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Spartek Ceramics India Ltd.

BSE: 515003 Sector: Consumer
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Spartek Ceramics India Ltd. (SPARTEK) - Director Report

Company director report

SPARTEK CERAMIC INDIA LIMITED ANNUAL REPORT 2003-2004 DIRECTOR'S REPORT The Members of Spartek Ceramics India Limited Your Directors present the Twentieth Report and Audited Accounts of the Company for the year ended 31.03.2004. FINANCIAL RESULTS (Rs. in lakhs) Particulars 2003-2004 2002-2003 (12 months) (6 months) Gross Income 6308.50 3048.63 EBDIT - before provisions & write offs 724.99 391.91 Add Extra-ordinary items 96.74 2282.63 Less Provisions & Write offs 35.86 2238.61 Profit / (Loss) before taxation (after Extra-ordinary items) 178.15 20.57 Provision for taxation - - Profit / (Loss) after tax 178.15 20.57 Net Profit 178.15 20.57 Surplus / (Deficit) brought forward from previous year (4092.42) (4113.00) Net Profit / (Loss) for the year available for appropriation (3914.27) (4092.42) APPROPRIATIONS Dividends - - General Reserve - - Debenture Redemption Reserve - - Surplus / (Deficit) transferred to Balance Sheet (3914.27) (4092.42) CERAMIC DIVISION This Division produced an output of 17.76 lac sq mtrs during the year. The first half of the year witnessed good performance, but the latter half production suffered due to the tremendous insufficiency of working capital. Added to this was the market dynamics which saw the onslaught of low quality low priced Chinese origin products coupled with enhanced capacity output from competitors. The market also saw an emerging segment of high quality imports from Italy and Spain positioned as niche products. The original plan .of introducing new designs (eg. Mediterranean Series etc.) and more value added products like 40cm x 40cm could not fructify, pending completion of capital expenditure programme for modernization / de- bottlenecking. A well structured and comprehensive capex program will be implemented soon i hereby enabling the Company to achieve the revised business / turnaround plan with a definite reduction in costs. GRANITE DIVISION This division achieved an output of 4.52 lac sq mtrs during the year. This segment of vitrified tiles, which is the growing segment of the industry witnessed the following. a. The Chinese, here too, dumped the markets with their low priced low quality products in large numbers in not a straightforward legal manner as has been widely reported in the Press. Large volumes of antidumping duties were evaded. In fact a large representation of manufacturers have protested against this dumping. b. A few new entrants also resorted to the low quality low price game thus leading to market disturbances. However your Company stayed clear out of this price / commodity game and stuck to its positioning of offering high quality products albeit at right prices. In this market war, the consumer has now, become wary of the Chinese quality and output. This, added to the rising costs in China, has started having a dampening effect on the Chinese imports. It seems reasonably clear that Brands with a tested legacy of reliability with service providing capabilities will emerge as winners in the long run. Even here, our Company has planned a significant capital expansion program to enable the division to offer large format, sophisticated designs of polished tiles as well as variants in the glazed vitrified tiles. Once these products are made available, your company is confident of leveraging on the brand strength and outlast competition. Basically your company is in the process of moving up the value chain. The Company continues to enjoy tremendous brand loyalty and independent studies have confirmed that we are recognized as the benchmark on all quality parameters. The Company currently has a huge order backlog position from very reputed buyers and is confident that once the working capital issues are resolved, can bounce back to its original days of profitability and performance. FINANCE During the year, a significant feature was the Corporate Debt Restructuring (CDR). This CDR package which was offered brought the overall debt to reasonable levels. The operations picked up momentum during early part of the year with the company reporting annualised net profits of around Rs 6 crores for the quarter ending Sept '03. However your Company continues to suffer from the problem of dealing with a multiplicity of lenders. It is extremely difficult and time consuming to make the lenders to agree to common terms and time frame for implementing decisions. This delay ultimately affects the spirit and purpose of the CDR package whose success hinges on timely implementation of the reliefs and obligations. One of the