MANAGEMENT DISCUSSION AND ANALYSIS

Economic Overview

Geo-political tensions in Ukraine and the Middle East, slowdown in China, continued sluggishness in Europe and Japan moderated global growth in 2014. According to the World Economic Outlook published in April 2015 by the International Monetary Fund (IMF), the world output grew at a modest 3.4 per cent in the year 2014, similar to that in 2013. However, unlike in 2013, there was a marked pickup in growth in advanced economies relative to the brvious year, while in emerging markets and developing economies, there was slowdown.

The US economy, the largest in the world, demonstrated a stronger than expected growth. For the last three quarters, growth averaged at an annualised 4 per cent. The key driver for this resurgence was consumption, that benefitted from steady job creation and lower oil prices in the latter half of the year. For the year 2014, the output of the US was 2.4 per cent, compared to 2.2 per cent in 2013, as per IMF's World Economic Outlook, April 2014.

In the Euro area, the crisis in Ukraine and the nervous uncertainty over whether Greece would opt out of the EU cast dark shadows. However, as in the case of US, there were some positive signals of pickup in growth in the latter half of the year, again with rising consumption aided by low oil prices.

There was a global glut in oil prices, particularly in the third quarter of FY2015, when the price of crude oil fell below

US$ 50 per barrel. This dramatic fall was caused by a combination of stock pile up and OPEC's decision not to cut down on production. However, oil prices picked up in the last quarter of FY2015 to US$ 55-60 per barrel.

China and India

In China, growth slowed to its slowest rate since 1990 to 7.4 per cent, missing the government's target of 7.5 per cent for the year. After almost three decades of double digit growth, this single-digit growth is being called the 'new normal' by President Xi Jinping, and is likely to continue in the short and medium terms. Labour costs in China have more than quadrupled in US Dollar terms since 2005 (as per Economic Intelligence Unit), and strikes have doubled since 2013. Jobs are now shifting to service sector from manufacturing sector.

In India, the year 2014 was a year of structural reforms. The new government introduced reforms in many key sectors of the economy like Banking, Insurance, Defence and Infrastructure. Another landmark development during the year was the change in GDP measuring method: the base year was changed to 2010-11 from 2004-05, and GDP will now on be measured at market prices instead of at factor cost basis. The revised GDP for FY2014 stands at 7.4 per cent compared to 6.9 per cent for FY2013. Also, the revision has increased the size of the Indian economy to over US$ 2.1 trillion for the first time.

Inflation was largely under control during the year. The retail inflation as measured by Consumer Price Index (CPI) hovered to around 5 per cent in the latter half of the year due to fall in oil prices

Industry Overview

About Phthalic Anhydride (PA)

Phthalic Anhydride (PA) is a downstream product of Orthoxylene (OX) a basic petrochemical. OX is clear and colourless at room temperatures and is used as a feedstock for the production of PA. Almost 97 per cent of all OX produced is used for making PA, and therefore, the demand for OX is strongly linked to the demand for PA. The total world production of OX is about 3.5 million tonnes of which almost 3.4 million tonnes is used for production of PA.

PA is a basic raw material used as an intermediate for the production of Plasticizers, Unstaturated Polyester Resins, Alkyd Resins and Polyols. PA is an organic compound and a downstream product of the basic petrochemical -Orthoxylene (OX). As much as 97 per cent of all OX produced is used for conversion into PA. The total world production of

OX is estimated to be around 3.5 million tonnes, of which, 3.4 million tonnes is used for conversion into PA.

PA is used in a variety of applications in both consumer durables to non-consumer durables. These range from paints, dyes, pigments, inks to PVC pipes, construction materials, textiles and transportation.

China is the largest producer of PA in the world, accounting for almost 35 per cent of global PA production, followed by Western Europe at around 15 per cent. India has a capacity to produce

340,000 MT of PA in 2014-15, compared to 280,000 MT in the brvious year.

There has been a steady rise in both production and consumption of PA in India over the last few years. The PA Industry in India is expected to grow by 7 to 8% annually.

Plasticizers Industry

Plasticizers account for almost 55 per cent of PA usage, followed by Unsaturated Polyester Resins at 20 per cent. The Asia-Pacific region is the largest plasticizer market in the world, accounting for more than half of total demand in 2013. Demand is projected to grow at a CAGR of 6.41 per cent from 2014 - 2019 and reach US$ 19. 4 billion by 2019. In the region, India is the third largest consumer of plasticizers after China and Japan. India is also the fastest growing plasticizer market in the region due to a strong domestic demand. (Source : MarketsandMarkets).

Impact of Falling Oil Prices on Petrochemicals

The fortunes of the petrochemicals industry are closely linked for the movement of oil prices, as the price of the key raw materials are closely linked to prices of crude oil. In the year FY2014, there was a market drop in prices of crude oil particularly in the months of October, November and December. The price of petrochemicals prices fell to their lowest in January 2015 since mid-2009, due to sustained drop in prices of crude oil. The Platt Global Petrochemicals Index (PGPI), a benchmark basket of seven widely used petrochemicals, fell by US$ 133 per MT to US$ 850 per MT in January 2015, marking a 14% slide on a month-to-month basis.

