MANAGEMENT DISCUSSION AND ANALYSIS The Board of Directors is pleased to brsent the business analysis and outlook for Zuari Global Limited (ZGL) based on the current Government policies and market conditions. i) Global Outlook The global economy in 2014 continued to grind on a slow momentum, recording a growth of 3.4% over the brvious year, with marked growth divergences among major economies. While the United States continued to register a stronger growth, many advanced economies like Japan and the Euro zone worked out course corrections to negate the cumulative legacies of the past global financial crisis. Contrary to expectations, emerging markets and developing economies, especially the BRIC, also displayed mixed prospects. While the slump in global crude oil prices is expected to provide a window of opportunity for oil- importing countries like India and China, they could dampen the prospects for some large emerging market economies and oil-exporting countries. Overall global growth in 2015 will not gain much traction and is projected at 3.5 percent according to World Economic Outlook (WEO). ii) Indian Economy After a 3 year hiatus, the Indian economy displayed a sense of buoyancy, riding on the pro-growth agenda of the new government. The revival of growth gained momentum in 2014-15 with the sharp decline in crude oil prices, the funds flow from strong investor sentiment and the reform initiatives of the new government at the Centre with its thrust on consolidation and fiscal stability. Despite the lukewarm growth in foreign trade, the strong domestic demand kept the growth momentum on an upward trajectory. IMF and the World Bank have pegged an optimistic real GDP growth of 6.4% for India, for the year 2015, as against 5.6% in 2014. A) New Initiatives The Company, armed with its land bank, is enthusiastic about unlocking the tremendous opportunity available for the growth of realty and infrastructure in India and has set its sights on building up fast in a growing market. The Company, through its wholly-owned subsidiary, Zuari Infraworld India Limited, is strengthening its pan-India brsence, leveraging its real estate capabilities to execute integrated development projects in strategic locations. With an amply demonstrated success in execution of its current projects, the Company is best placed to capitalize on positive market conditions and aims to transform living experiences through uncompromising quality, architectural excellence and intelligent design. B) Subsidiaries Diversity enriches, insulates and encompasses multiple hues of our business spectrum. With the objective of providing consumers with a combrhensive range of world-class products, the Company continues to strengthen its diverse product portfolio through its subsidiaries in the sugar, financial services, engineering services and furniture sectors, which are leading the Company to become a vibrant, multi brand enterprise. A profile of these businesses is given below: a) Gobind Sugar Mills Limited (GSML) Gobind Sugar Mills Limited (GSML) became an indirect subsidiary of your Company during the year in view of 51.27% of its equity share capital held by Zuari Investments Limited, a wholly-owned subsidiary of your company. The sugar surplus is expected to be 0.620 million tonnes and after four years of statistical glut, world production and consumption are fairly balanced in 2014-15. In 2014-15, the global sugar production is estimated to grow by 1.081 million tonnes to 172.083 million tonnes. This includes cane sugar production (80.6% of total sugar production) and beet sugar production. Despite lower production in Brazil, China and Thailand, the output is estimated to be high owing to better crops in Ukraine, India and European Union (EU). Global export supply is projected to be unchanged at 56.036 million tonnes as against 56.366 million tonnes estimated for 2013-14. World consumption is projected to rise by 1.84%, to 171.463 million tonnes. This includes a 4.889 million tonnes adjustment for unknown net trade. Prices The global sugar market continues to reel under price volatility. With surplus considerably decreasing from 4.7 metric tonnes in 2013-14 to 0.6 million tonnes in 2015-16, the bearish trend in sugar prices is likely to end in the next 1-2 years. However, barring China, where prices rose by 10% due to fall in production and Russia where sugar prices rose sharply, by nearly 60%, during August-January, several countries experienced declining sugar prices in the domestic markets (during the six-month period ended January, 2015). Indian Sugar industry India is the world's second largest sugar producer after Brazil and the largest consumer of sugar as well. India is expected to continue its fifth year of continuous surplus output as a larger number of mills were engaged in crushing in 2014-15 (508 mills in 2014-15 as against 491 during last season). India is estimated to produce 27.5 million tonnes of sugar in the current sugar season as against 24.4 million tonnes last season. This is against a consumption demand of 24.7-24.8 million tonnes as per Indian Sugar Mills' Association (ISMA). Passing through this phase of surplus production, the industry is expected to carry forward over 9.5 million tonnes of stocks (7.5 million