MANAGEMENT DISCUSSION AND ANALYSIS Your Directors are pleased to brsent the Management Discussion and Analysis for the year ended March 31, 2016. BUSINESS OVERVIEW Your Company’s business is an integral part of the FMCG and Pharma space, packaging being one of the four key marketing mix that drives the growth of a brand. The FMCG business across categories of Beauty and Personal care, Foods, Home care, Oral care constitute globally a multi-trillion dollar market and continues to grow in many different ways. In the developing economies, the growth is powered by increasing young population, growing disposable income, life-style changes etc. In developed economies where penetration and usage are already high, new products addressing even more needs are emerging to expand and/or change the face of the market, as for e.g. applications like Anti-ageing creams, Beauty balms, Complexion creams, Hair grooming range etc. are driving consumption. Besides, there is also a strong trend among brands to improve the efficacy of products by incorporating newer and more potent actives, herbal ingredients etc. which often demands different and more effective barrier properties of the packaging. Such Customised barrier properties are offered by your Company to suit different products that get filled in the tubes. The increasing competition in FMCG space and the rapid growth of organized retail trade means the consumer gets the ‘First Moment of Truth’ at the point of sale viz. the shop shelf. Packaging therefore is not anymore a vehicle to merely hold the product - a cost that has to be managed; it is a key brand property that rebrsents value to brand owner. That is where your company fits snugly in the scheme of things. A range of FMCG and pharma products in viscous form such as pastes, gels and creams use tube as a packaging format. The world market for tubes is huge, about 36 billion in the markets your Company operates. Of this, oral care tubes account for 14 billion, Beauty & Cosmetics account for 12 billion and Pharma & others account for 10 billion. Tubes for Beauty & Cosmetics applications are br-dominantly extruded Plastic tubes and bottles, and those for Pharma are brdominantly Aluminum tubes. The non oral care tube market rebrsents much higher, thrice or more in value as compared to oral care tube. Having established global leadership with its laminated tubes for the oral care category, your Company is now pursuing a considerably bigger growth opportunity in the non oral care category by leveraging customer insight, polymer and decoration technology, global brsence and state of art equipment capability to offer a superior packaging solution in the form of its new generation laminated tubes in place of the plastic/aluminum tubes and bottles. It is thus not just the sheer size and growth in the FMCG sector that is powering your Company’s growth potential, but also the larger trend of the packaging format migrating from plastic/aluminum tubes and bottles to the new generation laminated tubes, that your Company has heralded. The FMCG sector is looking for tubes which can resonate the product functionality in their own look and feel, which can provide barrier for long term efficacy and freshness, provide speed to market, and help the cause of reducing carbon footprint; in short a dependable ambassador for their product, a medium to connect with Consumer right from the retail shelf. And your Company is positioned right there with its products. In the case of pharmaceuticals, use of aluminum tubes for packaging is going out of favour for reasons of concerns on product safety. High barrier, safe laminated tubes with features such as tamper evidence, anti-counterfeit and innovative dispensing, now offered by your Company is finding wide acceptance as a superior packaging format. Categories such as Foods and Home care, for a range of products such as condensed milk, Wasabi sauce, Cheese sbrad, glue / adhesives etc., are now seeing tubes as an attractive packaging format and a value enhancer as compared to bottles etc. OPERATIONAL PERFORMANCE REVIEW During FY 16, your Company’s consolidated revenue was Rs. 21.8 bio. The operating margin expanded by 220 bps to 13.6% and the Operating profit grew by 12.3% to Rs. 3 bio. Key factors contributing to this are: l A strong performance by Europe with an underlying sales growth of 24.8%. l Strong value growth in the Americas , led by US laminated tube and the Colombian operations. l A robust 24.3% growth in the non oral care sales in the EAP. l Expansion of sales to non-oral care category, which accounted for 41.8% of sales during the year. l Improvement in asset productivity and sharply lower finance cost driven by strong cash flows. l Strong customer engagement leading to new business with existing and new customers. The operating performance has been analyzed by business segments below. SEGMENT PERFORMANCE REVIEW Your Company’s business is in plastic packaging materials. The business is managed by four geographical segments viz. 1. Americas (with operations in the USA, Mexico and Colombia) 2. Europe (with operations in the UK, Germany, Poland and Russia) 3. AMESA - Africa, Middle East & South Asia (with operations in Egypt and India ) 4. EAP - East Asia Pacific (with operations in China, Philippines & Indonesia) Americas Your Company has a