THERMAX LIMITED ANNUAL REPORT 2009-2010 DIRECTOR'S REPORT Dear Shareholder, Your Directors take pleasure in presenting the Twenty-ninth Annual Report together with the audited accounts of your company for the year ended March 31, 2010. FINANCIAL RESULTS (Rupees in crore) 2009-10 2008-2009 Total income 3235.23 3303.17 Profit before interest, 433.88 453.23 depreciation, tax and extraordinary items Interest & depreciation 41.94 35.38 Profit before tax & before 391.94 417.85 extraordinary items Extraordinary items of 114.86 (1.36) expenses/(income) (Net of tax) Provision for taxation (incl. 135.64 131.91 deferred tax) Profit after tax & extraordinary items 141.44 287.30 Balance carried forward from last year 548.00 359.20 Profit available for appropriation (cumulative) 689.44 646.50 Proposed equity dividend 59.58 59.58 Tax on dividend 9.90 10.12 Transfer to general reserves 14.20 28.80 Surplus carried forward 605.76 548.00 PERFORMANCE: The total order booking for the year was Rs. 5794 crore as against Rs. 3557 crore, last year. Your company completed the year with a record order book of Rs. 5381 crore. The year 2009-10 began with a lower order book, owing to the global financial crisis, resulting in the total income being marginally lower at Rs. 3235.2 crore, as compared to the previous year. Profit before tax and extraordinary items was Rs. 391.9 crore compared to Rs. 417.9 crore in the previous year. Profit, after tax and extraordinary items, was significantly lower at Rs. 141.4 crore compared to Rs. 287.3 crore in the previous year, owing to a one-time extraordinary expense of Rs. 114.9 crore (net of tax) towards a business settlement. Earnings per share (EPS) dropped to Rs. 11.87 from Rs. 24.11 in 2008-09. During the year, exports - including deemed exports were lower at Rs. 656.5 crore from Rs. 912.3 crore last year, a decline of 28% due to the continued financial turmoil in the global market. A detailed review of performance and future prospects is included in the section 'Management Discussion and Analysis' of the Annual Report. Collaboration with global technology majors: During the year, your company made significant moves that will help it to benefit from the rapid growth happening in the country's power sector. It signed two joint venture agreements - with SPX Netherlands BV (SPX) for air pollution control equipment to help power plants meet stringent emission norms and also improve their thermal efficiencies; and with Babcock & Wilcox (B&W), USA for manufacturing supercritical boilers. Details of the joint venture UV) company formed with SPX is provided in the 'Subsidiaries' section of this report. With Babcock & Wilcox Power Generation Group, Inc. (B&W PGG), a global leader in power generation industry, Thermax has entered into an alliance to form a strategic joint venture to engineer, manufacture and supply supercritical boilers for the Indian power sector. The JV will also manufacture subcritical boilers over 300 megawatts (MW) in size. Thermax will own 51% share of the joint venture while B&W PGG will have 49% ownership. The company will bring to the Indian power sector Thermax's expertise of integrating energy and environment solutions and B&W's long history of providing proven, state-of-the-art power generation technology and world class project management capabilities. B&W was the first company in the world to build a supercritical boiler. This technology will allow the new JV to contribute to efficient power generation in the ultra mega thermal plants planned to meet the massive energy requirements of the country. Utility boilers above 660 MW generally fall under the supercritical category. Operating at higher pressures than those of subcritical boilers, they increase efficiency and produce more energy from the same amount of fuel. The new joint venture is being established at a critical time when India's ambitious growth plans and its dependence on coal fired power plants for power throw up tremendous energy and environment challenges. It will help meet the challenges of energy efficient power generation, a crucial requirement in the context of emission reduction and the need to conserve fossil fuel. CONSOLIDATED RESULTS: The consolidated total income of the Thermax Group has reduced, marginally, to Rs. 3422.2 crore from Rs. 3500.7 crore last year. Income from international business was down to Rs.720.4 crore from Rs. 958.8 crore. The Group registered a profit before tax of Rs. 400.4 crore as against Rs. 423.3 crore in the previous year. Profit after tax & extraordinary items and minority interest decreased by 50.1% to Rs. 144.3 crore owing to a one- time extraordinary expenditure of Rs. 114.9 crore (net of tax) relating to the business settlement with Purolite. Consequently, earnings per share (EPS) also reduced to Rs.12.11 as compared to Rs. 24.25 in the previous year. The liquidation process of ME Engineering Ltd., the erstwhile UK based step-down subsidiary, was completed during the current year. Voluntary winding-up of Thermax Energy Performance Services Ltd., the joint venture company, is under way and is expected to be completed this year. Thermax Hong Kong Ltd., a whollyowned subsidiary has been registered for a dormancy status in March 2010. Accordingly, these companies have not been considered for consolidation. In terms of approval granted by the Central Government pursuant to the provisions of Section 212 (8) of the Companies Act, 1956, copy of the Balance Sheet and Profit and Loss Account, Directors' Report, Auditors' Report and other documents of all the subsidiary companies, have not been attached to the Accounts of the company for the year 2009-10. However, on request by any member of the company/statutory authority interested in obtaining them, these documents will be made available for inspection at the company's corporate office. The audited consolidated financial statement presented by the company include the financial information of all its subsidiary companies prepared in accordance with the Accounting Standard 21 (AS 21) issued by The Institute of Chartered Accountants of India. Pursuant to the approval, a statement of summarised financials of all the subsidiaries is attached along with the consolidated financial statement. Further, the accounts of individual subsidiary companies shall also be posted on the company's website. DIVIDEND: The Directors have recommended a dividend of Rs. 5/(250%) per equity share of face value of Rs. 2/-. The dividend, if approved by the shareholders, will entail a payout of Rs. 69.5 crore, including dividend distribution tax of Rs. 9.9 crore. SETTLEMENT OF BUSINESS DISPUTE: Your company had been involved in a business dispute with Purolite International Ltd., a US competitor, concerning inter alia their trade secrets. The case had been in a US court since May 2005 and has been amicably settled. In January 2010, the Honourable Judge of a US District Court, unexpectedly ruled against the company on certain aspects of the case and committed the matter to jury trial. Until then, the company had been advised by its legal counsel that there was remote probability of any significant financial cost in resolution of this dispute. After weighing the uncertainties associated with jury trial, prolonged litigation, resultant costs and future business prospects in that country, your Board of Directors decided as a matter of business prudence and abundant caution, that the company should seek settlement of the dispute. The business settlement arrived at in February 2010 permanently resolves and closes all claims and counterclaims. As per the business settlement agreement, Thermax will pay four installments of USD 9.5 million each, spread over the calendar year beginning April 2010. The liability, net of tax, arising from the settlement and amounting to Rs. 114.9 crore has been charged as an extraordinary item to the Profit and Loss Account of the year under report. Your Directors believe that this amicable business settlement will pave the way for your company to move on and pursue worldwide growth in its energy and environment business. DOMESTIC SUBSIDIARIES Joint Venture: Thermax SPX Energy Technologies Ltd. Your company has entered into a joint venture with SPX Netherlands BV, a wholly-owned subsidiary of SPX Corporation, USA - a global infrastructure leader in providing power plant equipment and services. The joint venture was incorporated on October 6, 2009. The company will operate on the basis of a license agreement with Balcke- Durr GmbH, Germany, a wholly' owned subsidiary of SPX Corporation. The initial planned equity capital of the joint venture is Rs. 25 crore of which Thermax shall hold 51%. The joint venture will address the requirements of the growing Indian power sector, providing technology solutions for projects above 300 MW range. By integrating SPX solutions for large infrastructure projects and Thermax's energy-environment expertise, the JV would help power plants meet stringent emission norms and also improve their thermal efficiencies. In the initial phase, it shall cover air pollution control systems, electrostatic precipitators (ESPs) for high ash coalbased power plants, bag filters and equipment for reducing SOx-NOx emissions, and rotary heat exchangers. During the year, the company has secured its first order for a regenerative air-preheater (RAPH). This order involves design, engineering, manufacturing, supply, supervision, installation, erection and commissioning of four RAPH units for two 750 TPH boilers (two RAPH for each boiler) for a leading oil refinery. The company has been actively participating in a number of bids for electrostatic precipitators, regenerative air-preheaters, air-cooled condensers and such balance-of- plant equipment to build a strong foundation for future business. During the year, your company has infused Rs. 10.2 crore as an initial contribution towards the share capital of the joint venture. wholly owned: Thermax Engineering Construction Co. Ltd. Thermax Engineering Construction Co. Ltd. (TECC) undertakes and executes engineering construction projects mainly for the Boiler and Heater (B&H) business unit of your company. In 2009-10, this subsidiary earned a total income of Rs. 96.8 crore and profit after tax of Rs. 3 crore compared to Rs. 99.9 crore and Rs. 1.5 crore respectively, in the previous financial year. The marginal decline in income was due to lower order balance as on March 31, 2009, resulting from the economic slowdown and projects being put on hold by customers during the financial year 2008-09. Despite the lower income, the subsidiary's profit improved as a result of better cost management. However, the profitability of the company may be impacted in the coming year due to enhanced demand for construction vendors and skilled labour from the power sector. During the year, the company successfully completed the assembly of a second FM boiler weighing 585 tons at the Mundra port facility, for export. Erection of three spent wash fired units and a municipal solid waste (MSW) fired boiler are the other highlights of the year. With the company's year end order balance being significant, the focus for the coming year will be on the execution of existing orders. The company is gearing up to face the challenge of recruitment along with training and development of skilled personnel for projects. Thermax Instrumentation Limited: Thermax Instrumentation Limited (TIL) focuses its operations on installation and commissioning of power and cogeneration plants including civil construction. During the year, the company earned a total income of Rs. 129.1 crore and profit after tax of Rs. 2 crore compared to Rs. 103.2 crore and Rs. 0.4 crore respectively, last year. Increase in business volume has helped the company achieve a better performance as compared to last year. The company has secured a breakthrough order in larger capacity projects in the Independent Power Producers (IPP) range. During the year, the subsidiary successfully commissioned eight power plants comprising ten units aggregating to 212.5 MW -the largest capacity commissioned in any year so far. With the country focusing on dramatically improving its power generation capacity, and with Thermax's foray into utility projects, the outlook for the company is positive. Thermax Sustainable Energy Solutions Limited: With the looming threat of climate change and the need to reduce carbon emission, Thermax Sustainable Energy Solutions Limited (TSES) is entering into businesses related to clean development mechanism (CDM). An amount of Rs. 4 crore was infused towards the share capital of the company to support its foray into this business area. During the year under review, TSES has developed CDM projects, which are now under validation. In the coming financial year, these projects are expected to be registered with United Nations Framework Convention on Climate Change (UNFCCC). The company has earned an income of Rs. 69.6 lakh during the year against Rs. 14.2 lakh in the previous year. This comprised mainly reimbursement of expenses for support rendered to the parent company. It has incurred a net loss of Rs. 117.3 lakh compared to Rs. 12.8 lakh loss in the previous year. The loss was predominantly due to higher outlay of expenditure, which would help ramp up the operations when the expected approval from UNFCCC is received. Thermax Onsite Energy Solutions Limited: Thermax Onsite Energy Solutions Limited (TOESL) was incorporated in September 2009. This subsidiary, focusing on the area of green energy from biomass and other alternate sources, plans to develop utility delivery business to customer on unit-consumption basis. For this, the company installs its own equipment and peripherals at customer site, operates and maintains these, and organises required inputs like fuel, manpower and consumables at its own cost. This business mainly aims to capture the major share of revenue-side spending of clients by supplying steam, heat or chilled water on a unit basis. During the period under review, the subsidiary has signed a project for a tenure of seven years to supply heat to a leading paint manufacturing company. The company is already offering services of steam supply to a joint venture in textile knit wear business. With several industrial units identifying the benefits of savings in capital expenditure and freedom from having to manage operation and maintenance of utilities, the outlook for the business looks promising. The Board of your company has approved an overall investment of Rs. 6 crore towards the equity capital of TOESL for this new business initiative. OVERSEAS SUBSIDIARIES wholly owned Thermax Inc., USA: This step-down subsidiary is the front-end value chain for your company s cooling and chemical businesses in the USA. The profit after tax of the subsidiary increased significantly to USD 0.96 million (USD 0.1 million, previous year) on a marginally higher top line of USD 14.9 million. Better financial results were achieved in a depressed market environment with sharper focus on speciality resins, customised solutions and cost control. The external economic environment continues to be challenging with respect to growth, investment and availability of credit. To maintain margins for the chemical business, the efforts to focus on product mix and pricing discipline will continue. The cooling business segment has started growing with the commercial execution of sourcing/distribution agreement with Trane (division of Ingersoll Rand). Marketing initiatives are in place to transform to a 'market share' player in the near future. Therniax Europe Ltd., UK.: The year witnessed a significant slow down in business activities in all European economies due to credit crunch. The company closed the financial year with a turnover of GBP 3.8 million (USD 5.7 million) as compared to GBP 5.6 million (USD 8.5 million) in the previous year. The profit after tax was GBP 0.43 million (USD 0.65 million) against the previous year profit of GBP 0.55 million (USD 0.83 million). In comparison to the previous year the profitability has increased to 11.3% from 9.8%, owing to better product mix. Although the enquiry levels for chillers remained constant, conversion into orders was a challenge. The year also saw a 45% increase in service revenues over the previous year. Key highlights of the year included supply of a 3 MW steam chiller to Copenhagen for a district cooling plant. The chiller formed part of the green systems highlighted during the Climate Change Conference. Working with a large German electricity firm, the company installed the first exhaust gas chiller at a major airport in Europe. With challenging conditions continuing and aggressive strategies adopted by competition, there is pressure on pricing. The company plans to identify standard market segments and improve profitability through operational efficiencies. Service business would continue to be the thrust area for the company to reduce volatility in the business. With the European economies yet to recover from the effects of global financial crisis the company aims to maintain its performance. Thermax Hong Kong Limited, Hong Kong: Thermax Hong Kong Limited (THKL) was formed in December 2003 as part of the strategy to enter the Chinese absorption cooling market. It had no revenue stream planned for the financial year. The company was slated for the 'dormancy status' after collection of debts and completion of committed contractual transactions. This being achieved, the company has been registered for a dormancy status in March 2010 under the existing company laws of Hong Kong. The absorption cooling business of the company is now routed through Thermax (Zhejiang) Cooling & Heating Engineering Company Ltd., a subsidiary set up in China. The sourcing activities are now being done directly by your company. To support and meet administrative expenses like audit fees, statutory filings, etc. during the dormancy stage, the Board of your company has invested USD 6,500 towards equity share capital. Thermax (Zhejiang) Cooling & Heating Engineering Co. Ltd., China Thermax (Zhejiang) Cooling & Heating Engineering Company Ltd. that began commercial operations in September 2008 completed its first full year of operations. During the year, the company has expanded its operations in China with the opening of sales offices in 10 regions. For the year ended December 31, 2009, the company has achieved overall revenue of RMB 20.2 million (USD 3.0 million). It incurred a loss of RMB 11.9 million (USD 1.8 million), after accounting for interest and depreciation. The company's top line is lower than initially planned and the management team is drawing up strategies to scale up revenues. For the export market, it has geared up to compliment your company's Indian manufacturing base by acquiring all the necessary certifications for supplying chillers to the European and American markets which are poised for growth in the coming years. The company has already commenced its first