group 4 section d end term paper
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Business Environment Analysis of Dempo
Shipbuilding and
Engineering Pvt Ltd
3/19/2011
Section D/ Group 4
Ashish Mukharjee 2010189 Email id: [email protected] Ph. No: 9823252709
Prathamesh Joshi 2010218
Suhail Thakur 2010230
Veera Redkar 2010235
Vikash Kumar 2010237
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DEMPO – THE GROUP
The Dempo Group of Companies has been a leader in the field of Trade, Commerce,
Industry, Education, Sports and Social Service right from the inception in the year 1941. This
company was built from Souza Mineralia Pvt. Company.
The group has diversified business activities like mining and export of iron ore,
manufacturing of Calcined Petroleum Coke, Pig Iron, Shipbuilding, Food Processing, Real
Estate, Sports and Media. The group has consolidated annual turnover of about Rs. 1000
crores. The group has global presence spanning from Europe to Far East and South East Asia.
The brand name of Dempo has been an inseparable part of the era of industrialization in the
State of Goa. A lineage dating back to the 17th
Century, Dempo today is a name that
symbolizes excellence, trust and commitment to the society.
DEMPO SHIPBUILDING AND ENGINEERING PVT LTD
Dempo Shipbuilding and Engineering Pvt. Ltd. is a premier shipyard in Goa. The Group's
other traditional mainstay has been ship building and ship repair, two areas in which it has
proved to be an anchor of reliability and innovativeness along the Western coast of India.
Located on the banks of the picturesque Mandovi River, just 8 Kms. off the Arabian sea, the
yard is spread over a area of 25,000 square meters and is strategically placed between the
National Highway and the river navigation channel. The yard has requisite facilities and
expert work force to provide International quality services at competitive rates. It is certified
to be conforming to ISO Standard 9001:2008 in respect of ship design, ship building and ship
repair operations. Quality is the key and Excellence is the norm, at Dempo Shipbuilding.
The shipyard also has another yard on the banks of the Zuari River at Undir, Ponda, just 10
Kms. Off the Arabian sea. The yard is spread over an area of 20,000 square meters with a
side lunching facilities and an outfitting bay. A Dry Dock of size 100 mts X 20 mts is
proposed to be constructed at this facility in 2010.
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FACILITIES AT THE YARD
The yard has Slip Way of the size120 mts X 20 mts.
The yard also has a Side Launching Bay 110 mts X 20 mts and 80 mts X 16 mts.
There are Dry Docks which, 2 in number, of the size 93 mts X 18 mts (maximum
docking draft – 2.5 mts) having the facilities for Blasting, Painting, Steel Renewals,
Stern Gear, Propulsion, Deck Machinery, Piping, Plumbing, Repairs and Overhaul
and all types of Mechanical and Electrical jobs.
The Outfitting Quay if 120 mts. In length
The Mechanical, Electrical and Steel Workshop is fully equipped
The Fabrication Bay both covered and open with monthly throughput of over 150 tons
per yard.
The yard has a full-fledged CAD Centre for a conceptual and detailed design,
production drawing, naval architectural calculations etc.
The yard has a Quality Control Department for on line quality assurance and liasions
with third party inspection agencies and statutory authorities.
Custom Bonded Warehouses
CNC Cutting and CO2 Welding Machines
Shipbuilding has historically witnessed a robust growth in demand for new vessels. Though
the short. Term demand has seen peaks and troughs; overall the sector has shown a healthy
rising trend in demand. The overall CAGR between 1980 and 2005 is around 6 percent,
which is higher than most Manufacturing industries. At present, the sector is amidst an
unprecedented boom, unseen in the last three decades. At the end of 2007, the global order
book had swelled to 457 mn DWT having quadrupled in the last 5 years. The key reason is
the rapid increase in new orders which has outgrown in the increase in global shipyard
capacity. Average delivery in the last 5 years has been around 60 mn DWT whereas new
orders in the same period have been around 100 mn DWT per annum.
