MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW OF THE ECONOMY The global economy recorded a moderate growth of 3.4% in the calendar year 2014. With economic growth in China slowing down, prices of commodities, especially crude oil saw a sharp downtrend on account of oversupply and subdued demand. Economies that are net commodity importers received a boost from lower commodity prices, while net commodity exporters like Russia and Brazil, saw a slowdown in economic growth. India's economy posted a marginal recovery with GDP (revised series) growth estimated at 7.3% in financial year 2014-15 as against 6.9% in financial year 2013-14. Lower commodity prices, especially crude oil, have benefitted India by reducing brssure on inflation, current account and fiscal deficit. This also helped in lower rupee volatility in the last one year compared to other emerging markets. Continued economic and regulatory reforms initiated by the Government and the expected pick up in domestic investment should help accelerate growth rate in FY 2015-16 STRATEGIC INITIATIVES Your Company's journey to strengthen its leadership position in its respective businesses through expansions and acquisitions is progressing well VSF Business Expansion The Company fully commissioned the Greenfield project (120K TPA) at Vilayat in Gujarat, during FY 2014-15 taking the total capacity to 498K TPA. The first two lines commissioned in the first half of FY 2014-15 have already reached 72% utilisation in the 4th quarter. The remaining two lines commissioned in the 4th quarter are also being ramped up. These two lines (43K TPA) are geared to produce specialty fibre. Commissioning of the plant will enable to ramp up VSF volumes in the current year with higher share of specialty fibres. Merger of Aditya Birla Chemicals (India) Limited (ABCIL) with Grasim In line with the Group philosophy to consolidate similar business in one company, your Company has initiated merger of ABCIL, another Group company. ABCIL has three manufacturing plants located at Rehla (Jharkhand), Renukoot (U.P.) and Karwar (Karnataka) with an installed capacity of ~293K TPA of Caustic soda and a 110 MW captive Power plant. ABCIL is also in the process of completing the acquisition of 59K TPA capacity at Ganjam (Odisha) from Jayshree Chemicals. The merger will strengthen Grasim's leadership in Chemical business taking its capacity to 804K TPA and enable the geographical diversification. With this merger, the Company with its financial strengths will be able to capitalize growth opportunities in Chemical business by bringing in operational and financial synergies. Ambitious growth plans in Cement Business In the Cement business, UltraTech Cement Ltd. (UltraTech), the subsidiary of your Company continues to grow at a rapid pace both organically and inorganically as detailed below: • The acquisition of the Gujarat units of Jaypee Cement comprising of an integrated cement plant at Sewagram and a grinding unit at Wanakbori, both in Gujarat, with a combined capacity of 4.8 Mn. TPA was completed in June 2014. • In December 2014, Ultra Tech entered into an agreement to acquire two integrated Cement plants at Bela and Sidhi in the Satna cluster of Madhya Pradesh having a capacity of 4.9 Mn. TPA together with a thermal power plant of 180 MW from Jaiprakash Associates. The transaction is subject to the requisite regulatory approvals. • A Clinkerisation plant of 2 Mn. TPA at Aditya Cement Works, Shambhupura, Rajasthan and 1.4 Mn. TPA Grinding unit at Rajashree Cement, Malkhed, Karnataka were commissioned during the year. • The Cement grinding facility of ~6 Mn. TPA to support the Clinker capacity already commissioned at Raipur and Shambhupura is slated to go on stream in a phased manner in FY 2015-16. Captive Thermal Power Plants of 25 MW each at Rajashree Cement and Andhra Pradesh Cement Works and Waste Heat Recovery System totaling to 22.5 MW at various plants have also been commissioned. Post completion of the ongoing expansions and the acquisition, UltraTech's cement capacity will increase to 75 Mn. TPA. Performance Review The overall Fibre consumption globally has grown at a CAGR of 5% from 2009 to 2014. During the same period, VSF has grown at a much higher pace of around 12% led by growth of Asian economies and high cotton prices in China. Asian countries - China, India, Indonesia along with Turkey are likely to continue to be the major consumers of VSF contributing ~85% of the global VSF consumption going forward. Despite growing demand, VSF prices remained under brssure due to excessive global over capacity, especially in China and falling prices of compete fibres. During the last few years, over capacity was created at a time when VSF was growing at a rapid