MANAGEMENT DISCUSSION AND ANALYSIS REPORT The Company has three businesses – Fertilisers and other Agri-inputs, Shipping and Textile. The Management Discussion and Analysis Report covering the aforesaid business segments of the Company is as under: 1.0 FERTILISERS AND OTHER AGRI-INPUTS DIVISION 1.1 Industry Structure and Developments A) Urea (i) Raw Material Natural Gas is the main input and constitutes the major part of cost for production of Urea. The Company uses domestic gas and imported Re-gasified Liquified Natural Gas (RLNG) under long term and short term supply arrangements. After upward trend for few years, the Gas prices came down sharply in the international market during the year 2014-15 due to fall in prices of Crude Oil. RLNG constitutes a major part of gas requirement of the Company. The spot gas prices came down sharply in line with the international market. The prices of long term RLNG are linked to long term average of crude oil index. Hence, the impact of current low prices of Gas in international market will gradually reflect in the long term RLNG prices over next few years. The dwindling domestic gas supply is an area of concern. The Government of India (Government) revised the prices of domestic gas during the year. The Government has recently announced the pooling of Gas for Fertiliser sector which is a positive step. However, the final contours of gas pooling mechanism are awaited. (ii) Demand-Supply Scenario Urea production remained almost stagnant in India for many years despite steady increase in its demand. No new capacities were added during last 15 years except revamp of few existing plants. This has resulted into significant gap between demand and supply. India imported around 8.75 million MT of Urea during the year 2014-15, constituting about 28% of the total urea consumption in the country. Imported Urea prices remained volatile during the year ranging between USD 270 and USD 360 per MT (FOB – Arabian Gulf). (iii) Developments in Government Policies New Pricing Scheme Stage III which was valid upto March 31, 2010, has been extended till March 31, 2015. The new government policy for existing Urea plants is awaited. In order to reduce the dependence on imports, the Government announced a New Investment Policy 2012 (NIP) with few amendments for attracting fresh investments in Urea sector. B) Other Products The Company is also engaged in manufacture of Single Super Phosphate (SSP). The installed capacity of the Company for SSP is 180,000 MT per annum. The SSP market is very fragmented with many small players. Apart from its own product, the Company also sources SSP manufactured by other parties. SSP is cheaper alternative of DAP which caters to specific segment of farmers and crops. The Company imports and supplies Di-ammonium Phosphate (DAP) and Muriate of Potash (MOP) in its marketing territory. The Company competes with large players in DAP and MOP segment. The products are sourced from reputed international manufacturers to ensure quality of the product. India imported around 3.82 million MT of DAP during the year 2014-15, about 51% of the total DAP consumption in the country. Imported DAP prices were volatile during the year. The consumption of MOP in India is entirely met out of imports. MOP imports in the country during the year were 4.18 million MT as against 3.18 million MT during the brvious year. The demand of DAP and MOP remained robust during the year. The Company also deals in other agri-inputs like Sulphur, NPK fertilisers, micro-nutrients, insecticides, herbicides, fungicides, seeds, etc. under the single window concept. The products are sourced from reputed manufacturers including multinational companies. The insecticides market is dominated by multi-national companies and the products are either manufactured by them or they supply the basic ingredients to domestic manufactures for production of finished products. The seeds and micro-nutrients market is dominated by small manufactures. Hence, the products like seeds, zinc, gypsum, micro-nutrient mixtures, etc. are sourced from domestic manufacturers with tight controls on quality of the products. 1.2 Opportunities & Threats The New Investment Policy 2012 (NIP) withheld earlier, was released during the year with few amendments. Since considerable time was taken by the Government in releasing the revised policy, the quoted prices of the suppliers for new Urea project has to be re-negotiated. Accordingly, the Company is reviewing its plans for capacity expansion for production of Urea and final decision will be taken in next few months. The implementation of Nutrient Based Subsidy Policy by the Government gave a major boost to the Company’s business of trading in branded fertilisers like DAP and MOP. The Company has established reliable supply channels in the international market and reinforced its marketing network to get full benefit of opportunities available in DAP and MOP segments. The Company has firmly established itself as a major player and achieved substantial increase in sales volumes of DAP and MOP. However, the volatility in the global prices of these fertilisers as well as variation in the foreign exchange rates are the challenges and your Company is conscious of these factors while making its marketing strategy. Urea production beyond re-assessed capacity is becoming unviable for most of the urea manufacturing units due to increased cost of RLNG, price rise in domestic gas and fall in the international urea prices. The Company had to shut down one of its Urea plants in February 2015 because production beyond 100% capacity was not viable. The Urea industry needs immediate policy intervention from the Government to sustain the production beyond re-assessed capacity. The Company expects the Government to come out with a new policy for existing Urea Plants which can enable the Urea manufacturers to produce beyond re-assessed capacity. The proposed pooling of Gas for fertilizer industry is a positive step in this direction. 