strong market brsence in both North and South America. Laminated tubes constitute the main stay in all these markets. It has manufacturing brsence in USA, Mexico and Colombia through wholly owned subsidiaries. During the year, the region as a whole grew the top-line on underlying basis after adjusting for sale price deflation on account of pass through of the raw material price reduction, and sharp devaluation in the Latin American currencies. Operating profit grew strongly helped by a 240 bps margin expansion. The laminated tube unit in the USA continued to actively market your Company’s new generation laminated tubes to non oral care customers leveraging the new capability established during the brvious year. Consequently the non oral-care share of its revenue improved by 212 bps over the brvious year. The improved sales mix together with higher operating efficiency has helped the Unit . With the capability on ground for cosmetic tubes using laminated technology, the operations of extruded plastic tube unit in USA were phased out through 2015 as part of strategy to drive growth in non-oral care through the new generation laminated tubes. Some of the existing plastic tube customers were migrated to the laminated tube solution and some are in the process. The equipments were re-deployed in Europe to meet the growth opportunity there. This to an extent impacted the revenue growth for the year. The Mexico unit continued to be impacted by off-take issues at a key customer. Sharp currency devaluation during the first half year further impacted the pharma. During the year, the Unit has been ramping up the new non oral care contract for a brstigious MNC brand. This together with pro-active cost and efficiency management has helped the Unit to make the operations profitable in the second half. Overall, the Unit reduced its losses by 14% compared to brvious year. Scaling up is the way forward and efforts are on to develop new customers and to expand volume share with existing customers. The Colombian subsidiary sales grew strongly by 29% on underlying basis, helped by additional line commissioned during the year. The market in Colombia and the surrounding Andean region continues to be promising and is mainly in the high value non-oral care category. With a view to seizing the export market opportunity, further capacity expansion in the form of a new unit is under way. The unit grew its profit in double digit on underlying basis, although the sharp devaluation in currency has adversely impacted the reported profit figures. Europe Your Company offers both laminated tubes and plastic extruded tubes in Europe. It has manufacturing brsence in Poland and Russia through wholly owned subsidiaries and in Germany through a Joint venture. The Region as a whole delivered a high underlying growth in sales of close to 25% (after adjusting for Euro debrciation) and similar growth in EBIT. The Polish unit continued to grow strongly, with both the laminated and extruded plastic tubes posting high double digit growth in sales. Investment was made during the year to augment capability for non-oral-care both in the laminated and the plastic tube format, the later was done through redeployment of existing assets from the Americas. Strong customer engagement is opening further avenues for growth in both the oral and the non oral care categories. Strong operational performance has driven a robust growth in the profit. The unit now is flagship of your Company’s Europe operations. The Russian operation is still relatively small. From a foreign exchange crisis impacted brvious year, the Unit has bounced back with strong double digit growth in Sales and operating profit. Pro-active pricing, active management of customer portfolio and operational efficiencies have further helped the unit to break even from a situation of loss during the brvious year. Operational issues continue to hold back the German joint venture unit from delivering to its potential in terms of sales and profits. The recent investments not having been ramped up have caused the profit to decline during the year. Your Company is extending help to the extent possible in terms of new customer wins and guidance on equipment productivity. Amesa (Africa, Middle East & South Asia) During the year, the Company divested PIPL, the Indian subsidiary engaged in flexible laminate based products. Hence, the performance numbers exclusive of divested business have been provided in the table in order to make the comparison between years meaningful. During the year, the region as a whole grew the top-line on underlying basis after adjusting for sale price deflation on account of pass through of the raw material price reduction, and the operating profit, albeit in single digit. As explained in the Director’s report, growth in the India tubing operation was adversely impacted by a sluggish economy, mainly in the non oral care category with reduced number of activities in the Beauty and Cosmetics, and export market related issues faced by Pharma. The unit has intensified new customer development, and is hopeful to see the demand pick up as the macro-economic conditions see a turnaround helped by government initiatives and good monsoons. The COCO model initiated couple of years ago is performing well and growing strongly. Your Company’s unit in Egypt has