supplies to these markets during the year. Thermax International Ltd., Mauritius: During the year, your company has invested USD 25,000 in the share capital of this subsidiary to meet operational expenses. The total investment in this subsidiary towards share capital now stands at USD 3.2 million. The company is a parent to the step down subsidiary, Thermax Inc., USA. Thermax do Brasil - Energia a Equipamentos Ltda., Brazil: During the fiscal year the subsidiary earned an income of BRL 0.12 million (USD 0.07 million) and made a profit after tax of BRL 0.04 million (USD 0.02 million). At present, steps are being evaluated towards putting the affairs of the company to hibernation. MANAGEMENT DISCUSSION AND ANALYSIS: A Management Discussion and Analysis report, highlighting the performance and prospects of the company's energy and environment businesses is attached. CORPORATE GOVERNANCE: It has been the endeavour of your company to follow and implement best practices in corporate governance, in letter and spirit. A detailed Corporate Governance Report is included in this report. A certificate from the auditors of the company regarding compliance with the conditions of corporate governance as required under Clause 49 of the Listing Agreement is part of this report. LISTING ON STOCK EXCHANGES: The company's equity shares are listed on two stock exchanges - National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange Limited (BSE). FINANCE, ACCOUNTS AND SYSTEMS: As on March 31, 2010, with the increased order booking, the company's cash and cash equivalents stood at Rs. 916 crore. After an investment of Rs. 88 crore in fixed assets, the company's net cash inflow was Rs. 452 crore. Its net working capital was negative at Rs. 380.6 crore as against a positive Rs. 17.1 crore in the previous year. The management of the company would continue to focus on prudent working capital management and cash flows. The company's funds are invested in debt funds and fixed deposits with reputed banks. It has not traded or engaged in any derivative instruments or options during the year. ICRA Ltd. has assigned the company LAA+ and Al + rating for long term and short term bank limits, respectively. Public Deposits: The company had no unpaid/unclaimed deposit(s) as on March 31, 2010. It has not accepted any fixed deposits during the year. EMPLOYEE STRENGTH: The total number of permanent employees on the rolls of the company was 3631 as on March 31, 2010. PARTICULARS UNDER SECTION 217 OF THE COMPANIES ACT, 1956: A statement of the particulars required under Section 217(1) of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988, is annexed and forms part of this Report. Particulars of the employees as required under Section 217(2A) of the Companies Act, 1956, read with the rules framed thereunder, are also annexed and forms part of this report. However, in terms of Section 219(1)(b)(iv) of the Companies Act, 1956, the report and accounts are being sent to all shareholders excluding the aforesaid annexure. Any shareholder interested in obtaining a copy of the same may write to the Company Secretary at the corporate office. DIRECTORS: In accordance with the provisions of the Companies Act, 1956 and the company's Articles of Association, Mr. Pheroz Pudumjee and Dr. Jairam Varadaraj retire by rotation at the ensuing Annual General Meeting and being eligible, offer themselves for reappointment as Directors. IN MEMORY OF DR. MANU SETH: Dr. Manu Seth, a senior member of the Board passed away on August 8, 2009. The Board and the management places on record its heart-felt appreciation of the valuable guidance and support provided by the late Dr. Seth during his tenure of over nine years with the company as its Director and a member of the Audit Committee. DIRECTORS' RESPONSIBILITY STATEMENT: The Directors accept responsibility for the integrity and objectivity of the Profit & Loss Account for the financial year ended March 31, 2010 and the Balance Sheet as at that date ('financial statements') and confirm that: 1. The financial statements have been prepared on a going concern basis. In the preparation of the financial statements the generally accepted accounting principles (GAAP) of India and applicable accounting standards issued by The Institute of Chartered Accountants of India have been followed. 2. Appropriate accounting policies have been selected and are being applied consistently. Judgements and estimates that are reasonable and prudent have been made so as to give a true and fair view of the state of affairs of the company as at the end of the financial year and of the profit of the company for that period. Significant accounting policies and other required disclosures have been made in Schedule 17 annexed to the Financial Statements. 3. Proper and sufficient care has been taken 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. To ensure this, the company has established internal control systems, consistent with its size and nature of operations. In weighing the assurance provided by any such system, its inherent limitations should be recognised. These systems are reviewed and updated on an ongoing basis. Periodic internal audits are conducted to provide reasonable assurance of compliance with these systems. The company has an Internal Audit department, which coordinates the internal audit process. The Audit Committee of the Board meets at periodic intervals to review the internal audit function. 4. The financial statements have been audited by M/s. B. K. Khare & Co., the statutory auditors and their report is appended thereto. COMMITTEES OF THE BOARD: During the year, changes have been effected in the following committees of the Board: Human Resources Committee: The Remuneration and Compensation Committee of the Board was renamed on January 30, 2010 and the terms of reference of the committee were also modified. The Corporate Governance Report details the changes in respect of the aforesaid committee. Audit Committee: The Board appointed Dr. Valentin von Massow on October 30, 2009 as a member. This was to facilitate quorum for the meeting of the committee on January 30, 2010 for which Dr. Jairam Varadaraj had expressed inability to attend due to business exigency. AUDITORS: M/s. B.K. Khare & Co., Chartered Accountants, retire as statutory auditors at the ensuing Annual General Meeting and being eligible, offer themselves for reappointment. Mrs. Ann Aga, Director of your company was honoured with the Padma Shri by the President of India. The Award is in recognition of her distinguished service in the field of social work. Thermax won the Enertia Award 2009 for setting up the state-of-the-art manufacturing facility for boilers and allied equipment at Savli, Gujarat. The award was given in the 'Manufacturing power generation equipment and related auxiliaries' category. Your company's manufacturing plants at Chinchwad won awards for safety performance and environment management from the Greentech Foundation. The plants of its Boiler & Heater business also won the Golden Peacock Award for Occupational Health and Safety from the Institute of Directors. Thermax also won the Imai Award for Operational Excellence for 'Exemplary Employee Engagement in Total Productive Maintenance' from the Kaizen Institute in February 2010. At CII's (Western Region) HR Awards for Excellence 2008, your company received a commendation award for 'Strong commitment to HR Excellence.' ACKNOWLEDGMENTS: Your Directors place on record their appreciation of the continued support extended during the year by the company's clients, business associates, supplier partners, bankers and investors. Your Directors also place on record their appreciation of the dedication and contributions made by employees at all levels, who through their commitment, hard work and support have enabled the company to steer itself through a tough and challenging year. Thanks to the climate of goodwill and mutual trust created over the years, industrial relations in the company continue to be warm and nurturing. The Directors would like to record their appreciation of the good work done by the company's labour union and employees to maintain a harmonious environment for productive work. Your Directors would also like to thank the shareholders for their continued support. For and on behalf of the Board Meher Pudumjee Pune: May 12, 2010 Chairperson Annexure to the Report of the Board of Directors as required under the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988, for the year ended March 31, 2010 A. CONSERUATION OF ENERGY: During the year, resource conservation worth Rs. 109 lakh was achieved as a result of implementing the following measures: 1. Electricity: Saved Rs. 18 lakh by reducing consumption with the use of energy saving devices & maintaining power factor according to MSEB rule. 2. Fuel: i) Saved Rs. 83 lakh by shifting the weekly off from Sunday to Thursday and avoiding the use of DG sets. ii) Saved Rs.33 lakh by shifting to local stress relieving for some of the products instead of complete stress relieving as allowed by the code of design. 