Management Discussion and Analysis Repor The global economic environment in recent times has been challenging and marked by increasing volatility and uncertainty. Concerns range from the slowing Chinese economy, falling oil and commodity prices, to geo-political risks. Inspite of the above, the Indian economy grew by a robust 7.3% in 2014-15 and is expected to grow at a similar rate in 2015-16. The agricultural sector is expected to remain flat due to the second consecutive year of poor monsoon. Industry and service sectors are expected to grow around 7% and 9% respectively in 2015-2016. On the back of green shoots in manufacturing, modest recovery in consumption and support from government spending, the manufacturing sector is expected to perform better. In 2015-16, the domestic automobile industry performed better on the spate of new launches. Production of four-wheeler light vehicles grew by 5.6% while two-wheelers showed a modest performance registering a growth of 1.8%. With the focus of the Central Government on removal of infrastructural bottlenecks, the Indian construction industry is estimated to grow by 5% in 2015-2016. Impetus to the rural sector, improved domestic demand, controlled fiscal deficit, cut in interest rates by the Reserve Bank of India and potential impact of reform initiatives of the government are some of the key factors which are likely to lead to the overall stability of the Indian economy. The products manufactured by your Company serve several sectors including agriculture, automotive, pharmaceuticals, construction, consumer durables, consumer care, paper, paint and leather. AGRICULTURAL SOLUTIONS The Agricultural Solutions business includes agrochemicals like insecticides, herbicides, fungicides and plant growth regulators. The sales of the products of your Company's Agricultural Solutions business are dependent on the monsoon. The advent of the second El Nino resulted in a drought across significant parts of the country. This adversely affected the sales of all products as well as resulted in subdued performance of this business during the year under report. However, your Company undertook various cost optimization & product diversification measures to mitigate the impact on profitability. To expand its product portfolio, your Company introduced two new crop protection products namely: OPERA™ and TYNZER™. Many training and marketing programs were carried out to launch these products within the farming community and were well received by the farmers. During the year, your Company continued to focus on sustainable farming by educating farmers on the safe use of agrochemicals. PERFORMANCE PRODUCTS The Performance Products business includes performance chemicals, dispersions & pigments, care chemicals, nutrition & health products and paper chemicals. The business caters to the requirements of a wide spectrum of industries, including leather, plastics & coatings, detergent formulators, pharmaceuticals, automobile and oil. During the year under review, the leather chemicals business witnessed challenges due to stringent pollution norms implemented by the government. Despite the challenging market conditions, the sustained efforts of this business helped to match the brvious year's volume and improve profits. The Leather Chemicals business continued to grow in the beam house segment, by converting challenges into opportunities. During the year under report, this business launched the Dry fast system, which led to water saving and process time reduction. In line with the strategy of moving closer to the customer, this business shifted its headquarters to Chennai in August 2015, with a clear objective of enhancing customer service through innovative, sustainable and reliable products and offerings. The Care Chemicals business of your Company caters to the personal care, home care and formulation technology sectors. Rise in disposable incomes and increased awareness amongst consumers have contributed to the increase in sales in the personal care industry. In the laundry care category, the business witnessed good growth in surface cleaning and dish washing categories. This growth has been ably supported by your Company's investment in the Dahej site. Improvement in the quality of lifestyles have made consumers more aware of better performing and higher efficiency products in the home care industry. This is expected to drive demand for your Company's polymers, fluorescent whitening agents, stain removers and surfactants. The formulation technology sector was characterized by growth in agrochemical additives, surfactants for textile chemicals and specialty additives. New opportunities for the products of this business were also realized in the rubber and paper industry. Key focus areas have been identified for specialty additives, with its offerings to enhance industrial processes. Your Company's Plastic Additives business is categorized into anti-oxidants and light stabilizers for the plastic industry. Customers are broadly classified into upstream industries such as polymer manufacturers and downstream industries such as packaging and automotive. Expansion