The Companys Business-wise performance during the year is shown below:
Rs. /crores Particulars 2018 - 2019 2017 - 2018 1 EBIDTA a) Cement 343 212 b) Tyres (63) (90) c) Total EBIDTA before Corporate Expenses 280 122 d) Unallocated Income/(Expenses) 25 37 Total EBIDTA 305 159 2 Exceptional Income - (75) 3 Finance Cost including interest 438 421 4 Cash Profit /(Loss) (133) (337) 5 Depreciation 133 128 6 Profit Before Tax (266) (465) 7 Tax Provision (12) (2) 8 Profit After Tax (254) (463)
Business-wise resume
Cement
Industry Overview
India ranks as the worlds second largest cement producer behind China. Cement production capacity stood at 502 million tonnes per annum (mtpa) in 2018. The top 20 cement companies accounted for almost 70 per cent of the total cement production in the country.
A total of 210 large cement plants account for a cumulative installed capacity of over 410 million tonnes, with 350 small plants accounting for the rest. Of the 210 large cement plants, 77 are located in the States of Andhra Pradesh, Rajasthan and Tamil Nadu alone.
The industry in India, however, actually produces about 300 million tonnes per annum with a per capita consumption of around 210 kg. Per capita cement is currently the lowest amongst developing countries while the world average is some 580 kg. Cement production in the country is expected to steadily grow going forward and total production figure should be in excess of 550 million tonnes per annum over the next few years.
Risks and Concerns
Progress of the industry in India continues to be largely dependent on the development of infrastructure and housing. Infrastructure development, being primarily a Government funded exercise, declining spends on infrastructure adversely impact the well being of the industry. For instance, announcement of the forthcoming elections resulted in a spending slow down. This is not expected to pick up till the new Government in office has fully settled in. Demand for housing is inextricably linked to economic growth. Although the Governments programme of housing for all by 2022 remains a target to be attained, lower disposable income in the hands of the populace on account of muted economic growth will inevitably lead to a push back of targeted time lines. Then again, it would be natural for the State to dictate prices at which it would buy cement. The State attitude during price fixation typically involving a clutch of producers is frequently oligopolistic. In the housing sector too, institutionalised buyers, including those in the ready mix concrete category, have the ability to decide on prices at which they would effect procurement thereby seeking to compound an already existing oligopolistic situation in the industry.
Access to insufficient quantities of sand adds to an already difficult scenario as the genesis of concrete (or mortar) which is the basic raw material for any building activity is contingent upon cement being mixed with sand. Certain Indian states are perpetually constrained in making available adequate quantities of natural sand for the sector. A solution could lie in making available artificial sand known as machine sand. This is an area still at the exploratory stage.
Price trends of key energy inputs, particularly those of fossil fuels continue to be northward bound and pose a burden on the industry. Industry is trying to reverse the ill effects of continually rising fossil fuel prices on production costs through usage of alternative fuel, substitution of conventional raw materials in the production process, waste heat recovery through cogeneration, increased adoption of renewable energy, particularly solar and wind power, as well as substituting clinker with fly ash and slag. Indeed, the country has taken rapid strides in this direction and has become a significant player globally in the alternative fuel utilisation segment. However, it has a fair amount of catching up to do. Transport and logistics constitute yet another major constituent of cement costing. There is realisation that these spends require a marked reduction through more streamlined supply chain practices for containment of costs.
The progressive depletion of reserves of limestone and other flux minerals required for cement manufacture is another concern. This is a clear signal for the industry to further gear up identification of fresh reserves. Side by side, there is the imminent need to expand production of blended cement and increase mixing of high grade limestone with lower grade limestone for use in clinker production.
Growth drivers
The prospects of the cement industry continue to be closely linked with the progression of the national economy. As infrastructure and housing sector moves forward, so will the latent demand for cement. It needs to be remembered that cement is a cyclical commodity with a high correlation to the countrys Gross Domestic Product (GDP). Long-term cement demand growth rate is estimated at 1.2 times the GDP growth rate.
Brief comments are now adduced on how the demand curve is expected to shape up:
Housing and Real Estate: The housing and real estate sector is the biggest demand driver of cement, accounting for about 65 per cent of the total consumption in India. The sector is expected to grow at a Compounded Annual Growth Rate (CAGR) of around 11%. The Governments thrust on affordable housing for realising its vision of Housing for All by 2022 and the Smart City programmes should also help in demand growth for cement. The primary aim of the Pradhan Mantri Awaas Yojana (PMAY) is to ensure that at least two crore dwelling units are built nationally per year.
Further, the Real Estate market in India is expected to reach US$ 1 trillion by 2023 from US$ 120 billion in 2017. Overall, strong growth in rural housing, low-cost housing and growth pick up in commercial real estate market should further amplify the demand for cement. Housing and the real estate segment demand is expected to grow by around 5% per annum.