pace which has resulted in widening gap of the supply over demand. The Cotton prices declined due to reversa l of Chinese Cotton policy and excess production. PSF prices declined as a result of fall in Crude prices. There is a l so a significant over supply in dissolving grade pulpdue to the increase in pulp capacity leading to decline in pulp prices, putting further brssure on VSF prices. Your Company's production and sales volume increased by 13% and 10% respective l y with the commissioning of the Vilayat plant. Realisation declined by 4% in line with the international markets. Increase in the sulphur and coal prices further intensified the brssure on margins whereas declineinpulp prices provided partial relief against cost increase. The Company further intensified its efforts to improve efficiency to strengthen its competitiveness. Your Company has also launched brand 'liva' for VSF based products intensifying the efforts for product awareness, market expansion and establishing closer connect with the end customer. Your Company has been working close l y with a large number of value-chain partners, including spinners, fabricators and processors through Liva Accredited Partner Forum in areas of technical support, design development, supply chain and market development The Pulp JVs achieved higher volumes supported by increase in production and reduction in inventory. Globall y, dissolving grade pulp is in oversupply which led to debrssed pulbral is ation, the benefit of which was realized in Standalone performance. Marked to market losses on foreign currency borrowings, which have been kept unhedged due to long term natural hedge, have affected the profits. Sector Outlook The combination of low prices of cotton and polyester coupled with over capacity in the VSF industry may continue to exert brssure on VSF prices in the near term and like l y to affect the VSF demand growth. Specialty products such as Lyocell and Modal fibre, however, are expected to grow at higher rates. There is no fundamental change in the VSF growth pattern helped by rising prosperity, population growth in the key consuming markets and increasing awareness about the benefits of cellulosicfibre coupled with l imitations in growth of cotton production. Business Outlook A continued thrust on specialty fibres, ramping up of Vilayat p l ant and expansion of market in India through actively working with value chain partners would be the key focus areas. Your Company's thrust is on the key R&D projects towards achieving the world benchmark quality, strengthening the cost competitive position and attaining higher environmental standards. Performance Review The chemical business reported a growth of 31% and 30% in production and sales volume respective ly supported by additional volumes from the newly commissioned Vilayat P l ant. The Vilayat P l ant achieved around 80% capacity utilisation in FY 2014-15. The regionalimbal ance in Chlorine demand and increase in supply kept chlorine prices under brssure and affected ECU realisations. The operating profit is higher led by higher volumes. The Epoxy p l ant is being ramped up and considerable progress has been made in customers' accreditation. Sector Outlook The Caustic demand in India will be driven by the expected increase in demand from key consuming sectors like Al umina, Fibre, Texti l e and Paper industries, though in immediate future, prices may be affected due to the commissioning of new capacities coup led with cheaper imports. Business Outlook The Business expects to maintain high capacity utilization, given the favorable demand outlook. The Business will continue to take energy conservation measures to reduce power consumption. Upon obtaining requisite regulatory approvals, the merger of ABCIL (w.e.f. 1st April , 2015; the Appointed Date) will further strengthen your Company's leadership in the Chlor A l ka l i sector. Higher captive use of Chlorine by increasing the volumes of Value Added Products should improve the profitability. Performance Review The Indian Cement Industry saw an over all sluggish demand resulting into surplus capacity of ~120 Mn. Tons. Additional l y, the year witnessed a continuous rise in the price of input material s and logistics cost. Your Company's on-going cost optimization measures helped in containing costs to some extent. Continuous optimization of process and raw mix design resulted in an increase in petcoke consumption. The domestic Cement sales volume improved by 7%,which include volume gain on account of acquired plants in Gujarat. U ltraTech's domestic realisations were higher partly to pass on higher costs. The Freight costs rose by 10% given the increase in rail way freight, lesser avail ability of rakes and changes in p l