seen a good growth in the non oral care category leveraging the new capability set up there. However, off-take issues at a key oral care customer have muted the topline growth to single digit. This together with the expiry of tax holiday has debrssed the profit compared to the brvious year. AMESA will remain a key region where diverse opportunities will continue to be thrown up by the economic growth, and as a first mover your Company is fully geared to invest and benefit from it. EAP (East Asia Pacific) Strong customer partnering and high quality servicing have helped the region to gain a high market share and build a large business in the Oral care category. But since last three years, this category especially has declined due to off-take issues at the key customers, although the Region has not lost the wallet share. The deflation in sale price as a result of pass through of raw material price reduction further impacted the reported sales growth. However, the continued momentum in the growth of the non oral care category as well as the forays into niche oral care brands have helped the Region to post a modest single digit growth in sales. The non oral care share in revenue during the year increased by 500 bps to 27.1%, driven by a 24.3% of growth in sales over the brvious year. Consequently the operating margin and the net profit improved strongly compared to the brvious year. The new manufacturing unit set up in the East of China is steadily ramping up, and a number of brstigious cosmetic and niche toothpaste brands are actively engaged with the unit for potential sourcing. The Philippine unit continued to contribute to your Company’s profits, with a large part of sales and profits arising from nonoral care category where the Unit has a long term contract. The Indonesian unit is an Associate of your Company. The region has a track record of operational excellence and a strong balance sheet. With the non oral care strategy gaining traction, the region should be back to growth path. As mentioned earlier, the reported sales growth is adversely impacted by the sale price deflation on account of pass through of raw material price reduction and sharp debrciation in euro and Latin American currencies compared to last year. Helped by stable raw material prices during the year, improved efficiencies and reduced finance costs, the net profit has grown by 29.5% AND INNOVATION (C&I) The Research and Development (R&D) function (a.k.a. Creativity and Innovation within the Company) has been one of the key drivers of your Company’s growth as a leading global player. Your Company’s C&I function has successfully amalgamated the evolving needs in the market place with its deep knowledge of the science and engineering to create tubes with special features, aesthetics and functionality. Your Company works to develop new packaging solutions for reputed brands, and partner the customers in rolling out globally. The C&I function continues to work on environment-friendly tubes, and new structures with customize barrier properties. A cross section of the latest innovated products of your Company are brsented in the features section of the Annual Report. A structured C&I process ensures that the innovation pipe-line of the Company at all times is full and contributes to in good amount to the sales and profitability of your Company. The recognition by the Department of Scientific and Industrial Research of the Company’s R&D facilities in India is a key milestone achievement. Your Company continues to protect the enormous intellectual property which its C&I function is creating. In this regard, your Company has filed till date as many as 130 patent applications in the different geographies in respect of the various inventions through its R&D activities, and has already been granted quite a few. Your Company’s research and development efforts continue to win accolades in several forums and among customers across the globe. FINANCE Capital productivity continued to be the driving mantra, with new capex levels carefully managed across the operations so as to generate positive free cash flow. This together with the strategic divestment of the India flexible packaging business has paved way for a strong balance sheet and high financial flexibility. The resultant saving in the Finance cost has been substantial at Rs. 170 mio or 21.4% lower compared to the brvious year. Prudent exchange risk management contained the exchange losses at Rs. 61 mio in a period of high currency volatility, large part of it being the brmium paid on forward exchange contracts. Consequently, the consolidated net debt as at end of FY16 was Rs. 6441 mio and the standalone net debt Rs. 194 mio. With debt equity ratio less than one and high DSCR your Company’s term debt is rated in the AA bracket. The ROCE and ROE improved to 20.7% and 18.5% respectively. HUMAN CAPITAL Your company strongly believes that ‘our people are our greatest assets’, they give your company its unique competitive edge. As a global organization, your company comprises of a diverse mix of people from different educational, cultural and geographic backgrounds who bring their unique inherent strengths to the organization. Your company recognizes and nurtures their strengths through a structured Talent Management process focussed on capability building