plans of major polymer producers and expected shift from natural fibers to plastic in the packaging sector will give rise to the demand for light stabilizers and anti-oxidants. Focused business development activities undertaken during the year helped to increase the sales of this business and also regain customers as compared to the brvious year. The Fuel and Lubricants business of your Company caters to the automotive, fuel, lubricants, refinery and refrigeration industries. Despite the marginal growth in the automotive industry, this business was able to register good growth in sales as compared to the brvious year. New markets in the area of coolants & brake fluids and service fills for automotive OEM's (Original Equipment Manufacturers) were established during the year. Additionally, this division continued to supply anti-freeze coolants to major automotive manufacturers in India. With new product launches and entry into new market segments, growth prospects for this business look optimistic. The Water Solutions business of your Company provides solutions to raw water, industrial and municipal effluents. Significant growth in the municipal and industrial effluent treatment sector is expected to offer good opportunities for its flocculants and coagulants. With secured orders from key accounts, the sales of the Water Solutions business of your Company grew over the brvious year. The Oilfield Solutions business caters to the service companies that carry out work for the oil sector. Growth opportunities have been identified in the enhanced oil recovery areas. Your Company's Mining Solutions business is mainly focused on the coal and alumina mining sectors. With reforms in the mining sector, this business is expected to grow, but industry related challenges continue to remain. The Nutrition & Health business of your Company offers a combrhensive range of products and solutions for Human Nutrition, Animal Nutrition, Pharma Solutions and Flavours & Fragrances. This business demonstrated strong growth across segments. The animal nutrition business also launched a new generation enzyme namely Natuphos* E during the year. The year saw a divestiture in the Pharma solutions business. A part of the portfolio on API and Custom Synthesis was divested globally. The focus of your Company continues to remain on excipients and certain core API's viz. ibuprofen, Omega 3, etc. The Dispersions & Pigments business of your Company comprises of pigments, resins, dispersions and additives, which cater to the needs of the adhesives, paints & coatings, printing & packaging, plastics and construction industries. The business also posted good growth in sales since commercial production began at the Dahej plant. Innovative paper coating binders were introduced to improve paper quality & printability. The decorative and construction industry as well as the plastic and printing and packaging industry will continue to receive priority. This business registered growth in profits during the year under review. The Paper Chemicals - wet end business of your Company caters to diverse industry segments such as graphical paper, newsprint, and packaging paper and enjoys substantial customer goodwill and industry leadership. Innovative solutions to encourage paper recycling and reduction in the usage of water in the paper manufacturing process were also introduced. Exports of imaging products continued to rise. A combrhensive product portfolio along with requisite technical expertise enabled this business to grow in sales and profits during the year. CHEMICALS Your Company's Chemicals business includes intermediates, petrochemicals & monomers. The chemicals supplied by the BASF Group cater to the requirements of a wide range of user industries including coatings, life sciences, construction additives, food and feed, pharmaceuticals, agrochemicals, plastics and fibers, process chemicals and intermediates. The Intermediates Division of your Company caters to more than 20 major industry segments such as pharmaceuticals, agrochemicals, coatings, epoxy, leather, food, feed, etc. Major growth drivers for the business were exports of agrochemicals and pharmaceuticals actives. New business model for one of the strategic products of this Division enabled customers to procure with less lead times, thereby supporting the growth of their businesses. During the year, this business registered robust growth in sales. However, lower crude and raw material prices are a major concern and may impact the performance of this business. With the expected strengthening of the US economy, growth in pharma sector, increase in export penetration by agrochemical manufacturers and growing thrust in the auto and appliance industries, the outlook for this business looks positive. The Petrochemicals business of your Company comprises Oxo-alcohols, Solvents, Acrylic monomers and Plasticizers. For the year under review, the business did not grow as compared to the brvious year, primarily due to volume availability in acrylic monomers. Inspite of this, the business was able to retain most key customers. However, with new and upcoming capacities in