MANAGEMENT DISCUSSION AND ANALYSIS SRF management in the following pages provides its own perspective on the operating and financial performance of the company during 2015-16 and an outlook of the business performance in the coming years. Businesses a multi-business entity SRF is today well recognised and respected for its R&D capabilities globally, especially in the niche domain of Chemicals. Building on the strength of its diversified business portfolio, SRF is well on its way to transforming itself into a technology & innovation oriented company. It remains the market leader for most of its products domestically and continues to enjoy significant global brsence in some of its businesses, with operations in three countries namely India, Thailand and South Africa and commercial interests in more than 75 countries. The company classifies its main businesses as Technical Textiles Business (TTB), Chemicals & Polymers Business (CPB) and Packaging Films Business (PFB). Technical Textiles Business In spite of the soft demand situation across all segments of Technical Textiles Business (TTB) and continuing volatility in commodity prices the business as a whole performed reasonably well in a dynamic competitive environment. Tyre Cord Fabrics The Nylon Tyre Cord segment managed to retain its leading market position with a stable market share despite the demand remaining soft and the radicalization in the bus & truck segment reaching around 35% during 2015-16. Competition landscape has changed significantly with the domestic competition increasing on account of settling down of a new entrant. Flooding of the Manali Plant in December 2015 affected the fortunes of the business significantly for three months. With various countermeasures, the company brvented major production loss for fully dependent customers. The business is back on track with the plant running at full capacity. The Polyester Yarn & Fabrics segment turned around with its new focus on the yarn business for diversified industrial applications. The market situation remained extremely competitive with Chinese aggression reaching its nadir. It appears that the bottom has been reached and the value chain may stabilise soon. Belting Fabrics In the current global economic situation, the company changed its strategy for this business segment by targeting domestic markets and expanding its range of value-added products. This, coupled with a reduction in turnaround time for orders, enabled it to sustain its performance in India. However, fewer projects and soft commodity prices led to severe underutilisation of capacities in the end use segment, thereby leading to a softness in demand. The performance of the South African subsidiary was adversely affected during the year primarily due to weak domestic and Latin American market and extremely aggressive competition from China. As a result, the overall belt industry operated below 50% level capacity utilisation. Coated & Laminated Fabrics The Laminated Fabrics segment performed satisfactorily in a tough competitive environment. Movement towards static covers and fabricated articles would help keep ahead of the industry. The Coated Fabrics segment also turned around during the year and kept its head above water in the off season as well. Its ongoing focus on becoming a 'Solution Provider' along with the branding initiatives is aimed at positioning the business as a 'value-added entity' thus enhancing the prospect of greater profitabilite Industrial Yarn SRF continues to hold its position in different applications of Industrial Yarns with stable performance. Outlook Nylon Tyre Cord Fabrics (NTCF) consumption in India is likely to remain flat in 2016-17 in spite of increasing radialisation. Entry of a new player may lead to a reduction in margins. The company, however, expects to maintain its share. The fortunes of the Laminated Fabrics segment are likely to be similar in 2016-17 with aggressive marketing of hot lamination products. In the Coated Fabrics segment, the domestic market share is expected to improve through appointment of new channel partners and reduced turnaround time for fabricated articles. The prospect of a resolution of the long pending issues with regard to mining & infrastructure projects, in particular, augurs well for Belting Fabrics which are essentially used as reinforcement in conveyor belts. The company hopes to be in a position to leverage the potential demand growth through additional sales. Chemicals and Polymers Business The Chemicals & Polymers Business comprises three different product lines namely Fluor chemicals, Specialty Chemicals and Engineering Plastics. Fluorochemicals The Fluorochemicals Business (FCB) derives its revenue from the sale of fluorine based refrigerants, propellants and solvents. With strategically located manufacturing operations at Bhiwadi in Rajasthan and at Dahej in Gujarat, the business is all set to continue on the growth path. The commissioning of HFC 134a Pharma facility in Dahej and HFC 32 manufacturing facility in Bhiwadi will provide greater momentum to the growth. The company successfully transitioned Dymel business (HFC 134a pharma) in the first year post acquisition from DuPont. With the recent announcement to set up a pilot plant to manufacture next generation refrigerant, HFO 1234yf, SRF has demonstrated its capability as a refrigerant