MANAGEMENT DISCUSSION AND ANALYSIS

1.0 OVERVIEW OF COMPANY:

Gujarat Narmada Valley Fertilizers and Chemicals Limited ('the Company' or 'GNFC') operates businesses mainly in the Industrial Chemicals, Fertilizers and Information Technology ('IT') Products space. Serving a diverse set of customers, the Company is now an established leader in most of its chosen lines of business.

GNFC today is one of the leaders in fertilizer industry. The Company is engaged in manufacturing and selling fertilizers such as Urea and Ammonium Nitrophosphate under the brand name of "NARMADA".

The Company has set up core chemical and petrochemical plants such as Methanol, Formic Acid, Nitric Acid, Acetic Acid, Toluene Di - Isocyanate, Aniline, Ammonium Nitrate, Ethyl Acetate, Methyl Formate etc. The Company is one of the largest producers of Formic Acid and Acetic Acid in the country. The Company has India's largest single stream plant of Aniline. The company is the only manufacturer of Toluene Di-Isocynate in South East Asia and Indian Sub Continent. The Company's chemicals enjoy high brand value in niche market.

The Company provides several cutting-edge IT services and solutions covering Digital Signatures Certificate (DSC), E-procurement, E-Governance projects, Data centres and CCTV surveillance systems etc. under Brand name of (n)code solutions. It remains the market leader in Digital Certificate business maintaining about 40% market share.

2.0 INDUSTRY STRUCTURE AND DEVELOPMENT:

2.1 Industry Structure:

Due to importance of fertilizer for sustained agricultural growth and in attaining self sufficiency in foodgrain for the country, Fertilizer Industry is one of the priority and regulated sector. Fertilizer Industry is characterized by high dependence on Government policies with respect to subsidy and control. Historically, fertilizer sector has not been able to attract new investment due to regulated return on Investment through subsidy and price control. Further, the industry's other woes are mounting subsidy bills and lack of clarity in policies particularly with respect to allocation of feedstock.

The Chemical Industry is one of the most diversified and growing industrial sector of the country covering thousands of commercial products. Imports of various chemicals are on a rise, as increased/enhanced capacities are not able to cope up with the increasing demand. This Industry occupies a pivotal position in meeting basic needs and improving quality of life. The Indian chemical sector accounts for 9-10% of total exports and 8-9 % of total imports of India. Currently, per capita consumption of products of the Indian chemical industry is one-tenth of the world average, which reflects the huge potential for growth.

Information Technology (IT) industry is characterized by constant innovation in product and service offerings required to meet rapidly changing customer needs coupled with challenges in talent acquisition and retention.

2.2 Recent Developments :

1. The Union Cabinet gave its approval to a combrhensive New Urea Policy 2015 for the next four financial years. The Policy has multiple objectives of maximizing indigenous urea production, promoting energy efficiency in urea units, to ensure availability of urea to farmers with lesser subsidy burden on the Government.

2. As per Government of India (GOI) notification, it has been made mandatory to coat 100% of urea production in the country with neem oil. The use of Neem Coated Urea helps in improving the efficiency of the nutrients, in curtailing diversion of urea for industrial uses and acts as a pesticide.

3. Government has approved Natural Gas pooling policy under which all urea units would get gas at a uniform price. This is to ensure level playing fields to all urea units.

4. Government has set up Integrated Petroleum, Chemicals and Petrochemicals Investment Regions to promote manufacturing of Chemicals and Petrochemicals in the country.

3.0 OVERVIEW OF PERFORMANCE:

3.1 Production/ Operational Performance: Chemicals & Fertilizers:

• The Company was able to do reasonably well in the debrssed market conditions, through its operational excellence, higher efficiency and well executed strategies around input sourcing and marketing. The operation strategy of the Company was driven by continuous adjustment of manufacturing/ trading pattern based on relative economics.

• Continuing its emphasis on product innovation, the Company has added Water Soluble Fertilizer and Technical Grade urea in its product portfolio during the year.

• The ability to operate at high utilisation levels and switch product slate to suit market conditions enabled the Company to capture margin optimisation opportunities in the market. The ability to operate at high utilisation levels is core strength of the Company. Most plants of the Company were operated at over 100% capacity utilization:

• 50,000 MTPA TDI plant at Dahej, which is in operation since March 201 4, is facing operational stabilization problems due to complex technology. Further, due to frequent interruptions, cost of production is high. This has been further aggravated by brvalent TDI prices which are lowest in the decade. During the year, the plant produced 6316 MT of TDI with capacity utilization of 12.63%. To address the anxiety, business plan is being worked out to stabilize the economical operation of plant.

• Due to lower sales realization and non availability Natural Gas at economical rate, production capacities of Methanol were operated only when market conditions were favourable.

