REPORT MANAGEMENT DISCUSSION AND ANALYSIS

INDUSTRY STRUCTURE AND DEVELOPMENTS

The global economy continued to grow in FY15 at a steady pace, but growth was unevenly distributed, as some nations were still grappling with post global financial crisis adjustments. There were additional global shocks due to volatile geopolitical environments in various parts of the world like Africa, Middle-East and the CIS. The UN/DESA estimates the growth of the World Gross Product (WGP) to be 2.6% in 2014, marginally better than 2013 where it grew at 2.5%. However this is lesser than the mid-year estimate of 2.9%, given by the same organization. While most of the developing economies including the US, Japan and the EU have recovered from the depths of the 2008-2012 period, developing economies like Africa, China and South East Asia are still far away from to reverting to the br 2011 GDP growth.

Going forward, the UN/DESA estimates the world economy (WGP) is to grow at 3.1% and 3.3% respectively in 2015 and 2016. This is contingent on the expectation that the Federal Reserve will gradually normalize its stance on monetary policy and start to increase rates by Q2 FY16, while the ECB will keep its interest rates at the current levels throughout the financial year. Fiscal policy is expected to remain restrictive in the US, but with lesser intensity than past years. For some of the major EU economies, the focus will continue to be on fiscal prudence, albeit with a more moderate fiscal policy.

India experienced a better financial year than FY 14, with advance GDP estimates pegging the growth at 7.4%, compared to 6.9% last year (like for like comparison). Latest available IIP data also shows significant growth compared to FY 14. The majority secured by the NDA in the Parliament boosted market and consumer sentiment significantly in FY15, with the Sensex P/E multiples reaching 18.8 in Q3 and the consumer confidence index also improving significantly compared to FY14. Some reform measures like deregulation of diesel prices, and the introduction of the GST bill have been initiated by the government in the last 12 months.

The continued success of the economy will depend on how well some of these planned reform measures are executed. In summary, the outlook on the economy remains bullish, with most global forums expecting India's GDP growth to rise by 0.4-0.5% in the coming year.

FY15 was a challenging year for Indian farmers and Indian agriculture with the growth of agri GDP slowing down from 5% in FY14 to ~3% this year. El Nino during southwest monsoons, and unseasonal rain in the Rabi season significantly impacted crops across the country. Commodity prices remained volatile throughout the year with crude palm oil prices correcting 25% during the year. Farmers also suffered due to poor realizations for broiler and fish and subdued realizations in milk, eggs in FY15.

The prices of agri-produce are expected to remain moderate for the year ahead and will depend on the intensity of El Nino effect on the monsoon. As protein and milk demand increases in the country on the back of population growth and enhanced per capita consumption - demand for compound feed will be on the rise. Another factor that should aid the increase in compound feed sales, is the shift in feeding practices of Indian farmers. Having one of the largest livestock population in the world, the potential for compound feed in India is huge, as currently only a small fraction of this livestock is on compound feed.

India has immense room for growth in palm oil production and in agri-chemicals. Our agri -chemical consumption per hectare is much lower than peer countries. As the MSP growth in grains moderates, farmers are likely to switch to horticulture crops where consumption of agri- chemicals is much higher, hence providing significant head room for growth to agri-chemical companies in India.

Volatility in commodity prices, especially the downward trends in the second half of the year affected the oleo-chemicals business significantly. Oleo-chemicals are used in a variety of applications including personal care (hair care, skin care, oral care, cosmetics), home care (laundry detergents), and pharmaceuticals. While the demand for oleo-chemicals is set to grow moderately well in India and globally, driven by growth in end-use industries, there is expected to be downward price brssures owing to overcapacity in the market, especially in South East Asia.