player at the world stage. The path breaking initiative will make SRF the first company outside US and Europe to develop and manufacture new generation HFO 1234yf using indigenous technology. Refrigerants SRF is the domestic market leader in the fluorinated refrigerant space. Exports to more than 60 countries worldwide account for a significant portion of the overall revenue. The refrigerant product range includes HCFC 22, HFC 134a, HFC 32 and 4'Series blends (HFC 404A, HFC 407C and HFC 410A). The business serves reputed OEMs manufacturing air-conditioners, refrigerators, chillers and automobiles with the strategic intent of leveraging on our distribution strength. Cheap exports from China continued to affect the international markets. The demand for refrigerants continued on the growth path during 2015-16 on the back of strong sales of air-conditioners and growth in automobiles with key indicators signalling continued economic growth next year. Thus the medium-term outlook for refrigerants looks positive, especially for consumer durables like air-conditioners and refrigerators, as well as automobiles. Solvents SRF's main products in the chloromethanes space are Methylene Chloride and Chloroform. During the year, the company emerged as the market leader for its newly launched Trichloroethylene and Perchloroethylene solvents in India which are manufactured at the Dahej site. The products have been well accepted in more than 20 countries. Outlook In 2016-17, with overall sentiments in the market remaining positive, the business is expected to improve its performance through renewed focus on capacity utilisation, cost improvement and brand building. The business will focus on increasing its share of HFC 32 and HFC 134a globally apart from its ongoing efforts to pursue growth in the solvents business. Specialty Chemicals Building on its expertise in fluorine based products used in the agrochemical and pharmaceutical industries, SRF has also been developing non-fluorinated chemistries to bolster its growth. New specialty products are being identified for commercialisation. The strength of R&D and Process Engineering has been substantially augmented, permitting simultaneous design and execution of multiple projects, with challenging timelines. The business is engaged with reputed domestic as well as global innovators for developing new products in its chosen markets. Outlook The business is expanding its horizons and the range of products offered. The business also continues to build on its reputation and credibility with global agrochemical and pharmaceutical majors and move towards higher value-added products. Sales growth in the agrochemicals market is likely to be muted in line with global trends. With new manufacturers from low cost countries entering a few of the more mature product lines, price erosion is being experienced. However, tightening of environmental norms may provide an upward cost brssure for such competition in the medium-term. During the year the business capitalised two new production facilities for specialty intermediate products at Dahej. These will contribute to the revenue stream and business growth, going forward. The business continues to work on developing new products and it maintains a robust product funnel. To this end, the business will continue to invest in people and processes that drive R&D, as well as in production assets that commercialise technology and result in growth. The company continues to remain optimistic about the future potential and prospects of the Specialty Chemicals Business. Engineering Plastics Overall market growth was under brssure during 2015-16 but the business posted improved performance amidst growing brssure on price. SRF continued to maintain its leadership in critical segments of automotive and electrical through persistent focus on key customers and applications, leveraging existing OEM relationships. The business adopted a coherent strategy of enhancing the current product portfolio by developing new products for the new segments in close co-ordination with key OEMs, fostering long term relationships with customers and driving cost competitiveness to maintain market share during volatility. Outlook In spite of a moderate outlook in the automotive segment, the business plans to leverage its long term relationship with key customers to gain market share by entering into new applications by expanding its capacity and enhancing new product development infrastructure. Besides, the business continued to have a strong focus on gaining a foothold in international markets and maintaining domestic leadership. Chemicals Technology Group The Chemicals Technology Group (CTG) is actively engaged in the development of new products and process technologies for the Fluorochemicals and Specialty Chemicals businesses. Its key focus has been on development of intermediates for new Active Ingredients in Pharmaceutical & Agrochemical industries and new generation refrigerants. Utilising synergetic efforts of chemists and engineers; two dedicated R&D facilities; state-of-the-art engineering lab and pilot plant facility; CTG is persistently working towards improving SRF's capabilities of process development, scale-up and commercialization of new chemistries. In order to cater to rising customer demands and shrinking timelines, CTG is expanding its