• The Company constantly focuses on technology, product innovation, cost improvements and safe practices. During the year, various modifications & energy saving schemes were implemented resulting into considerable monetary and energy savings. Further, various initiatives in operation and maintenance of plants like use of alternate materials, diversions of excess gases / steams to other potential uses, changes in catalyst design, changes in fuel or raw material mix, change in timings of shutdown have resulted into recurring benefits with added advantage of flexibility in operations and reduced dependencies.

• During the year, the Company has been awarded National Energy Conservation Award 2014, in Fertilizer sector from Ministry of Power, Government of India for 3rd consecutive year.

IT Operations:

• The Company has maintained its leadership position in DSCs Business with Digital Signature based solutions for secured transactions and Aadhar based biometric authentication.

• The Company has maintained its turn-key projects business in area of Data Centre, CCTV surveillance systems business, E-governance projects amid tough competition

From other than TDI Dahej operations of the Company, there was a profit of Rs.318 Crore. However, the Company reported loss of Rs. 452 Crore for the year mainly on account of:

• Loss of Rs.440 Crore relating to operations of 50,000 MTPA TDI Dahej plant.

• Exceptional item rebrsenting Impairment loss of Rs. 330 Crore relating to assets of 50,000 MTPA TDI Dahej plant.

3.3 Marketing Performance:

The Company has done reasonably well in the debrssed market conditions through its marketing excellence. The marketing strategy was driven by continuous adjustment of manufacturing and trading pattern based on relative economics. Depending upon market dynamics, the Company has explored trading opportunities in both chemicals and Fertilizers business to meet the growing needs of its valued customers. The major marketing initiatives during the year include:

• In fertilizer business, the Company has adopted strategy of more sales of its fertilizers in its primary marketing zone consisting of Gujarat and adjoining States. Further, the emphasis is laid on more sales of Fertilizers to the farmers directly by increasing progressively its network of retail outlet known as Narmada khedut Sahay Kendras (NKSKS).

• In chemical business, more thrust on export has been given to ensure availability of new markets. During the year, total 16,000 MTs of Chemicals were exported.

• In IT Business, the Company has identified untapped markets for IT Business which mainly includes Education, Data Analytics, Smart city and Mining and has brpared action plan to foray into them.

4.0 OUTLOOK:

In the short run, growth will receive a boost from lower oil prices, from likely monetary policy easing. Further, the policy reforms of the new government, on reviving investment and business, are creating historic opportunity for economic growth of the country.

Fertilizers:

Government's intent of incentivizing fertilizer sector is evident from major initiatives taken in the fertilizer policy by the government in 2014-15. Further, strong brand image and an excellent marketing network of fertilizer products will help Company maintaining its fertilizer business despite forecast of deficit monsoon. Accordingly, outlook for Company's fertilizer business is positive for 2015-16.

Chemicals:

The current low per capita consumption in India and strong growth outlook for the key end usage are the key growth drivers for this industry. Key concern areas in Chemical business of the Company are operation of 50,000 MTPA TDI plant at Dahej and tough competition in the sector. Based on growth history of the sector, outlook for Company's chemical business is positive for 2015-16. However, operation of 50,000 MTPA TDI plant at Dahej is the key anxiety.

Information Technology (IT):

Recognizing the need for greater penetration of IT services domestically, Digital India has been envisioned by Government as an ambitious umbrella programme to brpare India for knowledge-based transformation. Further, an increasing acceptance that digital technologies will impact business models, processes, new products and services offerings, access to new markets, new customer base etc. has resulted into increased spending on technology. This offers huge growth opportunities for Company's IT Business. Accordingly, outlook for Company's IT business is positive for 2015-16.

5.0 OPPORTUNITIES AND STRENGTHS:

1. Brand image of Company's fertilizers continues to be in the brmium segment. This will further help in consolidating markets in the Primary Marketing Zone in the decontrol scenario.

2. Huge gap of demand and supply of various chemicals and fertilizers offers a business opportunity of trading by the Company.

3. Increased capacity in Chemical segment particularly TDI and Ethyl Acetate offer a good opportunity for export.

4. The Company is planning to market TDI-MDI blend. This will open a new avenue for business. Production of TM80 (TDI/MDI blend) on regular basis is envisaged for supply in automobile, insulation sectors.

5. The ability to operate at high utilisation levels by innovative modifications, production enhancement scheme as well as effective upkeep and maintenance offer benefits of higher business volumes.

6. Oil and other petroleum products are significant inputs in production of fertilizers & chemicals and lower prices may improve profit margins.

7. The Company has also entered into long-term/ annual contracts for supplies of most of the critical raw materials like oil, Natural Gas, Rock phosphate, Benzene, Coal, Toluene, packing material etc. to ensure continuous production.

