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Wartsila India Ltd.

BSE: 500443 Sector: Engineering
NSE: WARTSILA ISIN Code: INE057A01012
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Wartsila India Ltd. (WARTSILA) - Chairman Speech

Company chairman speech

ANNUAL REPORT 2000-2001 Ladies & Gentlemen, It gives me great pleasure to welcome you to the 15th Annual General Meeting of your Company. We are particularly happy that we have in our midst today, Mr. Ole Johansson, President and CEO of our Principal Shareholders Wartsila Corporation. His presence symbolises the importance of India and South Asia to the long term business goals and objectives of the Group. The Report and Accounts of your Company, including the Notice to the Shareholders, have been in your hands for some time and with your permission, I shall take them as read. I am pleased to report on behalf of the Board that your Company's performance for the year ended December 31, 2000 was creditable, given the slowdown in fresh investments in the manufacturing sector, and the high fuel oil prices prevailing through most of the year. Your Company earned a PBT of Rs. 280 million on an income of Rs. 3465 million, representing a growth of 11% and 6% respectively over the corresponding figures for 1999. Your Company maintained its dominant market share in the residual fuels based power generation market forging and sustaining long-term partnerships with customers, driven by its commitment to offer energy solutions rather than mere product packages. Cost efficient power generation, progressively shorter installation periods and state-of-the-art technology combine to satisfy users representing almost all major industrial houses. The partnerships cover a spectrum of process industries of the "brick and mortar" businesses such as cement, steel, paper textile, natural and man- made fibre, caustic soda and chemicals and Software Technology Parks representing the "new economy". In my statement last year, I had said that both the "old economy" and the "new economy" are really complimentary to each other - indeed they have "a distinction without a difference' to quote from Business Week. An interesting observation During the year a total of 246 MW of Power Plants were delivered as against 267 MW last year. These included 26 MW from the Khopoli Plant. As of 315' December 2000 the cumulative deliveries to India were 2084 MW of which 1718 MW are in operation. The difference of 366 MW represents the projects under execution as at the end of December 2000. The year was particularly satisfying insofar as it saw the realisation of the Management team's dream of the early nineties to cross cumulative Power Plant deliveries of 2000 MW by the year 2000. In the year under review, the Marine Division secured orders for 14 engines to be fitted on seven tugs. All tugs are being built by Indian shipyards, four for an owner' in the Middle East, and the rest for Indian owners. Your company was also successful in winning an order for the main propulsion engine for a 93000 DWT Tanker being built by Cochin Shipyard. Total deliveries during the year improved to 18 engines from 12 in the previous year. Keeping pace with last year's success with the Indian Navy, your Company consolidated its position with an award for the supply of yet another 12 DG sets with acoustic enclosures to be fitted on three frigates. Speech by the Fifteenth Annual General Meet Your Company's-Service Division also achieved a satisfying milestone in 2000 crossing a turnover of Rs. 1000 million for the first time. The critical success factors were shorter response times, quicker turnaround during all types of overhauls, and winning customer loyalty through technical interventions aimed at improving plant availability. Your Company's O & M activity completed a successful third year of its operation, with a 74% increase over the previous year's operating base which at the end of year 2000 stood at 223 MW: The number of plants under this Division's care increased from nine at the end of year 1999 to seventeen at the end of year 2000 covering several industry sectors. Being' a pioneer in developing the O&M competencies for all capacities of Wartsila captive power plants, your Company aims to become preferred operator for customers of the entire range of Wartsila Power Plants including gas power plants. Coastal Wartsila Petroleum Ltd., the 50:50 joint venture between your company and Coastal Corporation has completed two years of operations in the procurement and supply of Fuel Oil. With a strong focus on product quality and customer service, the Company is steadily increasing its spread of customers and volume of business. ECONOMY: The economy is going through a difficult and recessionary phase. Overall the economic growth for the Financial Year 2000-01 is estimated to be 5.g% as against 6.4% in the previous year. The capital and intermediate goods industry continues to witness sluggish and weak demand indicating surplus capacities. Withdrawal of Quantitative Restrictions (QRs) on additional products with effect from 1s April 2001 has further dampered the confidence of domestic industry, which is experiencing for the first time the full impact of global competition. The growth of exports has also been depressed in the current year due to a fall in global demand as a result of the slowdown in US and Japanese economies, although a handful of countries like Germany Canada and some in Latin America have helped to mitigate the impact to some extent. Against this depressing backdrop, it is heartening that the recession has not dampened the confidence of foreign investors, with FDI