A review by Mr R. Doraiswamy Managing Director
Q: Were you happy with the performance of the Company during the financial yearunder review?
A: I would be honest to admit that we were not pleased with the performance of theCompany during the year under review. Most of the reasons for this were traced to theoverall operating environment which was largely outside the company's control. Forinstance India's Index of Industrial Production declined from 7.4 per cent in 2015-16 to5.22 per cent in 2016-17 which had a cascading impact on our performance. I would alsoadd that following the 2008-09 slowdown not much has improved at the ground level interms of projects consumption and growth in India within our space; the sector has gonethrough extended phases of relatively no growth.
The reason why one is mentioning this is that for a company that derived nearly 80percent of its revenues from India our performance is largely linked to the prevailingeconomic and capex scenario in the country. Given this operating landscape Salzer hasperformed creditably well in the last few years and also during the financial year underreview. Let us take an extended perspective: the Company has grown revenues from H55 cr in2006-07 to H384 cr in 2016-17 seven times in 10 years; net profit improved from H3cr to H17 cr during the period. Even during the financial year under review the Companyreported profitable growth if you do not factor project revenues (if you take EPC projectrevenues into account then the Company reported 7.5 per cent revenue growth and a flatprofit figure when compared with the previous year).
Q: What is the broad message that you wish to communicate to your shareholders?
A: The broad message would be that Salzer's core business has consistently grown inthe last few years despite ongoing challenges of low sectoral growth and growingcompetition. Project revenues have also been lumpy and unpredictable. The point ofoptimism is that the Company has performed creditably at a time of sectoral churn. Thischurn has been marked by the exit of older uncompetitive players from the market on theone hand and a decline in market share of the unorganized players on the others. Theresult is that the share of the organized players is growing faster than ever from a pointwhere it was 35 per cent a few years ago to a market that is equally shared by theorganised and unorganized sectors today to a market that could gravitate decisivelytowards the former across the foreseeable future.
Q: What is causing this churn to happen?
A: The churn is happening due to increasing sophistication at the customer's end.As downstream projects are getting larger they are also getting increasingly demanding intheir product requirements. There is a growing emphasis on product safety than everbefore. There is a growing need for vendors to respond with increasing product/processcertifications. There is a growing premium on the design and development oftechnology-intensive products that enhances the overall operational integrity ofdownstream customers. Most importantly there is a growing customer need for solutions asopposed to standalone product delivery. The result is that the churn within our businessis being caused as much by increased customer needs as by changes in government taxationpolicy.
The biggest highlight was that the Company continued to invest in the businessduring the course of the sectoral slowdown prioritizing the need to be future-ready assoon as business conditions revive.
Q: What accounts for Salzer's sectoral out-performance?
A: Our out-performance is the result of the coming together of a high productquality high technology intensity strategic flexibility and organizationalresponsiveness. In uncertain times there are sudden demand shifts making it necessaryfor product cum service providers like our company to respond with increasing speed tochanges in design and testing compliances. Besides the bar is continuously rising: fromISO 9001 to ISO 14001 to ISO 18000 and now ISO 26000 (which deals with organizationalethics). This underlines an evolution in customer needs: from product quality to processintegrity to environment compliance to whether the Company is managing the business in aholistically ethical manner to which Salzer has consistently been responding.
Q: What were the highlights of your company's performance during the year underreview?
A: The biggest highlight was that the Company continued to invest in the businessduring the course of the sectoral slowdown prioritizing the need to be future-ready assoon as business conditions revive. During the last quarter of the year under review theCompany completed its H27 cr investment in three phase dry type transformer project withdesign and technology collaboration from Traformodern a high technology company based inAustria. This investment represents a decisive step for the Company for some good reasons:this cutting-edge technology is largely confined to US and Europe; there are few Indiancompanies in this field representing a large under-addressed opportunity. This product isused in mission-critical areas like urban metro rail transportation systems. We areoptimistic of prospects of this product due to its widening use in solar investors(renewable energy) railways and large uninterrupted power systems.
Q: Why is the Company optimistic of its prospects?
A: Much of our optimism comes from the vast potential of the Indian market thatappears to be on the verge of a significant take-off. During the last few years there hasbeen modest investment in the country's core sectors; even as the government continued toinvest we have barely seen any private sector investment transpiring. We believe thatthis reality will soon change following structural shifts within the economy that couldresult in larger cash flows for the organized sector leading to larger investments.
At Salzer we are optimistic of our prospects for a number of reasons. One we haveselected to invest ahead of the curve. Two we are addressing a larger proportion ofhigh-value products and have a robust portfolio that addresses the diverse needs ofcustomers. Three we have invested in process automation that is enhancing processintegrity and product quality. Four we are a research cum knowledge-driven company withthe ability to customise products around user needs. Five we possess a broad productcomplement that is enhancing our ability to provide a single-point service to customersacross various sectors including oil & gas steel cement automotive real estateconstruction chemical agricultural and power sectors.
Our performance is the result of the coming together of high product quality hightechnology intensity strategic flexibility and organizational responsiveness.
Besides I believe that the sectoral turnaround should assert by the second half of thecurrent financial year.
Q: What are some of the positives that shareholders need to take cognizance of?
A: Shareholders need to recognise that even during the downturn the Companycontinued to develop products whereas the easiest thing would have been to retreat into ashell and await better times. Another important point to recognize is our marqueerelationships continue to be robust; our GE relationship doubled in quantum during thelast financial year to aggregate 5 per cent of revenues while we remained Schneider'spreferred global vendor for magnetics (7 per cent of revenues); our L&T relationshipcontinued to be strong while our relationship with various other multinationals isgrowing.
Q: What is the company's outlook for the current financial year?
A: Given the reality as it exists at the moment marked by attractive demandforecasts from customers Salzer is confident of reporting 15 per cent revenue increasecoupled with profitable growth that should enhance value for our stakeholders.