main reasons for the Company not to sustain a good performance during the year was lack of timely availability and inadequacy of working capital. Though the Consortium assessed the enhanced working capital, the same has not been made available so far. Despite constant follow up and the directions given in the CDR package, the working capital banks, mainly the lead bank, are yet to take the final supportive stand in the matter. Non-compliance of an agreed condition of the CDR Package by the Lead Bank in not providing the additional working capital (as per CDR scheme approved by all lenders including the lead bank and as assessed already by the bank) and simultaneously having the available working capital reduced by around 30% has compounded the problems of cash flow month after month and today we are at a point where with more than Rs.9 crores of orders on hand, are keeping the plants operating at far below full capacity levels. The Company has made all efforts to meet its commitments under the CDR scheme and is expecting substantial equity inflow from investors soon. The equity inflows, which were tied up in Nov 2003 have got delayed due to the non compliance of the CDR package by the working capital banks and non availability of the all important working capital, which, in turn, has had an adverse impact on the functioning of the plants and hence en the entire operations for the current year 2004-05. EXPORTS As the company is unable to cater to the large domestic demand even with substantial orders on hand, despite significant export enquiries, any focused export activity was not undertaken. Though, for the year 2005- 2006,, anticipating the capital expansion program to take off effectively, a new activity in this direction of Export Promotion has been initiated. A very senior member of your Company is currently exploring tie ups with Distributors and Agents overseas for developing this business. NEYCER INDIA LIMITED A strategic tie up is on the anvil with an international brand in terms of a Joint Venture for the Sanitaryware company unique as the only manufacturer with a complete range of wall, floor, ceramic, vitrified tiles and Sanitaryware division. This division will be hived off as a separate company after the JV. This would be a significant step up since the proceeds from this venture will be used to repay all debts to financial institutions. Thus the Sanitary ware Division of Neycer will start debt free and will take up modernization for it's onward path to growth again. The remaining Neycer entity with tile division will start off financially strong and will take up modernization. With these developments, your Directors expect the subsidiary to start providing positive cash flow on completion of modernization plan. Thus, Neycer, which for 12 years was stuck in BIFR process and been a substantial drag on Spartek's finances all through will now have the opportunity of being a healthy outfit and can give good return to Spartek on a regular basis. The performance of Neycer was affected largely by the loss made in the tiles division, which was closed for about 5 months during the year. A comprehensive capex program explained in the foregoing paragraphs will also include modernization of the Neycer- tiles plant, enabling the unit to manufacture high-end wall/floor tiles. Neycer India Limited's Balance Sheet as at 315' March 2004, Profit & Loss Account, Auditor's Report and Director's Report for the Year ended 315' March 2004 are attached for information. STILES INDIA LIMITED As mentioned in the fore going paragraphs, Stiles Ceramic Tiles plant could not be operated due to non-availability of working capital. The Company is also working with a few banks for tying up with working capital requirements. This Plant will also be modernized as a part of the overall capex program which will enable the Plant to produce large size / high-end floor tiles. Although this plant was a drag on the Overall group, with this modernization etc. it should be an asset for the future. Stiles India Limited's Balance Sheet as at 31st March 2004, Profit & Loss Account, Auditor's Report and Director's Report for the Year ended 31st March 2004 are attached for information. FUTURE PROSPECTS With the consumer preference shifting towards Ceramic /Vitrified tiles as the preferred floor covering, coupled with the boom in the construction / housing sector, the performance of your company is expected to improve during the current year. The performance level will also get bolstered with the implementation of the proposed capex program. The company is also redesigning its marketing strategy to meet domestic and international challenges. A totally new segment of wall tiles is proposed to be manufactured which will then make the company