inflows increasing by 39% to Rs 45 billion during the first quarter of the current calendar as compared to Rs. 32 billion in the corresponding period last year. This is a very strong indicator of the faith and confidence that global players have in our economy, in our resources and in our market. It is gratifying to ,note that the foreign exchange reserves have increased from US$ 37 billion last year to a healthy US$42 billion currently. A report published by A T Kearney in February this year entitled FDI Confidence Audit:India states that "market size and potential give India a definite advantage over most other comparable investment destinations.. Combination of Indian workforce's education levels and technical capabilities with competitive wages are India's other principal asset". This extract substantiates fully what I have just now said. A major deterrent, of course, is the lack of proper infrastructure, an area which for some inexplicable reason has not received its due attention since our Independence. It is clear that the infrastructure that we have built in the last 50 years would need to be doubled in the next 5ears if the formidable economic challenges that stAre us in the face are to be met. This highlights the enormity of the task that we have on our hands, which must be tackled on the top most priority. I must confess that development of infrastructure is an area where China scores heavily over us. I feel that the current economic phase we are witnessing is a process of correcting the imbalances in the economy. The inefficient and uneconomical -units are being phased out even as the impact of global competition sinks in. This;will doubtless be a difficult and turbulent period for some but at the same time., it could present vistas of opportunities for others. However, I am sure that with the continuing reform process, with the faith of foreign investors in our economy, and most importantly with the resilience, and technical and managerial competence of our people, we will emerge a much stronger economic power . The following extract from the same AT Kearney report confirms this when saying that "Indian Science and Technology capability is extraordinary and is changing the world's perception of India". You all know what tremendous success the IT revolution in India has achieved within a short span of time. It has done us all proud as Indians. In this connection' another extract from the Economist 5'h-11'h May 2001 which carries a special article on "Out Sourcing to India" will I am sure, be of great interest to you. It runs as follows: ".. Indian lawyers are doing research for British and American firms; Indian engineers are designing construction projects and testing Car parts for foreign clients. At the most rarefied end of the spectrum, Indian scientists are conducting basic research and development for western firms. In some cases, the availability of low-cost, high quality expertise in India could transform the economics of the industries that they serve." This is highly complimentary, to say the least. I am glad to say that, as a concept, a small beginning has already been made by your company in this direction, we want to gradually expend this activity as much as we can. This will help to enhance our shareholder value to a great extent. POWER:SCENARIO: December 2000 witnessed the crossing of yet another important milestone this time for our country. The installed generation capacity crossed 100,000 MW. Electricity is an all pervasive commodity that surrounds us today. The technology for producing electricity has existed for over a century and has sufficiently matured. We have become more and more dependent on electricity. It has become an increasingly important "raw material" input for most manufacturing processes. On occasions it is a dominant and critical input, witness the aluminum, steel cement and ferro-alloys sectors' to name some. In the highly competitive WTO regime of lowering tariff walls and borderless trade, every manufacturer in India is driven to deliver products and services of increasing value at constantly lower prices. The only way to sustain and enhance profits and shareholder value is to reduce costs of all kinds, including the cost of energy. Whilst manufacturers are free to procure all other "raw materials" from the most competitive source, in India they are denied the freedom to choose their source of electricity. In this deregulated delicensed and decontrolled economy, they are compelled to seek the State's permission to move away from a monopoly power provider. This is an anomaly that needs correction. Industry should have the freedom to source all its inputs, including electricity, as they consider appropriate. They should have the freedom to produce the electricity needed for self consumption whenever it is found that this is more attractive than buying from outside. Fresh investments by Industry in their own captive power plants needs to be encouraged as a first and important step, and not stifled as is being done by a few myopic State Governments today. There also exists a reservoir of captive power capacity lying under-utilised with industry. The States would do well to encourage optimal use of such national assets, by either purchasing excess energy at negotiated rates or permitting these plants to sell energy to third parties. Fortunately there is a glimmer of hope if one can go by recent pronouncements. It appears that the Government may free captive power generation; in this, it is gratifying to note that your company played a very pro-active role by highlighting the imperative necessity of a shift in policy. Likewise a