MANAGEMENT DISCUSSION AND ANALYSIS The businesses in which the Company operates can be categorised as follows: 1. Agrochemical Intermediates. 2. Specialty Chemicals 3. Polymer Inputs and Additives 4. Pharmaceutical Intermediates and Actives 5. Environment and Bio-tech This report seeks to brsent a discussion and Analysis of the Industry Structure, Outlook, Opportunities, Threats and Risks and Concerns for each of the business segments mentioned above. AGROCHEMICAL INTERMEDIATES Industry Structure The Agrochemical Industry plays an important role in ensuring food security. Globally, the agrochemical industry is going through a period of consolidation and lot of merger and acquisition activity has been seen in the last couple of years, particularly by the dominant innovator companies. Going forward, it is expected that once the process of consolidation is over, the multinational majors would be concentrating on newer generation molecules and brand promotion and marketing. This would open up the space for generic players in the older generation molecules and also create an opportunity for manufacturing companies to collaborate with the majors in contract manufacturing opportunities. On the domestic front, Indian agrochemicals sector has been witnessing imbrssive growth. There is a clearly visible trend of multinationals shifting from old generics (like Organophosphorous - OP insecticides) to newer generation molecules which would benefit the Indian agrochemical generic companies at least in the short to medium term. It is clear that the multinational companies would be looking at India as a cost effective manufacturing hub for sourcing specialty intermediates and actives. Given the fact that labour and environmental compliance costs are increasing in China, Indian manufacturing companies stand a very good chance of catering to this need for high quality knowledge intensive specialty intermediates and actives. The Company with its established position as a leading supplier of OP insecticide Intermediates and its process R & D and manufacturing strengths is well poised to take advantage of the opportunities arising out of the above trends as well as meet the challenges. Agrochemical Intermediates Business - Year 2015-16 in Retrospect The year 2015-16 was a challenging year for the Indian Agrochemicals Industry in general. India was faced with a drought for the second year in succession due to the "El Nino" effect. Further, Brazil which is a major export market for pesticides from India faced the worst ever drought in a century coupled with adverse overall economic conditions. The above factors had an adverse impact on the demand for agrochemicals resulting in debrssed prices, piling of inventories along the agrochemical value chain and brssure on the margins. The overall situation as elaborated above had a bearing on the performance of the agrochemical intermediates business of the company. The Company has been facing competition from China for its prime OP intermediate China has huge excess capacities. Due to the sluggish demand situation, Chinese producers sharply dropped the price. The Company had to respond by way of reduced pricing. Also, there was a reduction in the total off take because of the adverse demand condition. Hence, there was a reduction in the sales volumes of the Company. Despite the challenges, your Company was able to effectively increase the market share. The turnover of the agrochemical intermediates business for the year 2015-16 was Rs. 240 Crores as against Rs. 288 Crores for the year 2014-15. Outlook After 2 years of sub-optimal rainfall, it is expected that India will have a good monsoon in 2016. All the weather forecasting agencies have come out with optimistic forecasts for the monsoon in the current year. The El-Nino phenomenon is expected to weaken and this will be replaced by the La-Nina phenomenon which usually has a positive effect on the rainfall in the Indian subcontinent. Also, after a prolonged period of sluggish demand resulting in slow movement of finished goods inventory in the agrochemical value chain, we are seeing some movement and depletion of inventories resulting in increase of demand of our products. One of the indicators of the improved demand is that there has been a steady increase in the price of OP intermediates from China which will mean improved realisations for the products of the Company. Overall, in all probability, the external environment will be favourable during the year 2016-17, which will have a positive bearing on the performance of the agrochemical intermediates business. Opportunities • The shift in focus of multinational majors from older molecules to newer generation molecules is expected to create a space for Indian/Chinese players at least in the short to medium term. The company with its dominant position as a leading player in the area of OP intermediates is well positioned to take full advantage of this opportunity. • India is expected to emerge as a brferred manufacturing hub for specialty agrochemical intermediates/actives. The Company with its well established strengths in process R & D and manufacturing is in an ideal position to take advantage of these opportunities. The Company is actively engaging with leading innovator companies for custom development of specialty intermediates and actives. • A number of molecules are slated to go off-patent between 2016 and 2020. The Company has identified a few potential molecules from this list and has started working on offering the key intermediates as well as actives. • The Company is confident that the focussed approach as mentioned above in each of the opportunity areas will yield positive results for the agrochemical intermediates business. Threats • The Company is under constant threat of sudden and sharp price reductions by Chinese competitors. The company is constantly working on improving the process and cost efficiencies to ensure that it is in a strong competitive position to withstand this threat. • Agrochemicals are constantly under scanner of regulatory authorities and NGOs for environmental and health concerns. This threat exists for OP insecticides too which are mature molecules. An adverse regulatory/judicial decision can be detrimental