Diesel & Motor Engineering PLC | Annual Report 2007/08

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Vision & Strategy

Business Performance

	Vehicles
	Vehicle parts and services
	Lighting & power tools
	Construction & material handling machinery
	Diversified activities

Financial Review

Key Principals

• Bomag GmbH
• Claas India Ltd.
• Everdigm
• Komatsu Asia & Pacific Pte Ltd.
• Komatsu Forklift Asia Pte Ltd.
• Komatsu Ltd.
• KSB AG
• Mahindra & Mahindra Ltd.
• Mannesmann Dematic AG
• Schwing Stetter
• SSI Schaefer Systems International Pte Ltd.

business performance

Sale & Service of Earth Moving Machinery, Road Construction Machinery, Forklifts, Racking Systems, Tractors, Pumps, Dock Levelers, Car Parking Systems and Harvesters

Key Figures
	2007/08	2006/07	Change %
Segment Turnover (Rs. mn)	1,018	1,202	(15)
Segment Result (Rs. mn)	92	110	(16)
% Contribution to the Group Turnover	8	9	(1)
Segment Result/Segment Net Assets (%)	15	21	(6)

Customer Profile
	B2C	B2B	B2G	Total
No. of Customers (accumulated)	1,878	1,768	344	3,990
Customer Satisfaction Index (weighted average %)	-	-	-	79

Industry Overview

The construction sector of the economy continued to expand at a relatively high rate of 9% in the year 2007 with input from both the Government and the private sectors.

Construction activities of the Government sector were largely concentrated on infrastructure development schemes, particularly in road network expansion projects. The year also saw developments in capacity expansion projects in the power generation industry. Reconstruction activities, particularly in the Eastern province also contributed to the growth in the construction sector. Private sector interest in this sector was evident in the continued expansion of condominium, housing and shopping complex projects, which supported growth momentum in this sector.

Despite the high interest rate environment prevalent during the year, the loans and advances of the banking sector to this industry has grown considerably in 2007. Growth in this sector is further reflected by the higher usage of both domestically produced and imported building materials during the year. Although there was a shortage in cement supply for a short period of time during the latter half of the year, annual cement consumption increased by 10.7% in comparison to 2006.

The Government’s future plans to focus on particular growth areas within the construction industry however, are encouraging to the businesses in this sector. Some of the identified areas include:
• Irrigation Sector: Plans are in the pipeline to rehabilitate the existing irrigation systems and develop new ones,
• Roads: Plans include the rehabilitation of existing roads, development of the rural road network and building of new roads and expressways.
• Development of the Eastern Province (Nagenahira Navodaya)
• Public and Private Partnership (PPP) in the implementation of infrastructure projects.

The Agriculture, Forestry and Fishing sector in Sri Lanka grew moderately in 2007 and registered a growth of 3.3% in value added terms. With a huge global food crisis looming, the government is expected to step up its development of the agriculture sector, which augurs well for the growth of this sector.

A major focus area for the water and sewerage sector was the importance of providing safe drinking water and adequate sanitation facilities to the population. Given due credence, a separate Government ministry for water was established in 2007. The total budgetary allocation for projects undertaken by this ministry was Rs. 27.3 bn for the year 2007. At present 85% of the total population has access to safe drinking water, of which 32% has access to pipe-borne water. The drafting of legislation to strengthen the regulatory framework for water supply and sanitation by the Public Utilities Commission of Sri Lanka (PUCSL) was commenced in 2007 with the support of the ADB. The main objective of this technical assistance was to develop regulations for the water sector within the framework of the PUCSL. Act to facilitate credible, independent, accountable and transparent legislation for the National Water Supply & Drainage Board. This development opens up growth areas in
this sector.

The downside risks facing this industry come in the form of cheaper products from China. Furthermore, the availability of rental equipment for short-term projects and attractive prices offered on used equipment as a substitute to new equipment is a warning to future growth potential in the construction equipment industry.

(Source: Central Bank Annual Report 2007)

Operational Review

Construction Machinery

Dimo is the one of the main suppliers of heavy machinery for construction related activities in Sri Lanka under the brands of Komatsu, Bomag, Hanwoo & Schwing Stetter and Everdigm.