unique as the only manufacture with a complete range of wall, floor, ceramic, vitrified tiles and Santaryware. The Company has developed a detailed Business/ turnaround plan that involves all aspects of manufacturing, marketing, financial restructuring and Human resources. Despite a temporary setback experienced in the past 9 months due to non compliance of the CDR package by working capital lenders, a solid foundation is laid for reaping immediate benefits, once the restructuring plan is fully implemented within 12 -18 months after approval from concerned authorities and institutions. The revised plan includes capital expenditure for debottlenecking, up- gradation for new product categories to meet the market expectations, capacity expansion in some areas and development of export markets. Thus this would be a comprehensive plan encompassing all the plants simultaneously rather than one plant at a time. This entire capex plan is expected to be undertaken at a cost of Rs. 54 crores, out of full plan of close to Rs.100 crores. Effectively, with new equity inflows, the cost effective modernization for the whole group is structured in a way that with an incremental debt of as low as around Rs.20 to Rs.25 crores, an additional annual capacity of 5 Mn.Sq, mts, which would have otherwise cost Rs.100 crores to achieve the same from a greenfield stage, is added to the group. The Company is also getting this plan validated by an independent agency.. With this, all plants will be upgraded to higher levels of modernity and efficiency. This, while enhancing output and improving productivity, is expected to bring the cost level down by approximately 20% HUMAN RESOURCES DEVELOPMENT Your Company lays a very strong emphasis on nurturing and developing Human Resources. Towards this, a lot of initiatives have been taken. These are basically aimed at Trust & Transparency building across the organization as a management practice, Organizational Restructuring to deliver the new business goals, Competency .Enhancement, Measurement and Review Mechanism to monitor progress. This will ensure top class performance of your Company and equip the Company to take on competition effectively. Yet another strong HR Initiative has been in putting together a strong Management Team with both International and domestic exposure and your company is confident that this new team will bring back the market leadership position for the Brand. FIXED DEPOSITS Your Company has not accepted and renewed any deposits during the year under review. INDUSTRIAL RELATIONS During the year under review, the industrial relations remain stable and cordial. DIRECTORS Mr. Sadanand A. Shetty, Director retires by rotation and being eligible offer himself for. AUDITORS M/s. Brahmayya & Co., Chartered Accountants, Chennai the Company's Auditors retire at the ensuing Annual General Meeting and being eligible offer themselves for reappointment. DEPOSITORY SYSTEM The Company's shares are traded compulsorily in dematerialised form. In this Connection Company has already entered into agreements with NSDL and CDSL and about 26.46% of the shareholders have already availed this facility. The other shareholders are also requested to demat their shares in view of the advantages in holding shares in the electronic form. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND RESEARCH AND DEVELOPMENT In your manufacturing plants, the major input resource is energy - energy both in terms of fuel and in terms of power. These alone account for over 30% of the cost of production. Therefore your management has addressed this seriously and ensured that the concentration of the capital expenditure program is directed towards energy savings. All kilns are designed to save at least 10-15% of the fuel costs. Also your company already initiated a shift of certain sections to alternate fuels that could generate a saving of around Rs. 2,5 crore per year at each of 3 plants where this is expected to be implemented. The capex also cuts electricity consumption significantly. On the whole, this program is expected to bring down the total energy costs from over 30% of current sales to much lower percentages on enhanced sales in a 2 year period after implementation. The progress made and details on energy conservation, technology absorption and research and development are furnished in Annexure A to this Report. PARTICULARS OF EMPLOYEES Information as per Section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975 and forming part of the Directors' Report is given in the Annexure B to this report. CORPORATE GOVERNANCE Pursuant to the provisions contained in the Listing Agreement, a Management Discussion and Analysis Report (Annexure C) and a report on Corporate Governance together with the