to the prospects of the intermediates produced by the company. The company actively engages with the Government, trade bodies and associations as well as the OP insecticide producers to ensure that the correct and balanced perspective is brsented on the regulatory and environment front. Also, as mentioned above, the company is also putting in a lot of focussed effort on custom development and new product development to build up a revenue stream from new generation molecules in order to mitigate this risk. SPECIALTY CHEMICALS Industry Structure The specialty chemicals industry encompasses a wide gamut of the chemicals industry. Broadly speaking, specialty chemicals have the following features which distinguish them from the basic chemicals: • They are a few steps ahead in the value chain starting from basic chemicals • The performance of the chemical in the end use/formulation is a critical success factor apart from the compliance to the product specifications. • A knowledge/application development component is associated with these chemicals apart from the basic production technology. • Small Volume - High Value chemicals account for a significant chunk of the Specialty Chemicals Industry. There are some chemicals which are classified in this category but are sold in relatively high volumes and are commoditised as far as pricing behaviour is concerned. • Knowledge of the end applications of the customer, quick response to customer needs, investment in multipurpose equipment and ability to switch over quickly from one campaign to another are a few of the Critical Success Factors (CSFs) in the specialty chemicals segment. Due to the expected transition of China from a low cost manufacturing export oriented economy to an advanced consumption based economy, it is expected that the focus will shift on India as a base for sourcing of knowledge/application intensive specialty chemicals. Also, given the changing lifestyle and rising aspirations of the middle class in India, the domestic demand for many of these specialty chemicals is expected to increase significantly. Outlook The specialty chemicals business of the company comprises of the following product categories: • Organophosphonates • Acetyl Chloride • Biocides • Floatation reagents - Styrene Phosphonic Acid (SPA) The outlook for each of the product categories is brsented briefly as under: Organophosphonates Organophosphonates are chelating agents/corrosion inhibitors based on Phosphorous Trichloride (PCl3). The company is a leader in the production of Organophosphonates. It has the advantage of being the leading producer of PCl3 which is the key raw material required for the production of Organophosphonates. The company has been able to increase its volumes in the domestic market by leveraging on its dominant position and responding appropriately on the pricing. In terms of future outlook, we see continued demand for Organophosphonates because of their established and proven efficacy in various applications. However, we also see continued aggression on the pricing because of the huge global capacities, particularly in China. Acetyl Chloride The company is the leading producer of Acetyl Chloride in India. Acetyl Chloride is used as an acetylating agent in the production of Pharma APIs like Ibuprofen and Naproxen. India has emerged as an Ibuprofen manufacturing hub. The company has been able to successfully maintain its dominant position in Acetyl Chloride. Going forward, the Company is confident of retaining its dominant status in this product. However, an increasing trend of Chinese imports is being seen for this product which will mean a brssure on volumes as well as pricing. Biocides The company is the market leader in the product Sodium Pentachlorophenate (SPCP). This biocide has a proven efficacy in water based paints, wood brservation and a host of other applications. At the same time, it is highly cost effective. These are the reasons for its continued usage in India. Currently, there are only two producers in India. The company is the major producer with a dominant market share. In recent years, the company has been able to significantly increase the volumes for this product. We foresee continued demand for SPCP Opportunities • It is reasonable to expect a continued demand for Organophosphonates in view of their established efficacy as chelating agents in various applications. • The US which is a large market for Phosphonates and dominated by Chinese players has initiated anti-dumping proceedings against imports from China. If the Anti-Dumping Duty is put in place as a result of these proceedings, it will create a space for other players. The company with its established position as a leading producer of Organophosphates is ideally placed to exploit this opportunity. Threats • Because of huge capacities particularly in China, the market for Organophosphonates is highly price sensitive and the company continues to face brssure to match the price aggression by competitors, in order to maintain the volumes. The company plans to meet this threat by focussing on development of new applications using formulations based on the Phosphonates. Certain applications with potential have been identified and we are working on the market development of the same. • Specialty Chemicals which are application oriented are under constant scrutiny of the regulatory agencies and NGOs for potential harmful impact on the humans/environment. A ban/phase out resulting out of a regulatory/judicial decision might have an adverse effect on the performance of the business. The company actively engages with the Government, trade bodies and associations to ensure that the correct and balanced perspective is brsented on the regulatory and environment front. POLYMER INPUTS AND ADDITIVES Industry Structure and Outlook Polymer Inputs/Additives are a class of functional chemicals which are used to impart special properties / functional characteristics to Polymers. These include Catalysts, Flame Retardants, Clarifying Agents, Branching and Cross-Linking Agents, Plasticizers etc. With the increasing use of Polymers in various applications like automobiles, electronics, construction industry, power equipment, aerospace etc. there is a good