Company Profile

IG Petrochemicals Limited (IGPL) is part of the HP Dhanuka Group of companies. The HP Dhanuka Group is one of the oldest players in the Indian petrochemicals space.

IGPL has been a dominant player in the manufacture of PA in India. The Company's plant is located at Taloja, near Mumbai in Maharashtra, and enjoys distinct strategic locational advantages, as western India accounts for almost 80 per cent of all PA end-user demand in India. The Company successfully expanded its capacities in 2013, named PA-3, and is today one of the largest producers of PA in the world, with a capacity of 1,69,250 MT per year. IGPL is the only player in India to have expanded its capacities on a regular basis since 1993.

The key factors that contribute to sustained GROWTH of the Company are the unique competitive advantages it enjoys:

1. Locational Advantage - is the most important success factor for the Company. The advantages that accrue to the Company both in Procurement and Supply facets. As far as procurement is concerned, the Company procures almost 70 per cent of its raw materials from a petroleum refinery from the adjoining Gujarat State which is barely 850 kms. away, that gives the Company unbeatable advantage in transportation costs.

The Plant at Taloja, being just 50 kms. away from Mumbai, gives easy and excellent access to the entire road and rail link, connecting all corners of western India. It is western India where most end-users of PA are located, and which accounts for nearly 80 per cent of all PA demand in the country. Customers are assured of regular supplies of PA with lowest lead time for delivery, as well as lowest cost and need not stock large quantities as delivery time is short.

2. Scale Advantage - with the launch of PA3 in September 2013, the Company has expanded its production capacity. PA is a commoditised business, and volumes play a critical part in dominating the market place. Today, the economies of scale that accrue from a large manufacturing capacity make IGPL not only one of the largest manufacturers of PA, but also one of the lowest cost producers of PA.

3. Quality Advantage - the final advantage that the Company offers is the unmatched combination of scale and cost with an assurance of quality. The Company has adopted and implemented ISO 9000:2000 Quality Management System at its plant. In addition, the Company also has ISO 9001 certification and ISO 14001:2004 certification by Bureau Veritas. The plant has in strict six-sigma quality control in place. The entire organisation has implemented ERP

Opportunities and Outlook

The short and mid-term outlook for the Company continues to remain positive and bright. The concern of falling prices and inventory pile-up in the third quarter of FY2014 has since been overcome with recovery of demand and rising oil prices. The Indian economy is on the upsurge, spurred by bold reforms by the government. Both the IMF and the World Bank have forecast the Indian economy to grow at 7.5 per cent in the year 2015 and 2016. The Make In India initiative of the government is likely to boost the manufacturing sector in a major way. In addition, the macro economic factors like increase in economic activity, rising income of middle class, surge in overall demand and tame inflation are likely to drive up consumption, leading to sustained demand from all the end-users of PA in the country. Many end-users are also planning expansion of capacities in anticipation of increase in demand.

The Company is exploring certain downstream products in order to utilise its large PA capacities and to de-risk its existing business which can be conveniently and economically be added which can further fuel growth.

Risks and Concerns

Being a petrochemical product based business the Company is always prone to be affected by the fluctuations in the prices of oil. Abrupt fall in oil prices, like in 2014-15, do affect the business of the Company adversely, affecting sales and piling inventory as buyers defer their purchases. This affects the cash flow as well as profitability of the Company. However, oil prices have since risen and are expected to stabilise at around US $ 55-65 level during the year. This is likely to result in more stable business environment for the Company. Moreover, the surge in domestic demand driven by an overall improvement in demand is likely to result in firm prices for PA during the year.

Internal Control Systems and their Adequacy

The Company has adequate internal control systems commensurate with its size and the industry. All processes and systems are well-defined and well-documented in the form of Standard Operating Processes (SOP). The Company strictly complies of all rules, laws, and statutes of the land. All business transactions are properly recorded and are in total compliance and conformity with accounting principles and processes. The Company also regularly monitors all expenses and ensures these are strictly within the allocated budgetary limits. The strict Code of Conduct lays down clear guidelines to be followed by employees of the Company  and business associates in their day to day activities. There are regular internal audits conducted through an internal audit programme that check and correct any discrepancy or non-adherence or non-compliance with set and defined norms. The Senior management of the Company supervises the internal audit programme.

Material Developments in HR

The Company believes that through its strong set of values and cohesive work-culture, the employees will be able to achieve their potential not only on the professional level, but also in their personal lives. The plant of the Company has all safety features to ensure its workers can work in a safe and secure environment. Health of its employees is paramount to the Company. The Company regularly organises workshops and trainings at all levels to ensure that its employees have the best-in-class skills, and that these are always upgraded.

Cautionary Statement

This report contains statements that are "forward looking statements" including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to Company's future business developments and economic performance. While these forward looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macroeconomic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive brssures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. Company undertakes no obligation to publicly revise any forward looking statements to reflect future / likely events or circumstances.