Our increase in consolidated net worth at the end of FY21 was Rs.78 million whichincreased the per share book value by 4.4%. Over the last nineteen years (that is sincethe present owners took over) per share book value has grown from Rs.151 to Rs.596(Rs.673 after ignoring the effect of goodwill writeoffs) which after factoring individend paid during this period works out to a rate of 9.8% (10.6%) compounded annually.
The Drilling Solutions business had a decent year despite all the disruptions caused bythe ongoing pandemic. Though we would have liked to push our plans forward a bit more thanwe actually did under the circumstances I do not feel disappointed with the overalloutcome.
Old timers would know that the public sector business which has been our mainstay hasbeen a cash cow. While it creates most of our profit it does not grow at all. Howeverthere has been the concentration risk of depending too much on a few customers as well asstrategic risk of focusing too much on fossil fuels.
Historically we tried a few different things to diversify away from these risks.Unfortunately those experiments did not go very well. Those experiments were mainlyaround a whole new business (concreting equipment about which I wrote in some detail inthe FY16 letter) or around developing new products for new markets (again a bit riskierthan selling existing products into new markets). This strategy should have worked betterthan it did. The main reason it did not was that we spent more effort on productdevelopment than on selling the products that were developed. Until FY19 we were mainlyfocused on generating cash to clean up the balance sheet. The pain from carrying andservicing large amounts of debt was just too high to think about anything else in ameaningful way.
After turning debt free in FY19 we turned our gaze back towards growing the business.To pursue that agenda we created three verticals namely Public Sector Private Sector andExports each headed by a seasoned Revathi hand. These new leaders have done a lot of workto create new growth engines for our company. A brief commentary on some of the work donefollows.
The Exports team has been preparing the foundation to build our exports business. Thesesteps include upgrading our marketing collaterals participating in trade fairsappointing dealers in multiple target markets etc. Like any new initiative developingnew markets is a journey which involves getting multiple things right. These includeproduct specifications and quality (which may be different from the domestic market thatwe have been used to serving) finding the right target markets (which have significantmining activity light regulation relatively low competitive intensity etc.) appointingthe right dealers (who have an understanding of the industry and have relevant customerrelationships) finding the right customers (who deal honestly and fairly and who have themoney to pay for our equipment) etc.
It is not easy to walk into a new market and expect a new customer to start trusting anew supplier. This task becomes doubly difficult when meeting customers becomes impossibledue to pandemic induced travel bans. Despite
these challenges our team won an order from the largest cement producer in Africa.After getting stuck en route to the port in March 2020 these machines were finallydispatched during the year. Additionally several ongoing conversations with potentialcustomers makes me confident that we will win many more orders in the coming years.
While the sales team has been busy with the above work we have also been working toupgrade product quality and add technical specifications to meet expectations of globalcustomers. We have also hired and trained service engineers to make sure our equipmentdelivers the performance that the customers expect at a cost cheaper than what they end uppaying for machines supplied by our competitors.
The Private vertical is mainly focused on two industries which have a large miningcomponent - cement (limestone) and steel (iron ore). We have had Tata Steel as along-standing customer. During the year we added an international player in the Indiancement industry. This is just a start and at the close of the year we had several ongoingconversations with potential clients. We hope to convert some of these dialogs to ordersin the next year. We are also talking to some mining contractors working for cementcompanies as well as some steel companies. Breaking into new customers for capital goodstakes time but we are quite hopeful of making inroads into some clients very soon.
Both the Export and Private verticals should help us in achieving our objectives ofgrowth diversification out of a single customer and diversifying out of fossil fuels.
I would also like to mention a few "startup costs" associated with some ofthese new initiatives. The export markets usually expect fast deliveries after placingorders. As a result we have to build inventory in anticipation of order booking unlikeour public sector customers. Given we are new to this game often a customer delaysplacing orders or delays in closing the financing for the order etc. This leads to usholding inventories in anticipation. Similarly if we draw pre-shipment credit from thebank for exports but are unable to export within the time limit specified in the facilitythe concessional rate of interest does not apply. Both these are material to our BalanceSheet and P&L statements. We have suffered on both these counts but are hopeful thatas things get streamlined both these issues will fade away.
Following on from FY20 Semac had another soft year. In the middle of a pandemic mostput their capex plans on hold which significantly impacted our business this year.