heartening development is that some States may permit Independent Power Projects (IPPs) to sell power direct to consumers instead of to the State Electricity Board. One can only hope that this is a pre- cursor to another major strategic policy shift. It is now an acknowledged fact that to support a GDP growth rate of even 6% per annum, the next 11 years will require the addition of a further 100,000 MW to the present installed generating capacity. Power plant financing is a daunting task even under normal circumstances. In conditions prevailing in India, where SEBs are cash starved and have no escrow capacity, it is difficult to fathom how the capacity addition of 100,000 MW will occur during the next decade treading the old paths. I have spoken at length over the years in my annual statements to the shareholders on the nationwide compulsions to improve PLF, engage in renovation and modernisation, lower our T&D losses and eliminate cross- subsidisation of power. Many industry associations have also presented papers and addressed these issues at numerous Seminars and Workshops. Fortunately some changes have taken place, and as the process of consensus building catches up, the pace of change too will quicken. * A number of States have set up the mandated Electricity Regulatory Commissions * The use of naphtha as a fuel for power generation, which led to unaffordable tariffs, has now been correctly abandoned. * T&D losses which hitherto escaped precise quantification, now have some numbers thanks o the efforts of some of the State Electricity Regulatory Commissions. Though high to the point of disbelief in some cases, these T&D losses at least now have a reference point from which improvements can be driven. * Renovation and Modernisation are receiving significant budgetary allocations and accrual of benefits has started * The Electricity Bill 2000 has finally been presented to Parliament, after a number of committees have deliberated over the provisions. I see that an early adoption of the "Electricity Bill 2000" will accelerate India's move from a publicly owned, vertically integrated, monopolistic power system with fuel and electricity price distortions, to a more liberal system with market prices competition, efficiency, accountability, commercial incentives, freedom of choice and variable tariffs. I must, however, sound a note of caution about the so called T&D losses of the magnitude reported by some of the states- these are in fact to a major extent, a euphemism for "theft". Immediate steps must be taken to reduce these thefts though I wonder if there is the political will to deal with this situation in which the vested interests are so deeply engrained. I also believe that we should learn from the experiences of the advanced economies and leapfrog the development process. We should balance fresh investments intelligently between mega projects and distributed generation. Let us strike a balance between generation at mine mouth, near coastal and port sites, and close to load-centres. We should evaluate investment efficiencies of the Power system as a whole rather than as the summation of its constituent parts. We should encourage industry to choose its power source and support them to become competitive. I firmly believe that distributed power is the way forward. Power Plants close to load centres obviate the necessity for heavy investments in transmission and distribution. In the short and medium term our emphasis should be on small and medium sized plants which would be simpler to finance and quicker to set up. Early successes will help restore confidence of industry and boost the lagging Power sector. PROSPECTS: Notwithstanding the halting progress and occasional hiccups, the principles of liberalisation and Government disinvestment are espoused by all the major political parties. There is no doubt whatsoever that the way forward is to press ahead with the agenda for economic reforms. I am confident that once the privatisation birth pangs are over, National and State policies that encourage captive and decentralised generation will come to stay as I have said earlier. These will provide your Company the momentum for growth in the times to come. You are all aware of your Company's expertise in meeting industry'S needs for Captive Power Plants that deliver reliable and cost-effective electricity. Last' year has further enriched this with the construction of three large decentralised generating plants at Samalpatti Belgaum, and Samayanallur. And all these additions, be they CPPs or IPPs, will result in future revenue streams for the After Sales division. The activities of the Marine Division continue to contribute to the growth of your Company. Our hew emphasis on being "the ship power supplier" with turnkey and total solutions for complete propulsion systems and on-board power auxiliaries and control systems will, I believe, yield good results in the future. The concept of outsourcing of on-site round-the-clock operations & maintenance is relatively new to the captive power plants in India but is steadily gaining acceptance. This is evident from the growing customer demand for O & M services. Customers are realising the value derived by concentrating on their core business and leaving support activities such as power plant operations to specialists. Growing customer references & encouraging response for O & M of new and owner-operated power plant augurs well for the future prospects of this company. Our Principals Our Principals, Wartsila Corporation, are the leading global ship power supplier and a major provider of solutions for decentralized power generation and of supporting