MANAGEMENT DISCUSSION AND ANALYSIS REPORT

INDUSTRY STRUCTURE AND DEVELOPMENTS

There are currently four companies which manufacture Hydrogen Peroxide in India. National Peroxide Limited continues to be the largest producer of Hydrogen Peroxide in the country. In addition to being well-known in the industry as a pioneer, its product commands a strong brand image. It has been in the forefront in the development of technology for manufacture of Hydrogen Peroxide. Due to the efforts made by the Company in new applications development, the domestic market has significantly developed over the years.

The total production capacity in the country as on 31st March, 2015 is 2,19,500 MTPA on an annualized basis. The domestic demand is expected to grow by 6% during 2015-16. However, due to surplus in the neighbouring countries there have been significant imports at low prices.

OPPORTUNITIES AND THREATS

A Key Raw Material - Natural Gas - an Input for Production of Hydrogen Peroxide

One of the key inputs in production of Hydrogen Peroxide is Hydrogen Gas. This is produced by steam reforming of natural gas.

India imported 46.8 mmscmd of LNG in 2013-14.

The supply of natural gas from Reliance Industries KG Basin has been seriously affected. The current level of production is 11.3 mmscmd. The average production during 2014-15 was 12 mmscmd.

Currently, India imports LNG through Petronet (Dahej), Shell (Hazira) and Ratnagiri Gas and Power Pvt. Ltd. (Dabhol). There is a spare capacity of 1.5 - 2 million tonnes. If this capacity is used, the total gas sector volume can increase by 20 - 25 mmscmd. The imports of LNG have been low due to weak demand. This is on account of its reduced competitiveness compared with liquid fuels such as naphtha due to sharp price decline.

The Kochi terminal is currently operating at close to 5% capacity. This is due to the problem of laying the gas pipeline to connect Bengaluru to Tamil Nadu being affected due to problems of land acquisition. GAIL has entered into a twenty year gas sales and purchase agreement with Sabine Pass Liquefaction LLC, a unit of Chemiere Energy Partners in the US for 3.5 MTPA of LNG. It also has a terminal service agreement for 2.3 MTPA LNG liquefaction capacity with Dominion Cave Point LNG in the USA. In addition, it has a 20 year LNG supply contract for 2.5 MTPA with Gazprom Marketing and Trading Ltd.

There is a significant change in the natural gas market due to significant drop in crude oil prices leading to sharp decline in liquid fuels such as naphtha. Since long term gas prices are based  on 60 months average of crude oil prices with a cap and floor price. As a result, the current spot prices of natural gas are much lower than the long term contract prices.

The low crude oil prices are dependent on the shale oil exploration in the US. Most analysts estimate that cost per barrel for US companies ranges from mid 50s to low 90s USD. This cost has obviously fallen in the last six months as producers modified contracts with sub-contractors and jointly reduced costs anywhere they could.

The oil prices have now settled to around USD 60 and the expected price of barrel of oil probably would go not lower than USD 60 this year, but also not higher than USD 80.

The Government of India had notified New Domestic Natural Gas Pricing Guidelines, 2014. As per the said guidelines, the gas price will be based on weighted average basis of the volumes of natural gas consumed in the US (Henry Hub, US), National Balancing Point (NBP) UK, annual average of monthly prices at the Alberta Hub, Canada and Russia (as published by Federal Tariff of the Russian Government or equivalent source). The price is then calculated as a trailing one year average with lag of one quarter.

In line with this the price of natural gas was initially notified at USD 5.61 on NCV based mmbtu with effect from 1st November, 2014. The price has been reduced to USD 5.18 per mmbtu, with effect from 1st April, 2015. However, this price is not applicable to the LNG imports.

Pulp and Paper Industry - A Key Customer for Hydrogen Peroxide

The paper industry has been affected by a weaker than expected demand supply environment and higher input costs. There has also been addition of new paper production capacity, as well as brssures due to import. The paper industry is affected by large scale imports of newsprint from Russia and also writing and printing paper from China.