through customised Classroom Trainings, E Learning, Executive Coaching and Cross functional/cross geographical action learning projects. The process also ensures continuous talent availability, through Job rotations, Job enlargements, Cadre building programs, leveraging talent in various geographies for global roles. Case in point is the Global Quality and Processes lead based out of the Company’s US unit. Your company is committed to continuously engaging its employees as key drivers for shareholder value creation. Customised Unit level and Manager level Employee engagement action plans have enabled your company to take positive steps in this journey. These actions helped the company to significantly improve the global Employee Engagement score from 61% of 66%, higher than the global average for the manufacturing sector with 14 out of 23 participating units scoring 65% and above, which is in the High Performance range and in the zone of best employers across the industry. The year saw events specially designed to encourage employee participation in projects like “All Ideas Matter” to encourage widesbrad participation in generating and implementing improvement ideas on costs, efficiency, productivity, safety and work place areas. Employee morale was fostered through encouraging “apbrciation sharing”. Employee Communication through Town halls, Leadership interactions and messages, focused Goal Setting, newsletters and interesting competitions continued to ensure consistent alignment with Company’s Vision and Mission. In particular, Mission 20-20-20 was widely cascaded. The alignment to this Mission is now total and this has been one of the key drivers of this year’s strong performance. INFORMATION TECHNOLOGY (IT) Your company strongly believes in the power of IT and it continues to invest in best of breed infrastructure equipment and applications which enables seamless connectivity across sites and thereby enabling effective and efficient collaboration across all of its global manufacturing sites. Keeping in pace with next wave of IT i.e. Social, Mobile, Analytics and Cloud (SMAC) technologies, which are redefining the IT landscape, your company has implemented various mobile based solutions like SAP Fiori, Dashboards & Analytics which allows users to do transactions and consume the information anytime & anywhere thereby reducing business cycle times. Currently under implementation is another cloud based solution Success Factors for Human Resource Management, which will enable the monitoring of complete life cycle of an employee from Hire to Retire much more efficiently. A Steering Committee comprising of the Corporate Leadership Team supervises the IT initiatives and IT effectiveness through regular monthly reviews. INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY Your Company has in place internal control systems and a structured internal audit process charged with the task of safeguarding the assets of your Company and ensuring reliability and accuracy of the accounting and other operational data. The internal audit department reports to the Audit Committee of the Board of Directors. Your Company has a system of monthly review of business as a key operational control wherein the performance of units is reviewed against budgets and corrective action is initiated. Your Company has in place a capital expenditure control system for authorizing spend on new assets and projects. Accountability is established for implementing the projects on time and within approved budget. This is overseen by the Investment Committee of the Corporate Leadership team. The Audit Committee, the Statutory Auditors and the top management are regularly apprised of the internal audit findings, and regular updates provided at the Audit committee meetings of the Action taken on the internal audit reports. The Audit Committee of the Board consisting of non- executive independent Directors reviews the quarterly, half yearly and the annual financial statements of your Company. A detailed note on the functioning of the Audit Committee and of the other Committees of the Board forms part of the section on corporate governance in the Annual Report. During the year, your Company carried out a detailed review of internal financial controls in the India unit using independent experts. The findings were satisfactory and suggestions for improvement have been taken up for implementation.. Policy guidelines and SOPs continued to be updated where required to keep pace with business needs. RISK MANAGEMENT The Board of Directors and the Audit Committee of the Board review the business risks to which your Company is exposed and the mitigation plans. The senior management team led by Vice Chairman & Managing Director is responsible to manage risks pro-actively with appropriate mitigation measures and implementation thereof. Key risks to which your Company is exposed include: a) Escalation in raw material prices and impact for long term contracts - Your Company has raw material cost escalation pass through clauses in its customer contracts which enables the prices to be revised periodically to reflect the variation in the material costs. - Where possible, your Company continues to identify and establish alternate sources and equivalent materials in order to effectively manage the material costs as well as