I had mentioned in last year's letter that our wins in Design Build had been stalling.I had also mentioned that slowing wins has a direct impact on Revenues with a lag of aquarter or two and that this would mean that we will have a tough year in FY21.Unfortunately my prediction came true this year.
Several additional factors made things even worse than I had anticipated. The pandemicshock meant that most industries went into cash preservation mode and mothballed eventheir ongoing capex plans. That meant the jobs we had on hand got executed slower leadingto lower billing. The recurring lockdowns meant that prospecting for new clients torebuild the order book became tougher. Convincing new clients to try a new serviceprovider over their existing provider is as it is hard. Trying to do this without beingable to meet them in person is even harder.
The slowing pipeline even before we got hit by the pandemic followed by the new normalof trying to win new clients without a physical meeting forced us to revisit our salesapproach. A brief commentary follows.
When we acquired the business each office was a standalone office with nocollaboration happening across offices. After the last Principal left in 2016 wegradually reorganized the company by business vertical (India Design - designing theproject and in some cases project management; Design Build - turnkey execution includingdesign and construction and Oman Design). One person was responsible for the P&L ofeach vertical. This worked well for a period of time and we were able to build a robustDesign Build business from scratch in a short span of four years.
This organization structure ran its course and we started to stall as new Design Buildorders started to shrink last year. In response during the year we reorganized a secondtime to create a corporate structure. Under this structure we had one person take chargeof Operations and another take charge of Sales with the Oman operation remainingunchanged. This meant that each person would now focus on what they are best at doingwithout worrying about other aspects of the business. Of course each shift in role doesmean some disruption. Humans are humans and require a bit of time to adapt to the newrole. While this new organization structure should hold us in good stead over the next fewyears the short-term pain created by a drying pipeline and the team adjusting to the newrole will have to be borne.
We also made a few strategic shifts during the year. The Dubai market was never anindustrial market. In the Indian market we had decided to become a player focused on onlyindustrial projects in 2017. But we continued the Dubai office due to legacy reasons.Applying the 80/20 principle of focusing on fewer things that deliver most of our profitsand which will be our growth driver we decided to shut our Dubai office after over adecade of being there. We also decided to discontinue the pure play Project Managementbusiness where we took up project management for clients like Ashoka University BITSPilani IIM Bangalore etc. It is never easy to shut down profit making divisions. But inour quest to create ever tighter focus on what matters the most for our results wedecided to minimize our distractions.
This rejig led to some senior level exits mostly expected. I would like to place onrecord the contributions of the seniors who decided to move on. Though such departurescreate a temporary void I firmly believe that this helps in organizational renewal.Everyone contributes till the point they can. When sometimes the role outgrows thecapability of someone it is best that they move on. It is also good for the organizationsince this allows us to find new talent who would do justice to the new requirements ofthe role.
We also used the difficult year to clean up our books. This included writing off themoney invested in building the Africa business several years ago. While we are still doingsome projects in parts of Africa we had shut our Africa office down some years ago. Theseinvestments were made by the Oman office to open up a new market for its own growth.Unfortunately it didn't work as planned and we had to shut it down. Similarly theinvestments made in the Dubai office were written off during the year. Both thesewrite-offs totaled to Rs.7.31 crores. We also provided for and wrote-off some oldreceivables adding up to Rs.5.5 crores. These were accumulated over several years. We hadbeen trying to collect these old receivables for some time now and were able to collectsome of it. Whatever we could not collect we decided to write off.
After taking out these non-cash charges debited to this year's P&L our cash lossfor the year was Rs.97 lacs. This compared with a cash profit of Rs.5.68 crores last year.We have had a few tough years at Semac but each crisis just makes our resolve stronger.
I will leave you with some good news. Despite all our treasury grew by Rs.9 croresduring the year. This was the outcome of tight collections and also getting some longpending tax refund. During the pandemic year though our P&L was in bad shape westill managed to grow our treasury.
The treasury has been invested in multiple products most of which deliver highsingle-digit to low double-digit pre-tax returns. The intent is to build some cushion onthe balance sheet that gives us some options to grow the business as and when anopportunity arises. Until then the plan is to use the treasury to earn some money for ourshareholders.
It has been a difficult year for everyone but especially for our people. Stayingfocused despite massive disruptions to "life as usual" requires sincere effort.Semac adopted the digital life in 2017 which made the transition from coming to officeto working from home a bit smoother. But it took some getting used to nevertheless. Iwould like to thank our people for their commitment to keeping the engine running.