Diesel & Motor Engineering PLC | Annual Report 2007/08

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Enterprise Risk Management

Overview

Risk Appetite & Strategy

Risk appetite is the amount of risk exposure or the potential adverse impact that an entity is willing to accept, accompanied by the organisational risk capacity. The Company’s strategy reflects the risk appetite of the Company. The guiding principle is that the Company takes well calculated risks in order to enhance value while protecting the integrity and well-being of the Company.

Risk Management Model

Risk mapping is carried out in order to assess the likelihood of occurrence and the impact on the business in the event of occurrence. It is based on the following:

• Likelihood of occurrence is measured on the basis of past experience and the preventive measures in place. A ranking of high, medium and low in terms of the probability of occurrence is assigned for each risk.

• The impact of the event is assessed by ascertaining the loss it would inflict (financially, operationally or both) and the extent of the impact. By considering these two factors the impact is categorised as low, medium & high.

Risk Exposure

Risks are listed according to the above model and some of the important ones are discussed and analysed below:

		Likelihood	Impact
1.	Economic Risk	H	M
2.	Industry Risk	L	H
3.	Market Portfolio Risk	L	H
4.	Relationship with Principals	L	H
5.	Liquidity	L	H
6.	Human Resources	L	H
7.	Disaster Related Risk	H	L/M
8.	Compliance with Laws & Regulations	M	M
9.	Loss of Data	M	M
10.	Information Security	M	M
11.	Fraud & Error	M	M
12.	Customers	M	H
13.	Investment Risk	M	L/M
14.	Foreign Exchange Rate	H	M
15.	Credit	H	L
16.	Technological Obsolescence	L	M
17.	Labour Relations	L	M

Economic Risk

Economic risks are those changes in the economic environment that have the potential to affect the Company adversely. Rising interest rates was one of the issues the Company had to manage. Rising interest rates impacted on the Company’s activities in two ways. Firstly, it diminished the Company’s profit through an increase in finance cost.

Secondly, it affected vehicle sales due to the fact that most of the vehicle purchases by our customers are financed by borrowings and leases.

Effective management of working capital is seen as the key measure against rising interest rates.

Industry Risk

Industry risks arise from sudden changes within each industry. These could be driven by new customer trends such as the demand for fuel efficient and environmentally friendly cars or it could result from the entry of new/alternative products into the market. With a view to minimising these risks, the Company closely monitors development in the international market and also competitor strategies and promptly develops counter strategies that may be necessary. An effort is made to strongly position the Dimo brand and explore every available opportunity for the introduction of new and innovative products. The Company represents global leaders and is in a position of advantage due to constant technological innovations by them.

Market/Portfolio Risk

The Vehicles and Vehicle Parts/Service segments that form the Group’s core business, accounts for 85% of its turnover. Although the Company has taken steps to diversify its product portfolio in recent years it is still heavily dependant on the automobile industry and a downward trend in this sector will again have negative implications.

The Groups’ strategy is firmly directed towards reducing the imbalance in the product portfolio. The Group is developing its competencies in the areas of marketing and distribution and in providing engineering solutions to commerce and industry.

Relationships with Principals

Our relationships with principals are one of the mainstays of our business and a disruption of this can have negative consequences.

The Company has focused on developing a mutually beneficial relationship with principals in an effort to minimise the risk. Targets are met and the after care conforms to the rigorous standards set down by the principals. We are constantly looking for new opportunities to develop relationships with new principals and to reduce our dependence on any single sector or principal.

Liquidity

Unavailability of sufficient funds may disturb the smooth functioning of the Company’s day-to-day operations. The Group seeks to ensure that banking facilities are in place to cover its forecasted cash needs for a period of at least twelve months. Cash requirements of the Group are regularly and closely monitored and matched with banking facilities available; to ensure that requisite funds are available for operations and investment. The unutilised bank facilities/overdraft facilities as at 31st March 2008 were Rs. 3,321 mn (Rs. 1,693 mn as at 31st March 2007).

Human Resources

Risks stemming from the Company’s human resource base have also to be managed. The Company’s human resources are its most important asset and recruitment and retention of committed and capable employees are a constant challenge. A succession plan minimises the impact that the exit of employees has on the performance of the Company.

Disaster Related Risks

Damages from Fire and floods have been identified as key disaster related risks that the Company carries. Indemnity from insurance is the risk management measure taken to mitigate losses from such disasters. Preventive measures of safety are taken to minimise damages and specific attention is given to situations where such risks can not be adequately covered.

Compliance with Laws & Regulations

Laws, regulations and accepted principles have a considerable impact on any business. Regular review of compliance is done by the Management, Audit Committee and Internal Auditors. The Group Management Committee is placed with the responsibility of identifying any changes to legislations and educating relevant personnel promptly.

