Business Risks

Risk Mitigation

Risk is an inherent feature of commerce. As an organization whose products are sold to a number of customers and used in diverse applications and geographies, CUMI is impacted by a number of variables. It is their unambiguous understanding and methodical redressal that helps the company to promote stakeholders’ interests. The major risks encountering the business and their mitigation are given below:

Business Risks

Business Portfolio Risk

Nature of Risk

The company possesses a diverse portfolio of businesses, which require varied management competencies. Any failure in customising responses to the requirements of these businesses could result in business slowdown or failure.

Risk migitation

The company’s various businesses are managed through a competence-based structure that comprises SBUs, subsidiaries and joint ventures. This structure facilitates focused business and segmented development, encouraging specialisation. Also, the diversity in businesses has a common thread. All businesses have ceramics and ceramic technology as the uniting factor and there are operational synergies to be derived out of them. CUMI’s successful business presence over five decades is a testimony to its business portfolio management capability.

User Industry Concentration Risk

Nature of Risk

If there is excessive dependence on any one industry, cyclicality in that industry could affect performance of the Company.

Risk migitation

The most unique aspect of CUMI’s product profile is the diverse user base. Almost all industries use UMI products. Further CUMI’s products form a very small part of the overall manufacturing cost in end-user industries. Thus a cyclical downturn in any of them is not likely to adversely impact CUMI’s fortunes. While automobile and auto-component industries contribute a sizeable portion of the sales, a significant part is also derived from general engineering, building construction, woodworking and other industries.

Client Concentration Risk

Nature of Risk

An excessive dependence on a few clients could impact profitability in the event of slowdown or customer attrition.

Risk migitation

CUMI enjoys a diversified customer profile as a result of its wide base. Its profitability is therefore not dependent on a few customers. For instance, the five leading customers of the company accounted for less than 5 percent of its revenues in 2004-05 while the five leading dealers contributed about 7 percent of the company’s sales.
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Geographical Concentration Risk

Nature of Risk

Concentration of sales within a specific geography could be a significant risk in the event of recession.

Risk migitation

Over 90 percent of CUMI’s revenues were derived from India in 2004-05. However, the diversity of India’s market, its status as a sub-continent and the prevailing economic climate are favorable for CUMI’s business from a long-term perspective. The Indian market is not homogenous and in fact resembles an agglomeration of many distinct markets. CUMI enjoys a strong presence across all four Indian regions whose vastly different dynamics liberate it from a geographic risk. Exports constitutes 9 percent of sales. Exports are not confined to a specific geography but spread across North America, Europe, South East Asia, Middle East and Australia.

Technology Obsolescence Risk

Nature of Risk

Technological obsolescence could impair the effectiveness of capital investments.

Risk migitation

Over the last few decades, CUMI progressively invested in product and process up gradation to reflect superior technological standards. This initiative was institutionalised through a dedicated R&D centre set up in 1972. The CUMI Research Centre had acquired a significant maturity to innovate and adapt technological advancements into its processes. This translated into the creation of new abrasive products, enhanced properties and upgraded grain technology. Besides, the company’s full-scale pilot plant and application development centre helped it to simulate test products leading to advanced application engineering. This research initiative was reinforced through collaborations with renowned universities and research institutes. A number of CUMI products are comparable to the best in the world.

Competition Risk

Nature of Risk

This is the risk of unorganised or international competition impacting margins, as could counterfeit products.

Risk migitation

The company has leveraged a number of factors to counter competition: its rich product knowledge, economies of scale, backward integration and efficient logistics management. The combination of these translated into the following:

  • Application engineering capabilities that helped customize products for specific use and offered insightful assistance for the benefit of industrial buyers.
  • A formidable low-cost competitive edge
  • An ability to deliver products to customers just when they needed them.

As a hedge against counterfeit products, the company incorporated non-replicable product properties, security features and innovative packaging. The company also conducts periodic dealer market audits to eliminate the inflow of spurious products.

Cyclicality Risk

Nature of Risk

This represents the risk of the company’s business being cyclical.

Risk migitation

In the event of a significant cyclical downturn, the company’s prospects would indeed be affected. However, in the event of a selective downturn, the company’s wide customer portfolio presents adequate shock absorption potential. Since the company’s products address the country’s core industries, there is a greater possibility of their demand growth being sustainable.

Environment Risk

Nature of Risk

Long-term business viability could be adversely affected if its products or processes are found to be environmentally unsafe.

Risk migitation

The company’s products and processes are environmentally safe. The company’s environmental compliance is periodically audited. Many of its plants are ISO 14000 certified.

Financial Risks

Liquidity Risk

Nature of Risk

The company’s businesses may consume more cash than they generate, creating a liquidity trap.