Public Infrastructure and Industrial Development: The other major consumer of cement includes public infrastructure and industrial development. Higher Government spending on infrastructure and rising per capita incomes will rank as leading growth drivers for cement in the country. There have also been positive moves on the policy front, in areas relating to ease of doing business, promoting start-ups, rationalising tax structure and administration and opening up more areas for foreign investment through the automatic route. The Government seems to be progressively stepping up infrastructure spending. Thus, outlays on infrastructure development, including for highways, roads and railways have been moving up perceptibly. The Government has also pushed for construction of concrete roads, highways through its unique Bharatmala & Sagarmala Project, 100 smart cities, construction of rural roads under the Pradhan Mantri Gram Sadak Yojana, dedicated Railway Freight Corridors, ports and Metro rail projects which all augur well for cement demand going forward.
The industry is also examining the prospects of exports to West Asia, Africa and other developing countries.
The Companys Cement business going forward
The Companys Cement Business is well poised to fully cater to the gradually increasing demand for cement in its serviced areas.
The Government of Karnataka has permitted the Business to acquire some 675 acres of land to further augment limestone reserves.
The Businesss brand, Birla Shakti, is now an approved brand in several Government projects for supply of cement, including the Military Engineering Services and the Ministry of Defence.
To further accelerate penetration of Birla Shakti in the southern, western and central parts of the country, the Business is closely scrutinising the forging of strategic tie ups with those grinding and blending unit owners for utilising their spare facilities for manufacture of cement. Plans are afoot to exponentially grow both in the trade category as well as in the blended cement category by appropriately leveraging the Birla Shakti brand. Initial results have been encouraging.
Reduction of cost of production is another focus operational area that is engaging attention. The quantum of reduction effected will help boost the Businesss Earnings before Interest, Depreciation Taxation and other Amortisations (EBIDTA). Sale Volumes are expected to rise even further as the Business busies itself expanding its dealer network and escalates marketing efforts through influencers and market makers. Here also, initial results give rise to increased confidence that such incremental efforts will be productive.
The large overburden at its Basant Nagar manufacturing facility is proposed to be utilised, subject to the required regulatory approvals, to make stone aggregates and machined sand (M Sand) that should open new vistas for improved and differentiated product offerings to add to the Businesss bottom line. Samples are presently undergoing regulatory testing.
A clear strategic shift is now discernible from giving primacy to volume to delivering profitable volume growth by entering high realisation zones while at the same time driving cost reduction, including through innovation, broadening distribution network, penetrating new geographies as well as bringing rigour in branding and technical services. This emphasis should enable the Business to consolidate on its strengths during the current year.
Tyres
Industry Overview
The origins of the tyre industry in the country go back by nearly a century when Dunlop Rubber set up the first tyre company. Although manufacture of automotive tyres is now largely concentrated in the organised sector, the industry does have a horde of small and medium scale manufacturers in the unorganised sector catering predominantly to bicycles and cycle rickshaws. The industry nonetheless produces and markets an impressive array of automotive tyres beginning from those for commercial vehicles and tractors to off the road tyres.
Keeping pace with the leaps in technology, the industry is progressively transitioning from cross ply (bias) to radials. The passenger car tyre market, for example, has been virtually radialised. Radials have certain distinct advantages. They are, for instance, lighter in weight making them more fuel efficient than bias tyres. Bias tyres have latent benefits too. They possess, for example, load carrying capacity because of a higher presence of natural rubber and are generally effective on poor road conditions, a phenomenon still endemic in the country. Growing radialisation notwithstanding bias tyres will continue to command a niche in the Indian market and other such similar overseas markets.
Sales of tyres manufactured or imported into India are conducted through an established network of dealers and related intermediaries for reaching the ultimate consumer. Dealers, typically, stock multiple brands though some companies have set up exclusive retailing outlets.
Automotive tyres in India are called upon to perform with the same dexterity in varying road and climatic conditions- from mud tracks to concretised surfaces, from extreme heat to the cold North India winters. Overseas buyers recognise this capability. India made tyres therefore command acceptance beyond the countrys shores. Indeed, some tyre manufacturers have actually established manufacturing arms abroad and are successfully operating them.
Risks and concerns
Profit margins on tyres are continually under strain. Natural rubber and crude oil based derivatives to name a few that are essential for the manufacture of tyres suffer from considerable price volatility and, in some cases, relative unavailability. With margins under pressure, it is often not possible to pass on the entire input and other throughput cost increases to customers. This position tends to denude the industry of the required internal surpluses so essential for expansion of tyre production facilities.
It is often not realised that ultimately tyres, are just another product distinct from a commodity. This would call for investments in brand building to further the cause of equity of a particular brand in a discriminating market. Existence of low profitability in the industry tends to dilute efforts in this direction given the industrys competitive setting and the fact that there are only limited restrictions on imports and that also only from China.
To negate or, at least, reduce the ill effects of the disequilibrium in margins, industry is taking a much closer look at applied research per se. This process will serve to rationalise and streamline existing recipes and the application of chemicals and compounds in tyre manufacture. There may be a marginal increase in development costs in the short run but will pay off going forward.