focus on enhancing efficiencies of its resources. With a clear vision and keeping innovation, quality and productivity as the key drivers of success, CTG remains dedicated towards sustainable growth of SRF. CTG made capital investments of about Rs. 31.5 crores during the year 2015-16 for Research & Development (R&D) labs and pilot plant expansion. CTG filed 27 process patents during the year 2015-16 taking the tally to 81 patents filed so far. Packaging Films Business Flexible packaging industry continued to face the prolonged down cycle with global capacity utilization at the level of around 70%, thus creating brssure on margins in all the markets. In addition, the continuous fall in crude prices led to a price fall in the entire value chain impacting the profitability However, as a respite, the demand for flexible films continued to grow at a healthy pace of 6-7% during 2015-16. In line with the company's strategy, all the units under the Packaging Films Business were able to improve their cost structures and capabilities. Both the overseas units achieved 100% capacity utilisation on a sustainable basis. The value-added products (VAPs) remained a continuous focus area and the business posted a growth of around 30% in VAP sales during 2015-16 over the brvious year. Overall, the business performed well even in a tough scenario, helping the company protect its reputation as a credible supplier of films with various Global majors across regions. Outlook Globally, demand for flexible films is expected to grow at nearly 6% per annum. In view of new capacities coming up, supply will continue to far exceed the demand and put further brssure on margins. Demand of flexible films in India is expected to grow by 10% per annum. In view of the demand supply imbalance and global uncertainty, SRF's strategy would evolve around sustaining and continuously improving business performance, further enhancing its capabilities and successfully starting up the new BOPET film plant in India on time. Human Resources SRF attained some significant milestones in the year with respect to various organisation-wide HR initiatives. As part of key learning initiatives of the organisation, over 12000 man-hours of training was completed for 2015-16, a 25% increase over the brvious year. With a special focus on Capability Development, a special project was undertaken defining Business Specific Capability Indicators which shall help organisation to measure and assess capability of the organisation in the years to come. The company also initiated a specific developmental intervention for the various senior leadership team members during the year. Among other key HR initiatives taken during the year included a project to improve the Quality of New Hires, designing and deploying an Early Warning System that shall help the organisation brdict a possible attrition, Engagement Survey for Management Cadre employees and an organisation wide Employee Acknowledgement and Recognition System. Information Technology SRF executed a wide range of IT Application projects, IT infrastructure upgrade projects and Information visibility projects this year. Specialty Chemicals deployed the Project Portfolio Management solution to help keep track of its various plant implementation projects and also meet customer commitments in supplying new products. Customer Portal Solution for some of the businesses, Customer Complaint Management Solution for Technical Textiles Business and Packaging Films Business and Vehicle Tracking System at the Dahej plant were some of the initiatives that the company deployed during the year in its effort to improve the operational efficiency, logistics and customer satisfaction. The company also revamped its website during the year with several new features and product related relevant information for different stakeholders. SRF launched internal Shared Services this year which provides financial services to all business units in India. The IT document and workflow system which is the backbone for such initiatives was designed internally to enable the key processes. This initiative will provide productivity and quality benefits by standardising back office operations for the group. The company upgraded its Datacenter Network with state-of-the-art equipment. This has eliminated all the single point of failure risks in the SRF network infrastructure apart from improving the speed for users significantly. Community Partnerships Continuing with its commitment to improve the quality of life of the communities, SRF, through its social wing SRF Foundation, took a wide spectrum of initiatives during 2015-16 in the identified areas of education, vocational skills, natural resource management and affirmative actions. The company also strengthened its public-private-community partnership (PPCP) model to positively impact the lives of the people. The Foundation expanded its Education Programme to 1150 government schools in 1150 villages across 10 locations in Six States. The Programme, with a motto of Quality Education for All, strives to provide quality education to more than 130,000 students by working with more than 1600 teachers in all these government schools. The Foundation continued with its work towards improving infrastructure facilities under School Education Programme, promoting computer aided learning through KidSmart Centres