Recovery fiber consumption is going up globally in India. About 0.85 to 1.00 million tonnes of waste paper is being recovered annually. The recovery rate works out to about 20% which is much lower in comparison with 65% recovery achieved by many global players. Low recovery is on account of alternate use of paper in wrapping, packing etc. Paper mills are heavily dependent on import based waste paper which has exorbitant prices due to inadequate availability. Some companies are making efforts to increase the recovery of waste paper.

Raw material availability is expected to increase due to import of wood as well as increased farm forestry efforts and lower incremental demand.

Emerging Customer for Hydrogen Peroxide -Environmental Applications

The Indian refineries have been using Hydrogen Peroxide for their effluent treatment and this has been adding to the growth in demand for Hydrogen Peroxide. In the near future, no new refineries are expected to become operational.

OUTLOOK

The outlook for industry in the near term can only be viewed with cautious optimism. During the year under review, significant imports took place from Thailand, Bangladesh and Pakistan. These imports have been at significantly lower price as these countries have a limited demand. Imports from these countries are expected to continue during the coming year. The price of natural gas in the neighbouring countries such as Pakistan and Bangladesh has created serious distortions in the cost structure of the industry. This coupled with lower logistics costs, due to their proximity, to the customers in the North and East from Pakistan and Bangladesh respectively, has an impact on demand and price levels of domestic users.

The implementation of Goods and Services Tax (GST) is now being taken up. The capital and operating cost of the Company continue to be affected by Local Body Tax (LBT).

RISKS & CONCERNS

In India, the consumer price index replaced the wholesale price index in 2013, as the main measure of inflation. During the last six months the inflation rate has been in the range of 5-6%. The Current Account Deficit (CAD) is under control due to lower prices of crude oil.

The customs duty on Hydrogen Peroxide from Thailand and Bangladesh has been reduced to zero. Therefore, there is no protection available to the domestic industry. The problem of inverted duty structure continues as some of the raw materials are imported by the Company at a higher rate of customs duty.

INTERNAL CONTROLS

The Company has a system of Internal Controls to ensure that all its assets are properly safeguarded and not exposed to risks arising out of unauthorized use or disposal. The Internal Control system is supplemented by a programme of Internal Audits to ensure that the assets are properly accounted for and the business operations are conducted to adhere to laid down policies and procedures. The Internal Audit plan is approved by the Audit Committee.

The Audit Committee of the Board of Directors meets regularly to review, inter alia, risk management policies, adequacies of internal controls and the audit findings on the various segments of the business.

The Company carries out periodic review of the Risk Management framework during the year, as per the requirements of Clause 49 of the Listing Agreement with BSE Ltd.

FINANCIAL PERFORMANCE

Discussion on financial performance with reference to operational performance has been dealt with in the Directors' Report which should be treated as forming part of this Management Discussion and Analysis Report.

HUMAN RESOURCES

Peace and harmony between employer and employees brvailed during the year. Relations with the Union continued to be cordial. The long term settlement with the recognized Union, Maharashtra Girni Kamgar Union (MGKU) is valid upto 30th September, 2016.

The Company continues to emphasize its in-house technical training of the employees to upgrade their technical skills. Some of the employees were also sent to technical programmes conducted by ICC.

The Company has obtained certification for RC-14001 2013, from M/s. DNV Certification (India) Pvt. Ltd., for Responsible Care. This is expected to foster improvement in the team work within the Company.

The employee strength on the permanent rolls of the Company was 116, as on 31st March, 2015.

The expansion of the Company's plant from 84,000 MTPA to 95,000 MTPA has provided for many of the employees to enhance their project management and technical skills as this expansion has been carried out internally.

RESOURCES AND LIQUIDITY

The Company finances working capital requirements by sourcing credit lines placed at its disposal by a consortium of banks led by State Bank of India.

CAUTIONARY STATEMENT:

Statements in this Management Discussion and Analysis Report describing the Company's objectives, projections, estimates, expectations or brdictions may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include raw material availability and prices, cyclical demand and pricing in the Company's principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries in which the Company conducts business and other incidental factors.

Place : Mumbai,  

date : 26th May, 2015