China for both Oxo-alcohols and acrylics, the future outlook for this business is challenging. We will continue to have close engagement with our customers and position ourselves as one of the key suppliers in the Indian market. The Monomers business deals in basic raw materials for polyurethane & polyamides and intermediates. Strong market conditions in sectors such as flexible PU foam, construction, footwear, flexible packaging etc. contributed to the growth of the methylene diphenyl diisocyanate business. In the polyamides and brcursor business, focus was on the packaging and monofilament segment, where substantial growth was seen both in value and volume terms. However, local availability of Toluene diisocyanate (TDI) and increasing capacity for Isocyanates in Asia with fluctuating raw material prices will be a challenge for this business going forward. We will continue to engage with customers and with the methylene diphenyl diisocyanate (MDI) splitter at Dahej, we expect to position ourselves strongly in the market. FUNCTIONAL MATERIALS & SOLUTIONS The Functional Materials & Solutions segment of your Company comprises of Coatings & Construction Chemicals, Performance Materials and Process Catalyst Technologies. The Coatings business comprises of automotive, two wheelers OEM coatings and industrial coatings for the wind energy segment. The Coatings business for automotive and two-wheelers was affected by adverse market conditions. The business focused on developing new products as well as enhancing supply share at existing accounts and enabled acquisition of new customers. Coupled with policy liberalization and thrust on clean energy, the industrial coatings business, in respect of its wind energy segment witnessed an increase in demand. The Construction Chemicals business of your Company supplies chemical solutions and technologies to customers in the construction industry. The Admixture Systems segment in the construction chemicals division caters to customers from the ready-mix, brcast, site mix, underground construction and the cement producing industries. Inspite of liquidity concerns, this segment registered a positive growth in sales driven by volume growth in infrastructure and institutional sales. The Construction Systems segment offers a wide range of products and solutions such as industrial floorings, grouting and anchoring systems, concrete repair and protection materials, crack repair and injection resins, joint sealants, tiling products, waterproofing membranes and exterior insulation and facade systems. This business registered substantial growth driven by higher value in Waterproofing, Flooring and Repair systems. During the year, a new Admixture plant was commissioned at Nellore in Andhra Pradesh. This plant will cater to the growing needs of customers in Andhra Pradesh, Telangana and Tamil Nadu. The year also witnessed the groundbreaking of our new plant at Kharagpur, West Bengal which is expected to be inaugurated during the financial year 2016-17. This site will produce the entire range of admixtures and accelerators and will cater to the demands of customers based in East India and Bhutan. With the advent of rising demand in various infrastructure and industrial projects, coupled with our expanding production footprint, the outlook for this business looks optimistic. The Performance Materials business of your Company caters to the requirements of the Consumer, Construction, Industrial Product applications and Transportation Industries. The automotive industry recorded slower growth in 2015-16. Despite this, the Performance Materials business (primarily Polyurethane and Engineering plastics) achieved significant growth in sales during the year by continuing to capture new markets through business development and improving share at OEMs and their suppliers. The production unit for CELLESTO* at Dahej ramped up production in the current year and expects to achieve full capacity utilization in the forthcoming year. While the Budget proposal of levying pollution cess on new vehicles is expected to have an impact, the Company maintains a positive outlook towards growth in this sector. The Consumer industry business continues to have a strong brsence in the appliance (refrigerator), footwear and furniture markets. While the appliance market did not grow significantly, this business registered growth by adding new customers and gaining volume from existing customers which resulted in increased utilization of our integrated polyurethane production at Dahej. In the footwear market, your Company is one of the leading suppliers. While competition from China led to drop in volumes in the year under report, the Company will continue to engage with customers and further strengthen its participation leveraging on local supply capabilities from the Dahej plant. The Polyurethanes business of your Company continued to register growth in the construction industry due to value-added services provided to large customers and introduction of our system solutions in new markets. Overall, the Performance Materials business delivered strong growth in sales volumes during the year