3. Water: Saved Rs. 4.7 lakh by identifying and stopping leakage in old pipelines. HEALTH, SAFETY AND ENVIRONMENT MEASURES: Your company values human life and believes that all injuries are preventable. Hence Health, Safety & Environment (HSE) is a priority for the company and in order to further enhance HSE performance, various initiatives were undertaken during the year: 1. Safety and Environment Management System: All manufacturing locations (Chinchwad, Savli and Paudh) have been certified with Environment and Safety Management Systems as per the requirements of ISO 14001 (Environment Management System) and OHSAS 18001 (Occupational Health Safety Assessment Series) standards. Savli plant, Baroda, has received the certification by DNV India in February 2010. A surveillance audit of Chinchwad plant and Paudh plant was conducted successfully for OHSAS: 18001 and ISO: 14001 International Standard by DNV and BVQI respectively. 2. Leadership & Commitment: The Board reviews safety performance every quarter. The Managing Director also reviews each division's safety performance every quarter. In each division a safety council has been formed under the chairmanship of the SBU Head and a safety meeting is held every month. Site safety committees have been formed for effective monitoring. 3. Competency and Training: Safety passport system has been implemented wherein induction training is provided and a safety passport is issued to all contractors' workers before they undertake any work at any plant location. There is an emphasis on safety training at all levels of employees, contractors, vendors and suppliers. A number of training programmes were conducted during the year. 4. Standards and Procedures: Method statements for all safety critical activities have been developed and a job hazard analysis has been carried out for the same. S. Incident / near- miss reporting and investigation: Nearmisses / incidents reporting has been encouraged and investigation for the same is done. Sharing of lessons learnt is done with all divisions. 6. Emergency Preparedness Plan: Site emergency management plans have been developed to deal with any emergency. Training on fire prevention and control and mock drills on emergency evacuation have been conducted in all Thermax offices. 7. Audits: Internal and external safety audits and inspections are carried out regularly and the compliance of audit action points is monitored. A total of 588 internal audits and 37 external audits have been conducted in 2009-10. The overall audit compliance level is 82% whereas the same is 92% for'A' category items. 8. Awards & Recognition: Your company won several HSE Awards during the year for its manufacturing plants. B. TECHNOLOGY ABSORPTION: Research and Deuelopment (R&D):- 1. Specific areas in which R&D is carried out by the company: Four Centres of Excellence (COE) in heat transfer, material science, solar and biotechnology became fully functional this year. An advanced computing centre has also started functioning with strengthening of the computing facilities and induction of experts and state-ofthe-art computational software packages. This centre is supporting R&D projects as well as all computation requirements across the organization. R&D projects initiated last year in the domain of energy and environment are under final stages of completion. The COE in solar is equipped with state-of-the-art facilities for evaluation of optical and thermal properties of the critical components of solar thermal power and energy technologies. 2. Benefits derived: New products, solutions and technologies derived through the efforts of the COEs and Research Technology and Innovation Center (RTIC) are being implemented by the business divisions. Some of these are efficiency improvements in electrostatic precipitators, new smallscale sewage water treatment system, new anaerobic bio gas generator from kitchen waste, etc. These centers are the resource centers for building competencies in advanced areas across Thermax. The solar facilities will be first of its kind in India. 3. Future plan of action: Your company is on the path of developing integrated energy and environment management systems. Every effort is being made to develop, collaborate and strategically partner with knowledge organisations and accelerate developments in critical areas of renewable energy, clean energy, energy efficiency, climate change and water. Towards this, the company is funded by agencies (DST, MNRE, AP6) for working on state-of-the-art technology for applications in solar thermal power, cooling and cold storage for food and pharma sectors. 4. Expenditure on R & D: a. Capital Rs. 1.3 crore b. Recurring Rs. 12.9 crore c. Total Rs. 14.2 crore d. Total R&D Expenditure 0.46% as a percentage of turnover Technology absorption, adaptation and innovation: 1. Efforts, in brief, made towards technology absorption, adaptation and innovation: Indigenous development of new high efficiency kitchen waste-to-energy conversion plant and new zero sludge sewage treatment plant. 2. Benefits derived as a result of the above efforts product improvement, cost reduction, product development, import substitution, etc.: Thermax business divisions are in the process of commercialising these technologies which provide benefits to users in terms of improved yield and ease of operation. New growth units on renewable energy will get incubated in RTIC. 3. In case of imported technology (imported during the last five years reckoned from the beginning of the financial year), following information is furnished: Technology Year of Has technology If not fully absorbed imported import been fully reasons thereof and future absorbed plan of action Difficult-to- 2009 No The technology partner has degrade imparted training under the wastewater know how agreement. systems First pilot plant commissioning is planned during 2010-11. Absorption of technology shall commence in due course Sequencing 2009 No Installations of sewage Batch Reactor treatment plants based on system (SBR) SBR are under execution and are expected to be completed during 2010-11. Photo-electro- 2009 No Technology transfer has chemical Air commenced. Purification Complete absorp non of Technology for technology and Indoor Air indigenisation of the same Purification is expected by March 2011. Sub critical 2008 No Presently using the utility boiler technology for design of technology boilers for one order. However, full technology absorption will take place on completion of manufacturing, supply, erection and commissioning of such boilers. This is expected to take another two years. Paper Process 2007 Yes N.A. Chemicals Electrostatic 2007 Yes N.A. Precipitators Cement plant 2005 Yes N.A. waste heat recovery boiler C. FOREIGN EXCHANGE EARNINGS AND OUTGO: The Management Discussion and Analysis Report elaborates the company's operations in export markets. During the year, the company had a net foreign exchange inflow of Rs. 172.2 crore as against a net inflow of Rs. 276.6 crore in the previous year. The details on foreign exchange earnings and outgo are given in the Notes 6(E), 6(F) and 6(G) of Schedule 17 to the Accounts, which form part of the Annual Report. MANAGEMENT DISCUSSION AND ANALYSIS Overview: Economies, worldwide, are recovering from the severe downturn of 2008 that continued into 2009. Many countries are showing signs of small but positive growth due to domestic consumption and a marginal improvement in international trade. The recovery is uneven and the business environment for sustained growth is fragile. Much of the economic rebound is due to the strong fiscal stimulus provided by the governments of both developed and developing countries. In developed economies, increasing unemployment, rising inflation and tightening credit conditions have resulted in subdued consumer and investment demand. Government plans to withdraw the financial stimulus to control the ballooning fiscal deficit are met with concerns about economic recovery losing momentum. In the next couple of years, at least, the developed economies are not expected to provide a strong impetus to global growth. Displaying remarkable resilience in 2009-10, India continued to be the second fastest growing economy in the world. With the support of capital goods and consumer durables sectors, the Index of Industrial Production (IIP) growth for FY 10 is far higher, at 10.4% as compared to 2.8% in 2008- 09. Despite the negative impact of the agricultural sector, the continued momentum in services and manufacturing sectors coupled with strong fundamentals and broad based recovery, have ensured a higher GDP growth rate. The Union Budget 2010-11 indicates a positive outlook for the Indian economy in the near term. The economic agenda emphasises inclusive growth and development of infrastructure in both urban and rural areas. Rs.1,73,552 crore has been allotted for infrastructure expansion, which accounts for over 46% of the total allocation. Budgetary allotment to power, road transport, shipping, urban infrastructure and railways will provide the much needed growth trajectory for the manufacturing and infrastructure related sectors. In the recent past, averaging 4000 - 6000 MW a year, India has fallen short in adding to its power generation capacity. However, the coming five year plans promise to be different, with a dramatic improvement in capacity addition. Supercritical technology has just begun to make headway in India, with the government approving a proposal for induction of this technology. This is a major stride for India in developing cleaner, high-capacity and more efficient power generation capabilities and a boost for companies that provide supercritical technology. While constructively engaging with the international community at the Copenhagen conference on climate change, India has pursued a strong domestic agenda for addressing the issue. The National Solar Mission with