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INDIA SHIP REPAIR INDUSTRY
NEED FOR SHIP REPAIR
Ship repair is done for following reasons
Routine maintenance and Regulatory Inspection
Damage Repair
Conversion and Reconstruction
There are various categories of repair
Hull Repair: constitutes mainly structural work.
Machinery Repair: Mainly repair of main engine, propeller shaft, auxiliary engine etc.
Accommodation Repair: Repair of equipment‟s found in accommodation area, air
conditioning and ventilation etc.
Electrical/Instrumental Repair: Repair of any electrical or instrumentation on ship.
Painting: Painting plays a very major role in preventing structural member and
pipelines to decay while operating in saline water.
Ship repair industry has to consider the following things:
Trade operations existing near ship repair yard.
Transportation facilities for getting raw materials and equipment.
List of ship size operating in that particular region.
Environmental conditions prevalent at the site.
Draft available for channel.
List of sub-contractors and availability of skilled labour locally.
Proper and standard management of repair activity.
Equipment‟s used should be standardized.
Availability of advanced cutting, welding and outfit machineries.
Advance detail design layout for machineries and dry dock facilities.
Selection of dry dock.
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Research report on dock days of dry dock.
Shipyard should be able to cater to the future growth.
Costs involved in ship repairing can be divided as
Direct cost
a. Dry docking cost
b. Labour cost
c. Spares cost
d. Structural work cost
Indirect cost
e. Revenue loss
f. Operational expenses
g. Mobilisation expenses
h. De-Mobilisation expenses
Demand and supply growth in ship repair
Major component in ship repair is the requirements that are derived from dry docking surveyundertaken to satisfy the regulations of classification societies. Other demand comes from
damage repair, technological changes/ ship conversions. Because of economies of scale size
of ships are increasing and to accommodate those bigger vessels port capacity is also being
increased. Increasing world trade is also another major demand influencer of the ship market.
Demand influencers
International regulations
Technological changes/ ship conversions
Age of fleet
Accidental damage
Increasing trade
Related developments (port sector)
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Supply influencers
Ship repair capacity
Low cost and productivity.
Subcontracting capabilities.
Repair subsidies.
Ancillary industry.
Ship repair technology
IT enablement and process integration
INTERNAL ENVIRONMENT
Mining activities in Goa commenced in the early 1940‟s when it was still a Portuguese
colony .The key players‟ in the market at that time who were given permission to operate in
the mining business were family owned firms who had found favor with the colonial
governments. These included the Dempo‟s , Salgaocar‟s and Chowgule‟s.
Initially the transportation of ore on the inland waterways from the mines to the bulk carriers
out at sea was unorganized. It was carried out manually using small boats and canoes. This
was feasible as the operations were at a small scale level and did not suffer from the absence
of better methods. But 1950 onwards as the demand for Goan ore increased in the
international market the companies started procuring small 100-150 DWT barges second
hand from abroad to meet this demand. This can be considered as when the industry took its
first steps to becoming and group of organized businesses.
Dempo Ship Building and Engineering Pvt. Ltd opened its first yard in Goa in the late 1950-s
to meet the service and repair requirements of the vessels the Dempos had procured from
abroad to aid in their ore export business. This yard was primarily a repair and maintenance
yard which looked after these activities in the monsoons when the mining activities were
suspended due to bad weather. The organization employed and trained locals to work in this
yard so as to provide an employment avenue to the local population. For this it invested a
major amount in training and developmental activities. But very soon it realized that the
employees and the work force in general was underutilized as they had a major chunk of
work in the monsoon season and for the rest of the year there was hardly and work. Thus in
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Dempo Shipbuilding and Engineering Pvt Ltd
orders to better utilize the work force they decided to venture into the barge building industry.
For this they hired new engineers and drew up contracts with ships design firms in Mumbai.
The first vessels constructed at the yard were of 750DWT and for personal use by the Dempo
Mining industries
Geographical constraints
The geography of Goa is a major constraint for further development of ship building
activities in the inland waterways. This is due the tidal nature of the rivers and a very small
tidal difference of less than 2.6 meters. This constrains the size of vessels that can be built at
any location on any inland shipyard. Also the draft capacity of the Mandovi (on which the
Old Goa shipyard is located) and of the Zuari( on which the Undir-Ponda shipyard is located)
is very less because of which ships with a very large draft requirement cannot be constructed.