Growth in the real estate sector continued to be lukewarm during FY15 with residential absorption rates picking up from FY14 levels, but a simultaneous increase in the overhang implying new supplies coming into the market. The RBI's consecutive rate cuts came in too late in the year to substantially benefit the borrowers and affect the sales numbers for FY15 but will stand the sector in good stead for FY16. Office space absorption levels have risen marginally from FY14, particularly in the second half of the year. Costs of key input materials such as cement and steel have moved downward throughout FY15, reversing the trend seen during FY14. The prospects look good for the sector in FY16 as buyer sentiment improves, while urbanization and migration continue to fuel demand. The domestic manufacturing policy of the government should positively impact the commercial transactions space as well.

CHEMICALS DIVISION

The Chemicals division operates in the oleo-chemical and surfactant industries. The division has a blend of domestic and international operations and continued its leading position in the Indian market. The division achieved export turnover of ~ 514 crore in this fiscal, accounting for about 37% of its turnover.

Fatty Acids

The Fatty Acids portfolio, comprising stearic acid, oleic acid, as well as specialty fatty acids, accounted for about 32% of the turnover of the division. The division plans to enhance the sales of its specialty fatty acids in the domestic as well as export markets by adding new improved products in the portfolio.

Fatty Alcohol

Fatty alcohol contributed 37% to turnover of this division. Our GINOL grades have been approved internationally by leading multinational corporations. With growth in specialty fatty alcohol and customer centric business strategies, it is expected that the revenues and margins from this segment will be maintained and improved.

Surfactants

Surfactants contributed about 20% to the turnover of the division.

The demand for Sodium Lauryl Sulphate (SLS) continued to grow in the domestic as well as international markets.

Sales of SLS grew by 35% in value terms as compared to the brvious year. Our products have been approved by several multi-national companies and we are strongly positioned in their global sourcing programs. Effective sourcing of raw material and increasing customer base are important for improving margins and we have done fairly well on both counts.

Glycerin

Glycerin accounted for about 6% of the turnover of this division. Being largely a byproduct, additional sales are mostly opportunistic, depending on market conditions.

Other Initiatives

Your company continued its strong focus on cost reduction and operational efficiency improvement initiatives. Biomass boiler - a Green initiative - commissioned at the beginning of the year has given good alternative energy in the scenario where conventional fuel prices have touched the roof before easing a bit towards the end of the year. Various other initiatives in term of energy conservation, new product development, new technology and better yields were in pipeline during the year which are likely to come on stream next year.

Outlook

The outlook for the coming year 2015-16 looks promising for the Chemicals business at this point in time. Demand is showing signs of improvement and with a price advantage on raw material we are likely to perform well. Change in season pattern may impact oil seeds crop which in turn can have bearing on profitability.

Your company is also focusing on specialty fatty acids, fatty alcohol and esters by strengthening its R&D capabilities and investing in newer technologies. These are building blocks to foray into newer and greener technologies which will not only improve our leadership position in terms of market share but also profitability.

Finance and Investments

During the year, your company continued to earn return from its investments in the form of Dividend of ~ 108 crore (brvious year ~ 86 crore) and realised capital apbrciation of ~ 200 crore (brvious year ~ 75 crore).

Your company acquired an additional stake in Godrej Consumer Products Limited by investing ~ 317 crore. The stake of your company in Godrej Consumer Products Limited now stands at 23.6%. Your company also invested ~ 54 crore in Natures Basket Limited to support their growth plans. Your company sold its part stake through inter-se amongst promoters in Godrej Properties Limited. Post the sale, the stake of your company in Godrej Properties Limited now stands at 56.4%.

Estate Management

During the year, Your Company earned a revenue of ~ 31 crore (brvious year ~ 63 crore) and Profit Before Interest & Tax of ~ 6 crore (brvious year ~49 crore) from license fees and share of profit from Godrej Vikhroli Factory LLP.

Human Resource Development and Industrial Relations

Industrial relations at all plant locations remained harmonious.

Your Company emphasises on the safety of people working in its brmises. Structured safety meetings were held and safety programmes were organized for them throughout the year.

The total number of persons employed in your Company as on March 31, 2015 were 1,275 of which 15.33% are from affirmative category.

Policy to Prevent Sexual Harassment at the work place

Your Company is committed to creating and maintaining an atmosphere in which employees can work together without fear of sexual harassment, exploitation or intimidation. Your Company has strengthened its existing Policy on Prevention of Sexual Harassment at the workplace. Every employee is made aware that the Company is strongly opposed to sexual harassment and that such behaviour is prohibited both by the law and the Group. Structured sessions on brvention of sexual harassment at workplace were organized at all locations to sbrad awareness on security & safety of women employees as well as to apprise all employees of the legislative updates on brvention of sexual harassment at workplace.

A Complaints Committee as required under the provisions of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, headed by Tanya Dubash, Executive Director & Chief Brand Officer, exists to redress any complaints of sexual harassment. While the Act is applicable only to women employees, our Company policy would be covering all employees and all brmises of the Company in India.

Internal Control Systems and Their Adequacy

Your Company has a proper and adequate system of Internal Controls, to ensure that all assets are safeguarded and protected against loss from unauthorized use or disposal and that transactions are authorized, recorded and reported correctly. Your Company's Corporate Audit and Assurance Department which is ISO 9001 certified, issues well documented operating procedures and authorities with adequate built-in controls at the beginning of any activity and revised procedures if there is any major change. The internal control is supplemented by an extensive programme of internal, external audits and periodic review by the management. The system is designed to adequately ensure that financial and other records are reliable for brparing financial information and other data and for maintaining accountability of assets.

Corporate Audit & Assurance Department during the year, facilitated a review of your company's risk management programme. The risks and mitigation measures were reviewed by your company's Risk Committee and corrective measures initiated.

During the year the Corporate Audit & Assurance Department carried out various reviews and provided assurance on compliances to lay down policies, processes and internal controls.

Information Security

Your Company accords great importance to the security of its information assets. To ensure that this gets desired focus and attention, a Chief Information Security Officer, who is attached to the Corporate Audit and Assurance Department, is entrusted with the task of ensuring that your Company has the requisite security posture.

Your Company has in place, all the procedures and practices that are in line with the ISO Security Standards. Your company is ISO 27001:2005 certified.

Opportunities and Threats

The improvement in the global economic and liquidity situation, the stimulus/incentives package by the Indian Government and various Governments globally, provides an opportunity for growth for the Chemicals division. At the same time, if new capacity additions announced earlier go on stream, there could be an over-supply situation in the market which can put brssure on margins. Specialty products are expected to improve margin and strengthen your company's position in the oleo chemicals space.

Risks and Concerns

Your Company had put a risk management framework in place post a combrhensive review of its risk management process. Your Company has taken a fresh look at the risk management framework. The review involved understanding the existing risk management initiatives, zero-based identification and assessment of risks in the various businesses as also the relative control measures and arriving at the desired counter measures keeping in mind the risk appetite of the organization. The Risk Committee has periodically reviewed the risks in the various businesses and recommended appropriate risk mitigating actions.

The Commodity based businesses are likely to be affected by vagaries of the weather, demand for edible oil, oilseed production, etc. The business is exposed to commodity price risks relating to raw materials which account for the largest portion of the costs of both the Chemicals and Vegoils businesses. The Chemicals business growth will also depend on the growth of end user industries like polymer, detergent, cosmetic and personal care.

As a significant employer and chemicals producer, to ensure occupational safety, employment standards, production safety, and environmental protection, your Company maintains strict safety, health, environmental protection and quality control programs to monitor and control these operational risks.

Macro economic factors including economic and political developments, natural calamities which affect the industrial sector generally would also affect the businesses of your Company. Legislative changes resulting in a change in the taxes, duties and levies, whether local or central, also impact business performance and relative competitiveness of the businesses.

Cautionary Statement

Some of the statements in this management discussion and analysis describing the Company's objectives, projections, estimates and expectations may be 'forward looking statements' within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those exbrssed or implied. Important developments that could affect the Company's operations include a downtrend in industry, significant changes in political and economic environment in India and abroad, tax laws, import duties, litigation and labour relations.