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Roofit Industries Ltd.

BSE: 526089 Sector: Industrials
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Roofit Industries Ltd. (ROOFITIND) - Director Report

Company director report

ANNUAL REPORT 2000-2001 ROOFIT INDUSTRIES LIMITED Your Directors are pleased to present the Nineteenth Annual Report and Audited Accounts for the year ended 30th June,,2001. Operations Despite a slowdown in the economy, your Company improved its performance for 2000-01 The total turnover of the Company increased by 42 per cent to Rs.45628 lakhs and the operating profit of the Company increased by 30 per cent to Rs 9041 lakhs The net profit of the Company increased by 12 per cent, to Rs 4164 lakhs from Rs.3704 lakhs Dividends Your Directors are pleased to recommend a final dividend of Rs 0 50 per equity share The total dividend, including an interim dividend of Rs 1.50 per equity share, will be Rs 2.00 per equity share (Previous year Rs.3 50 per share) on the increased equity share Capital following the bonus issue for the year ended 30th June, 2001. The consequent outflow including preference dividend paid and dividend tax of Rs 81 lakhs will be Rs 538 lakhs (Previous year Rs 415 lakhs). Audit Committee Pursuant to the provisions,of new Section 292A of the Companies Act, 1956, your company constituted the following Audit Committee of the Board of Directors - 1. Mr. M. D. Gothivrekar- Chairman, 2. Mr. Ramesh Dhall, 3. Mr E V Hariharan Deposits Some 91 deposits, totalling Rs 10.49 lakhs due for repayment on or before 30th June, 2001, were not claimed by the depositors on that date. As on the date of this report, deposits aggregating Rs.7.59 lakhs thereof were claimed and paid or renewed. Directors' Responsibility statement Pursuant to the-requirement under Section 217(2AA) of the Companies Act, 1956, with respect to Directors' Responsibility Statement, it is hereby confirmed. i) That in the preparation of the accounts for the financial year ended 30th June, 2001 the applicable accounting standards have been followed along with proper explanation relating to material departures; ii) That the Directors have selected such accounting policies and applied them consistently and made judgements and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for the year under review; iii) That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; iv) That the Directors have prepared the accounts for the financial year ended 30th June, 2001 on a 'going concern' basis. Significant developments, during the years The Company commissioned a,drymix factory at Ratnagiri and at Kurkumbh near Pune during the year under review. The Chennai factory for drymix is expected to commence production in October, 2001. After the commissioning of Chennai factory, the company will possess a total production capacity of 720,000 tpa, the only company to have such a large production facility in India. Outlook. The company's outlook appears to be optimistic. The Indian government has made housing a priority sector. Various tax incentives have been announced to encourage the growth of residential units leading to increased institutional disbursements. India's rural economy is expected to grow at nine per cent in 2001-02, leading to a higher consumption of construction and ancillary products. Your company possesses plants with adequate capacity and relevant technologies to make cost-effective products. The company's plants are judiciously spread in regions of demand in south and west India, close to raw material sources and attractive growth. Your company, with a diverse product portfolio, is in an ideal position to address the growing demand. Much of the growth is expected to come from the company's drymix operations. The to-be commissioned Chennai plant is expected to address drymix demand from the southern states The marketing focus will dovetail the manufacturing. The company expects to raise its profile as a national brand It expects to leverage its quality, brand and portfolio to deepen its penetration. It is in the process of establishing its products in the overseas markets These initiatives are expected to generate higher than average realisations and strengthen the company's margins. Directors Mr Kishore Motwani and Mr. Vinod G Motwani retire by rotation at the ensuing Annual General Meeting and being eligible offer themselves for re- appointment. Energy conservation and technology absorption The provision under the Companies Act, 1956 in regard to reporting on energy Conservation are not applicable to the industry in which the