an enabling policy framework has been created with the objective of generating 20,000 MW of solar power by 2022. This is expected to be achieved by creating favorable conditions for solar manufacturing capability, indigenous production and market leadership. A proposal to establish a National Clean Energy Fund for funding research and innovative projects in clean energy technologies and a 61% increased budget outlay for new and renewable energy sector, provide the much needed support to companies in related fields. Overall, the energy and environment sectors are poised to ride the wave of positive growth in the coming years. Review of Operations: During the fiscal year 2009-10, your company witnessed a decline in revenues, due to the lower order book of the previous years. It generated a total income of Rs. 3235.2 crore, with profit after tax at Rs. 141.4 crore. Exports, including deemed exports, represented 20.3% of the total income. With the economic situation recovering, the order book of the company has improved and stands at Rs. 5381 crore on March 31, 2010. The company's energy business comprising Boiler & Heater, Power, and Cooling & Heating contributed to 75.6% of its income while the environment business comprising Air Pollution Control, Chemicals along with Water and Wastewater Solutions generated 24.4%. Industrial growth, particularly in the capital goods sector remained subdued in the year 2008-09, affecting the order book and carry forward of several manufacturing companies. Due to economic uncertainty, financial closure of most projects were delayed and orders were either put on hold or were postponed till the situation improved. In 2009-10, with the improvement in the global economic scenario, many of the projects on hold were awarded, but with strict delivery schedules and lower budgets. The innovation oriented projects initiated last fiscal have been progressing well, with contributions from heating and cooling products supporting the company's business. Thermax Innovation Council, established last year and chaired by Dr. R. A. Mashelkar is providing guidance in nurturing an innovation ecosystem within the company's business divisions. During the year, your company positioned itself for robust growth in the Indian power sector. It formed two joint venture partnerships with global majors in the areas of energy and environment that are expected to support the growth in power. Thermax also made its entry in the utility space of independent power plants (IPP) by winning a project order. With the country's dependence on coal fired power plants for electricity generation, reduction of carbon footprint remains a daunting challenge. For reducing emissions and to counter the shortage of fossil fuels, energy efficiency has become very relevant in power generation. It is envisaged that in the twelfth five year plan about 60% of the 100,000 MW capacity addition and about 90% of 102,000 MW in the thirteenth plan would be based on supercritical technology. Supercritical technology, with its ability to operate at increasingly higher temperatures and pressures is aiding the improvements in energy efficiency in thermal power stations worldwide. This technology offers much higher efficiencies of 40-42% by raising the temperature and pressure of steam in the boiler, thereby obtaining more energy output from the same coal input. This shift to supercritical technology is a specific mitigation exercise of the Government as part of its climate change agenda. With huge investments anticipated in the sectors of energy and environment, these partnerships will help in supporting the government's objectives of efficient technology introductions and establishment of indigenised production capabilities. These sustainable models will help arrest environmental degradation and counter the negative effects of climate change. Energy Segment Analllsis: In 2009-10, your company's energy business income stood at 75.6% of the total income. Energy Business Year Income Growth Exports Growth (Rs. cr) %YoY (Rs. cr) %YoY 2007-08 2620 53 614 90 2008-09 2513 -4 830 35 2009-10 2407 -4 542 -35 The energy segment saw a decline in total income due to a lower order book of the previous years for the domestic and export projects. With the reduction in economic uncertainty and financial closure happening on many projects, your company has secured a number of prestigious domestic and export orders this year. The new joint venture partnerships Thermax formed in 2009-10 will help it to make a positive contribution in this area. In March 2010, your company signed a joint venture agreement with its technology partner Babcock and Wilcox of USA for supercritical boilers over 600 MW and for subcritical boilers above 300 MW The new joint venture cements the business relationship that Thermax and Babcock & Wilcox have had over the last 20 years. Similarly, in August 2009, your company formed a new joint venture, Thermax SPX Energy Technologies Limited with US based SPX Technologies to supply equipment and services for the Indian power sector. This partnership will provide power plant accessories and balance of plant equipment for power plants above the 300 MW range. In the area of green energy, Thermax has begun an initiative through a public private partnership for a 250 kW solar thermal project at Shive village in Maharashtra. This project is expected to establish a replicable model for clean and decentralized power generation and cold storage through solar energy. Funded by the Government of India's Department of Science & Technology, the project will be designed and developed by Thermax. The company incorporated a wholly owned subsidiary for utility delivery business to capture a sizeable share of revenue-side spending of customer by supplying steam, heat or chilled water on a unit basis. The new business would look after installation of equipment and peripherals at customer site, ensure operation & maintenance, organize required inputs like fuel, manpower and consumables, and supply endutility products to its customers. The new manufacturing facility of the company at Savli, Baroda completed one year of its operations with a marked increase in productivity. To meet the objective of making this a world class facility, the staff and workers are being rigorously trained. New systems are also being introduced for process and productivity improvements. At Chinchwad, Pune, continuing with its operational excellence initiatives, Thermax is building consistency and productivity in its manufacturing processes with the support of an internationally renowned expert in lean manufacturing strategy and implementation. The service businesses of all divisions contributed substantially to the revenues of the company through retrofit and revamp, spares sales and operation and maintenance of captive power plants. Boiler & Heater: The Boiler & Heater group of the company saw a revenue decline for the second year in succession due to lower order booking of the previous years. Business from captive power plants provided opportunities towards the end of the first quarter and grew at a fairly robust pace throughout the year. Cement, sugar, oil & gas and power sectors saw a surge in investment which substantially benefited the group in order booking. The Boiler & Heater business commissioned supplementary fired heat recovery steam generators (HRSGs) for an integrated solar combined cycle power plant in Algeria. It also obtained a large contract for supplying four circulating fluidized bed combustion (CFBC) boilers for captive power generation in a cement plant in Uttar Pradesh. Using coal and washery rejects as fuel, these power boilers would each generate 250 TPH of steam for captive power generation. With the commercial availability of natural gas, the business division was also able to secure a repeat order for heat recovery steam generators (HRSGs). The global increase in sugar prices also facilitated the order inflows for bagasse fired boilers from both India and South East Asia. The company's first waste-to-energy boiler installation designed for partial firing of fuel derived from refuse, is in an advanced stage of completion and awaiting commencement of trial operations. Our efforts in the distillery sector to incinerate spent wash as a fuel is progressing at a slower pace as the two units in operation are under stabilisation. The division also supported the company's Power division by bagging an order for the largest CFBC boilers with reheat, for an independent power producer (IPP). Exports showed signs of improvement with orders from Egypt and South East Asia. Several oil & gas fired units were commissioned during the year particularly in the gas fields of Abu Dhabi and refinery and petrochemical complexes in Saudi Arabia. The division's major highlight of the year was the complete modularization of a flue gas cooler for a refinery in the Middle East. The boiler and heater facility at Savli in Baroda has seen its first full year of operations and productivity is showing significant improvement. The year closed with an order book in excess of Rs. 1400 crore. It also saw the inauguration of the group's new office aptly christened 'Energy House'. A substantial increase in revenue is expected for the year 2010-11, signaling growth opportunities. Power: Continuing with the previous year's growth trend, your company's power business commissioned eight plants constituting 10 units and totaling 212.5 MW this year. Repeat turnkey power project orders