services. The Group's Power Divisions had a successful year in 2000 and posted a profit after three years of losses. This is a remarkable turnaround for which I would like to congratulate Mr. Ole Johansson and his highly professional and committed management team. As I said last year and many times before from different platforms, our relationship with our principals right from the inception has been exceptionally good and that is what makes this joint venture a role model for others to follow. I will not say more on this and leave it to Mr Ole Johansson to tell you in a few minutes about the Group as a whole, about its activities, and its achievements. Ladies and Gentlemen, I would now like to conclude my statement on a personal note. I have been connected with your Company right from day one, when the project was conceived in 1986. I was one of the promoter Directors and your Company's first Chairman. It has indeed been a matter of great satisfaction for me to see a sapling which was planted 15 years ago to grow into a very healthy and robust fruit-bearing tree, poised to grow stronger and bigger as years go by. The time has now come when I must relinquish my appointment as the Chairman and as a Directors of your Company. As I look back, I recall two stalwarts who were associated with this project right from its inception - one was Pentti Jantunen, and the other is llkka Aarnio. I am sure llkka is as thrilled aas I am today to have helped to shape the success of this Company. I also remember at this moment Mr Stolpe who was the Chairman of Wartsila Group in 1986. It was his vision and his foresight which helped to conceptualise this project. At this very moment, I also think of our dear young colleague who would have been present on this dais today if destiny had not decided otherwise. Mr.P.D. Gupta, who had years ahead of him - years to see this fruit - bearing tree start propagating, was suddenly snatched away from us a few months ago. He was one of the promoter Directors of your Company, along with me, but his association with the Wartsila Group started even earlier as an agent for their DG sets. His dynamism, wise counsel and astute business sense would be sadly missed. I must also take this opportunity to thank Mr Georg Ehrnrooth, who recently reliquished his appointment as Group Chairman, Mr Hintikka, Mr Virtanen, Mr. Strand, Mr Norrgard, Mr Aarnio and many others who helped me personally in this joint venture from time to time during our long association. I owe a special debt of gratitude to Mr Christian Andersson who has been a tower of strength through thick and thin. Based on his knowledge, experience and unflappable disposition, his support to me and to this Company has been invaluable. Ladies and Gentlemen, it has been a matter of great pleasure for me to have known Mr. Ole Johansson. I will always cherish my association with him as a manager par excellence. Major restructuring of the parent company that he undertook as soon as he came to the helm of affairs was, I am fully aware, a difficult exercise but as I have said earlier, it has produced excellent results. l am sure that this is a fore-runner of even greater achievements in the years to come. I congratulate Mr. Johansson on his success and wish him the very best in his future endeavours'. At this stage I must also express my deep sense of gratitude to the Government of Finland for the honour conferred on me some years ago with the award"of the "Medal" of "Commander of the Order of the Lion of Finland". It is a great distinction for re, which I will always cherish. Last but not the least I must thank your Managing Director, Mr. Pradeep Mallick and his comparatively young management team, which he has, literally built "brick by brick" from scratch. It is this highly competent and cohesive team which has delivered the 'goods even when the chips were down In this great achievement, Mr. Mallick has displayed excellent qualities as a manager and as a team leader and I compliment him on this. The excellent support given by Mr V Ramachandran, our former VP (Finance) & Company Secretary and by Mr Ashok Bapat our former VP (Manufacturing), in the formative stages of this Company, helped in building a strong foundation. With such a committed team and with a well- structured organisational framework, I have no doubt whatsoever that your Company will not only continue to maintain, but will also improve, its pre- eminent position in the industry. Before I end, it is my very pleasant duty to announce Mr. Subodh Bhargava as the Chairman of your Company. I have known Mr. Bhargava for many years - he is a past President of CII and is highly respected by the industry at large. I can only say that we could not have found a better person than him as the Chairman of your Board of Directors. I wish him well. The induction of Mr. Pradip Shah as a Director and as the Chairman of the Audit Committee has further added strength to your Company. He is a venture capitalist and a person of great eminence. I also wish to,thank each and every employee of Wartsila India-for their sincerity, and for the sense of commitment and belonging demonstrated by them . Finally dear shareholders I thank you most wholeheartedly for the support you have given to the Company and to me personally during the last 15 years that I have chaired your AGMs. Your observations and comments have always been results in the future. ' I am grateful to you for all that and above all for the courtesy extended to me GOOD BYE AND GOD BLESS. WARTSILA INDIA LIMITED Registered Office: 76 Free Press House, Nariman Point, Mumbai - 400 021. Tel.: (022) 2815601 Fax: (022) 284 0427