of a competent and motivated team of employees, who are encouraged to enrich and update their competency by attending regular training programs, both in-house and external, national and international. The Company has an in- house Academy which conducts training programs throughout the year on various areas and all employees are encouraged to participate in these programs. The Company follows the philosophy of market conform remuneration and benchmarks its compensation levels with other companies in the engineering sector. This ensures that the Company has a market based remuneration review policy for compensation to its employees. In addition, to recognize and reward good performance, the Company has a performance based variable compensation structure, which ensures proper reward for those employees who excel in relation to their performance targets. All employees are made aware of and have an access to the database where the Companys Business Code of Practice has been published and it is mandatory for all senior managerial employees to disclose their financial interests, if any, in any of the transactions with the Company. CAUTIONARY STATEMENT: This report contains forward-looking statements based on the perceptions of the Company and the data and the information available with the Company. The Company does not and can not guarantee the accuracy of various assumptions underlying such statements and they reflect the Companys current views of future events and are subject to risks and uncertainties associated with such statements. Many factors like change in the general economic and business conditions, significant changes in political environment, tax laws, amongst others, could cause actual results to be materially different from those expressed or implied in this report. The Company does not assume any obligation for such variations.