company is engaged. The manufacturing operations for AC sheets are based on indigenous technology, which is well established. During the year the company has installed its drymix Plant at Kurkumbh near Pune and Ratnagiri. Raute Dry Mix OY, Finland, specialising in drymix plants and product technology, has supplied complete plant, machinery and equipment for the production of plasters and mortars, as well as product technology and development services to manufacture drymix products The product know-how received from them has helped to improve the market evaluation and designing of the product range to the marketing of final product Employees Roofit employees are part of an extended family. The Company strives to cultivate a spirit of involvement amongst them The Company has not paid any remuneration attracting the provisions of Companies (Particulars of Employees) Rules, 1975 read with Section 217 (2A) of the Companies Act, 1956 Hence no information is required to be appended to this report in this regard. Foreign Exchange Earnings and Outgo During the year, the company exported products valued at Rs 1141 lacs (previous year Rs 194 lacs) The outgo of foreign exchange was Rs 2852 lacs on account of the import of raw materials (previous year Rs 2346 lacs) and Rs. 31.32 lacs on foreign travel (previous year Rs 22.70 lacs) Rs.1146 lakhs for import of capital goods (previous year nil) Auditors The Auditors, M/s Nitish Nigam & Co. Chartered Accountants, retire at the conclusion of this Annual General Meeting They have signified their willingness to accept re-appointment and have further confirmed their eligibility under Section 224 of the Companies Act, 1956 Appreciation The Board wishes to place on record its appreciation of the hard work and dedication of employees at all levels Industrial relations in all the units of the Company continued to be cordial during the year under review Your Directors also convey their grateful thanks to the Financial Institutions, Bankers and Shareholders for their continued co- operation and patronage. On behalf of the Board of Directors, Suresh G Motwani Place: Mumbai Chairman Date : 7th September. 2001 RISK MANAGEMENT Business portfolio Risk Roofit makes and markets a number of products. The mix may not be synergic and eventually strain the organisation's capacity to manage them effectively. Risk mitigation All products manufactured and marketed by the company are used in the construction of houses and industrial properties. This represents a strong synergy with an attractive branding and distribution payback. The company does not intend to enter any unrelated business. Competition risk Competition might affect Roofit in the marketplace. Risk mitigation Roofit is one of the lowest cost AC sheet producers in India. The AC sheet business is capital-intensive. To set up a cost efficient plant, the minimum capital requirement is Rs. 40 cr. The reach of a single plant is restricted to a limited geographical area due to the high freight component in transporting products. To sell higher volumes, multiple plants are required over a large area. Roofit has four plants spread over the southern and western markets to service demand across regions. Roofit also possesses an extensive distribution network - 35 distributors spread over ten states, the highest number of distributors per state in the industry, which will be difficult to replicate in a short period. Roofit possesses a strong brand, which is synonymous with quality. The company also possesses the financial muscle to sustain a long receivables cycle in some of its businesses, which new competitors may find difficult to match. Perception risk Much of the company's revenue is sourced from asbestos-based products. Asbestos is considered environment unfriendly in a number of countries. Risk mitigation Even though asbestos represents a danger to the environment, it is the company's considered option that its end products are safe and durable. However, in a prudent, de-risking initiative, Roofit has reduced its exposure of asbestos-based products - AC sheets and pipes - from 99.45 per cent in 1998- 99 to 57.02 per cent of its turnover in 2000-01. This is expected to reduce further over the foreseeable future following an increased focus on drymix and other non-AC products. 