Auditors' Certificate on the compliance of conditions of Corporate Governance (Annexure D) is furnished as Annexure forming part of this Directors' Report. DIRECTORS' RESPONSIBILITY STATEMENT The Board of Directors Report: i) That in the preparation of Annual Accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; ii) That the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are 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 that period; iii) That the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; iv) That the directors had prepared the annual accounts on a going concern basis. AUDITORS' REPORT In respect of observations made by the Auditors in their Report pertaining to point nos. 1) Para 4(f) : In respect of, loans given to and amounts due from other companies including advances, it is known that those companies are in the process of implementation of restructuring plans and once the restructuring is completed, we are hopeful of recovering the amounts. 2) Para 4(g) : In view of the inadequacy of the profits for appropriation, the transfer to Debenture Redemption Reserve could not be effected. The Debenture holders have agreed for re-schedulement and payment of the amounts in four annual installments. 3) Para 4(h): The non-compliance of provisions of section 372A of the Companies Act, 1956, had arisen out of changes in the law coupled with reduction in the net worth of the Company and not due to further borrowing or investment after changes in law. The Company had made an application seeking permission from Institutions and the same is pending. 4) Para 4(i): The reconciliation of debtors and creditors accounts are in progress. Steps have been taken to collect old debts and some amounts have been collected and some other amounts have been adjusted. Still there are some debtors accounts that need to be reconciled. ACKNOWLEDGEMENT The Directors acknowledge the support received from various Government Departments, Financial Institutions, Banks, Shareholders, Debenture holders, Customers, Dealers and Employees. For and on behalf of the Board SADANAND A SHETTY Chairman Place: Chennai KRISHNA PRASAD TRIPURANENI Date : 30.11.2004 Vice Chairman & Managing Director ANNEXURES TO THE DIRECTORS' REPORT ANNEXURE A Information under Section 21 7(1)(e) of the Companies Act, 1956 read with the Companies (Disclosure of particulars in the Report of Board of Directors) Rules, 1988 which forms part of the Directors' Report. Form A Form for Disclosure of Particulars with respect to Conservation of Energy Power and Fuel Consumption: CERAMICS GRANITES 2003-2004 2002-2003 2003-2004 2002-2003 (12 months) (6 months) (12 months) (6 months) A) Electricity a) Purchased Units 5591932 2554530 4253373 1889969 Amount paid - Rs. 22280888 10693962 20018105 9129085 Cost/Units (Rs./KWH 3.98 4.19 4.71 4.83 b) Self Generation 24672 76728 214286 155654 Units/Lit. of Diesel 2.67 3.33 2.96 3.11 Cost/Units (RS/KWH 8.23 6.65 7.59 6.94 B) LPG Consumption (MTS) 2101.95 1086.08 1223.46 555.26 Total Cost 49114273 23945312 27291914 12111727 Cost/Unit (Rs./Mt.) 23366.05 22047 22307.25 21798.92 C) LDO/HSD Consumption 1761.057 852.22 757.99 323.67 Total Cost 37297487 16206074 16727053 6371807 Cost/Unit (Rs./KL) 21179.03 19016 22067.64 19686.12 D) Consumption/Unit of Production Total Production (in sq.m) 1775188 901375 452274 190974 a) Power (Units) 3.16 2.92 9.88 10.71 b) LPG (Kg./sq.m) 1.18 1.2 2.71 2.91 c) LDO/HSD (Lit/sq.m) 0.99 0.95 1.68 1.38 TECHNOLOGY ABSORPTION Information on Technology Absorption in Form B is given below: FORM B RESEARCH AND DEVELOPMENT The Company has a continuous on going R&D program which during the period under review introduced larger format (40x40 cm) Tile in both matt and glossy finish from it's Ceramic Factory along with number of new designs. At Granites unit, we developed several new designs and also introduced 50x50 cm tiles in to the market. In addition to development of new products, the R&D Department also instituted a comprehensive quality audit of all factories to ensure that all the Company's products meet or exceed international standards. Continuous cost reduction efforts in all Factories are another facet of the R&D section. Reduction in Raw Material, Power and Fuel cost as well as improved efficiency has been achieved. BENEFITS DERIVED FROM R&D New designs and larger format Tiles have enabled the Company to be more competitive in the market. Savings from cost reductions and improved efficiency have improved the Company's profitability as well as allowing it to meet competitor's prices on certain large projects. Benefits from quality improvements give the Company better realization as more of the product goes to first grade. Improved quality also gives the Company a better image in the