1.3 Risks and Concerns The Urea segment of Fertiliser Industry operates in a Government controlled regime highly dependent on the Government policies. During last few years, the Government has resorted to under-provisioning of fertilizer subsidy in the union budget. This has resulted into long delays in payment of subsidy to the fertilizer companies thereby substantially increasing industry’s interest burden. High volatility in foreign exchange rates, likely reduction in demand of DAP due to its high cost and interest burden due to delay in payment of subsidy may impact the profitability from trading activities of the Company. In the event of non-revision in Government policies on Urea, the likelihood of reduction in Urea production beyond re-assessed capacity is another area of concern. 1.4 Outlook Subject to risks and concerns mentioned above, the Urea industry is unlikely to face any challenge in terms of sales volumes in near future in view of demand-supply gap. The outlook of branded products in trading segment also looks positive in view of lower inventory of DAP in the trade channel, strong marketing network and brand loyalty for the products of the Company. 1.5 Operational and Financial Performance The revenue from branded traded products was Rs. 3209.71 crore during the financial year 2014-15 in comparison to Rs. 2628.81 crore in the brvious year. The sales of various products were as under: Products 2014-15 2013-14 Your Company is setting up an additional marketing office at Kolkata to expand its market brsence in eastern India. 1.6 Material Developments in Human Resources/ Industrial Relations People and Talent Management continue to be one of the key focus areas of the Company. The availability of qualified and trained manpower is critical for the Company’s continued success. Your Company’s HR Strategy is aligned to business and seeks to ensure that appropriate talent acquisition and retention plans are in place and reviewed periodically. Your Company believes in regular employee engagement with a sense of belongingness. The Company continues to adopt progressive policies and processes for its personnel through the reviews of best market practices and other surveys to keep pace with need of the hour. The Company has thus been able to maintain attrition rates below the Industry level for the last three years. Your company continues to build the talent pipeline through recruitment of fresh engineers and professionals on a continuous basis. Wherever necessary, company recruits experienced manpower to bridge the talent gap. Your Company provides behavioural and functional training regularly to its employees based on their development needs. Employees were nominated for external training programs, including Management Development Programmes of brmier Management Institutes. The employee strength of Fertilisers and Agri-inputs Division was 926 as on March 31, 2015 and it continues to maintain open and cordial employee relations across all locations. 2.0 INDIA STEAMSHIP- SHIPPING DIVISION 2.1 Industry Structure and Developments The dry bulk, containers and tankers are three major segments of Shipping Industry. The oil tankers carry crude as well as refined products. Your Company owns and operates Aframax tankers. The Aframax spot rates strengthened considerably during the fourth quarter of 2014, being highest for a fourth quarter since 2008. The rates remained strong during January – March 2015 also. The increase in tanker rates was primarily due to a combination of winter weather delays and the impact of lower global oil prices. 2.2 Opportunities and Threats The outlook for Aframax tankers is expected to remain positive in 2015. This is based on a shrinking mid-size crude tanker fleet and increase in long-haul tanker demand as more crude oil moves from the Atlantic to Pacific basins. The impact of low prices and the development of floating storage in the first quarter of 2015 are also expected to support positive tanker demand in the first half of 2015. The increase in tanker rates have also resulted into increase in asset rates of takers in the second-hand market. The growth is driven by emerging markets mainly China and India, with the refinery margins on the rise. The addition of new capacities in the tanker segment and adverse movement in crude prices in future may impact the high charter rate scenario and thereby the profitability of the ships owned by the Company. 2.3 Risks and Concerns The shipping being global industry, the developments in the world economy are bound to have its bearing on this industry. The changes in spot rates, production and demand for oil or trading patterns may affect overall vessel tonnage requirements. New building orders and tanker scrapping also have impact on charter rates. The declining demand for oil in OECD countries, Europe and Japan is an area of concern. Russia’s financial turmoil and conflict driven geo-political situation in Libya, Yemen, Iraq and Ukraine continues to be another major concern. 2.4 Outlook Global oil demand is projected to rise at a slightly faster pace than that in 2014. There is positive outlook on account of Asian growth although there is downward brssure due to contracting demand from Japan and Former Soviet block. The demand for crude tanker tonnage is expected to increase in the year 2015 slightly over 2%. Overall, crude tanker demand growth is expected to be driven by increased demand for Very Large Crude Carriers and Suezmax tankers. 