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



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.



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.



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.



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)



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



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.




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




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




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




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




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.




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




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.




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.




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




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




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.




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




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)




2(a)

2(b)

2(c)




REFERENCES:

(The Dempo Group, Home, Shipbuilding)

(KPMG, Shipbuilding Sector in India, 2007)

(KPMG, Indian Maritime Industry, 2009)

(Kanekar, 2011)

Group 4 Section D End Term Paper

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