from the cement sector, among others, have resulted in a healthy order book. The division has bagged, orders of a record capacity of 629 MW in the financial year 2009- 10, ably supported by repeat turnkey power project orders from the cement sector. The division's first overseas turnkey power project for a large paper plant in Philippines was handed over after successful commissioning and stabilization. This has resulted in a couple of captive power plant orders for a leading cement company in South East Asia and a sugar refinery project in the Middle East. The division achieved a breakthrough in larger capacity projects in IPP range with an order from a power producing company in South India. This is likely to be the largest CFBC boiler based IPP to be commissioned in the country during the 11th plan period. During the last financial year, the division reorganised itself, creating full fledged business units to address various segments of power plants. It successfully concluded a process improvement exercise for each function through an external consultant and a core internal team. The Division's focus on safety was acknowledged with an award by a large corporate customer. With a record orders-in-hand, the outlook for the division for the year ahead is positive. The orders are fairly spread across various sectors and across geographies with a mix of green energy based plants, mainly in waste heat recovery The division is making conscious efforts to achieve a balanced presence across private and public sector projects, apart from a mix of fuels and traditional power plants. This strategy is likely to be catalysed by the revival of conventional cement and steel sectors, in addition to the public sector's infrastructure spending. For its growth, Thermax plans to be a significant player in the IPP range and utility power market of unit size up to 300 MW and multiples. The division is in the process of offering the solution of power generation from waste heat recovery in cement sector with selective equity participation. Cooling: The cooling business witnessed a 10% reduction in revenues during the year, with exports contributing 42% of the total income. This was due to the sluggish market conditions in the first half of the year resulting in a lower order inflow. The rupee appreciation also accounted for reduction in total income for exports. This year, the cooling business successfully developed and commissioned an absorption heat pump for a few automobile majors, that will reduce their heating fuel bill by 30-40%, significantly reducing carbon emissions. The division also commissioned India's single largest capacity vapour absorption chiller of 3000 TR. It developed two new products - a new machine supplied to a pharmaceutical unit that simultaneously provides chilled and hot water without any additional heat source; and a unique absorption system using water heated by solar energy. This high efficiency machine, which has been tested, will reduce the cost of solar collection devices, making solar cooling viable. A European OEM in power generation has selected your company's absorption systems for recovery of waste heat and conversion to cooling. The division's manufacturing shop received an award for Right First Time at the National convention of Quality Circles held in Bangalore this year. This year, to counter the challenge of peaking of order inflow in the latter part of the year, specific lean manufacturing techniques were used. Appreciation of the Rupee against major currencies of our export markets is likely to put pressure on price realization in 2010-11. Heating: Heating business recorded a decline of 9% in total income as compared to last year, with exports accounting for 26% of its business. The decline is mainly on account of many projects being put on hold and lack of prospects from overseas markets. With volatile fuel oil prices in the first half of the fiscal, there were also no fuel shift opportunities, which account for a sizeable share of its business. To address the change in the Indian Boiler Regulation (IBR) Act, the business division responded with two new products one suitable for liquid and gaseous fuel and the other for solid fuels. These products will help small users shift to lower operating cost options, providing good business opportunities for the business division. They would be introduced in the overseas markets as well as for the hotel and hospitality segments. Coil products grew in volumes by over 10% during the year due to increased demand from the hotels planned for the upcoming Commonwealth games. Bi-drum boilers serving the fuel shift and small cogeneration markets doubled its growth over the last year in the domestic market. The division is poised to capture emerging opportunities for this product line in overseas markets, concerned about energy costs. Under the company's operational excellence program, the division initiated mass customisation and engineering automation to reduce cost and eliminate waste. It also kick started a manufacturing excellence program targeted to double the output in the next two years time frame from the current manufacturing facility at Pune. The outlook for the next year looks good with a vibrant domestic market and markets like Middle East, South East Asia showing recovery where the business unit has a good presence. The division expects markets like Africa, SAARC to continue with the upswing in the current year. Latin America, the new market entered in the last year appears promising. Food processing, chemical, drugs & pharmaceuticals, hospitality and health care segments would continue to yield a major share of the business from both domestic as well as overseas markets. The business unit will continue its innovative efforts with new products to reduce energy costs. Solar Growth unit: The recently established Solar business of Thermax, integrated with steam boilers and vapor absorption systems, successfully completed six demonstration projects in FY 2009-10 across its application segments - laundry, cooking and cooling. A first-of- its-kind installation of 70 solar concentrators generating process cooling has been completed at a major auto facility near Pune and it will be commissioned shortly. The parabolic concentrator acquired by the business in FY 2008 has been engineered and necessary design improvements have been introduced to suit domestic markets for cooling and heating applications. Continuous monitoring of operational data is helping in designing better systems for our customers. The division would focus on replicating its installations in select market segments. It would also extend its application range with existing and newer products. With the new projects, your company is positioning itself as a solar product manufacturer and as an integrated renewable energy solution provider of cooling and heating solutions. By targeting hotels, auto and garment segments and educational institutes, the new business would help increase the renewable portfolio of Thermax's offering to customers. Environment segment Analysis: In 2009-10, your company's environment business income stood at 24.4% of the total income. Though income improved marginally, exports grew by a healthy 40% due to certain export orders. Environment Business Year Income Growth Exports Growth (Rs. cr) %YoY (Rs. cr) %YoY 2007-08 584 26 64 -18 2008-09 751 29 82 28 2009-10 778 4 115 40 The environment segment witnessed growth this year as several domestic and international customers opted for environmental products and solutions in the air pollution control and water and waste treatment areas. In 2010-11, the industrial sector is expected to continue to do well, with the continuing emphasis on power projects and stricter norms for the use of water. Projects for municipalities under JNNURM will get significant funding as quite a few detailed project reports have been cleared by the government authorities. All over the country, regulation standards, particularly through pollution control boards, are becoming stringent and pressure is being brought on companies to recycle treated effluents. Chemical business continued its export growth with the domestic market also providing the required support. Production has commenced at the state-of- the-art paper chemicals manufacturing plant of 12,000 tons per annum (TPA), which was set up after a technology tie up with Georgia Pacific Chemicals of USA. The partnership with General Electric of USA to distribute reverse osmosis (RO) membranes has commenced successfully, and the product is made available in all the areas allocated to the company. The service businesses of the environment segment contributed to the growth of the company in a year of recovery and will continue to focus on enhancing efficiency from existing facilities of the customers. Enviro (Air Pollution Control): The air pollution control business registered 11% lower turnover during the year. Its business came from segments like captive power, steel, sponge iron, and aluminum in domestic markets. To compensate for the slowdown in the domestic cement sector, it focused on select industries in international markets. The division's international business obtained orders from its focus sectors during the year. This includes the largest ever order of electrostatic precipitators (ESPs) for a project as part of the Egyptian pollution abatement programme, won through international bidding under World Bank guidelines. This division has also signed a contract