potential for Polymer Inputs and Additives In recent years, the Company has been able to establish itself as a leader in the range of polymer inputs produced by it. The company has been able to establish a leadership position for the Polycarbonate Branching Agent produced by it. The sales turnover of the Polymer Inputs business for the year 2015-16 was Rs. 48 Crores. Going forward, the Company expects the sales of its existing range of Polymers inputs to be strong. There are concerns on the declining trend of sales for the Polypropylene Co-Catalysts produced by the company due to the shift by the customer to new generation catalysts. Opportunities • With its established position for the polymer input products manufactured by it, the Company is in an ideal position to take advantage of the market opportunities by expanding on the range of its offerings. The Company is engaging with potential customers for custom development of new products. Threats • A shift to newer generation co-catalysts by the customer might adversely impact the sale of co-catalysts produced by the company. The Company is working on expanding its product range in order to mitigate this threat and has invested in dedicated R & D and process development resources for this purpose. • The Polymer Additives as well as the final polymeric materials in which these additives are used are subject to constant scrutiny by regulatory bodies and NGOs for their potential impact on environment as well as human health. Any ban/restriction on the additives produced by the Company/end products due to such scrutiny might have an adverse impact on the sales/ profit margins of this segment. PHARMACEUTICAL INTERMEDIATES AND ACTIVES The Indian API industry and its latest trends The Indian Pharmaceutical industry is estimated to grow at 15-20% CAGR over the next five years. The industry is expected to outperform the global pharmaceutical industry which is set to grow by 5% in the same period. Presently the market size of the Indian pharmaceutical industry stands at USD 20 Billion. India has around 2300 API manufacturing units and hence commands respect in the global supply domains. Stringent regulatory norms by the CDSCO ensures that the quality of the product meets Global Standards. The biggest challenge for Indian API manufacturer comes from China. Over a period of time, Indian API players have gradually migrated up the value chain to focus on value added formulations with higher margins. Under these situations, it is imperative that API manufacturers in India focus on backward integration to achieve better control on critical activities which add value to the chain. This scenario appears to be an opportunity for several API intermediate manufacturers to look towards moving ahead in the value chain and enter the API domain. Segment Performance and Outlook The Pharmaceutical Intermediates and API business has recorded sales of INR 20 Crores for the fiscal year 2015-2016. Robust process engineering and expertise in handling complex high volume reactions has enabled the business to achieve leadership position in one of its molecules in the domestic market. The Business has extended its reach in the export markets and is soon anticipating to be manufacturing a key intermediate for a large Japanese Pharma major. The Company has increased focus on new products & pipeline of APIs and Intermediates to be launched in next two years has already identified which will give boost to segment performance. The Company has obtained WHO - GMP Certificate for complying with Good Manufacturing Practices at our Lote Parshuram site for manufacture of Active Pharmaceutical Ingredients (APIs), Bulk Drugs. Way Forward: • Moving up the Value chain - Increase of API sales as compared to Intermediates in the Domestic markets • API sales to export markets - DMF compilations and partnering with finished formulations manufacturers • Intermediate sales in highly regulated markets • Commercialisation of pipeline products • Add new products to pipeline through enhanced customer interaction • Product selection based on volume and capability based approach • Investment in manufacturing facility for added capacities to support future growth Opportunities • Intermediate manufacturing for Large Japanese Pharma major. • API sales to Domestic and Export markets • New products in therapeutic segment (Antidiabetic) scheduled to be commercialized in the year 2016-17 are expected to contribute significantly • Aligning itself with the fastest growing therapeutic segment (Antidiabetic) in the Indian Pharmaceuticals market. • Manufacturing of Intermediates for high value off patented products. • Willingness of Increasing European players to partner with Indian intermediate manufacturers Threats • Lack of support from Government to levy anti-dumping taxes on Imports • Goods confiscated as illegal imports are sold off to Traders with heavy undercutting • Competition from China in APIs and its intermediates continues to grow. • Short term Indian API and Intermediate players - Traders • Short Life span/product life cycle Risks and Concerns • Dependency on single molecule as prices may drop within 2-3 years during replacement of molecule. • Next generation molecule may impact existing molecule efficacy. • End user exploring possibility of backward integration. • Aggressive domestic competition. • Delay in getting export approvals, will have impact on penetration in export market. ENVIRONMENT AND BIOTECH Industry Structure and Development Municipal Solid Waste Management industry is seeing an unbrcedented momentum in India thanks to the Prime Minister's very ambitious 'Swachh Bharat Mission'. The industry has seen two very important regulatory milestones in the forms of: (a) Municipal Solid Waste Management Rules 2016 released by the Ministry of Environment and Forests which lay significant emphasis on segregation, de-centralized (at source treatment of waste) and composting. (b) Marketing Development Assistance of Rs 1,500 per MT on the sale of City Compost released by the Department of Fertilizers. Your company has played a significant role in the ideation, formulation and release of the above policies which will act as a shot in the arm for the entire Solid Waste