1998-99 99.45 % 1999-00 74.41 % 2000-01 57.02 % Gloalisation risk The company's products may be hit by cheap imports. Risk mitigation Since inward freight is prohibitive as a percentage of the selling price, the company faces no significant import threat. Roofit has also insulated itself against imports through a strong distribution network in the rural and urban markets. Roofit's brands represent trust, an effective buffer against competition in the marketplace. Raw material risk In the case of an unfavourable review by the European Union, the mining of asbestos may be banned, leading to raw material scarcity. Risk mitigation Until 1999-2000, the entire raw material requirement of the company was sourced from Zimbabwe. In a de-risking initiative, the company also sourced material from Russia from 2000-01. Since Russia is not expected to toe the line of the European Union, Roofit does not expect any disruption in the supply of asbestos. To de-risk itself further, Roofit markets EU-compliant sheets and PVC sheets as well. The company has also modified its production process to facilitate the production of sheets using an alternative material. Economy risk. Since the company's products address the construction sector, Roofit's earnings could be affected in an economic recession. Risk mitigation Roofit has countered this threat through a product portfolio that addresses urban and rural demand (AC sheets are directed at the rural sector, PVC sheets and drymix at the urban consumer). Within the urban market, the company caters to institutional and individual buyers. This customer spread has reduced dependence on any one segment; besides, it has helped the company capitalise on growth. Roofit has also used the recession to strengthen its brand, increasing its market share from 16 percent to 23 percent over the last three years. Geographical risk A major part of the company's income is sourced from sales in the south and west, a geographic overdependence. Risk mitigation The company's decision to be present in a few markets to start with was influenced by the need to penetrate vertically and establish a strong distribution network before expanding horizontally. The company selected its markets of presence with care. The southern and western markets of the country represent the most affluent and fastest growing markets in the country. Roofit is in the process of spreading itself across more geographies - exports six-folded in 2000-01 and the quantum of shipped material is expected to increase in 2001-02. Roofit also expects to enter the growing north India over the foreseeable future. Client risk Roofit's AC pipes revenue is dependent on Government offtake, marked by low realisations and long receivables. Risk mitigation Roofit has prudently supplied AC pipes to projects, resulting in higher realisations and a shorter receivables cycle. The company expects revenues from the sale of AC pipes to increase since the water and sewage system is a priority thrust area for the Government. Capital-intensive risk Roofit's gross block increased from Rs. 123.75 cr in 1999-2000 to Rs. 203.04 cr in 2000-01 resulting in negative operating cash flows. Risk mitigation Roofit's aggressive expansion has enabled it to strengthen its business for the future. As a result, Roofit's plants are equipped to cater to a large area, a pre- requisite in a business with a large transport cost component. The company does not expect to incur major capital expenditure in the coming year. Besides, higher drymix revenues are expected to generate positive operating cash flows Liquidity risk Interest and financial charges increased from Rs. 22.05 cr in 1999-2000 to Rs. 35.97 cr in 2000-01. The company's debt-equity ratio stands at 2.12, a liquidity threat. Risk mitigation Roofit expects to reduce its interest outgo through a debt swap - high interest, working capital loans with low interest term loans. Drymix revenues are expected to generate resources for working capital requirement while term loans are expected to fund minor capital expenditure. The company is also in the process of infusing equity into the company, which will reduce its debt- equity ratio. MANAGEMENT DISCUSSION & ANALYSIS Income accounting method The company followed the accrual system of accounting in 200001. Under this method, revenue and expenditure were recognised as soon as the transaction was recorded in the books even though the actual receipt or disbursement transpired later This format of accounting corresponded to the Generally Accepted Accounting Practices in India. Wherever the treatment of accounts required an interpretation, the company preferred to be conservative 2000-01 Vs 1999-00 The total income increased from Rs. 321.02 cr in 199900 to Rs. 456.16 cr in 200001. Profit after tax increased to Rs. 41.64 cr in 200001, a rise of 12.45 per cent. Miscellaneoux income Income from other products increased from Rs. 1.56 cr in 199900 to Rs. 46.73 cr in 200001. 