Loss of Data

The Company operates in a fully computerised environment and the loss of important data arising from technological failure is another risk we have to guard against. The Company makes daily back-ups to guard against the risk of losing vital data. Regular maintenance of our equipment ensures that the risk of system failure is minimised. Off-site storage of data back-ups is another measure taken to minimise risks.

Information Security

Employees are made aware of the importance of the security of information and maintaining confidentiality. Some information is accessible only to selected employees so as to ensure that leakage of vital information does not affect the Company adversely. The ethical values that we propagate also stress the need to maintain confidentiality.

Frauds & Errors

The management has put in place a system of internal controls, to minimise the risk of fraud and irregularities and safeguard the Group’s assets. Internal controls include continuous internal audit, the findings of which are reviewed by the management as well as the Audit Committee.

Customers

The Company’s Customer Relationship Management process helps it respond effectively and efficiently to customer complaints and develop relevant solutions. The Company is constantly upgrading its level of after care and employees are periodically trained in this regard. We promote customer loyalty through a number of innovative schemes and have developed a diverse customer base.

Investment Risk

A common concern associated with investment risk is that it may not provide the desired returns. The Company invests substantial amounts in Capital Expenditure. In order to minimise risks associated with such investments the Company closely monitors its investments and periodically evaluates the returns/benefits derived.

Foreign Exchange Rates

Foreign currency exposure arising out of trading activities are hedged through forward contracts, when appropriate. An impact on profits arises when translating foreign currency assets and liabilities into local currency at the Balance Sheet date.

A hedging of this impact is available to the extent that trade receivables and foreign currency bank account balances cover the exposure on foreign currency payables.

Credit Risk

Strict control measures are in place to mitigate the Credit Risk. Credit facilities are extended to customers in accordance with Group Credit Policy. Customers are evaluated prior to extending credit facilities to them. Processes employed for credit extension include approvals prior to granting credit facilities, periodic review of receivables by senior management, credit suspension on overdue accounts and legal procedures for recovery of long overdue receivables.

Technological Obsolescence

The non-availability of state-of-the-art technology can have an impact on performance. The Company makes regular investments in cutting edge technology. Staff are constantly exposed to new technologies and trained for the better application of existing technologies.

Labour Relations

The regular meetings of the Employee’s Council provides a forum to discuss employee concerns and help the management to then respond to them. The Company’s remuneration package is in line with market rates. Regular training is provided to our employees both to motivate them and also to expose them to state-of-the-art technology. The Employee Satisfaction Index.

Risk Management Process

Risk identification, assessment and management are part of the annual business planning process. Risk management options are considered in determining the suitable risk strategy. The options available are avoiding risk, transferring the risk, managing the risk and accepting the risk.

There are two key activities that enable the organisation to identify risks. They are strategic planning & review of business units and internal audit.

The identification, development, implementation and review of an effective risk management strategy are some of the key objectives of the Audit Committee. The identification of risks calls for a sound enterprise-wide reporting system. An early warning system to track emerging risks is built into this reporting structure.

Once the risks are identified and prioritised the most appropriate counter strategy to manage, minimise or eliminate these risks will be implemented. The Board of Directors and the Audit Committee continuously review the implementation of the selected risk managing strategy and if necessary, take steps to modify or change it.

The Group Management Committee (GMC) which consists of Executive Directors and Senior Managers of the Company is responsible for directing business units on risk management. The heads of business units convey their views on aspects of risks and their management to the respective GMC member which in turn, will be discussed at the GMC meetings.

An effective system of Internal Controls is in place to minimise the risk of irregularities and fraud taking place within the Company. However, a sound internal control system can only provide a reasonable assurance that it will bring to light within a reasonable time any irregularity or non-compliance.

A Firm of Chartered Accountants, which acts in the capacity of Internal Auditors of the Company, communicates their findings to the Audit Committee by way of periodic reports and presentations to the Audit Committee every quarter.

The finance function assists GMC in identifying operational risks. The findings of the finance department are communicated to the GMC for their consideration.

Monthly management reports, special investigation reports and internal audit reports presented to the Audit Committee are some of the key tools used in risk identification.

Monthly Operational Results

Monthly operational results which are a key reporting tool is used as a risk review mechanism by identifying significant deviations from original objectives. This in turn, enables the management to take corrective steps at an early stage.

Internal Audit Reports

Internal audit reports may include any non-compliance with policy, laws or processes. Non-compliance with laws and regulations have financial and non-financial implications. They also recommend improvements to the existing systems and procedures to strengthen the internal controls within the organisation. In order to ensure previously reported irregularities are not repeated; follow up actions are also regularly monitored.