and enrolling girls for residential learning under Udaan Programme. Similarly, SRF Foundation took several new initiatives to improve the employability of people especially the younger generation from the disadvantaged communities by way of providing vocational skills for the communities in its plant locations. As part of its initiatives under Natural Resource Management (NRM) Programme, an initiative that aims at improving the livelihood of the poor people in the community around SRF's Bhiwadi plant, the Foundation has so far impacted more than 6,500 farmer families and improved their livelihood. During its 10 years of the NRM project intervention, the company has extensively worked for the soil and water conservation in the 38 project villages. Among other things, the company has constructed and revived more than 200 rainwater harvesting structures (earthen check dams, ponds etc.) for ground water recharge and has reclaimed 1751 hectares privately owned waste land till 2015-16 in its effort to support the sustainable livelihood of the rural poor and contribute towards the food security of the country. Internal Control Systems & Adequacy The company believes that Internal Control is a necessary concomitant of the principle of Governance. It remains committed to ensuring an effective Internal Control environment that provides assurance to the Board of Directors, Audit Committee and the management that there is a structured system for: • Close and active supervision by the Audit Committee • Business planning and review of goals achieved • Evaluating & managing risks • Ensuring reliability of financial and operational reporting • Ensuring legal and regulatory compliance • Protecting company's assets • Prevention and detection of fraud and error • Validation of IT Security Controls Interrelated control systems, covering all financial and operating functions, assure fulfilment of these objectives. The company uses Enterprise Resource Planning (ERP) supported by in-built controls that ensures reliable and timely financial reporting. The company also has a robust & combrhensive framework of Control Self-Assessment (CSA) which continuously verifies compliance with laid down policies & procedures and help plug control gaps. In the Indian business environment many laws and regulations have either undergone a change in the recent past, or are likely to change in the coming future. These changes are expected to have a far reaching impact on most companies in the way the companies conduct their businesses and are administered and account for various transactions. Companies Act 2013, the new Accounting Standards, Direct Taxes Code, proposed Goods & Services Tax are some such regulatory changes which will require companies to re-assess at their processes and practices. The company has taken the required steps and is well brpared to meet these challenges in a smooth and timely manner. Risk Management The objective of SRF's risk management framework is to identify events that may adversely affect the company, and manage risks in order to provide reasonable assurance for achieving the company's objectives. The Board of Directors is apprised of the developments in risk management in the company on a periodic basis. Strategic Risks Strategic plans for the company's businesses take into account likely risks in the industrial environment from competition, changing customer needs, obsolescence and technological changes. Annual plans that are drawn up consider the risks that are likely to impact the company's objectives in that year, and the counter-measures put in place. Operational Risks SRF has a combination of well documented centrally issued policies & divisionally evolved procedures to manage operational risks. The company has a well-defined delegation of power and relies on a TQM system of control points, combrhensive budgetary controls and review systems to monitor its operations. In addition, internal audits verify compliance to defined policies and procedures Financial Risks With a diverse business portfolio, SRF is exposed to numerous financial risks. These primarily emanate from foreign currency exchange risk from exports of its products, imports of raw material and capital goods and servicing of foreign currency debt. SRF follows a conservative foreign exchange risk management policy to minimise or eliminate the risks associated with operating activities. The company has laid down detailed policy guidelines to deal with all aspects of financial risks viz. liquidity risks, credit risks and market risks. Information Technology Risks The company has set up adequate redundancy at the hardware and software levels in the mission critical information systems like the ERP to keep business going in the event of any disruption. As an additional brcaution, regular backup of data is taken to brvent any data loss in these critical applications. The company has a robust & combrhensive framework of Compliance Manager (CM) which continuously verifies compliance with respect to various applicable laws and help to monitor the compliances across the company. Financial and Accounting Risks The company has well defined Accounting Manual and Financial & Accounting Policies in place. The company is ensuring the smooth transition to New Accounting Standards (Ind-As) to comply with the applicable rules and regulations. |