Bell Ceramics Ltd merged Management Discussions

BELL CERAMICS LIMITED ANNUAL REPORT 2010 MANAGEMENT DISCUSSION AND ANALYSIS Industrial Scenario: Mix reports are being received in the matter of witnessing signs of recovery in the world economy. The market remained volatile for most part of the year. Inflationary trends prevailed in the developing economies like China and India adversely affecting their estimated growth in GDP. In the earlier part of the year the financial situation in the European countries had gone out of control. In the later part of the year, there are reports of improvement in performance of some of these countries. There was constant pressure of increase in the prices of crude oil which has further fueled the inflation in the prices of important minerals and metals. Efforts are still on to improve the situations but the conditions are so bad that it may take long time for normalcy in the situation. The Indian economy largely depending on imports for its requirement of crude oil, the increase in the international prices of the crude oil coupled with appreciation of US dollars vis-a-vis the Indian currency, the balance of payment position was not satisfactory to support the desired growth in GDP. Recessionary trends in the countries importing Indian materials have restricted growth in the export earning of the country. The situation of inflationary trend started in the previous year in the prices of basic food grains have further worsen for most part of the year. The corrective measures taken by the government hardening the credit norms also could not yield the desired results to curb the inflation. High volatility in the international market more particularly in the economies of developed countries like USA and Europe resulted into increase in the prices of major minerals. There is still uncertainty prevailing in the international market. In the circumstances, more efforts would be required to sustain the Industrial growth at the desired rate. Outlook of the Industry The trend of growth in the real estate market of the country, started in the previous year continued during the year. This has been supported by the Central and state Government agencies in the form of huge spending on infrastructures. However on account of very high increase in the prices of basic construction materials like steel and cement, in the later part of the year, the industry witnessed a pressure of with holding the growth. With the increase in prices of fuel (both for transport of raw materials as also fuel used in the manufacturing process), the cost of manufacturing has increased. Increase in the outward freight has lowered the per unit sales realization. To avoid the situation of high ratio of NPA in their real estate financing, banks have become more vigilant in their lending to this sector. Apart from increase in the interest rate on housing loans, the banks have also stipulated higher margin money by the investors. Despite the overall growth rate of 15% in the Ceramic tiles industry, it continues to face the problem of overcapacity situation. Export market in ceramic tiles did not see any improvement due to very high ratio of default in the financial commitments noticed in the international market. There was always a pressure in selling the products in the domestic market resulting into lower per unit sales realizations . With finance becoming costlier, the industry has to carry higher cost of inventory holding . With the expected spending on infrastructures by the Government , the industry is looking up to sustain the present growth rate of 10% to 15%.in years to come. Review of Companys operation: With continuous reduction in the market share of the companys product, there was further fall in the capacity utilization of the plants. During the year on an annualized basis, the production reduced by 6% in terms of quantity whereas the sales reduced by 10% in terms of quantity over the previous year performance. DORA (Baroda) Unit Due to lower off take in the market, the company was forced to reduce the production resulting into under utilization of the plant. During the year of 9 months there was fall in both production and sales quantity by 21% and 23% respectively on an annualized basis. This unit was operated at 50% of the installed capacity. With the under utilization of the plant capacity, the fixed cost could not be amortised resulting into the higher effective per unit cost of production. With the change in the management control effected in the later part of the year, the unit has started receiving technical and marketing support from the holding company i.e. Orient Ceramics and Industries Ltd. The unit has already started witnessing improvement with reduction in the energy cost and higher yield in the form of improved percentage of first quality production. Steps are being initiated to improve the marketability of products by up gradation in the existing product and by improving the product mix to suit the market requirements . All efforts are being made which would result into higher capacity utilization. HOSKOTE (Bangalore) Unit The performance for the 9 months of the current year were comparable with the performance of the similar period of previous year. However this was not enough to optimize the plant capacity. Overall reduction in the market share forced the company to operate the plant at lower capacity. During the year there was an annualized increase in the production by 2% and reduction of sales at 3% in terms of quantity over the previous year. This unit was operated at 85% of the installed capacity. LPG being the major component in the cost of manufacturing, consistent high prices of LPG through out the year, reduced the operating margin considerably. With the ability to use higher % of electricity form the grid, the unit has seen some sign of relief in the cost of power and rescued the situation to some extent. The unit is looking for the opportunity to replace use of LPG (a costly fuel) by availability of natural gas in years to come through proposed pipe line from GAIL. As mentioned earlier, this unit has also started receiving technical and marketing support from the holding company i.e. Orient Ceramics and Industries Ltd. The unit has witnessed improvement with reduction in the energy cost and higher yield in the form of improved percentage of first quality production. Steps are initiated to improve the marketability of products by up gradation in the existing product and by improving the product mix to suit the market requirements. All efforts are being made which would result into higher capacity utilization. Opportunities and Threats: Opportunities: With a very low per capita consumption of ceramic tiles in India as compared to global average, the opportunity for growth in the domestic market is high. Continuous thrust on the real estate industry noticed in last so many years annual budget of the Indian Government, keep the hope of maintaining the overall growth of the industry at 15%. in the years to come. Significant importance is given by the Central Government on the development of urban infrastructures, Agricultural sector, affordable housing etc which are expected to aid for the growth directly or indirectly. With the consistent higher GDP, there will be improvement in the disposable income of the people. Threats & Risks: (a) Power & Fuel cost is a major ingredient in manufacturing of ceramic tiles. Increase in the prices of natural gas and LPG is a matter of worry . During the year 2010-11, the prices of the domestic gas increased to almost more than 75%. Similarly the prices of imported gas and LPG also increased as per the international prices. The gap in the demand supply position of natural gas (including the imported gas) is widening and this is adversely affecting the supply of gas on a continuous basis and at a normal price. (b) Working of the ceramic tile industry in India which is more dependent on the European countries for its requirements of machinery parts, some raw materials and the capital equipments would likely to be affected due to continuous financial disturbances prevailed in those countries . (c) Dumping of ceramic tiles at a very low price both from China and the unorganized sector in the domestic market is a big threat to the industry. (d) Frequent increase in the prices of crude in the international market results into increase in the diesel and petrol prices in the Indian market. This has direct impact on the freight cost for both the incoming and outgoing materials. The position on the supply price of crude oil is not likely to improve in the near future. Internal Control System and their adequacy The various internal control systems prevalent in the Company include: (a) Maintenance of an ERP System for Companys logistic system (sales & marketing), accounting systems and for manufacturing activities have strengthened the Management information system. (b) Periodical verification of assets at both the plants of the Company and stocks of finished goods at warehouses as well as at the depots through out the country were carried out at a regular interval both internally as well as through independent firms of Chartered Accountants. (c) Generation of periodic management reports to monitor the statutory and other compliance. (d) Review of the internal audit system and compliance of the accounting standards prescribed by the Institute of Chartered Accountants of India by an independent audit committee. Discussion on financial performance with respect to the operations of the Company Your Company achieved the turnover of Rs. 11368 lakhs during the year (9 months) against the turnover of Rs. 16456 lakhs for the previous year (12 months) which shows annualized reduction in turnover by 8% over the previous year. For the year ended 31.12.2010, the Company has incurred cash loss of Rs. 220 lakhs (previous year cash profit of Rs.377 lakhs) and net loss before Extra ordinary itmes and tax of Rs. 1058 lakhs (previous year loss of Rs. 738 lakhs). Pursuant to one of the conditions of the Restructuring Agreement, IDBI Bank Ltd. have during the last quarter of the year, raised a demand of recompense amount of Rs. 525.45 lakhs being the differential interest of 3% for the period from 01.04.08 to 01.08.2011. Accordingly the finance cost for the year has increased to the extent of the proportionate amount of the recompense amount as above, worked out for the period upto 31.12.10. During the year under review, there was some delay in meeting the financial obligations with IDBI Bank and other banks. The Company has entered into one time settlement with one of the short term loan providers who have waived off recovery of the principal liability of Rs. 525 lakhs. Due to shoftfall in meeting the projections of financials, the working capital banks though apprised enhancement in the requirement have not provided required fund resulted into lower productivity during the year. Material developments in human resources and Industrial Relations The Company has been regularly monitoring its policy for enhancement in the skills of its employees by providing need based training. Industrial Relations continued to be cordial during the year resulting in constant co-operation by all the employees in day-to-day work and implementing policies of your Company. Disclaimer: This report is based on the information available to the company in its businesses and assumptions based on experience in regard to domestic and global economic conditions and Government and Regulatory policies. The performance of the Company is dependent on these factors. It may be materially influenced by macro environment changes, which may be beyond the companys control, affecting the views expressed in or perceived in this report.