There is also a limitation with respect to air draft which is the height to which a ship can be
constructed. Due to the presence of road and rail bridges along the Mandovi and Zuari the
maximum air draft possible is just 9.5 meters in the Mandovi and 12.5 meters in the Zuari
Organizational Structure
Dempo Shipbuilding and Engineering Pvt. Ltd is primary divided into two main divisions
Production
Administrative
Production looks after the actual construction and repair work of vessels. They are further
divided into
Mechanical Engineering: Look after the engineering aspects of repair and
production. This includes interpreting designs, drawing up production plans, raw
material requirements, assembly of parts, testing, certification etc.
Electrical Engineering: Look after internal electrical and electronic installation
and planning. These are required in all modern vessels according to regulatory
requirements. They are also responsible for finding vendors for components which
will be required in the vessels such as navigational equipment, electrical fixtures
etc.
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Dempo Shipbuilding and Engineering Pvt Ltd
Fabrication: They are primarily involved with fabrication of parts which are
required and outsourcing jobs which cannot be carried out at the yard itself. They
thus are also responsible for checking quality of outsourced parts that they get and
maintaining that all parts are within the specified limits of tolerance
Carpentry: They are responsible for providing any wood work related equipment
required in the vessels. Most of the work is outsourced though some of it is also
carried out in house
The administrative duties involve human resource management, accounting, legal
documentation and marketing.
In 1990 the company shifted to a contract based labor system to better utilize funds and also
better use their. The human resource department today primarily looks at whether contractors
follow the required regulations with respect to registration, Employment security, PF
schemes, PAN card requirements and other such labor regulations. They also install
mechanism to keep their permanent staff numbering between 55-60, motivated and design the
remuneration schemes and plans for them.
Finance and accounting look after day to day financial activities. They deal with payments to
contractors, petty cash payments, internal auditing, arranging for loans and financing, bank
guarantees and if required communicating with the Dempo group financing head for any
extra financial aid if required. An important thing to be noted is that the balance sheet is not
prepared individually for each company under the Dempo group of industries and a
consolidated balance sheet is prepared for the whole group comprising the assets and
liabilities if the whole Dempo group. Hence the finance and accounting department are
answerable to the CFO of the Dempo group.
Operations
The company has a well-defined set of operational regulations and places high importance on
process capability and quality. Dempo Ship Building and Engineering Pvt Ltd is an ISO
9001:2008 certified organization and thus implements stringent measures and works to a
great extent on its quality management systems.
The company does on have its own design team and relies on design consultants for vessel
design with 2 consultants in Goa and Mumbai each and 1 in Singapore. Depending on
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Dempo Shipbuilding and Engineering Pvt Ltd
customer requirements they outsource their design requirements and choose the best design
available depending on what the customer desires and the price negotiated.
The company is also highly concerned and sensitive to the issue of continuous improvement
to as to remain competitive in the market and provide highly quality services and vessels to
all customers. They believe that the best way of remaining in the business is by improving
continuously and obtaining re-orders from their customers. The organization also uses ERP
systems to better utilize its resources. At present it is using a self-developed system called
Shipyard Management System but with expansion and growth in mind, they are planning to
implement SAP within the next year for which the pre-implementation training programs
have already commenced
The operations in the marketing department follow a fixed procedure and involve the
following steps
Customer enquiry
Preliminary design
Negotiation on price and design
Design modification
Design Approval
Final negotiation
Legal documentation
The payment schedules for the vessels taken as projects are as follows
7.5 lakh rupees on projects acceptance
20% of price on commencing construction
20% of price on keel laying
20% on completion of hull construction
10% on vessel launch
Balance on delivery
The usual time taken to construct a 2000DWT barge is between 4.5-5 months
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Dempo Shipbuilding and Engineering Pvt Ltd
Products
The company caters to a wide variety of customer requirements. Their major products include
Barges up to 4500DWT
Pilot launches
Mini Bulk Carriers
Off shore supply vessel
Hopper barges
Multi Utility craft
Jack-up platforms
The company functions with the aim of maximizing the value provided to its customers.
