MANAGEMENT DISCUSSION AND ANALYSIS ECONOMY REVIEW Indian Economy grew at 7.5% in 2015-16 and is poised to grow at about the same rate in 2016-17. This year's budget is designed around nine pillars aimed at 'Transform India' with greater focus on agriculture and rural sectors with a view to boosting the rural demand. Fast tracking of irrigation projects, 100% village electrification by May 2018, push to rural infrastructure, opening up farm product marketing to enable farmers to discover product price and an outlay of Rs. 2.18 trillion on roads and railways will all add to the development of rural areas and in turn pushing overall demand growth in the coming years. The Government's aim to double the farmers income by 2022 will help in growing the rural demand year after year. The fiscal deficit and revenue deficit targets fixed by the Government for FY 2016-17 are positive for the economy. The steep fall in the global crude oil prices has greatly helped the Government meet its fiscal deficit target and also contain the current account deficit during FY 2015-16. The implementation of seventh pay commission award and forecast of above normal monsoons are likely to provide help in boosting demand in the coming year. Initiatives taken by Reserve Bank of India and the Government to address the rising NPAs problem in the banking sector will help lowering of interest rate going forward. Lower inflation with low interest rates will boost discretionary spending which augurs well for your Company. REVIEW OF OPERATIONS Steep fall in crude oil prices in the period July 2015 to December 2015 from $60/barrel to less than $30 /barrel resulted in consequent fall in price of the main raw material Styrene Monomer (SM) and your Company's products. SM prices saw a fall of over $400/MT during the July 2015 to September 2015 quarter, resulting in erosion in inventory values and steep fall in the selling prices of your Company's products. The falling prices had the anticipated effect of reduction of inventory by the distributors/ customers, simultaneously resulting in poor off-take of your Company's products. The SM prices however stabilised in the second quarter ended on December 31, 2015 and with the low prices of the Company's products demand improved. The January to March 2016 quarter witnessed upsurge in demand for the Company's main products due to marked improvement in demand for consumer appliances like refrigerators, air conditioners and air coolers. The demand for daily use products also has shown better growth. The uptick in Crude oil prices and stable SM price with upward trend from January 2016 enthused your Company's customers to start stocking, anticipating increase in prices of your Company's products. This coupled with smart pick up in business sentiments, helped your Company earn PBIDT of Rs. 106.00 crores as compared to Rs. 3.14 crores in the corresponding nine month period in the brvious year. Your Company earned net profit of Rs. 56.05 crores for this financial year of nine months as compared to loss of (Rs. 27.72) crores in the corresponding nine months of the brvious year and Rs. 35.70 crores for the twelve months period July 2014 to June 2015. Your Company registered a volume growth of 26% in respect of all its manufactured products during the period July 2015 - March 2016 compared to the same period in the brvious year. Polystyrene (PS): The domestic market saw healthy growth of 10.11% in the nine months financial period of July 2015 to March 2016, whereas for April 2015 to March 2016 the growth was 8.1%. Robust growth in consumption was seen in Consumer Durable sector, Air-conditioners and Air Coolers where by major players are not only manufacturing for domestic market but also for exporting to neighboring countries and Africa. Growth in Rigid sheets, artificial jewellery & embellishments, stationery, PS foam food service also added to demand growth. Your Company is working closely with the customers to create awareness of post consumer recycling which if not handled in a sustainable manner can dampen this growth. Export of PS grew by 57% in the year under review, as compared to the same period in brvious year due to addition of new distributors in Europe, USA and Canada. Business in Turkey remained stagnant since the anticipated correction in duty structure by Turkish Government in line with EU levels did not take place. With this growth in Exports, Company was able to increase share of export volumes to over 35% of total volume sales of Polystyrene as against 30% in the corresponding period in the brvious year. Expandable Polystyrene (EPS): EPS market grew by 9.7% during 9 months period under review. Demand growth of EPS April 2015 to March 2016 period was in double digit at 11%. The growth was contributed mainly by packaging industry for white goods and grape boxes apart from construction industry using sandwich panel, 3-D panels and cold storage constructions. Your Company continues to lead in promoting EPS based applications and technologies for construction segment. Use of 3-D EPS Panels in construction of individual houses and bungalows is growing. Use of EPS sheets for external insulation of residential buildings has been undertaken. Geofoam technology for construction of roads and highways especially on soft soil and other geotechnical applications using EPS blocks was introduced. Seminars were conducted in Mumbai and Delhi for the benefit of the Officials from the Government, road authorities, research institutes and infrastructure companies with the help of qualified and distinguished professors from USA universities. Trial project for Defence was undertaken as planned and is brsently under performance investigation. Civil projects to testify this application are under evaluation. Your Company has supplied EPS FR grade for sandwich panels used for economical RO Water Plants. Introduction of new machinery imported from Bulgaria which made steam boilers redundant has made it possible for many entrebrneurs