with a Brazilian multinational for the design, engineering and construction of ten ESPs in the Middle East. These orders would provide the company a firm entry in the export market of pollution control equipment and related services. The company's technology tie-up with Balcke-Diirr GmbH, now part of SPX Corporation, USA, for large ESPs has helped the company address new applications and international markets. It obtained an order in the aluminum sector which includes supplying fume treatment centres for greenfield alumina projects in Madhya Pradesh and Orissa. Continuing with its operational excellence programme through process improvements, the division implemented quality management systems under ISO 9001:2008 and was awarded the ISO certification by Lloyds. This will help in delivering consistent quality products and providing high customer satisfaction. For 2010-11, though there is pressure on costs due to volatile steel prices, foreign exchange rates and higher inflation, the division is confident of countering these challenges. With the increased number of power plants coming up in the next few years, the outlook for the division is positive. Chemical: The chemical business continued to perform better than the previous year with a 13% increase in the turnover and exports contributing a significant 38% of business volume. The division, continued its focus on specialty resins. This has been achieved, competing against global market leaders in the Middle East, CIS and North American markets. Commodity chemical prices, forming a key part of the material cost of this division, saw an increase in the latter part of the year together with crude oil prices. The division could successfully assimilate this by moving up the value chain and ensuring margin continuity. The division increased its market share in its performance product group (PPG), making it the largest in the domestic market. Business has increased in the infrastructure and related industries as well as the dealer segment. This business competes with some of the best known global companies, who already operate in India. It has also increased its exports to the Middle East and South East Asia. The division received a major order for oil field chemicals from a petroleum company. This is a three year contract won against international bidding to supply the required chemicals in the oil fields in Andhra Pradesh. The business has stabilized its presence in the paper industry after its launch in 2007-08. These chemicals help the industry produce better grade paper using lower quality material. The paper industry is now moving towards more eco-friendly technologies for which alkaline and neutral sizing products are being offered. Exports of paper chemicals have also begun. In 2010-11 the division is expected to continue to maintain its strong presence in its business lines in the domestic market and increase its focus in the overseas markets. New technologies are being evaluated which will bring the knowhow for superior products to the Indian customer and will also bring in green chemistry, thus enhancing value. Water & Waste solutions: The Water and Waste Solutions division has seen a remarkable increase in its presence in the domestic market. It could more than double its order booking and also show a 20% increase in its turnover, while maintaining healthy margins. The year started with a stagnant market and increased competition. With better cost control and productivity, coupled with enhanced project management skills, customers to a larger extent, have chosen to repose their faith in this division. The newly created municipal vertical has started with a good order booking, riding on the back of government investment in various JNNURM schemes. The industrial vertical has enhanced its strengths and increased its presence in power plants that are coming up. The standard products group (SPG) which sells through dealers, has improved its offerings and enhanced its presence across the country. In India, there is enormous water shortage coupled with deteriorating water quality. Many industrial units are experiencing water shortage, which might affect the production capabilities. Deteriorating water quality has started severely affecting areas, especially in parts of Andhra Pradesh, Punjab, Rajasthan and Madhya Pradesh. The division has introduced a rugged model of RO equipment for village drinking water supply. It is executing some prestigious sewage treatment plants in several states of the country, which when completed will enhance the quality of life. A major project for augmenting the capacity of a sewage treatment plant to 136 million liters per day (MLD), was completed in Chandigarh during the year. Water &waste solutions business with its municipal vertical obtained several orders awarded through the JNNURM schemes. In a major order secured, the division will provide 10 sewage treatment plants as part of a project for constructing an underground network for collecting and treating sewage for a municipal corporation in Maharashtra. In the previous year, the division has acquired advanced know-how from Germany for waste water treatment and had also entered into partnership with General Electric of USA for membrane bio reactor technology. In 2010- 11, operationalisation of this technology is expected to provide sustained benefits to the business. Services: Boiler & Heater: The Boiler & Heater service continued its steady growth with repeat boiler upgradation orders from both domestic and the overseas markets. It made a major advance by manufacturing a reformer package on a build-to-print basis with residual engineering. There was an increase in revenue from pure service offerings. Repeat orders in condition assessment / residual life assessment teams made significant gains in the Middle East and South East Asia markets. In spite of commoditisation, the spares business showed growth. The service business outlook is positive for 2010-11, considering its current order book position and the customer's requirements of service and spares. Power: The Power division's service business has been steadily maintaining its pace of growth. The group successfully stabilized an 80 MW power plant, based on pulverised fuel boilers, for a mining major in Rajasthan and achieved an annual plant load factor (PLF) in excess of 97%. To provide better value to the customer, a software application, Enterprise Asset Management (EAM) was successfully implemented. A new petroleum refinery in central India entrusted the operation and maintenance (O&M) of their 99 MW cogeneration plant to the division for three year tenure. The power plant is slated for start up in August 2010. The group continues to tap the power plant management business from the growing list of EPC projects. The group also mobilized its first O&M services team in the overseas market for a paper mill cogeneration plant in the Philippines. It plans to add more overseas assignments after this first successful experience. For 2010-11, the division plans to target the utility sector for O&M business, with the experience gained in pulverized fuel fired boiler based power plants. It also seeks to meet the demand for O&M support of power plants built by other manufacturers, which require support for stabilization and efficient operation. Cooling & Heating: Cooling & Heating service business increased its total income, its growth driven by spares, O&M along with professional services like energy audit, facility energy management services, branded heating service products and steam accessories. The business offered energy efficiency solutions in steam generation and distribution to one of the largest edible oil manufacturers in Africa. It also made an entry in the oil & gas segment for energy audit in export markets. The division launched new products like high capacity condensate transfer pump with zero moving parts and de-aerators for special applications. Based on the expertise of offering green steam generation and O&M capability, the energy rental business line was established at two locations in India. Additionally, a memorandum of understanding was signed with a US based company to evaluate and launch solutions in fuel savings and emission reduction for the benefit of users of packaged boilers heaters. Based on successful pilot studies, the new technology will be introduced in the coming months. The division will continue to add new services and customised solutions in the areas of energy efficiency to develop its business. Chemical & Water: The service business of Chemicals & Water manages the O&M of over 45 water utilities across India - for textile, chemical, automobile, thermal and municipal water and wastewater treatment facilities. In the context of JNNURM projects and several corporate customers outsourcing fixed cost O&M contracts with their orders, the group provides value added service from pretreatment of raw water to effluent treatment. Thermax has developed the capability to provide customised service with high standards of plant performance, operational efficiency, safety and adherence to statutory norms. The O&M of water facilities has introduced green practices like water recycling and zero liquid discharge - that could become mandatory requirements in future. They help customers by refurbishing and upgrading plants when it is a more viable option than putting up a new plant. Integrating the solutions available from the water and waste treatment divisions with the chemical