The industry needs nonetheless to do much more in stepping up the gas on tyre related research with a view to staying ahead of the curve in producing dedicated tyres for new generation vehicles like electric vehicles and those that will evolve as driverless vehicles.
Growth drivers and Outlook
The country is today a growing market for vehicles. Road conditions are improving virtually by the day. Consequently, what were reckoned earlier as pure mud tracks are metamorphosing into multi lane thoroughfares whether with asphalt or with concrete. Indeed, there has been a credible move towards concretising road surfaces both in urban agglomerations as well as state and national highways.
The progressive upgradation in road conditions and their geographical spread across the country has been a fillip to road transport. Road today can ably compete with rail in the carriage of both passengers and goods.
The gradual exposure of the Indian economy to the more developed markets abroad has helped create a multiplier effect on the various components that go into the configuration of a countrys economy. Road transport is one such component. As the Indian economy expands in size, so will road transport and therefore the demand for tyres. And this market need will not be for commercial vehicles alone. There will be a demand boost for tyres of all types of automotive vehicles including off the road ones.
Moreover, as the size of the Indian middle class accelerates so will the requirement for four wheelers. Sales of tyres therefore to original equipment manufacturers as well as to those in the replacement market will see a meteoric rise. Indeed, in a scenario of depleting tyre margins, four wheeler tyres have the distinction of fetching better profitability margings. Side by side, sales of two wheelers in India, certainly in the foreseeable future, ought to be by characterised by a virtual inelastic demand. Two wheelers are, on one hand, aspirational for todays youth but equally are convenient for those not so young to negotiate difficult city traffic.
The Companys Tyre business going forward
The Business will continue to be an influential player in bias given that these tyres even today have a steady demand. Several new bias product offerings are in the pipeline, including a range of fuel savers. The Businesss bouquet of tyres for light commercial vehicles have been re-engineered and the remodelled tyres will now enter the market.
Even so, the Business, during the current year, will further re-position and consolidate its radial offerings in keeping with its standing as a key industry player. Radials both for commercial vehicles as well as for passenger cars will be unfolded in a phased manner.
Two and three wheeler tyres constitute an attractive slot in a thriving market. The Business will more effectively leverage this market during the current year through its strong network of dealers.
Exports will be another thrust area. Besides the conventional markets in South-East Asia where the Business already has a presence, efforts are on to enhance visibility in several other select overseas markets.
At the same time, attention to further refining manufacturing technology and managing supply chain is being accorded the priority they deserve. Economising on sourcing costs, for instance, is a major goal and, to this end, the use of alternative materials and other input items are under serious consideration. The Businesss Research Centre is working on advanced simulation techniques for better product performance and lessen service failures.
In overall terms, the Tyre Business looks to the future with confidence.
Financial Performance during 2018-19
The General Review incorporated in the Directors Report sets out a brief performance resume of the Companys operating businesses.
The Companys improved financial performance, on a stand-alone basis, during 2018-19 as compared with the previous year favourably impacted financial ratios. As a result, these ratios have generally strengthened. The following three critical ratios have changed beyond the 25% indicative threshold specified in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 - all of them for the better:
A. The Interest Coverage Ratio which stood at 0.07 as at 31st March, 2018 firmed up to 0.34 as 31st March, 2019.
B. The Operating Profit Margin percentage went up to 7.87 from 4.30 in the previous year.
C. The Net Profit Margin percentage, however, continued to be negative but moved upward to 6.56 from the 12.51 recorded in the previous year.
The Net Worth as at 31st March, 2019 dipped to I530.19 crores from I773.70 crores in the previous year. However, the Loss for the year which was I463.51 crores in the previous year reduced to I254.25 crores during the year ended 31st March, 2019. Looked at from this angle, there was indeed a modest turnaround. The decline in Net Worth as at 31st March, 2019 was largely a consequence of the loss during the year being deducted from the opening Net Worth.
Internal Control Systems and their adequacy:
This has been covered in the Directors Report.
Material Developments in Human Resources
Human Resources continue to be the cornerstone around which the Company functions. The Company engages with the people who work for it on a proactive basis so as to transform the work environment from a place of work to a place to work. The Company believes that such approach has assisted it enormously in promoting harmony and a sense of belonging amongst those working for it thereby seeking to enhance their work life balance. The gradual evolution of this perception constitutes, according to the Company, a defining sign of sustained employee commitment to its well being. The number of people employed as on 31st March, 2019 is separately covered under Annexure VI to the Directors Report. Industrial relations remained cordial during the year.
Basant Kumar Birla
Chairman
Manjushree Khaitan
Executive Vice- Chairperson
Amitabha Ghosh
Lee Seow Chuan
Jikyeong Kang
Directors
Siddhartha Mohanty
Kashi Prasad Khandelwal
Sudip Banerjee
Chander Kumar Jain
Whole-time Director
P Radhakrishnan
Chief Financial Officer
Gautam Ganguli
Company Secretary
Place: Kolkata
Date : 15th May,
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