Management industry for both centralized and de-centralized technology providers and operators. The industry has seen multiple entrebrneur driven organizations enter into the business of de-centralized solid waste management seeing the potential in the market due the above. The MSW Management industry is definitely poised to assume a solid structure with long term players looking to provide sustainable solutions for a cleaner India. Segment performance and outlook The Company has registered marginal increase in sales during the year. The sales of Organic Waste Converter (OWC) machine have improved and the outlook for the OWC market is promising. Opportunities, Threats, Risks and Concerns Urban Local Bodies are being mandated and monitored by the state and central governments for the tangible steps being taken by them in the field of sustainable solid waste management. Though the process is slow, this brsents immense opportunities to all players in the industry in terms of offering technology solutions, end-to-end services as well as operations and maintenance of small and medium plants employing the urban poor. Many large business houses are looking to spend a significant amount of their Corporate Social Responsibility funds towards sustainable models of de-centralized solid waste management. The mandate on bulk waste generators to segregate and manage their own organic waste is becoming much tighter. Hence a large opportunity brsents itself in that sector too. Multiple Municipal Corporations are coming up with tenders / exbrssions of interest to set up and operate mixed MSW treatment and disposal facilities which will compost and Refuse Derived Fuel (RDF) as major components. While the opportunities are immense, the threat of competition is also increasing. The first decade of 2000 saw several large opportunistic players enter the business expecting a quick turnaround, in turn offered halfhearted solutions which put reputation of the entire industry at risk. Your company will need to actively explore the opportunities, weigh the risk of liabilities and also ensure we remain competitive at all times. Continuous innovation, newer solutions with high barrier to entry and focus on differentiation continue to be our strategy to face the above threat. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY Your Company has put in place adequate internal financial controls with reference to the financial statements, some of which are outlined below: Your Company has adopted accounting policies which are in line with the Accounting Standards brscribed in the Companies (Accounting Standards) Rules, 2006 that continue to apply under Section 133 and other applicable provisions of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014. These are in accordance with generally accepted accounting principles in India. Changes in policies, if any, are approved by the Audit Committee in consultation with the Auditors. The policies to ensure uniform accounting treatment are brscribed to the subsidiaries of your Company. The accounts of the subsidiary companies are audited and certified by their respective Auditors for consolidation. The Company has proper and adequate system of internal audit and control which ensures that all the assets are safeguarded against loss from unauthorized use and that all transactions are authorized recorded and reported correctly. The Company continuously improves upon the existing practices for each of its major functional areas with a view to strengthen the internal control systems. The Company has assigned internal audit function to a firm of Chartered Accountants. Regular internal audit and checks are carried out to ensure that the responsibilities are discharged effectively. All major findings and suggestions arising out of internal audit are reported and reviewed by the Audit Committee. The management ensures implementation of these suggestions and reviews them periodically. FINANCIAL PERFORMANCE & ANALYSIS During the year under review, the total net sales decreased from Rs. 476.25 crores to Rs. 443.09 crores, registering a decline of 6.96%. The export sales increase from Rs. 78.00 crores to Rs. 93.13 crores registering an increase of 19.40%. Further, the Company made a profit of Rs. 36.55 crores before taxation compared to Rs. 50.29 crores in the brvious year. Net profit after tax amounted to Rs. 25.20 crores as compared to Rs. 40.56 crores in the brvious year registering decline of 37.87%. HUMAN RESOURCE DEVELOPMENT/INDUSTRIAL RELATIONS Your company believes that human talent is its fundamental strength. The Company nurtures competencies and skills through learning and development programmes and recognizes talent, and rewards it through performance management system. Performance management system ensures setting of KRAs in the beginning of the Financial Year and periodic and annual assessment of performance on the defined KRAs. For setting KRAs, Business Unit's KRAs are first established and then percolated down to the departmental and finally to individual KRAs. Your company has generally enjoyed cordial relations with its employees. Worker and staff employees are paid in accordance with the wage agreement established with trade unions. The employee strength of the Company as on 31st March, 2016 was 912. CAUTIONARY STATEMENT Statements in this report on Management Discussion and Analysis relating to the Company's objectives, projections, estimates, expectations or brdiction may be forward looking within the meaning of applicable securities laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results might differ materially from those exbrssed or implied depending upon factors such as climatic conditions, global and domestic demand-supply conditions, raw materials cost, availability and prices of finished goods, foreign exchange market movements, changes in Government regulations, tax structure, economic and political developments within India and the countries where the Company conducts its business and other factors such as litigation and industrial relations. The Company assumes no responsibility in respect of forward looking statements herein which may undergo changes in future on the basis of subsequent developments, information or events. |