Because of this focus they have been able to maintain a steady number of orders from their
customers and the yard is booked to capacity till the end of 2012.
Apart from this the major highlights of the company are
No capacity underutilization in the last 5 years
90% of the workforce consists of migrants
They provide wages above the industry average in order to retain and draw the best
talent in the industry
EXTERNAL ENVIRONMENT
The Dempo Group has embarked on a major restructuring exercise involving all itsbusinesses in the group, which include Mining, Calcined Petroleum Coke, Pig Iron,
Shipbuilding, Food, Travel and Media, Dempo Football Club and its interests in Education.
As a part of this restructuring, the Dempo Group has sold V S Dempo & Company Private
Limited (VSD), which houses the Group's Goa mining assets, to Sesa Goa Limited. The
major customers of Dempo are
o Dempo Industries
o United Shippers Mumbai
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Dempo Shipbuilding and Engineering Pvt Ltd
o Adani Shipping Pvt Ltd
o M Pallonji & Co. Pvt ltd
o Vespan
o Mundra port & SEZ
The Shipbuilding at Dempo is aimed at the domestic market only. The external factors have a
very minimal effect on the company. Hence Dempo was not affected by the recent economic
recession and the other global factors.
Raw materials
The company‟s requirement for steel is fulfilled by either importing steel from outside or by
the indigenous market only. They have special “Bond Arrangements” with customs and are
exempted from import duties on the incoming steel for their company‟s requirement. The
engines that are needed by the company are either imported aor bought from the local
company Kirloskar Cummins. As all these things are bought with a bond arrangement in
place, hence the scrap value is closely monitored. They use high end navigational equipment
and gearboxes which is imported from abroad.
Market Segment catered to
Dempo Shipyard caters primarily to the domestic market only. Hence it does not have a large
market outside its domestic reach, because of this factor they have a large number of loyal
customers and they get repeat orders from them. They don not compete with EOU( export
oriented units) e.g. Bharati shipyard and Chowgule shipyard who deals with the international
market.
Competitive Advantage
The market that deals with shipyard is basically an unorganized sector and Dempo is one of
the few organized company in this sector. Hence it has an edge over the others. As they have
been established for the past 40 years and cater majorly to the domestic market only, they
have a powerful goodwill. The Dempo name is highly respected and reputed in the state andalso outside state, so this name is very beneficial for the company. As the company is dealing
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Dempo Shipbuilding and Engineering Pvt Ltd
in many other businesses and is successful in each of them. This gives them better financial
credibility and it is much easier for them to raise funds. Dempo gained from being first
movers in industry because today land prices and laws regarding starting similar ventures are
very stringent.
Dempo has been rated highly for Quality and Timely delivery in the recent IRS (Indian
revenue services) reports. The pricing of the company is slightly higher compared to the
competitors but despite of this they have repeat customer orders because of a strong and loyal
customer base. Based on repeat orders the customer satisfaction level at Dempo is found to be
95%.
Taxes
Dempo pays a 5% VAT on new vessels up from 4% earlier. The excise duty was exempted
for the company due to the bond agreement but according to the new rules the company is
required to pay at 1.06%. They have special customs bond with special permissions to import
metal from abroad.
Regulatory Compliance
According to the regulatory bodies the vessel is constructed abroad and brought to India.
Hence they keep a constant tab on use of steel which is imported. This is done by customs
officials posted to their office. The scrap levels of the machines are also measured from time
to time and the maximum allowable is limit is 3.5%. This also helps improve processes and
keep strict control. A strict fine is imposed an case any of the rule is not followed e.g. any
increase in scrap level leads to a fine .The company has no benefit from the government of
Goa.
The company have not faced any major opposition or problem from local environmentalist
etc due to this regulatory compliance. They follow the reuired statutory ruling i.e. CRZ-1993
etc. which is a coastal regulation zone.