'Other products' included GRP tanks, PVC tiles, FRP sheets, dust ventilators and other accessories. The company expects income from 'other products' to remain at the existing levels in 2001-02. Other income Other income stood at Rs. 0.43 cr in 2000-01 compared to Rs. 0.34 cr in the preceding year. Dividend income and income from the sale of scrap constituted more than 67 per cent of 'other income '. As a percentage of total income, other income reduced from 0.11 percent in 199900 to 0.09 per cent in 2000-01. Surplus management Policy The surplus generated from the business was used for working capital requirements, for asset expansion and for distribution as dividend to shareholders. The Rs 18 cr drymix plant at Ratnagiri was funded entirely through internal accruals. Capital structure The company's equity share capital increased from Rs. 7.80 cr in 1999-2000 to Rs. 15.99 cr in 200001 through an issue of bonus shares in a 1 :1 ratio in December 2000. The company also issued 2,00,000 equity shares at Rs. 50 per share (face value Rs. 10) as the final installment to Sun Earth Ceramics Ltd. for the Rs 15.07 cr purchase of its AC pipes plant in 199798. During the year, the company also approved a rights issue in the ratio of two fully convertible debentures/equity shares for every five shares held to be issued at such premium (face value Rs.10) that the Board may approve. This will increase the company's equity capital to Rs. 22.40 cr. Roofit's redeemable preference share capital was Rs. 14.53 cr in 200001 Preference shares were issued for funding the company's expansion and meeting long-term working capital requirement. Reserves Roofit's reserves and surplus increased from Rs. 91.47 cr in 199900 to Rs. 119.72 cr in 200001. Transfers from the Profit and Loss account stood at Rs. 68.22 cr and constituted around 57 per cent of the company's total reserves. General reserves accounted for Rs. 35.86 cr and debenture redemption reserves for Rs. 7.17 cr Share premium reserves stood at Rs. 7.10 cr. Borrowing philosophy Roofit's borrowings increased due to loans taken to commission new plants, launch new products and for the working capital required to fund their distribution and offtake. Roofit is in the process of replacing working capital loans with term loans, resulting in a lower interest. Loans Roofit's secured loans increased from Rs. 152.80 cr in 199900 to Rs. 237.56 cr in 2000-01, an increase of Rs. 84.76 cr. The company floated commercial paper of Rs. 40 cr at an interest of 9.5 per cent for funding working capital needs. Two loans of Rs. 10 cr each were taken to finance working capital. A project loan of Rs. 27 cr at an interest of 12.5 per cent per annum funded the drymix plant near Pune. Roofit's unsecured loans increased from Rs. 35.11 cr in 1999-00 to Rs. 81.61 cr in 2000-01, an increase of Rs. 46.50 cr. Public deposits increased from Rs. 14.51 cr to Rs. 39.42 cr. Other unsecured loans increased from Rs. 13.26 cr to Rs. 33.37 cr. The rest represented interest-free loans given by the Directors. All unsecured loans were used for capital expansion Capital employed As a result of the increase in equity, reserves and debt, Roofit's total capital employed increased from Rs. 301.37 cr in 1999-00 to Rs. 469.41 cr in 2000-01 Gross block Roofit's gross block increased from Rs. 123.75 cr in 1999-00 to Rs. 203.04 cr in 2000-01. Productive assets accounted for almost 91 per cent of the company's gross block. Factory buildings increased by Rs. 16.07 cr and plant and machinery by Rs. 48.04 cr on account of the company's drymix plants in Ratnagiri and Pune. Since the plants are relatively new with an average age of six years, no large-scale asset replacement is expected. Capital work-in progress Roofit's capital work-in-progress, representing the drymix plant in Chennai, stood at Rs. 43.73 cr in 2000-01. The plant, with an installed capacity of 285,000 tpa, is expected to be completed before the end of 2001-02. Investments Roofit's investments increased marginally by Rs. 0.36 cr during the year under review. The company does not have any investments on the stock market. The company does not expect to invest in the capital market during the current year. Inventories Roofit's inventories increased from Rs 74.16 cr in 1999-00 to Rs.118.23 cr in 2000-01. At Rs. 59.33 cr, finished goods constituted more than 50 per cent of the inventories (Rs. 39.73 cr in 1999-2000, 54 per cent of the inventories). The increase was on account of the increased drymix inventory being placed with an increased