8. Increased emphasis on E-governance and Internal Security by Government offer a lot of business opportunities for the Company in E-governance, Data Centre and CCTV surveillance system projects.

9. Strategic alliance with new partner for managing IT Business offers benefit of innovation and new ideas.

10. Following its policy of growth based diversification, the Company has developed a diversified basket of products that helps the Company to sail through cyclical changes in business.

6.0 THREATS, RISKS & CONCERNS:

1. Fertilizer being highly controlled and subsidized sector, Company's fertilizer business is largely dependent on Government's policies with respect to subsidies, availability and pricing of feedstock, marketing of fertilizers etc. Changes in such policies may impact fertilizer business.

2. Chemical business is largely dependent upon domestic market which is highly competitive.

3. The prices of TDI are the lowest in the decade due to increased new capacities worldwide.

4. Frequent interruptions in operation of 50,000 MTPA TDI plant at Dahej on account of complex technology resulting into higher cost of production is the key anxiety. This woe of the Company is further aggravated by brvalent TDI prices which are lowest in decade due to increased new capacities worldwide. This also entails risk of further impairment loss.

5. Availability and pricing of key raw materials like Natural Gas, Rock Phosphate and other petroleum based products is limiting factor and have potential to impact profitability and operations.

6. Key raw materials are purchased at import parity prices. Further, Company is largely dependent on foreign vendors for critical machineries, spares and technical services. Therefore, currency fluctuations may impact operations or results of the Company.

7. Certain long term contracts entered into by the Company contain clauses, which if triggered, have potential of resulting into adverse financial implications to the Company.

8. The Company has certain litigations, rebrsentations and applications etc. pending before Courts, Tribunals, Government Departments and Agencies, Regulators etc. which, if adversely decided, could impact business and operating results.

9. Company's IT Business to a certain extent depend upon ability to compete for firm priced and/or cost plus contracts with tight execution deadlines.

10. Recruitment and retention of talented human resource particularly at senior level is a matter of concern.

11. Changes in the policies of Government, Regulations and Laws which have potential of impacting business in India generally could also impact business of the Company.

7.0 NEW PROJECTS:

1. In terms of Government's new Investment policy to facilitate fresh investment in urea, the Company is evaluating proposal for setting up a large scale Ammonia-Urea manufacturing facility at Bharuch.

2. The Company has adopted a very unique multifaceted and people-centric approach in Neem Project. The Company has embarked upon the Neem Project as a backward integration project to manufacture its own requirement of Neem oil, selling excess Neem oil and also to make organic Neem cake fertilizer but with the main objective of women empowerment and uplifting of poor rural masses by providing additional income.

3. The Company has also initiated necessary steps for setting up Di-Calcium Phosphate project, in a joint venture with M/s. Ecophos SA, Belgium based on Hydrochloric Acid generated as by-product from 50,000 MTPA TDI plant at Dahej.

4. The company is exploring opportunities of projects in countries where there is availability of raw materials like Natural Gas, rock phosphate and other petroleum products at economic prices.

8.0 HUMAN RESOURCE MANAGEMENT:

One of the strengths of your Company lies in its skilled and professional manpower. This could be achieved by adopting good HR policies and undertaking training and development of all employees. The Company makes  continuous and concerted efforts to groom its human resources to meet with the brsent and future challenges in the field of Technology and Management functions in the rapidly changing Industrial scenario. Remaining conscious & focused about the importance of safety, environment and health aspects, the Company conducted in-house training programmes on safety awareness, environmental aspects, health awareness etc. during the year. The Company's proactive actions have resulted into good, harmonious, cordial and healthy industrial relations throughout the year which has helped in sustained production levels and economical operations. The total strength of human asset of the Company as on 31st March, 2015 was 3052.

9.0 INTERNAL CONTROLS SYSTEM, INTERNAL AUDIT  AND ITS ADEQUACY:

The Company has adequate internal controls for its operational processes across the business segments to ensure efficient operations, compliance with internal policies, applicable laws and regulations, protection of resources and assets and accurate reporting of financial transactions.

The Company has internal audit system which is conducted by a reputed firm of Chartered Accountants so as to cover various operations on continuous basis. The internal audit plans and reports are reviewed by the Management and Audit committee and necessary actions plans are decided, wherever needed.

The Company has exhaustive operational as well as procurement budget system in place. Throughout the year, actual expenses are monitored against budgeted. Variances are analysed and timely corrective actions are taken, when needed.

The Company has sound Management Information system in place to ensure availability of qualitative and quantitative information on operations of the Company. This helps to keep operations on its targets.

10.0 CAUTIONARY STATEMENT:

The statements in Management Discussion and Analysis describing the Company's objectives, expectations or projections, may be forward looking and it is not unlikely that the actual outcome may differ materially from that exbrssed, influenced by wide variety of factors affecting the business environment and the Company's operations. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events.