under report. But, falling feedstock prices may impact the product pricing and is a concern for this business. Your Company is taking the necessary measures to ramp up capacity utilization at Dahej which will give the business a further boost. The Process Catalysts business of your Company caters to the refining, petrochemicals and downstream base and fine chemicals industries. During the year, this business registered growth in sales of refining catalysts. Commercial supplies from the fine chemicals catalyst plant at Mangalore, which caters to the pharmaceutical & agrochemical industries, also picked up during the year and we expect momentum to build further over the coming years. The medium term outlook for process catalysts remains positive on the prospects of growth in the refining, petrochemical and pharmaceutical segments in India. TECHNICAL MANAGEMENT During the year, production volumes at your Company plants increased over the brvious year primarily due to commencement of commercial production at the new plants at Dahej and Nellore. All the 10 plants at the Dahej site have commenced commercial production resulting in higher output during the year under report. Our commitment to the site was further reinstated due to ISO 9001 and ISO 14001 certification. Additionally, the Care Chemicals plant has been certified by cGMP. The CELLESTO* plant which caters to the automotive industry has obtained the certificate of confirmation for TS 16949 within the first year of its operation. Capacity debottlenecking was carried out at your Company's Ankleshwar plant manufacturing imaging products which led to improved capacity. The Ankleshwar plant was also the runner up in the Large Industry category for Manufacturing Performance (2014-15) in a competition organized by the Ankleshwar Industries Association. The Thane site, your Company's first manufacturing site in India located in Navi Mumbai, completed 50 years of operation this year. This site achieved successful safety performance in the combrhensive Responsible Care audit carried out by BASF SE, Germany. This site also received State Level Energy Conservation Award for the third time in a row. In line with your Company's purpose "We create chemistry for a sustainable future", your Company has been working together with Indian chemical suppliers' community towards enhancing sustainability within the area of supply chain. These programs have been successful in sbrading awareness on sustainability and have been well apbrciated by the suppliers. Your Company, through Industry Associations, have helped the Ministry of Environment & Forests to draft the Plastics Waste Management Rules and have also highlighted the use of alternate composite plastic bags for virgin plastic bags INTERNAL FINANCIAL CONTROL SYSTEMS AND THEIR ADEQUACY Your Company has established adequate internal financial control systems to ensure reliable financial reporting and compliance in accordance with the laws and regulations. All resources are put to optimal use and adequately protected against any loss. All transactions are authorized, recorded and reported correctly. Policies and guidelines of your Company are being adhered to and improvements in processes are being carried out on an ongoing basis. The principles of risk avoidance, such as segregation of duties and approval based authorisation matrix form the basis for the internal control systems. The efficiency and effectiveness of the internal control system over financial reporting has been performed by the management by evaluating, documenting, testing and reporting the relevant processes and controls. Your Company's internal control systems are also supplemented by an extensive program of internal audit by an independent firm of Chartered Accountants. Internal audits are conducted on a regular basis and a summary of the observations and recommendations of such audits are placed before the Board of Directors or Audit Committee of your Company. In line with BASF Group policies, the Group's internal auditors also perform audits periodically in selected areas of operations. The Audit Committee constituted by the Board of Directors reviews the internal financial control systems on an ongoing basis. HUMAN RESOURCES AND INDUSTRIAL RELATIONS During the year, your Company focused on various development initiatives to identify and develop potential talent for undertaking leadership positions in the future. The Company employed 1,904 persons as on 31st March, 2016. Your Company has always believed in having a collaborative approach and works closely with the Trade Unions. Industrial Relations have been cordial at all the sites of the Company during the year under report. Continuing with your Company's communication strategy, the global advertising campaign enhanced brand awareness in relevant markets, covering print, television and online media. This campaign was well supported by media activities and market brsence initiatives such as seminars, customer symposia and industry events. On behalf of the Board of Directors RAMAN RAMACHANDRAN, Ph.D. Chairman & Managing Director (DIN : 00200297) Mumbai Dated : 3rd May, 2016. |