number of dealers. The closing stock of raw materials was Rs. 55.72 cr in 2000-01 compared to Rs. 31.56 cr in the preceding year, primarily due to an increase in raw materials for the production of drymix. Debtors Sundry debtors increased from Rs. 95.88 cr in 199900 to Rs. 144.61 cr in 2000- 01 on account of higher rural sales. Debtors' turnover increased from 108 days in 199900 to 114 days in 200001 due to a higher credit given out following the launch of new products. In 2001-02, the company expects to address a larger urban market which is expected to reduce the debtors' turnover. Loans and adances Loans and advances increased from Rs. 27.99 cr in 19992000 to Rs. 28.58 cr in 200001. A major part of the loans and advances comprised deposits with suppliers of raw material and finished goods. Subcontracting expenses Subcontracting expenses increased from Rs. 14.07 cr in 199900 to Rs. 19.26 cr in 200001. These expenses refer to payments made to government approved contractors for the installation of AC pipes. Transportation charges Transportation comprised an important cost item across all products marketed by Roofit. Primary freight comprised the movement of finished goods from the factory premises to the distributor / warehouse while secondary freight comprised costs incurred for the transfer of goods to the retailer or consumer. Roofit reduced freight by Rs. 530 per tonne on AC sheets due to better production planning and negotiation. Transportation cost as a percentage of gross sales reduced from 4.94 per cent in 1999-00 to 3.85 per cent in 2000- 01. In 2001-02, Roofit expects to use sea vessels to transport sheets from its Ratnagiri plant to markets in Gujarat and Kerala, reducing costs by approximately Rs. 75 lacs. (Rs. cr) 1999-00 2000-01 Transportation cost 15.87 17.56 Transportation cost as a % of net sales 4.9 3.85 Advertisement expenditure Roofit's advertisement expenditure increased from Rs. 2.70 cr in 1999-00 to Rs. 9.32 cr in 200001 due to increased promotional activities for drymix. The company expects advertisement expenditure as a percentage of net sales to remain around the same levels during the current year. Interest outflow Interest outflow increased from Rs. 22.05 cr in 199900 to Rs. 35.98 cr in 2000-01 due to an increase in the secured and unsecured loans for funding capital expansion and meeting working capital requirements. Roofit's average rate of interest increased marginally from 14.18 per cent in 199900 to 14.19 per cent in 2000-01. The company expects to reduce its average rate of interest in 2001-02 through a debt swap. Particulars 1999-00 2000-00 Opening borrowing 122.99 187.91 Closing borrowing 187.91 319.17 Average borrowing 155.45 253.54 Interest outflow 22.05 35.98 Interest/average borrowing % 14.18 14.19 Depreciation Roofit provided Rs 27.72 cr for depreciation in 2000-01 compared to Rs. 19.67 cr in 199900. The depreciation was provided on a straight line basis as per the rates specified in Schedule XIV of the Companies Act. 1956. There was no change in the depreciation policy followed by the company in 2000-01. In 200102, the company expects to capitalise approximately Rs. 36 cr on account of its drymix plant in Chennai, resulting in an adequate tax shield. Corporate tax Roofit's tax provision was Rs. 4.75 cr in 2000-01 compared to Rs. 4.60 cr in 1999-00. The company registered exports of Rs. 11.41 cr during the year under review compared to Rs. 1.95 cr in the preceding year, bringing down the company's tax exposure. Outlook In the Union Budget 200102, the Indian government introduced a number of schemes to accelerate housing growth in the rural sector: * The government planned to set up 2.5 million dwelling units in rural areas. * A Plan allocation of Rs 15.01 billion was made for providing 1.2 million houses for the poor. * A Plan allocation of Rs 920 million was made to provide 100,000 houses for families with an income of less than Rs 32,000 a year. * Under Golden Jubilee Rural Housing Finance Scheme, National Housing Bank committed to finance companies for the construction of 150,000 houses. * The Centre for Monitoring Indian Economy (CMIE) has forecast a 6.3 per cent growth in the real GDP in the current fiscal year against 5.2 per cent growth in the GDP in the last fiscal. The growth is expected to come entirely from the agricultural sector. CMIE has forecast agricultural growth at a high 9 per cent, the highest in the last seven years. This follows two disappointing drought years in Gujarat, Maharashtra and Rajasthan. As a result, demand for Roofit's goods and services is expected to improve.