market therefore improving the marketability of its products. FUTURE PLAN OF R&D Continued development of new designs and colors to meet the changing market demands. Develop and implement cost effective methods of running high fuel consumption areas of manufacturing, such as Biomass for heat in spray driers. Develop more products utilizing indigenous materials in place of imported. Expand quality-training programs in all factories. Foreign Exchange Earnings and outgo 2003-2004 (Rs. in lakhs) Earnings NIL Outgo 235.99 For and on behalf of the Board SADANAND A. SHETTY Chairman Place: Chennai KRISHNA PRASAD TRIPURANENI Date : 30.11.2004 Vice Chairman & Managing Director ANNEXURE C: Management Discussion and Analysis Report: During the year under review, a number of new players both in the organized and unorganized set up manufacturing facilities. The competition in general increased significantly and this exerted tremendous price pressure on the established companies. This took away to some extent sustainability of profitability levels achieved by Spartek during the earlier years. However there is a continuing boom in the real estate/construction activities in all the metros and tier 2 cities. Tiles Industry - Structure, Trends & developments The over all market size for Tiles was around 100 million Sqm with a value of around Rs. 2500 Crores. The Market is dramatically shifting to large size formats and intricate designs. The leading players in the Industry are now moving towards large format floor tiles -vitrified in particular. While some of the established companies have started to import tiles from Far East/ South East Asian countries, some others have set up new units which are mainly natural gas based plants. Business Review This has been dealt with in detail in the Directors' Report to the Shareholders. Marketing & Distribution New Products Offering SPARTEK is positioned as a unique solution provider for the home for the discerning upper and middle class user providing convenience, flexibility and visible value for money. With this in view the Company plans to introduce superior Enhanced Products in larger sizes and Innovative product series. Distribution With the impending expansion plan and to spruce up the distribution network, the Company intends to :- * Enhance the current Dealer Channel in terms of Availability, Merchandising and Servicing. * Create a separate Architects/Builders channel through technically savvy market professionals. Create a `New' channel, complementing the existing ones. * Extend Distribution by 75% across the country through both new Areas and greater penetration in the existing areas * Create relationship orientation through exclusive Spartek Outlets especially in new towns (estimated at 20) Future Outlook The Tile Industry is fast transforming. The fierce competition in the domestic market has resulted in the players looking at product differentiation as the marketing mantra. This has also underlined the importance of export markets. Spartek has also realigned its marketing strategy on the above premises. The future plans of the Company have been accordingly drafted. These will result in reinstating the brand image of Spartek and leverage the same. Therefore the future is expected to be full of opportunities as well as challenges. The government policies continue to be conducive and the consumer behaviour is also holding out a lot of discernment and brand loyalty. Internal Control System The Company continues to emphasize the importance of a good internal control system that ensures transparency in operation, statutory compliance, reliable MIS and a built in correction mechanism. As a part of this, internal audit programme is conducted covering all the key areas of the operation. The top management and the audit committee on a regular basis review the internal audit reports. Financial Performance This has been dealt with in detail the Directors' Report to the Shareholders Human Resources This has also been dealt with in detail the Directors' Report to the Shareholders Risks and Concerns As mentioned in the foregoing paragraphs, the Tile Industry is going through some short term threats like cheap imported tiles, advent of low cost producers in the market and increased transportation costs. However these are not insurmountable and the companies should look at a medium term horizon to mitigate the risks. Constantly bringing in new & innovative products will provide the cutting edge of product differentiation for strong brand players like Spartek. Cautionary statement Statements in this Management Discussion and Analysis Report and Directors Report giving company's objectives, projections, estimates and expectations may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied.