MANAGEMENT DISCUSSION & ANALYSIS GLOBAL ECONOMY The global economy grew at a slightly faster pace in 2014, as a modest revival in the Eurozone and a pick-up in India helped offset slowdowns in China and Japan. Growth picked up, albeit marginally, from 2.5% to 2.6%, mainly driven by momentum in United States and U.K. It is seen shifting upwards to an average of 3.3% between 2015 and 2017, brought about by an upward shift of growth in Gross Domestic Product (GDP) of the developed economies from 1.8% to 2.2% and with developing economies accelerating from 4.8% to 5.4 %. The combined gross domestic output of the Group of 20 largest economies, which accounts for 90% of the global economic output, expanded 3.4% in 2014, up slightly from 3.2% in 2013, aided by a return to growth in the Eurozone. Global growth is forecast to rise moderately to 3.5% in 2015 and 3.7% in 2016, the net positive being a sharp decline in oil prices. International Monetary Fund (IMF) projects growth in emerging markets and developing economies to remain broadly stable at 4.3% in 2015 and increase to 4.7% in 2016. Moving ahead, across nations, the mandate to Governments is to control inflation, improve fiscal prudence and sustainable growth, with concerted efforts being on job creation through public and private investments. INDIA'S MACRO-ECONOMIC ENVIRONMENT India continues to be one of the most promising economies to sustain a strong growth in its GDP. The current growth in GDP, as per the new series, places it at 7.4% for FY2015 as against a revised past trend of 5.1% and 6.9% in FY2013 and FY2014, respectively. The revised trend is estimated to take GDP growth to 8% plus in FY2016. A year after formation of the new Government, positive impact of Government policies and decisions are expected to reflect at the ground level. The Government seems to be moving in the right direction - balancing the act of reforms, capital spending to boost economic recovery and fiscal prudence. During FY2015, the Indian economy stood up to the challenges of consumer inflation, policy paralysis, weakening of Indian rupee, widening current account and fiscal deficits and an unstable global environment. It is now on a firm path of a revival with a wave of optimism. The strong uptick in GDP growth was accompanied by a receding inflation - at 5.1% in January 2015, considerably lower than double-digit figures in 2013. Current account deficit and fiscal deficit, the prime causes of concern in 2013, are now within manageable levels. company background & evolution Gujarat Fluorochemicals Limited (GFL or the Company) was incorporated in 1987 and it commenced commercial operations in 1989. The Company started its chemicals business by setting up Refrigerant Plant in Ranjitnagar in 1989 under the know-how and expertise from M/s Stauffer Chemicals USA and Pennwalt Corporation of USA. The chemical business primarily consisted of sale of CFC Chloro-fluoro-carbon) - 70%, and HCFC (Hydro-chloro-fluoro-carbon) – 30%. At one time, GFL exported refrigerants to more than 75 countries across the globe. The Company’s business model hit a speed breaker on account of the coming into force of the Montreal Protocol. The Montreal Protocol, an international treaty created to eliminate the production of ozone depleting substances, brscribed a legally binding phase-out schedule for CFCs, so as to bring down production to zero by 2010. The Company was able to phase-out CFCs completely by 2005- 06, and shift its entire business focus on HCFCs, which have a much lower ozone depleting potential and hence a much longer phase-out schedule under the Montreal Protocol. In the 2000s, the Kyoto Protocol came into force to address the environmental concerns around global warming and climate change, caused by anthropogenic emissions of global warming gases. The Kyoto Protocol placed legally binding emission reduction targets on the signatory countries from the developed world, and permitted entities such as GFL, in the developing world, to reduce emissions voluntarily, and through the process of the Clean Development Mechanism, convert the emission reductions into carbon credits, for selling to buyers in the developed world, who required them for their compliance targets. GFL used the cash from its Clean Development Mechanism project to strengthen and integrate its chemicals business and to set up its renewable energy business. As part of strengthening its chemicals business, GFL set up an integrated chemicals complex at Dahej, Gujarat, where it has set up India's largest manufacturing facility of PTFE (polite trafluoroethylene) with an initial capacity of 6,000 tonnes per annum (tpa), based on state-of-the-art international technology. GFL also set up a 50,000 tpa caustic soda / chlorine plant, and a 40,000 tpa chloromethane plant to become one of the most backward integrated PTFE producers in the world. Eventually, the PTFE plant was expanded and debottlenecked to its brsent capacity of 16,200 tpa, and the caustic soda / chlorine plant brsently stand at 134,750 tpa and the chloromethane plant at 108,500 tpa. In FY2014-15, GFL also commissioned a 40,000 HCFC plant to make the Dahej complex totally integrated. In addition, GFL has about 75 MW of captive power plants at its Dahej facility. With these investments, GFL has evolved to become the largest producer of chloromethantes, the largest producer of HCFC, and the largest producer of PTFE in the country. In addition, it is amongst the largest and most competitive producers of PTFE globally. As part of its diversification strategy for value creation, in 2002 GFL mandated McKinsey & Co. Inc. to advise it on identifying new business opportunities. As a result of that study, due to the strong fundamentals of the Indian theatrical exhibition business, and to top into the strong and growing consumption story of India, GFL decided to invest in setting up a national chain of state-of-the-art multiplex cinema theatres. This business was implemented through its subsidiary, Inox Leisure Limited, which eventually got listed in 2006. As a result of another study carried out by McKinsey & Co. Inc., GFL decided to invest in the renewable energy business, essentially to capitalise on the global trends of emission reduction measures. In pursuance thereof, it entered the wind farming business in 2007 and the wind turbine manufacturing business in 2009. These businesses are being carried out by Inox Renewables Limited and Inox Wind Limited, respectively, both subsidiaries, of which Inox Wind Limited got listed in April, 2015. GFL TODAY Since their inception, each of GFL's businesses have emerged as sizeable entities with significant market leadership positions in the segments they operate in, and each has begun generating considerable cash flows on their own. As a result, GFL has been transformed from being a single-product, single plant, single market and single business Company, into a conglomerate with interests in the chemicals, refrigerants, fluoropolymer, entertainment and renewable energy segments. CHEMICALS BUSINESS: INDUSTRY STRUCTURE & GFL (1) PTFE Industry Structure PTFE Total global PTFE market is around 1,50,000 TPA, of which 60% is granular and 40% is dispersion and aqueous grades. The market is growing at a CAGR of 3-4%. Demand is expected to get a boost due to increased usage in the architectural and household applications. In terms of supply, the industry is dominated by two kinds of players - long term, high quality, large players from developed countries, who command around 50% market share; and new players from developing countries with around 50% market share Overview of GFL's World Class Fully Integrated Facility Today, GFL is the largest manufacturer of chloromethanes, hydro-chloro-fluoro-carbons (HCFC) and various grades of PTFE in India. The Company's primary end product is PTFE, which is made out of HCFC. Besides being used as a feedstock in the production of PTFE, HCFC is also used as a refrigerant gas. The Company makes its own HCFC for feedstock use and also exports HCFCs for refrigerant use. HCFCs, in turn, are made out of anhydrous hydrogen fluoride (AHF) and chloroform, which is a chloromethane. The Company makes its own AHF and chloromethanes, which are made out of chlorine. The Company makes its own chlorine for feedstock use. The Company's chloromethane, HCFC and PTFE plants are the largest in India. Besides, this forward and backward integration makes GFL one of the most cost competitive producers of these chemicals globally. The manufacturing complex at Dahejenjoys international quality and process certifications, including ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007. GFL's PTFE Leadership In 2005, GFL took a conscious decision to forward integrate into PTFE segment and in FY2007-08, it attained a key milestone in operationalising its PTFE manufacturing facility at Dahej, Gujarat. It also decided to build a completely integrated chemical complex and simultaneously commissioned a 30 MW captive power plant, a 52,500 tpa caustic soda/chlorine plant, a 41,500 tpa chloromethane plant, and a 5,500 tpa PTFE plant. Subsequently, these projects have now been expanded to capacities of 134,750 tpa caustic soda/chlorine, 108,500 tpa chloromethanes, and 16,200 tpa PTFE. Originally pioneered by DuPont, PTFE is commonly known as Teflon. It is a versatile and advanced engineering plastic, which has multiple applications across industries due to its outstanding chemical resistance, heat resistance, insulation, low friction and non-stick properties. PTFE is used in chemicals, textile, automobile, electrical, semiconductor, aerospace, medical, pharmaceutical and a host of other sectors. Apart from these segments, the largest consumer related usages for PTFE are in cable & wires, non-stick cookware and consumer solar electronics. With strong demand in these application areas, PTFE demand is expected to grow at a CAGR of ~ 5-6% till 2020. Combined sales of PTFE are estimated to be around 150 ktpa in CY2013, with a value of approximately US$2.5 billion. It is consumed majorly in the US and EU, but would be overtaken in time by China and India. Having entered the PTFE business in 2008, GFL has become a significant player in the global market within a short span of time. The Company enjoys a significant competitive advantage, because of its integrated operations. It is amongst the most integrated players globally, giving it significant cost competitiveness amongst other global players. The Company has placed enormous emphasis on high and consistent quality of all PTFE grades matching the best in the business, by continuous operations and process improvements. With a capacity of ~16 ktpa, GFL is a dominant player in the domestic markets. It also participates in the global markets, primarily in the EU and US, and enjoys a peer position amongst the top 4 PTFE suppliers worldwide. Consistent with its commitment towards the environment, the Company manufactures fine powder and aqueous dispersion PTFE grades manufactured by using environment friendly surfactant technology. GFL PTFE Operations in FY2014-15 During FY2014-15, GFL has sustained its market share and penetration and has added a number of key accounts by meeting their stringent and unique product quality and applications requirements. The Company has adopted marketing strategies to be proximate with its customers and engage with them consistently both before and after the sale. It also provides value-added services such as office and warehousing facilities in the USA and EU markets, and technical services to drive value for customers. Through its subsidiaries in USA and Germany, GFL imparts high support and service levels by maintaining a close connect with its customers. As a result, the market place perceives GFL as a brferred quality supplier. GFL works closely with customers to develop products with required specifications for niche applications, and also renders top-level technical services. The Company enjoys 70% market share in India, being the only significant producer in the country. There is an immense latent potential for higher PTFE demand and the Company is working with Indian PTFE processors to develop new products and applications to spur higher growth and demand in the domestic market. Other Specialty Fluoro Chemicals Globally, established players are moving to higher value-added polymers, leaving the space in the traditional PTFE markets for players such as GFL. Nevertheless, in the near future, the Company has also been endeavoring to build up a process competence and manufacturing capacity in other higher value-added speciality Fluoro chemicals, namely Fluoropolymers and Fluoroelastomers. This family of chemicals is one of the largest speciality chemicals segment globally and estimated to be ~US$15-16 billion, growing at ~4% according to industry experts. The target industrial users for these are aluminium, pharmaceuticals, agro chemicals, oil & gas, auto, plastics and moulding and electrical cables. Due to shifting environmental norms, integrated players such as GFL are expected to continue to prosper by migrating from fluorocarbons to fluoropolymers. Other non-integrated players are gradually exiting the sector, leaving fewer players in the industry. The barriers of entry into these products are tall and these chemicals are highly regulated from an environment point of view. Also, Chlorine and Chloromethanes are hazardous and have huge logistics restrictions. On all these fronts, GFL stands on solid ground. It is highly integrated in its manufacturing operations, well experienced in manufacturing such class of chemicals and secure in its procurement of key raw materials. (2) Caustic Chlorine Operations Industry structure caustic chlorine The domestic caustic soda capacity is ~3.3 mtpa (million tonnes per annum), and accounts for ~4% of the global capacity (78 mtpa). Caustic soda (Sodium Hydroxide) is manufactured by electrolysis of salt water (brine solution). As one cannot be produced without other, this industry is known as caustic chlorine industry. In India, caustic soda is the principal product and chlorine a by-product, while global caustic-chlorine industry is characterised by chlorine as the principal product. As merchant demand for chlorine, which is a hazardous chemical, is relatively low in India, operational viability is mainly achieved through the sale of caustic soda. Nevertheless, due to the growth of plastics (PVC) and other inorganic chemicals, the demand for merchant chlorine is slowly picking up. GFL's Caustic Chlorine Operations GFL has a distinct advantage over other caustic soda manufacturers as it consumes chlorine within its value-added processes for manufacturing chloromethanes. The key industries that consume caustic soda in India are textiles, paper & pulp, alumina, organic and inorganic chemicals and soaps & detergents. In time, it is expected that demand for caustic soda will also start to emerge from the growing alumina, paper and pharmaceutical sectors. Value Added Chlorine: Chloromethanes Chloromethanes are the result of GFL's value addition on chlorine, which is a byproduct of caustic soda manufacturing. The major products of these operations are Methylene Dichloride (MDC), Chloroform and Carbon Tetra Chloride (CTC). While Chloroform is consumed for the captive production of HCFC-22, the Company sells MDC and CTC in domestic markets where these chloromethanes have a robust demand. CTC is mostly used as a cleaning agent in multiple industries and in manufacturing fire extinguishers. MDC is largely used as a feedstock for manufacturing silicones, agricultural chemicals and synthetic rubber. Silicones account for the vast majority (approximately 85%) of the global consumption of methyl chloride. GFL uses the Chloroform for its captive use in manufacturing HCFC. (3) Refrigerant Gases Industry Structure Refrigerant Gases Used as a cooling medium in the air-conditioner and refrigeration appliances/ machineries, it is produced by four large players in India, of which most export a significant part of their production. The Montreal Protocol and the Ozone Rules of India place restrictions on setting up of new manufacturing capacities, and mandate phase out of production of HCFCs for refrigerant use. However, there are no restrictions on HCFCs used as feedstock in the production of PTFE and other chemicals. Driven by rising affluence, changing lifestyle and altered dynamics in real estate, the domestic air-conditioning industry is growing by ~20%. GFL's Refrigerant Gases Operations GFL manufactures HCFC-22, which is used mainly as a raw material for manufacturing PTFE, and HCFC as a refrigerant is sold by the Company in both the domestic and export markets GFL ADVANTAGES • Presence in a sector with high entry barriers: GFL has a peer position within an exclusive club of PTFE producers and enjoys the advantages of high entry barriers caused by high capex intensity, restricted access to technology, strategic access to key raw materials, cost competitiveness due to integrated operations, and long and arduous product development and approval cycle with customers. New players cannot easily enter this market on a standalone basis. • Enjoying the benefits of Vertical Integration: GFL's ability to produce a wide range of chemicals through its vertically integrated facility makes it one of the most cost-competitive producers of PTFE in the world. The operational advantages of this integration have ensured that the Company is well placed competitively and less susceptible to the volatility of the commodity cycles. Also, the multiple products in its portfolio reduce dependence on any one product and sbrads risks across a basket of products. • Scope to increase Operation Leverage: Having already made large investments in capacity expansion across all its product lines, GFL is poised to reap the benefits of scaling volume growth through further improvements in capacity utilisation. With capacity utilisation of around 60% in PTFE production during FY2014-15, the Company has ample headroom to increase its capacity for this family of chemicals over the medium term, giving it even higher operating leverage and better top and bottom line, going forward. Secured in its key Raw Materials: GFL acquisition of a significant interest in Fluorspar mines in Morocco and its joint ventures in the fluorspar and AHF space implies that it has secured for itself access to this strategic raw material. High Degree of Customer Sustenance: The Company works closely with its customers to understand their requirements, and develop grades and qualities to suit a customer's applications. Further, high service levels, quality consistency and continued post-sales technical support helps GFL to maintain long term customer retention. The Company supports its customers through its on-shore warehousing and service brsence in Germany and USA. GFL's gradual shift to value-added products for its customers will allow the Company to harness better margins and more stable pricing for its products. RISK MANAGEMENT & INTERNAL CONTROL Your Company believes that sound internal controls and systems are related to the principle of good governance, and should be exercised within a framework of proper checks and balances. Accordingly, your Company has devised and implemented such internal control systems as are required in its business processes; the adequacies of these are confirmed by the Statutory Auditors in their report. The Company remains committed to ensuring a reasonably effective internal control environment that provides assurance on the operations and safeguarding of its assets. The internal controls have been designed to provide assurance with regard to recording and providing reliable financial and operational information, complying with the applicable statutes, safeguarding assets, executing transactions with proper authorisation and ensuring compliance with corporate policies. OPPORTUNITIES, RISKS, THREATS AND CONCERNS Due to the commodity nature of some of the products produced by GFL, the Company is susceptible to the vagaries of commodity cycles. GFL mitigates the impact of such fluctuations through a multiple product range in its bouquet of product offerings, and also reducing the dependence on commodity grades of products, by emphasising on value added products. GFL's business requires a significant amount of working capital. Any inability to meet working capital requirements, or the non-payment or delayed collection of receivables from customers, could materially and adversely affect liquidity, financial condition and results of operations. Currently, GFL is well resourced financially to manage and maintain smooth operations. Its accruals, cash flows, lines of credit and banking arrangements are well balanced to ensure continuity. The Company has the ability to comfortably raise more capital at any time should the need arise. GFL imports a substantial proportion of the components and raw materials and thus has exposure of risks relating to the fluctuation of exchange rates. Exports accounted for ~40% of revenue in FY2014-15. It also has borrowed loans in foreign currency of Rs.55,000 Lakh. GFL takes appropriate currency risk mitigation measures in the form of hedging to protect its bottom lines and return ratios. A key risk includes increased competition and impact on pricing, due to any additional capacities set up by Chinese manufacturers. GFL remains confident of being able to maintain its competitive position due to its cost competitiveness derived from its integrated operations and its strong marketing and customer retention strategies. The key opportunities in the PTFE business include the vast undeveloped potential in the Indian markets that will be converted into market demand by new products and application development. The market gaps created by established players moving to higher value-added polymers also gives GFL the opportunity to absorb new unmet demand. There also exists the potential to work with reputed global players of PTFE based components to expand the PTFE market in India. GFL also sees major opportunities in US, Latin America and Far East to expand its sales and global market share. The Company has taken appropriate steps to market into and service these markets to achieve this goal. Human Resources We believe that our employees play a pivotal role in realising the Company’s strategic goals and ensuring a consistent global quality in the delivery of all its products and services, within the framework of a customer-focused culture. The Company encourages an environment of development and empowerment, enabling each staff member to contribute his/her skills and talents towards sustaining high performance. Annual Employee Satisfaction (E-SAT) (for technicians) Survey and Employee Effectiveness Survey (EE2) (engineers and executives up to managerial level) is administered across locations, which highlights the strengths and the major areas to improve employee satisfaction and their effectiveness for sustained profitable growth. To keep employees motivated, Functional Heads and Supervisors are encouraged to spontaneously recognise their team members for a small, but significant, contribution in their day-to-day work. An Employee Newsletter "GFL PULSE" has been launched to keep all the employees updated about the happenings within the Company. This newsletter with bi-annual editions is a small step to keep everyone connected. • We strive to continuously upgrade the skills of our operators and technicians to ensure productivity and enhanced output matching the required quality. A special tool 'Skill - Will' has been introduced to determine to map the performance of operators and technicians based on the skill and willingness of the employees to perform and arrive at their individual training needs. The tool has been awarded as one of the best practices in Training & Development in the Annual Survey of Best HR practices by Dun & Bradstreet in 2015. • To ensure sustained profitable growth, it is pertinent to build continuously on our internal human capital through leadership development. The first step taken towards this end saw the introduction of a Leadership Competency Framework. This Competency Framework has now been dove-tailed into our Performance Management system and will help us to identify the "High Potential" employees who can be groomed for becoming the leaders of tomorrow. • We are an 'Equal Opportunity" employer and we believe that to tap into the country's vast resources, it is essential to reach out to various groups of men and women who are not a part of our workplace as they bring in good talent. The gender ratio in our Company has been steadily increasing and we have now place for young lady engineers in our Company. We also celebrated diversity at our workplace on International Women's Day and Mothers' Day by felicitating our women employees across locations. INFORMATION TECHNOLOGY GFL deploys amongst the best-breed IT systems to power every operation it performs and to aid the management in running its affairs efficiently. At the centre of our business is our SAP-based system, which enables full visibility to management of our operations, marketing and financial goals and allows it to raise its standards for customer service and reliability. In addition, innovative technology solutions differentiate us in the marketplace in terms of both our offerings and operational efficiency. Technology is also the foundation for process improvements that enhance our productivity, improve efficiency and reduce costs. During the year, we re-implemented SAP for GFL and INOX Wind for integration of the business processes into a central ERP for the following modules: • PM - Plant Maintenance Module • SD - Sales & Distribution Module • MM - Materials Management Module • QM - Quality Management Module • PP- Production Planning Module • FI - CO - Finance & Costing Module • PS - Project Systems Our key achievement in the IT landscape has been the installation of high-end SAP servers for fast data and information access with high-end data security of business critical information. Our new infrastructure with high end servers are based on the latest processor (power 8) IBM power series p8 servers for SAP application. In addition to this, a new UTM (Unified Threat Management) has been installed for better data security and to have efficient controls on information and data. We also implemented SOP in SAP to enable internal controls on business commercial operations, besides developing and implementing a wind turbines online data access portal for our external customers. OUTLOOK & STRATEGY GFL has emerged as a niche player with strong operational specialty chemicals business with a sizeable ownership in thriving renewable energy and film exhibition businesses. The domestic and global markets for GFL's products remain resilient and steady, despite economic growth challenges in various pockets of the world. GFL believes that its Chemical business is on the verge of taking off in terms of value addition, market penetration, capacity utilisation and margin expansion. In the medium term, the Company expects to reach maximum capacity utilisation and be able to generate strong revenue streams to drive cash flows. The ensuing revenue growth along with improvement in operating margins would enable GFL to generate significant gross cash flows in the next few years and the Company is confident that it would be able to further deleverage its balance sheet significantly. As it delivers strong operating leverage, the margins on GFL's product portfolio could also improve disproportionately. In the near term, we have no plans for making any major capital expenditure. We plan to spend modestly between Rs. 10,000-15,000 Lakh per year for de-bottlenecking and routine maintenance. As a result, we expect that the improving capacity utilisation will result in higher operating leverage and better margins. As it is a highly vertically integrated setup, this should help the Company to generate incremental margins at every stage of production. Further, increasing contribution from value added products are expected to help improve its margin profile. The Company introduced solutions around aqueous dispersion technology last year and is currently in advances stages of final qualification with major customers. This should further add to the Company's growth and margins. Finally, GFL is well positioned as a peer within its industry and is planning to expand its offerings into other value added products in the Specialty Fluoro Chemicals family. This would provide GFL new avenues for growth on top of the existing organic growth of the established product portfolio. The Company is placing special R&D focus on this new class of fluoro specialty chemicals, which are based on TFE, the brcursor to PTFE. With only marginal investment required to enter this segment, GFL expects to leverage its PTFE plant capabilities to make this a reality. CAUTIONARY STATEMENT Statement made in the Management Discussion & Analysis describing the Company's objectives, projections, estimates, expectations may be "Forward-looking statements" within the meaning of applicable securities laws & regulations. Actual results could differ from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand supply and price conditions in the domestic & overseas markets in which the Company operates, changes in the government regulations, tax laws & other statutes & other incidental factors. |