division, this business is expected to grow significantly in 2010-11. Risk management: In recent years, your company's capabilities to forecast, manage and contain risks in an unpredictable and deteriorating business environment helped it to weather the storm with resilience, and build better prospects for future. The company has adequate internal control procedures commensurate with the size of operations and the nature of the business. These controls ensure efficient use and protection of company's financial and non financial resources. They also have ensured compliance to stipulated policies, procedures and statutes, ensuring accuracy of accounting records and corporate governance. With the empowering of the executive management at all divisions and at centralised functions, suitable measures were initiated to identify and control risks - by reporting and reviewing business as well as process related risks, at defined intervals. The internal audit department has been strengthened to increase audit coverage, its frequency and at the same time to test the adequacy and effectiveness of all internal controls laid down by the management and recommend improvements. Your company's management reviews and monitors the risks associated with its various businesses at periodic intervals. Analysis and comments on key business risks: Risk of cyclical business:- The business in the capital goods sector is cyclical in nature and the company's project business is predominantly from sectors like power, steel and cement which have witnessed volatility. Thermax reviews significant developments taking place in the industry sectors and also closely monitors the projects under execution. The company continues to reduce the impact of the cyclical business risk by developing its product and service businesses and through selective internationalisation. The service arms of all the divisions are well developed to counter the risk of cyclical businesses. Customer concentration risk:- Large orders from a few customers particularly in the project business can result in customer concentration risk. To mitigate this, the company continues to broad base its orders. However, given the nature of the power, boiler & heater and utility boiler business, where individual orders are of large value, the company reviews such orders on a case to case basis and monitors them closely. With the company's foray into utility and supercritical boiler manufacturing, project sizes are expected to be significantly large and adequate controls are being set up to mitigate the risk of customer concentration. Rids of concentration in one business segment: As large value projects within the energy segment form a significant share of income, the company faces the risk of concentration in a single business. However, as the energy segment offerings are under diverse businesses that cater to different market requirements, risk concentration to a single business segment is significantly mitigated. The environment segment too includes three different businesses, making the company's portfolio diverse. With the enforcement of stringent norms in many countries, your company's environment business segment is availing the business opportunities as a de-risking strategy. The management closely reviews and monitors the overall business situation. Competition Risk: With integrated global markets and increasing trade between geographies, your company faces competition not only from domestic players but also from imports. The company recognises this risk and is focusing on quality, cost and delivery. It aims to create sustainable competitive advantage and as part of its select internationalisation programme, benchmarks its products and services against global competitors. Protect Management Risk: Your company faces risks associated with project execution with a large portion of the business coming from various projects. As the duration of these projects is 18 months or more, delays can affect the company's finances and reputation. The management reviews the risks related to key projects at all levels, on a case- to- case basis depending on their size and complexity. The management has established processes and systems for reviewing the progress and costs of projects. Risk related to safe operations: Safety of its people is important to the company. For its operations spread across multiple locations, the management has put in place policies, procedures and processes to enhance and monitor safety. Your company has a Health, Safety & Environment (HSE) Policy in place with safety officers posted at all major project sites. The safety function is monitored and reviewed by a Corporate Safety Officer. Many initiatives undertaken in the area of safety in the recent past are yielding good results. The company continues to focus on enhancing safety awareness further and inculcate a culture of safety at senior management and operational levels. Risk related to human resources: Your company recognises that its people are its assets and strives to motivate and retain its people. The recent economic crisis has improved manpower availability and better talent is being sourced for various segments of the business. Attrition risk and manpower availability risk are reviewed periodically by the management and necessary measures taken to mitigate the impact of these human resource related risks. Risk of energy price fluctuation: As your company is in the energy business, fluctuations in fuel and energy prices can impact viability of projects being executed by your company or future orders. The company has proven capability of handling a variety of fuels, including a wide range of biomass, and is a leader in harnessing waste heat as a source of energy for its clients. These capabilities place your company in a position where it can capture opportunities as well reduce the impact of energy price fluctuations on the company's business. Input price increase and supply chain management risk: Rise in raw material prices could impact the profitability of the company. To reduce this risk, when quoting for large orders, the company obtains price quotations to ensure that input prices are determined and firm for the contract. At the time of quoting for projects, taking cognisance of the business environment, escalations of input prices are factored in. The company's Central Sourcing Group works closely with existing vendors even as it continues to establish new sources including those from overseas markets. These efforts help in reducing the risk of delayed critical input. Exchange fluctuations and interest rate risks: The volatility witnessed in the global markets has reiterated the need for robust forex management systems and prudent investment practices. Your company has conservative forex management processes, which ensure that forex exposures are hedged immediately upon the occurrence of an exposure. Currently the company uses only forward contracts to hedge both its imports and exports and continues to maintain the philosophy of protecting cash flows. The company does not speculate in the forex market. Regarding deployment of surplus funds, the company continues to maintain its conservative policy and accordingly invests funds only in fixed deposits of reputed banks and rated debt mutual funds. The company does not have any long term borrowings and therefore does not face any impact on account of interest rate fluctuations on long term borrowings. Risk related to international operations: The company operates globally through 19 international offices including its sales and service network, 4 manufacturing facilities and overseas subsidiaries. There is a risk of international operations relating to recruitment of employees, technology cooperation etc which may result in litigation causing disrepute to the company, thereby affecting the business growth. The company has set up necessary policies and procedures relating to the use of technology, operations and personnel information verification to make informed decisions and minimise instances of legal action or lawsuits in future. Human Resources: Human Resources function continued with the initiatives that were launched in previous years. During the year, there was also emphasis on building capability to address higher volumes of business. The Thermax Leadership Development Program (TLDP), launched in 2007 saw more than 589 executives attend development centers and around 300 executives participate in the programme. This strategic initiative addresses leadership at different organizational levels and consistently delivers results. Through the Graduate Engineer Training program (GET) and Thermax Graduate Program (TGP), your company was able to attract entry level talent from colleges across the country. Open Forums were held in Pune and Regional Offices. The forum has become an effective employee engagement tool and the follow up actions help create a better engaged workforce. Industrial Relations remained cordial throughout the year. Thermax Kamgar Sanghatana became the first internal union in the country to receive the ISO 9001-2000 quality certification for the administration of its general labour affairs. Cautionary statement: Statements in this Management Discussion and Analysis describing the company's objectives, projections, estimates and expectations may constitute 'forward looking statements' within the meaning of applicable laws and regulations. Actual results may differ materially from those either expressed or implied.