ant/ market mix. An increase in royalty on limestone from Rs. 63/ton to Rs. 80/ton and new levy on mining products under MMDR Act led to rise in Limestone cost. Increase in prices of major additives and freight cost has a l so impacted the overall and cost at the p l ants. PBIDT rose by 10% at Rs. 4,776 Crore compared to Rs. 4,358 Crore last year mainly driven by higher volumes. U ltra Tech has a total capexoutl ay of 7,600 Crore of which, Rs. 2,725 Crore has a l ready been incurred. Of the remaining amount, the Company plans to spend Rs. 3,500 Crore in FY 2015-16 and the remaining amount later. Outlook for Cement Business The demand for Cement is expected to improve as it is l inked with GDP growth. The key drivers will be the revival of infrastructure projects supported by regulatory reforms and improvement in the demand for housing with the softening of interest rates. The pace of capacity addition has s l owed down constrained by current profitability and long gestation period. Textiles - Grasim Bhiwani Textiles Limited (GBTL) GBTL, your Company's textile subsidiary, has recorded net sales of Rs. 464 Crore. The volume was maintained despite the slowdown in the Textile industry globally. Its Operating profit at Rs. 34 Crore was lower by 9%. INTERNAL CONTROL SYSTEM Your Company has a robust internal control system commensurate with the size and scale of its operations. Roles and responsibilities are c l ear l y defined and assigned. Standard operating procedures are in p l ace by way of built in control s in ERP system and have been designed to provide a reasonable assurance. A reputed CA firm has a l so been engaged for internal audit, covering a l l units and business operations. The Audit Committee reviews the adequacy and effectiveness of internal control systems and provides guidance for further strengthening them. Apart from having all policies, procedures and internal audit mechanism in p l ace, your Company a l so periodically engages outside experts to carry out an independent review of the effectiveness of various business processes. The observations and good practices suggested are reviewed by the Management and Audit Committee and appropriately implemented with a view to continuously strengthen internal controls. RISKS AND CONCERNS Risk Management is an important business aspect in the current economic environment. The objective is to identify, monitor and take mitigation measures on a time l y basis in respect of the events that may pose risks for the businesses. Your Company has Risk Management Committees at each business unit and Corporate office for effective identification and monitoring of risks and imp lamentation of mitigation p l ans. The Risk Management Committee of the Board reviews the identified risks and mitigation plans from time to time. CONCLUSION In the VSF Business, the new p l ant at Vilayat with a higher share of specialist products will augment the product mix and profitability. The focus on cost optimization will continue re lentlessly. The Company has launched brand 'liva' and is actively working with the value chain, brands and retailers to expand the domestic market of VSF. In the Chemical Business, the scale of operations will rise significantly post the merger of ABCIL with the Company and ramping up of the Epoxy operations. In the Cement Business, the Company with its existing and proposed capacity is well placed to grow from the acce l erated growth expected in the sector. Your Company enjoys a leadership position in all its businesses: Viscose Staple Fibre, Cement and Chemicals, which has been strengthened with an investment of US$ 4 bn. over last five years. Additional investment of US$ 2 bn. will be made over the next two years towards merger of ABCIL with the Company and acquisition of cement assets in Madhya Pradesh, brownie l d expansions, logistic infrastructure, coa l mine etc. by UltraTech apart from modernization capex. The Company is well poised to reap the benefits of these investments with ramping up of capacity utilization and expected upturn in the business cycleled by accelerated growth in the economy. CAUTIONARY STATEMENT Statement in this "Management Discussion and Analysis" 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 impede. Important factors that could make a difference to the Company's operations indude global and Indian demand-supply conditions, finished goods prices, feedstock availability and prices, cycUcal demand and pricing in the Company's principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which the Company conducts businesses and other factors such as Utigation and labour negotiations. The Company assumes no responsibiHty to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events or otherwise. |