to enter the business of processing food grade EPS for cups . This helped in meeting local demand in Tier II & III cities like Surat, Amritsar etc, avoiding long distance transportation of light weight product which was adding significantly to the cost of EPS cups. The operations of the EPS plant in Chennai were disrupted in December 2015 due to the unbrcedented rains and flooding in Chennai. The flood waters attained a level of 6 feet inside the plant and damaged inventories, electrical, mechanical equipment and instrumentation as also spares, system hardware, office equipment and furniture. Part of the compound wall and water pond were also damaged. The Management team and employees worked untiringly to restore operations in a months time. Care was taken to ensure that customers were not inconvenienced as supplies were made to them from the plant in Maharashtra. Your Company has adequate insurance cover on the reinstatement cost basis for fixed assets, on cost basis for raw material and stores and on market price basis for finished goods. Your Company is also insured for "Loss of Profit" during the period the plant operations were shut. The Company therefore does not envisage any financial loss on this account. The insurance Company has appointed surveyor and his work is in progress. The Company has in the interim received an on account claim amount of Rs.4.49 crores from the Insurance Company. Speciality Polymers and Compounds business (SPC): SPC business has been restructured with a team focusing on sales and marketing of variety of Masterbatches and compounds. We expect volume growth to happen in the coming year. Efforts are on to replace the market lost in Middle East due to political instability by concentrating on other regions. Extruded Polystyrene Insulation Board (XPS): Your Company sold 16068m3 during the period under review as against 8968m3 in the corresponding period in the brvious year thus clocking 79% growth during the period under review. Continuous efforts are being made to strengthen the distributor network. Your Company is the only producer of XPS board in India, who has successfully incorporated the most environment friendly blowing agent in the product. World-class quality & timely delivery have enabled your Company to be recognized as a leading player of building insulation material. Leading construction companies have started incorporating your Company's product in their tenders for major projects. FINANCE: Your Company continues to remain debt free. This has helped in brserving the cash flows for Company's operations with reduced financial cost. CAPITAL EXPENDITURE: Your Company proposes to modify one of the three Polystyrene (PS) lines into a swing line capable of producing either PS or upto 42500 TPA of SMMA. The technology for the modification of the PS line and production of SMMA will be from Polysty Inc. USA. The cost of the project, including hardware and technology fees will not exceed Rs.600 lacs and shall be met from internal accruals. The plant start-up is expected by end of 2016 and the estimated payback period is two years. SMMA is widely used for optical sheets. Other applications include homeware, office accessories, toys and medical devices. During the year 2016-17 your Company also intends to integrate its standard EPS and food grade EPS lines at the Maharashtra plant to achieve better efficiencies and improved rated capacity. Your Company would also be incurring capital expenditure on revamp of extrusion lines in the SPC plant to meet new requirements. The total capital expenditure for the year 2016-2017 for above scheme including the expenditure to be incurred on replacement/renewal of certain old equipment and general plant improvement projects is estimated at Rs.23 crores. The said capital expenditure shall be met from internal accruals of the Company. OUTLOOK Globally availability of Styrene Monomer, our major raw material, remains tight with no new major capacities under implementation. One of the large SM producers in Japan moth-balled permanently an old SM unit of 320,000 TPA capacity without any plans to replace this capacity. Your Company, however, is well protected for procuring its Styrene Monomer requirement with long term commitment from its foreign suppliers. While the polymer industry is undergoing a paradigm shift in USA due to new plants being commissioned or existing plants being revamped based on the availability of cheap shale gas & oil, Styrene/ Polystyrene industry seem to be relatively unaffected by this trend, since the major raw material Benzene is not obtained by the shale fracking technology. Your Company therefore expects stability in PS/ EPS business both in India and export markets. GDP projection of 7.5% for 2016-17 augurs well for your Company in achieving all round growth in all products of your Company. Polystyrene (PS): Your Company expects favourable market conditions created by the stability in raw material & finished goods prices to help in growing the domestic demand in PS. Your Company has established a dedicated Business Development team to focus on upgrading technology of the highly fragmented but high potential sector like beads/ embellishment etc. Efforts are being made to bring back household tableware & rigid disposables which had migrated to alternate polymers, by bringing about new technology hitherto not used in India. Stable power situation in Tier II & III cities is expected to give a fillip to sale of entry level refrigerators in towns where lack of continuous power supply was a deterrent in the past. Serious emphasis in modernising agriculture & direct transfer of benefits to rural population by Govt.of India is expected to give more disposable income in the hands of farmers, which will substantially improve their purchasing power; this is expected to be a game changer for growth of the beads/ bangles/ artificial jewellery sector. With the monsoon brdicted to be above normal and states gearing up for better acreages