Risk migitation

In 2004-05, the company generated a cash flow of Rs. 380 million (Rs.309 million in 2003-04) from operations. Even though the company had a huge capital expenditure outlay, a large portion of expenditure was met through internal accruals. Besides, the company’s strong credit rating of P1+ and AA by CRISIL and low gearing provide it with an immediate access to low cost funds to tide over any liquidity crunch.

Leverage Risk

Nature of Risk

A high debt component could result in an excessive interest drain.

Risk migitation

The company enjoyed the benefit of low gearing in which debt accounted for only 16 percent of the capital employed. Interest cover stood at 19 times signifying strong debt servicing ability.

Receivables Risk

Nature of Risk

A long debtors’ cycle could potentially affect the company’s cash flow, while sales to suspect customers could translate into bad debt.

Risk migitation

The company’s receivables of Rs.678 million as on 31 March 2005 corresponded to 69 days of turnover. Also the Company serves a large number of customers / dealers and therefore, payment default by any single customer / dealer will not have a significant impact on its cash flow. The bad debts ratio over the past 3 years averages only 0.4% of gross sales.

Exchange rate fluctuation risk

Nature of Risk

Foreign currency fluctuations may adversely impact the company’s profitability.

Risk migitation

The company follows prudent forex management practices to hedge its foreign currency exposures and mitigates the risks arising from unforeseen exchange fluctuations. It most often enjoys a natural hedge against forex fluctuations in respect of its raw material imports.

Process Maturity Risk

Process failure Risk

Nature of Risk

Risk of process failures leading to uncertainties at the operating level.

Risk migitation

In order to reduce the uncertainties at the operating level, CUMI has put in place TQM practices so as to ensure the efficacy of processes. All major manufacturing locations are ISO certified. The Enterprise Resource Planning (ERP) software has been implemented to ensure data availability and accuracy.

Quality Risk

Nature of Risk

In a precise engineering business, any quality variation could lead to customer complaint, attrition and revenue loss.

Risk migitation

The company strengthened its comprehensive quality culture. Its products undergo quality checks under conditions that are more severe than actual operating conditions. As a result, the chances of failure at the customer’s end is significantly reduced. Also, the company’s continued investment in quality improvement ensures that there is no let up in delivering the best possible product to the customer.

Legal & Statutory Risks

Contractual Liabilities Risk

Nature of Risk

The risk arising out of contracts that impose onerous responsibilities.

Risk migitation

CUMI does not have any such contracts and is not tied to any third party indefinitely with regard to sale or raw material purchase. All material contracts are subject to review by the in-house legal team. In addition independent legal counsel have been retained by the Company and their advice is sought whenever necessary. Product liability insurance is also taken to cover potential claims from customers.

Compliance failure RiskCUMI America Inc.

Nature of Risk

The risks arising out of non compliance with statutory requirements

Risk migitation

CUMI has in place an internal process for ensuring statutory compliance across the Company. Legal compliance is given due importance in the Company’s management processes.

Inter Control Risk

Nature of Risk

Weak internal control can jeopardise the Company’s financial position.

Risk migitation

CUMI has an established framework of internal controls for ensuring optimal use of resources and safeguarding of assets. Clear policies have been laid down for the approval and control of expenditure. Investment decisions involving capital expenditure are subject to formal detailed appraisal and review according to approved levels of authority. Capital and revenue expenditure is monitored and controlled with reference to approved budgets. Physical verification of fixed assets is periodically done. Internal audit is carried out to ensure adequacy of internal control system and adherence to policies and procedures. The Audit Committee reviews the functioning of the internal audit department.

Risk Management Process

Risk Management Process

The key elements of the company’s risk management framework comprise:

Strategic review: Each business prepares a strategic overview taking into account existing and prospective market environments vis-a-vis its competitive position.

Business reviews: Thereafter, the company reviews how its strategy is translating into financials as well as the risks that could potentially affect their achievement leading to proactive mitigation.

Budget and financial plans: Each business prepares budgets and financial plans after accounting for associated risks.

Capital expenditure authorization approval: All significant capital expenditure undertaken by the company is subject to a formal authorisation process, which involves evaluation of operational, financial and technical risks.

Reporting and analysis: All businesses are required to periodically report their performance to the management / Board in independent terms and with a comparison to their corresponding budgets, reinforced by notes to explain significant deviations, if any.

Forecasts: Each business is permitted to periodically reassess its monthwise forecast for the ongoing and subsequent financial year, leading to a precise estimation of business health.

Financial strategy: A centralized team assesses the principal financial risks related to interest rates, currency exposures, debt maturity tenures and liquidity comfort.

In addition to the above, during 2004-05, the Company has adopted a set of ‘Risk Assessment and Minimisation Procedures’ in order to formalise the risk management process. The process of implementing this formalised process will be undertaken during the current year.

Murugappa Group Abrasives & Ceramics Manufacturers