tonnes from the brvious inventory of sugar stocks along with the surplus crop this year). Problems faced by Sugar Industry The health of the sugar industry in India worsened during the season 2014-15. The environment was not conducive for business, especially in the state of Uttar Pradesh. The industry continued to be severely impacted due to lack of alignment between sugarcane and sugar prices and witnessed a sharp fall in sugar realization due to panic and irrational selling by the sugar mills. The Central Government and the State Government of Maharashtra have offered fiscal incentives to the sugar mills to export sugar. However, the fall in international prices of sugar brvented significant exports from materializing. To address the issue of huge sugarcane arrears, Indian Sugar Mills Association (ISMA) and the Cooperative Mills have approached the Central Government to bail the industry out of this brcarious situation. The industry has requested for creation of a strategic/ buffer stock of at least 3.5 million tons of sugar, restructuring loans of Rs. 36,000 crores and provision of interest-free loans to the industry to allow timely payment to the farmers. It is expected that the Central Government would take a decision soon. The performance of the distilleries was also adversely affected due to restrictions imposed by the State Government on the movement of molasses and ethanol. Co-generation and supply of power continue to be under brssure. Furthermore, the delayed payments by the buyers of surplus power have also added to the financial crisis being faced by the industry. The governments in Karnataka and Maharashtra have rationalised their cane pricing by adopting a model where cane prices are fixed after taking into consideration the prices of finished products. Uttar Pradesh has fixed high prices for cane which threaten the viability of sugar business in the state. Demand drivers for Sugar industry • Rising per capita consumption: Sugar consumption is expected to be the highest in Asia and within Asia, India is estimated to have 18.8% of the global consumption. • Demographics: As per the Census of India, India's growing population (estimated to reach 1.3 billion by 2020) is likely to consume more sugar in future. Sugar users such as soft drink manufacturers, bakeries, confectionery, hotel and restaurant consumers account for 60% of milled sugar demand in India. • Rising incomes and urbanisation: People demand more processed food (high on sugar content) as incomes rise and dietary habits change. • Deregulation: Government initiatives in cane-price rationalisation and levy on sugar imports will augur well for the domestic industry. • Urgent need for renewable biofuels: Unbrcedented opportunities emerge from diversifications like electricity and ethanol for sugar millers (ethanol from molasses). Supportive government policies in both these by-products can drive demand for sugar millers. b) Zauri Infraworld India Limited (ZIIL) Real Estate Sector Overview The prospects of India's real estate sector are closely linked with the state of the economy. The overall economy has weakened in the recent years with low GDP growth, fiscal deficit, current account deficit and with inflation being at unfavorable levels. This has impacted consumer and business sentiment adversely, affecting demand across residential, commercial and retail segments in the recent past. Factors such as increased urbanization, rising disposable incomes, nuclear families, young working population and economic growth continue to act as strong drivers for growth in the housing sector. The construction and real estate sector is the second largest employer in the country following agriculture. Since this sector provides significant stimulus for other sectors to grow, the development of the real estate and construction industry can be directly linked to the development of other industries like cement, steel, building materials etc. Risks: The real estate business is exposed to a number of risks such as inflation, high interest rates, high risk weight-age for loans to companies operating in the sector, time lag during the approval process while launching a project, high statutory levies, non-availability of skilled manpower, etc. These continue to remain as challenges being faced by the sector as a whole. ZIIL is in the process of implementing a robust Risk Management Framework that sets out the tolerance for risk and monitors the exposure to implement appropriate measures in a timely and effective manner. ZIIL is following the Asset Light Model for all its new projects by associating with the land owners for the development by way of joint venture or joint development models. This is to avoid blocking of high cost capital. Opportunities: Since the dawn of new government, there is a growing optimism among the real estate sector that can now hope for a new phase of growth, be it in the commercial or the residential segments. The macro environment is encouraging as the government has initiated several reforms such as announcement of REITs; relaxation in FDI norms; affordable housing getting priority under the Land Acquisition Act, 2015; housing for all by 2022; 100 Smart Cities etc., which shall improve the prospects of the sector in the long