supply continuity. b) Single Product dependency - Being an essential consumer product and an item of daily use, tooth paste as a category still dominates your Company’s product range albeit to a much lesser extent than before. However, it also tends to have a stable demand in an adverse economic environment. Your Company’s engagement with all global majors in this category further fortifies its position. - All the same, your Company is rapidly developing products / customers in the cosmetics, food and pharma categories with a view to maximizing value and tapping the benefits of a diversified portfolio. The share of non-oral care in your Company’s consolidated revenue today is 41.8% up from 41.1% in FY15. In India, this share of non oral care revenue is even higher at 49.2%. - Laminated Tubes as a packaging form is being increasingly sought after by FMCG brands, and stands to benefit from replacement of plastic and aluminum tubes and bottles in the course of time. - Scale, technology, integrated manufacturing process, innovation capability, operational efficiencies are other factors which further strengthen your Company’s competitiveness in the tubes space, as well as the ability to work as global partners for large multi-national customers. c) Attracting and retaining talent As with any other business, high demand for talent globally impacts employee turnover. - Your Company addresses this to the best possible extent by being an empowering organization with professional management culture and maintaining a lean structure. Contemporary HR practices such as career planning, competitive remuneration, performance management system, performance linked variable pay, performance incentives, stock options, skills and competency training linked to Individual Development Plan are now well established in the business globally. Top talent is given the opportunity to move across functions and geographies. Employee engagement survey is carried out annually and the findings are used to further improve the work place and employee satisfaction. d) Currency volatility The global nature of operations exposes the Company to multiple currencies; fluctuations in exchange rates could affect your Company’s performance. - Appropriate pass through clauses have been built into long term customer contracts in order to offset the impact on material cost due to exchange rate fluctuations. Prices get reviewed and revised in the event of significant currency movements. Your Company also has the policy of systematically hedging its trade and capital exposures using forward contracts. Wherever possible transactional currencies are aligned to the reporting currency in order to obviate exchange fluctuation impact. e) Economic downturn This could impact your Company’s markets, suppliers, customers and finances leading to business slow down, disruptions etc. - Your Company’s products are linked to daily necessities of the consumers and their demand is not much impacted by the downturn. - Your Company pro-actively monitors the emerging trends in consumption and offers relevant solutions to its customers so as to stay ahead of the curve. - Your Company also is focused on containing costs and improving efficiencies as a means to stay competitive. - Proactive supplier and customer engagement is another way your Company seeks to minimize risk to business continuity. f) Competition This could put brssure on volume growth and pricing. - Your Company focuses on superior quality, shorter lead time and high service level to keep the customer satisfaction high. Besides, its ability to be a one-stop shop for all customer needs, ability to support the customer across the globe and focus on efficiency and cost management help to sustain its position as a world-class provider of packaging solution. g) Wage increases in the developing markets This could impact costs and margins. - Your Company is pro-actively using automation and asset productivity improvement as a means to contain the headcount and manage the employee costs. OUTLOOK The performance in the recent years of your Company’s business has been very encouraging. The strategy for growth is clear. The non-oral care category globally offers immense potential for your Company to sustain a profitable growth for next few years, and the track record of last few years gives us confidence. Your Company has been fast re-shaping its processes and aligning its people to this Vision and Mission of creating long term shareholder value. Global customers are seen to consolidate their sourcing and partner with global suppliers like your Company. Even more exciting is the long term growth opportunity brsented by the cosmetics, hair and personal care FMCG brands moving from other packaging forms into laminated tubes. With its large scale, global brsence, innovation capability and a motivated Human capital, your Company is well set to take on the task of delighting all its stakeholders. CAUTIONARY STATEMENT Statements in this Annual report, particularly those which relate to management discussion and analysis, describing your Company’s objectives, projections, estimates and expectations may constitute “forward looking statements” within the meaning of applicable laws and regulations. Actual results may materially differ from those exbrssed or implied. Corporate Governance Report |