2.6 Material Developments in Human Resources development/Industrial Relations Human Resources continue to be the thrust area for the organization. The committed on-shore staff continuously provides prompt and efficient support and guidance to the floating staff which results in effective performance and operational efficiency at all times. The organization’s focus and emphasis on Occupational Health and Safety, Quality and Protection of environment further drives the performance of its employees. Training programs for shipboard officials help in building an efficient and wellqualified cadre of experienced seafarers for our fleet. The shipping division had 66 employees in its shore office and 133 floating staff on-board as on March 31, 2015. The Employee relations remained cordial during the year. 3.0 BIRLA TEXTILE MILLS - SPINNING DIVISION 3.1 Industry Structure and Developments Indian textiles industry is well-established with strong features and the country is the second biggest textiles manufacturer worldwide after China. India ranks third in cotton production and consumption and fifth in synthetic fibre and yarn. 3.2 Opportunities and Threats The Union Budget 2015-16 did not augur well for the Textile Industry. With the reduction of fund allocation for Technology Up-gradation Fund Scheme (TUFS), the operation of TUFS in the ensuing financial year may run into problems. After a setback that lasted a few months, textile sector is showing some improvement both in domestic and global markets. Cotton prices have stabilized and the steep decline in the prices of crude oil has made synthetic fibre more affordable. After going through a tough period of rise in input costs as well as interest cost, it is unlikely that the sector’s outlook will turn positive until fundamental issues such as power shortage and capital investments are resolved. 3.3 Risks and Concerns Incremental capital investments in debt reliant textile industry is expected to remain subdued given unwillingness of banks to lend to the sector coupled with higher cost of funds. The withdrawal of global retailers like Walmart from their joint venture with Indian partners is a huge setback for the textile sector. The ongoing economic slowdown in USA and consequent lower orders from retailers may result in lower capacity utilisation and impact profitability of textile companies in India. The primary risk for Textile Industry is raw material prices, mainly cotton, which is the largest component of cost. Since cotton is an agri-produce, it suffers from climatic volatility in the major cotton producing countries. The availability of power at reasonable price and adequate skilled manpower are the other challenges for textile industry. 3.4 Outlook The textile industry is very volatile with low profitability and to compete effectively, it should be aggressively expanded to achieve reasonable scale of operations. The land in factory brmises is fully utilized and there is a no further scope for expansion at the current location. It was therefore thought prudent to sell the business. Subject to necessary approvals, it is proposed to sell the textile business on a going concern basis by way of slump sale to Sutlej Textile and Industries Limited. 3.6 Material development in human resources / industrial relations Being a labour intensive industry, training and development of human resources is of paramount importance. The well-structured in-house training programmes conducted by experienced and competent faculty have improved the skill levels and the employee commitment. The results of the training efforts at the shop floor level have been excellent. Presently, the manpower deployments comprises of 1439 workers, 249 staff members and 216 trainees at Textile Division. Industrial relations remain cordial during the year. INTERNAL CONTROL SYSTEM The Company has a strong internal control system comprising various levels of authorization, supervision, checks and balances and procedures through documented policy guidelines and manuals. The Internal Audit department regularly monitors the efficacy of internal controls and compliances with Standard Operating Procedures and Manuals with an objective of providing to the Audit Committee and the Board of Directors, an independent, objective and reasonable assurance that all transactions are authorized, recorded and reported correctly and compliance with policies and statutes are made. The managers exercise their control over business processes through operational systems, procedure manuals and financial limits of authority manual. These processes are reviewed and updated on an ‘on-going basis’ to improve their efficacy and meet the business needs. During the year, the internal audit was carried out by the internal audit team of the Company and M/s. Deloitte Haskins & Sells, LLP in clearly demarcated areas as per the approved audit plan. Internal Audit develops a risk based annual audit programme which is aligned to the brvious year’s observations, suggestions from the operating managers and statutory auditors. The Internal audit programme is approved by the Audit Committee. The audit approach is based on random sample selection and takes into consideration the generally accepted business practices. The internal audit reports are first discussed by the Management Committee and subsequently placed before the Audit Committee of the Board of Directors along with the direction/ action plan recommended by the Management Committee. The directions are implemented by the respective departments and Action Taken Report is placed before the Audit Committee. The Internal Audit department also assesses opportunities for improvement in business processes, systems and controls, gives recommendations and reviews the implementation of directions issued by the management, Board of directors or its committees. CAUTIONARY STATEMENT The report may contain certain statements that the Company believes are, or may be considered to be “forward looking statements” that describe its objectives, plans or goals. All these forward looking statements are subject to certain risks and uncertainties, including but not limited to Government action, economic development, risks inherent to the Company’s growth strategy and other factors that could cause the actual results to differ materially from those contemplated by the relevant forward looking statements. For and on behalf of the Board of Directors Delhi S. K. Poddar Chairman Place: New Date: April 30, 2015 |