for agricultural and implementation of seventh pay commission it is estimated that the PS market will grow at about 6% - 7% during 20162017. Expandable Polystyrene (EPS): With the growth in demand for packaging for appliances, increased application of EPS in construction activities it is estimated that EPS market in the country will grow at 10% in 2016-2017. In respect of EPS food grade we expect that 26 additional Bulgarian machines for processing of EPS for Cups will be installed in 2016-2017 in cities like Gorakhpur, Noida, Bengaluru etc. thus increasing demand for EPS food grade. Your Company expects to reap rich dividends, being the only producer of Food Grade EPS in India. Speciality Polymers & Compounds (SPC): A strong sales & marketing organisation is in place and promotion via exhibitions/ seminars in metro cities and other industrial locations is being done vigorously. Introduction of new grades suitable for the rapidly growing plastics industry is continuing apace, in line with the Government of India's emphasis in modernising Agriculture sector. Efforts are being made with the help of your Company's technical collaborator M/s Ultrabatch, Italy to develop suitable masterbatch for Agricultural applications, like Green House films etc. in which India is dependant on imported products due to non availability of required technical expertise. Extruded Polystyrene Insulation Board (XPS): Several cities have been identified for converting to smart cities, which will give a great opportunity for the growth of XPS insulation board business. Construction of several new IIT's, IIM's and AIIM's in different cities, construction of new capital of Andhra Pradesh & Chattisgarh (Naya Raipur) are all based on Gold / Platinum rated Green buildings, with Roof/Wall insulation an important feature. The strong distribution network being established by your Company is expected to help in increasing the sales volumes of XPS vertical of your Company by 35-40% during 2016-2017. RISK MANAGEMENT International pricing and demand/supply risk are inherent in the import of Styrene Monomer, the main raw material. Your Company enters into procurement contracts for imports of Styrene Monomer on annual basis. The contracts specifies the quantity and attributes for arriving at monthly pricing. However, a part of the requirement is sourced on spot basis so as to float with fluctuations in the market demand and to guard against price volatility. Your Company has linked part of its sales to raw material prices so that any increase/decrease in raw material cost has an adequate cushion to protect the margin. The global economic events impacting the Dollar Index and in turn dollar-rupee parity has a direct effect on cost of imports and also pricing of your Company's products. To overcome these risk of cost and pricing due to foreign exchange volatility your Company hedges part of open foreign exchange exposure relating to imports so as to lessen the impact of foreign exchange rate fluctuations in respect of import of raw material. Your Company also has a natural hedge to the extent of its exports and pricing its products for domestic market based on import parity of its products. Your Company has adequately insured its plant and machinery on a reinstatement basis. The Policies also cover stocks of finished goods, raw materials (at plant and while in transit) projects under erection and third party liabilities. Adequate loss of profit insurance policy to cover loss of gross profit if any, due to interruption has also been purchased by your Company. Your Company also has Credit Risk Insurance in respect of its receivables for one of its products. The management periodically reviews the adequacy of the insurance cover. HUMAN RESOURCES/INDUSTRIAL RELATIONS Your Company considers Human Resources as one of the most important ingredients for growth and strives to align human resource policy and initiatives to meet business plans. Training of employees to maintain high level of motivation is therefore an ongoing process. Industrial relations at all the units remained cordial during the year. INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY The internal controls system for safeguarding and protecting assets against loss from unauthorised use or disposition are in place. Regular internal audits, review by management and documented policies, guidelines and procedures supplements the internal controls which are designed to ensure that financial and other records are reliable for brparing financial information and other data and for maintaining accountability of assets. AWARDS & RECOGNITION Your Company received the following awards and recognition during the period under review: • National safety Council of India Safety Awards 2015 -"Shreshtha Suraksha Puraskar" in recognition of developing and implementing highly effective Management Systems and Procedures and achieving outstanding performance in OSH for the assessment period 2012 to 2014. • Greentech safety Award 2015 (Gold Award) from Greentech Foundation, New Delhi for outstanding achievement in Safety Management. • Greentech Environment Award 2015 (Gold Award) from Greentech Foundation, New Delhi for outstanding achievement in Environment Management. • Your Company has completed 5641 Accident Free Days as on March 31, 2016 which amounts to 14.87 million man-hours of accident free operation. CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis describing your Company's objectives, estimates, expectations or projections may constitute "forward looking statements", within the meaning of applicable laws and regulations. Actual results may differ materially from those either exbrssed or implied in the statements. Important factors that could make a difference to Company's operations include economic conditions affecting demand/ supply and price conditions in the domestic and international markets, changes in the Government regulations, tax laws and other statutes and other incidental factors. |