Buoyed by the growth in the construction sector, the Company has succeeded in achieving 102% of its budgeted turnover in the year. Favourable sales growth from the products introduced last year have contributed to this growth in turnover. During the year, the Company introduced Schwing Stetter Pump Cars and Mixers.

The focus continues to be to offer total product support services using our branch network. Further, to increase customer convenience, we plan to use the Anuradhapura and Kurunegala branches to display products from brands like Komatsu, Bomag and Everdigm. The Company also hopes to open a Training Centre for operators of construction machinery and material handling equipment.

An identified potential development area for the Company within this sector is the machine rental business. We also plan to introduce the GEHL Skid Steer Loader; a versatile piece of equipment for utility work around job sites. Apart from this, the Government’s future focus on some areas in the construction industry as discussed in the industry overview opens up new opportunities for this business.

Storage and Material Handling

The Company markets a range of products for storage, material handling, dock equipment and building maintenance under franchised brands of Komatsu, Schafer and Mhe-Demag. The most recent addition to our product range was the car parking solutions.

The sector has achieved 93% of budgeted turnover in the year. The Company’s profitability depends on our ability to offer ‘Integrated’ solutions, success in bundling products and effective after sales services.

Responding to the need for modern and compact Car Parking Solutions for new buildings due to the scarcity of parking spaces in the city area, we started marketing car parking systems last year. This new product has been accepted and is doing well in the market and we anticipate good future growth due to the expected growth in that industry. In the year under review we ventured into marketing plastic pallets for a wide spectrum of customers.

Causes for concern for this sector in future will include the emergence of 3rd party logistic companies in Sri Lanka and the GSP issues of the garments industry.

However, on the positive side, we anticipate growth in the market for material handling and storage facilities, especially in the Eastern Province.

Agri-Machinery

Dimo markets tractors, agricultural implements and machinery for the Agricultural and transportation sectors for franchises held by Mahindra & Mahindra and Claas harvesters.

During the year, the growth in turnover of this sector decreased by 14% compared to the increase of 68% enjoyed in the previous year.

To promote and encourage better sales, this business sector has decentralised its sales operation through its island-wide dealer network of 56 main dealers and 24 sub dealers. In order to further promote our products, a sales campaign was launched with the assistance of our principal Mahindra & Mahindra.

Among the new products we plan to introduce are the range of Mahindra & Mahindra Tractor Mounted Implements such as ploughs, cultivators, winch, post hole diggers and others. Another product we plan to launch next year is the Class wheel-type combine harvester for use in dry farmland.

The implementation of the Government’s large infrastructure development projects, especially targeting the agriculture sector of the country is expected to contribute to the growth in this business sector of the Company.

However, cheaper Chinese products pose a significant threat to the growth in sales of the DIMO products. In response to this challenge and in order to diversify its product range, the Company has plans to introduce Power Tillers at a low cost to the Sri Lankan market.

Fluid Management Systems

DIMO supplies electro mechanical equipment manufactured by the world renowned manufacturer, KSB, and offers technical expertise to the water supply and sewerage sector companies in Sri Lanka. Turnover decreased by 60% in the year as a direct result of the delays experienced in the publishing of tenders.

A continued source of concern for this business is the easy availability of cheaper Chinese products. Furthermore, competition within the sector has intensified by the entry of local manufacturers into the high-tech market which had been the domain of the imported products in the past.

We are planning to re-launch the Demag cranes and accessories, and to extend the product range by the introduction of Siemens process instrumentation equipment, electrical panel boards and electric motors. In addition, we are also planning to venture into the market for water, sewerage and waste water treatment market in the next year. The increased Government focus in this areas is bound to lead to greater growth in the future.

A key event organised by the business unit was a series of technical sessions to engineers and consultants in the building services sector to make them aware of the range of products and total solutions available by the Company.

The turnover of this business sector is expected to increase in the future as a result of the Government’s mandate to ensure clean drinking water as already discussed in the industry overview.

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