At first glance, it may seem strange that in a year when it has incurred losses at both the standalone and consolidated levels why do I believe that your Company has actually done well. Let me explain this apparent anomaly at some level of detail.
First, consider the results of your Company’s two business units, Power Systems BU and Industrial Systems BU.
In FY2018, despite serious competitive pressures faced by the Power Systems BU, it:
- Had an unexecuted order book (UEOB) of Rs.3,127 crore as on 31 March 2018.
- Generated revenue (net of excise duty) of Rs.3,633 crore.
- Earned an EBIDTA of Rs.386 crore and an EBIT of Rs.312 crore.
- Posted a return on capital employed (ROCE) of 20.4%, which is greater than any of the peers in the industry.
For the Industrial Systems BU, the results were better still. In FY2018:
- The UEOB increased by over 96% to Rs.1,457 crore.
- Net revenue grew by 22% to Rs.2,541 crore.
- EBIDTA was Rs.220 crore, and EBIT was Rs.166 crore.
- ROCE was 22%, which was also greater than any of the competitors in the business.
Second, look at the results at the consolidated level:
- Net revenue and income from operations was 12.1 % higher at Rs.6,189 crore.
- EBIDTA excluding ‘other income’, was 2.7% higher at Rs.455 crore.
- Profits before taxes (PBT) including ‘other income’ but without exceptional items was Rs.126 crore.
- Cash profit from continuing operations was Rs.213 crore.
These are creditable results and clearly demonstrate that your Company is now firmly on the path of profitable growth. Why then, you may ask, are the net profits negativeRs.
The answer lies in four words: ‘cleaning up the accounts’. In the last quarter of FY2018, your Company’s management decided to examine the recoverability of certain overdue assets that had accumulated over the years. After detailed analysis, both the Risk and Audit Committee and Board of Directors opted for a clean-up and unanimously agreed to write these off. Such items included provisions for litigation claims, advances given to subsidiaries and their related foreign exchange gain / loss, other advances and overdue inventories. At the consolidated level, these non-cash items included provision for litigation claims, other advances and overdue inventories aggregated to Rs.443 crore, and have been accounted for as ‘exceptional items’.
Because of these exceptional items, net profit from continuing operations (after minority interests) turned to a net loss of Rs.392 crore.
And, after taking into account net losses from discontinued operations amounting to f772 crore, the overall net loss for your Company in FY2018 was Rs.1,164 crore. At a standalone level, this was a net loss of Rs.325 crore.
This cleaning up was painful but necessary. It has helped to create a leaner balance sheet that can financially accommodate the growth impetus that your Company is beginning to enjoy. The leverage ratio (long term debt to equity) of your Company is 0.3; the interest coverage ratio of continuing operations is a comfortable 2.3; and the ratio of net sales to net working capital of continuing operations is a very healthy 6.6. Simply put, your Company has all the levers in place to push for sustained profitable growth.
From an operational perspective, CG India has done well. Despite competitive pressures, the power transformers business is performing satisfactorily, and distribution transformer sales as well as profitability have continued to increase. (Motors are doing very well—indeed well above the rest of the industry.) And your Company has performed excellently in securing its highest ever orders from Indian Railways. Internationally, the Indonesian operations have been satisfactory. Even the Belgian power transformer and systems operations, though still treated as discontinued, have turned around.
Significantly, your Company has continued with its focus on diverting non-core businesses as it re-engineers itself to being an India driven power, industrial and railways systems major—one that ‘makes in India’ best-in-class equipment and systems to sell to the world.
Thus, among the ‘discontinued operations’, CG sold its power transformer business in Canada in FY2016; sold the automation business under ZIV in March 2017; and exited from the distribution franchise business at Jalgaon, Maharashtra. In FY2018, your Company sold its wholly owned power business in the USA to WEG, a major Brazilian multinational in electric motors and other electro-electronic products. And serious efforts are being made to sell the Company’s Hungarian power transformer and rotating machines business.
At the time of calling off the sale of the International Business to First Reserve your Board had taken the decision to dispose off the various international assets, excluding Indonesia, separately as it was more beneficial for your Company. Subsequent disposals have vindicated the Board’s decision.
Our European asset in Ireland and Belgium have since been restructured and are profitable. Your Board’s decision to strategically focus on growing India, Asia and Africa / ME markets, will require us to redeploy resources from the slower growing European markets. In this respect, having taken the path of restructuring, we will accelerate our search for a buyer for rest of our European assets. Till the time a suitable buyer is found, these assets will form part of our Company business.
In India with significant over capacity in power transformer manufacturing, your Board has decided against any further investment in capacity in this business for the foreseeable future. This also includes winding down our transformer plant in Kanjur Marg and consolidating it in our plant in Bhopal. Our HV Switchgear and MV distribution continues to grow healthy and profitably and we will continue to make investments in capacity as needed. In the case of our other two manufacturing segments, motors and railways, we will also look at investments as required.
I have no doubt that CG is on a strong growth path. Your Company is now leaner, tighter and h more focused than before. It has developed a strong performance-driven team. It now not only has the hunger for success but also a clear understanding of what needs to be done to deliver superior performance.
Last year I had written, “CG is better positioned to leverage business opportunities that come out of higher economic growth in both India and across South East Asia”. After two successive years of strong operational performance, I am confident of even better operational results in FY2019, coupled with improved financial performance.
Thanks as always for your support.