M M Forgings Ltd Share Price Management Discussions
M M FORGINGS LIMITED
ANNUAL REPORT 2011-2012
MANAGEMENT DISCUSSION AND ANALYSIS
GLOBAL SCENE:
1. 2011-12 saw a firming up of equity and commodity prices, riding on the
back of the fiscal stimuli infused by both developed and developing
countries.
2. USA - The structural weaknesses in the US economy continue to prevail
due to the sheer size and depth of the legacy.
3. Europe - The survival of the Euro as a single currency union without a
political union has come under severe pressure in the last few months. The
structural problem in Greece haunted the ECU and threatened the very
survival of Euro itself.
The weaknesses in core Europe namely France, Italy and Spain, have come to
the fore, clearly leaving Germany as the unshaken foundation of the ECU.
4. China - Property prices spiraled upwards and the rise in commodity
prices have fueled inflation. There are strong indications of excess buying
of commodities. This has resulted in a weakening price trend on many
commodities, particularly non ferrous metals.
5. Asia - Japan recovered from its earthquake and is grappling with the
damage to its reputation on nuclear safety. Many global firms have altered
their strategies on supplies and are reducing their dependence on Japan.
6. Commodities - The bull run seen right through the year has bottomed out
in the last few weeks.
7. Overall, Global output is expected to have grown marginally between 1%
and 2% as reported by various economic think tanks. Most countries have run
up sovereign debt over the last two decades. The global economy has grown,
but so has sovereign debt. The rise of sovereign debt levels is now of
serious concern. In many cases, repayment of sovereign debt and even
payment of interest is in doubt.
INDIA:
8. The Indian economy has grown by approximately 6.5% in FY12 as compared
to about 8% in FY11. This growth is impressive by global standards. Most of
the developed world recorded only marginal growth during this period.
9. During FY12 the automotive industry posted growth rates of approximately
14% in the car segment and 25% in the CV segment.
10. Steel prices have increased by about 16% compared to the previous year.
11. The INR depreciated considerably between July and December 2011 against
the US Dollar. Please refer graph below. April, May and June 2012 have
witnessed a further sharp deterioration.
M M FORGINGS - capitalising on favourable winds:
12. The following were important developments during the year:
* The revival of global manufacturing meant a sharp increase in demand
right through the year. Customers are currently buying close to the highs
seen in FY11.
* Adding to the volume of existing products, were new products which were
developed in the last 2 years.
* The Indian market was characterised by strong growth and the company was
able to take only limited advantage of this on account of capacity
constraints due to power shortages and non availability of trained
manpower.
* Increases in steel prices are being passed on to customers as is the
industry practice.
* We are strenuously de-bottlenecking at the factories to enhance
utilisation of the production capacities created in the last 2 years.
13. Sales increased by 29%. Return On Net Worth is 18%, Return On Capital
Employed is 19% and current Ratio is 1.44. The total outside liabilities to
net worth stands at 1.21. Debt Equity Ratio is a comfortable 0.53.
14. The details of segment-wise sales are provided below:
Off Highway : 15% (18%)
Engineering : 1% (1%)
Valve & Oilfield : 11% (13%)
Automotive : 73% (68%)
Note: FY11 figures provided in brackets for comparison.
Human Resources and Industrial Relations:
15. Your company continues to focus on the development of its human
resources to improve its performance. The company currently has 1105
employees. It is their invaluable contribution that has primarily resulted
in your companys strength in the industry.
16. Work place safety, evolving systems for recognition and reward,
consistent communication, imparting skills and training underpin, all HR
development activities in the company. All HR activities have meeting
customers needs as the prime objective.
17. Every year, each plant of the Company celebrates Founders Day in a
family atmosphere with all employees and their household members
participating.
Health, Safety and Environment:
18. The Company follows a policy of zero tolerance towards accidents.
Visible controls and fail*safe systems are provided to ensure prevention of
accidents. Regular communication, training and periodic reviews play a
vital role in maintaining safety standards.
19. The Company complies with all pollution control regulations. Adequate
pollution control equipment have been installed to minimize pollution
levels in effluents discharged and to control air quality.
Risk Management:
20. A major proportion of the Companys Domestic sales is to the Automotive
Sector. This sector is subjected to cyclical variation in demand and is
very sensitive to Governments policy changes. The market is highly
competitive. Any downturn in this sector exposes the company to high fixed
costs.
21. Prices of Raw Materials fluctuate dramatically based on supply and
demand. The companys margins are under constant pressure.
22. 70% of the Companys sales are accounted for by Exports. The Companys
health is therefore heavily dependent on the Global Economy, the
fundamentals of which are currently weaker than that of the Indian Economy.
The Company has increased the geographic spread of its customer base to
mitigate this risk.
23. Availability and cost of funds is a potential threat affecting the
companys capacity utilisation and working capital management.
M M FORGINGS - forging ahead:
24. Our goal in the coming months is to focus on:
* Improving sales in keeping with market conditions.
* Increasing utilization of the production capacity created in the last 2
years.
* Continuous cost reduction particularly, reducing energy consumption.
* Enhancing IT systems with the development of the ERP system already in
place.
* Focus on green sources of energy for environmental protection.