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Dempo Shipbuilding and Engineering Pvt Ltd
Work Culture
Dempo Shipyard believes in keeping proper paperwork. Work culture throughout dempo
industries is standardized and properly maintained. 99% paperwork is always in order and
ready for inspection
SWOT ANALYSIS
Strength
Situated at major shipping line between east and west.
Skilled as well as unskilled workforce.
Low cost and cheap labour.
English speaking people.
Experienced labour force.
Manufacturing hub.
Robust financial system.
Weakness
Lack of research and development in ship repair sector.
Lack of dedicated ship repair yard.
Lack of capacity.
Low labour productivity and high labour unrest.
Lack of well-developed ancillary industries in India.
Old age employees.
Old and outmoded facilities and lack of trained and qualified manpower.
Exchange rate fluctuation.
Opportunities
Growth in trade
Increase in Port capacity
Growth of Indian Fleet size
Increase in exploration and production of oil in Indian subcontinent region
Old age profile of Indian Domestic fleet Boom in ship building
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Dempo Shipbuilding and Engineering Pvt Ltd
Threats
Increasing labour cost without much improvement in productivity.
Environmental regulation in ship repair.
Attrition of young and talented people to gulf.
Over supply if ship repair yard.
PEST
Political
Government support.
o Goa government does not provide it support for expansion so Dempo is
planning to move to gujrat. Gujrat government is providing it support required
for expansion.
Economic
Policy initiatives
o Dry docks will be given deemed „export oriented unit‟ (EOU) status.
o Policy will encourage FDI in ship building and repair industry.
Infrastructural initiatives
o In house design and research activities will be promoted by giving budgetary
support and fiscal initiative.
o
The new dry docking policy will encourage creation of ship repair unitsadjacent to the ports to be able to repair/dry dock large sized ships.
Financial and fiscal initiatives
o Taxation in ship building and repair activity including customs and central
excise would be brought on par with EOU units.
o Capital goods imported for ship building/repair facilities would be exempt
from customs duty.
o The industry gets excise and sales tax exemption for steel procured
indigenously.
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Dempo Shipbuilding and Engineering Pvt Ltd
Social
Have not faced any major opposition or problem from local‟s or
environmentalist.
Follow required statutory ruling, and CRZ-1993 coastal regulation zone
Believe in keeping proper paperwork. Work culture throughout dempo
industries.
99% paperwork is always in order and ready for inspection.
They provide higher than average salary considering high cost of lib=ving in
GOA and to retain employees.
Technology
Dempo uses ERP system but soon it will be migrating to SAP. With increased business using
IT tool like SAP is advisable because of its features like:
o Ability to make basic planning based on initially assessed volume of repair
work.
o Flexible for re-planning because of emerging additional work found necessary
to attend or cancellation work.
o Ability to take up issues regarding procurement planning and indent
generation.
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Dempo Shipbuilding and Engineering Pvt Ltd
QUANTITATIVE ANALYSIS
The first regression was done to check the improvement in productivity. Manufacturing
expenses varies directly with sales and repair revenue. Time was introduced as a dependent
variable to gauge the improvement in productivity over time.
As per Exhibit 1(a), R square is 0.995. So the dependent variables can explain the 99.5%
change in manufacturing expenses. The F is 417.187 and the significance is .00. So the model
is significant.
As claimed by the company that over the years they have improved their productivity. We
observe that time has a negative slope, which shows that manufacturing expenses have not
increased proportionately with sales and repair revenue, thereby generating more profits for
the company. The significance of time is just above 0.05. This could be because of less
number of data points and data modifications by the company.
Regression Equation:
Manufacturing Expenses = 16999430.77 - 3058077*Time + .252*Sales Revenue+
.364*Repair Revenue
The Second regression was done to gauge the effect of steel prices on profitability of the
company. The profitability ratio was taken as independent and steel prices were taken as the
dependent variable. The profitability ratio was taken as (sales+ repair revenue)/manufacturing
expenses.
As shown in Exhibit 2(a) The F Value is 27.21 and the significance is .001. So the model is
significant. The R square is .773 so; the steel prices can explain the 77.3% variation in
profitability. Steel is the main input to the manufacturing and profitability depends quite a bit
on steel price.