term. In addition, the effective implementation of Real Estate Regulatory Framework will open up further opportunities for the organized real estate players like ZIIL. The Company has identified the Development Management Consultancy as a new line of business in addition to the JV/JD model; the new projects where the land is owned by the group companies will be executed under this model. The Company will charge a fee for the services rendered. The Company is also working on the development of promising concepts such as Elderly Living, Serviced Apartments on the land owned by the group companies, with an objective to have product diversification, growth and risk reduction. c) Simon India Limited (SIL) Investments in large capacity process plants in chemicals, hydrocarbons and fertilisers sectors in the near future are unlikely. However, investments will continue to be made in small capacity plants and in modernisation/ revamp of existing plants. The speed with which these projects are implemented will depend on new government policies regarding facilitation of new investments in these sectors. In contrast, large investments are being made or have been planned to be made in near future mainly in hydrocarbon and fertilizer sectors in the various countries of MENA region. Simon India Limited is well positioned to capitalise on these opportunities. With a broad spectrum of capability, expertise and an enviable track record, SIL is poised to bid for and execute projects in collaboration with large EPC contractors as a partner or subcontractor. iii) Internal Control Systems and their Adequacy The company has adequate systems of internal control in place, which is commensurate with its size and the nature of its operations. These are designed to provide reasonable assurance with respect to maintaining reliable financial and operational information, complying with applicable statutes, executing transactions with proper authorisation coupled with ensuring compliance of corporate policies through documented Standard Operating Procedure (SOP) and Limits of Financial Authority Manual (LOAM). These documents are reviewed and updated on an ongoing basis to improve the internal controls system and operational efficiency. The Company uses a state-of-the-art ERP (SAP) system to record data for accounting and managing information with adequate security procedure and controls. The Company has an Audit Committee of the Board of Directors, the details of which have been provided in the Corporate Governance Report. The Audit Committee of the Board reviews the Audit Reports submitted by the Internal Auditors along with the recommendations of the Management Committee. Suggestions for improvement are considered and the Audit Committee follows up on the implementation of the corrective actions. The implementation status of the directions is placed before the Audit Committee periodically, confirming the actions undertaken. The Committee also meets the Company's statutory auditors on a periodic basis to ascertain, inter alia, their views on the adequacy of the internal control systems in the Company and keeps the Board of Directors informed about its major observations from time to time. iv) Enterprise Risk Management (ERM) The Risk Management Committee of the Board has approved a Risk Management Policy which has been formulated in accordance with the provisions of the Companies Act, 2013 and Clause 49 of the Listing Agreement. Our ERM framework encompasses practices relating to identification, assessment, monitoring and mitigation of strategic, operational, financial and compliance related risks. The coverage includes both internal and external factors. The risks identified are prioritised based on their potential impact and likelihood of occurrence. Risk register and internal audit findings also provide input for risk identification and assessment. The prioritised risks along with the mitigation plan are discussed with the Risk Management Committee on periodic basis. The Company has, during the year internally conducted the Risk Assessment exercise for reviewing the existing processes of identifying, assessing and prioritizing risks. Mitigation plans have been defined for the prioritised risks and same are being reviewed for adherence periodically. The Risk Management Committee shall periodically review the risks and report to the Board of Directors from time to time. v) Material development in human resources Overall, this year the focus remained on the implementation of initiatives rolled out by the Corporate, rather than on initiating anything new. Steps have been taken to inculcate a performance-oriented culture by focusing and laying more emphasis on the performance management system. Open communication has been encouraged so that the employees understand the objectives of the organization, and their needs also get taken care of in the process. Development of employees has been taken up through specialized training modules and programs that focus on soft skills. It has been Company's endeavour to attract talent from the most reputed institutions to meet the requirements of various functions. Efforts are being made towards retention of talent so that the organization does not lose high performers and high-potential employees. |