Regression Equation:
Profitability Ratio = 1.246 + 8.32E-005*Steel Price
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Dempo Shipbuilding and Engineering Pvt Ltd
FUTURE PLANS
Dempo Shipbuilding and Engineering Pvt Ltd In 2004 opened their second yard in Undir-
Ponda. This yard was started with an initial expense of just 1.5 crore rupees and in the last 6
years has been highly profitable. The company now plans to expand this facility by investing
between 8-10 crore. This investment would be used to construct a new jetty, a new metal
workshop, a new CNC facility and an office.
The company also feels that its operations in Goa have reached a saturation level and for
growth prospects they must look outside the state. The only improvements possible are in the
form of additional automation at the yards and optimizing the processes.
The company is thus looking at expanding its operations to Gujarat where is plans a new yard
capable of building vessels of 25000DWT. For this they have outline three strategies which
are
Partnership with an existing yard
Direct purchase of an existing yard
An altogether new Green field project
Of the 3 options the first two have an advantage that if chosen then operations can begin
within a year. The Green filed project on the other hand will require at least 4 to 5 years
before becoming fully operational due to the infrastructure development that will be required
first.
The company has also signed an MOU with the Gujarat government who have agreed to aid
and support in whatever way they can.
The new yard will target a different set of customers and as it will be able to provide much
larger vessels. Also it will look at targeting the export market as well which right now is not a
priority for the company. Also the new yard will have advanced dry dock and repair facilities
which will make it lucrative for a lot more customers and with the Indian shipping industries
future looking bright and growth oriented this venture is expected to be a very big profit
generator for the company
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Dempo Shipbuilding and Engineering Pvt Ltd
KEY FINDINGS AND RECOMMENDATIONS:
The company is recession proof in terms of the order book, as the clientele is
primarily domestic, whereas EOU‟s face fluctuations in their revenues.
The custom bonded facility offers them the advantage of duty exemptions on
imported steel, but it also calls for strict supervision with regards to the amount of
scrap and usage of steel. This in turn increases their productivity.
As per our quantitative analysis, the company‟s profitability is heavily influenced by
fluctuating steel prices. To weather-proof themselves form the uncertainty of steel
prices, they could think about entering in hedging agreements. Also the steel is mostly
imported so even the exchange rates influence the profitability.
With the plans of expansion in headway, the company should analyse the macro-
environment in various states, in which it plans to operate by conducting market
research studies on regular basis, through experts. This will help increase control over
both internal and external environment to an extent, as well as will give the company
time to prepare for unpredicted situations.
As the company is planning to implement SAP, the need for which arose because of
the expansion plan, we recommend them to provide training to the employees for
better and quicker acceptance.
To improve productivity in terms of repairing Ships, the company could do feasible
repairs in layup berth. This will save time and cost as no additional compensation
have to be borne by the company. This is a best practise followed by international
Shipyards.
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Dempo Shipbuilding and Engineering Pvt Ltd
LIMITATIONS:
As the company is not listed, we had to rely on financial data provided by the
company. This data was modified to a certain extent as dictated by company policy
Most of the findings expressed are based on our primary research, due to lack of
previous study and lack of information on the Web
The short duration of the research carried out did not allow for extensive analysis of
the company and the industry
We were unable to find a comparative listed company, that would add to our findings
and analysis
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Dempo Shipbuilding and Engineering Pvt Ltd
EXHIBITS
1(a)
Model Summary
Model R R Square Adjusted R SquareStd. Error of the
Estimate
1
.998(a) .995 .993 4432491.38404
A Predictors: (Constant), Repair, Sales, Time
1(b)
1(c)
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2(a)
2(b)
2(c)
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Dempo Shipbuilding and Engineering Pvt Ltd
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Dempo Shipbuilding and Engineering Pvt Ltd
REFERENCES:
(The Dempo Group, Home, Shipbuilding)
(KPMG, Shipbuilding Sector in India, 2007)
(KPMG, Indian Maritime Industry, 2009)
(Kanekar, 2011)