MANAGEMENT DISCUSSION & ANALYSIS

GLOBAL SCENARIO

During the year 2015, the global economic growth continued to remain subdued due to the overall slowdown in world economies. However, Advanced Economies (Exhibit 1) grew  by 1.9% in 2015 vis-a-vis 1.8% in 2014. Thus, for the second  year, Advanced Economies have shown some signs of revival. On the other hand, the Emerging Markets & Developing Economies (EMDEs) witnessed deceleration. EMDEs which contribute over 70% of the global growth, declined for the fifth consecutive year due to fall in commodity prices, volatile currency rates and turbulent financial markets.

As per International Monetary Fund (IMF) estimates, the growth in Advanced Economies is anticipated to remain flat at 1.9% in 2016. Revival is likely to be stressed by weak demand, unresolved crisis, unfavourable demographics and low productivity growth.

Due to slowdown, EMDEs GDP growth dived from 4.6% in 2014 to 4.0% in 2015. It is further expected to remain tepid at 4.1% in 2016. The global demand growth for 2016 is pegged at 3.2% due to slowdown and rebalancing of economic activities in China, stubbornly low prices for energy and other  commodities and ongoing tightening of the U.S. monetary policy.

DOMESTIC SCENARIO

During FY 2016, India remained steady on its growth trajectory backed by stable domestic consumption and increased government push towards reviving the infrastructure sector. Key macroeconomic parameters like inflation, fiscal deficit and current account balance have exhibited distinct signs of improvement during the fiscal. The Reserve Bank of India (RBI) opted to cut the repo rate by 75 basis points during the year retaining its target of 5% CPI by March 2017. Exports remained muted due to global slowdown. The rupee continued to show resilience as compared to the currencies of other EMDEs. India has been one of the key beneficiaries from the fall in the commodity prices, especially crude oil, resulting in moderate trade and current account deficits. As per Central Statistics Office (CSO) estimates, the Indian economy is expected to grow at 7.6% in FY 2016. Weathered by two successive monsoon failures plus damage from unseasonal rains, CSO has mooted strengthening the domestic capex cycle in order to give thrust to investments in infrastructure sector.

The government concentrated on key issues in the Union Budget 2016-17 which would propel the economy progressively on its recovery trajectory. The IMF hailed India as a 'bright spot' amidst a slowing global economy. The economy would also reap benefits from implementation of the salary and pension revisions recommended by the One Rank One Pension Scheme and the Seventh Pay Commission. A normal monsoon as forecast by India Meteorological Department (IMD) in 2016, will further cheer the economy.

INDUSTRY TRENDS AND OUTLOOK

The global chemical industry witnessed steady progress in the last decade reflecting an average annual growth of about 11%*. The industry however witnessed a gradual shift to the emerging Asian regions from the developed western world which led to 'easternisation' in production of chemicals. While this was largely led by China where chemicals sales swelled rapidly, other emerging markets also contributed to this growth.

While China continues to remain the most important chemical market, the recent slowdown in that country is viewed as a positive factor for chemical manufacturers in other emerging markets like India where the chemical industry is worth US$ 144 billion* and IBEF expecting the industry to touch US$ 224 billion by FY 2017. The Indian chemical industry forms a backbone for the Indian economy, accounting for  about 2.5% of the Gross Domestic Product (GDP), 16% of  India's manufacturing and 9%* of the exports. Robust demand for chemicals over the past few years has been fuelled by strong economic growth, large population and rise in per-capita income. As a result of strong domestic demand and Asia's increasing contribution to the global chemicals industry, India has emerged as one of the 'focus destinations' of companies worldwide.

The Indian chemical industry enjoys the position of third largest producer in Asia and sixth largest producer in the world, in terms of volume of production. Bulk chemicals account for 39% of the Indian chemical industry, followed by agrochemicals 20.3% and speciality chemicals 19.5%#. Pharmaceuticals and biotechnology account for the remaining share. India's growing per capita consumption and demand for agriculture-related chemicals offer huge scope of growth for the sector in the near-term. Consequently foreign firms have increasingly strengthened their brsence in the Indian chemical space attracted by the emerging size and returns. From April 2000 to May 2015, the total foreign direct investment (FDI) into the Indian chemicals industry (excluding fertilisers) stood at US$ 10.49 billion*.

In line with increase in the demand of value-added products, the Indian speciality chemicals, is now one of the fastest growing industries globally (next only to China), delivering 13% annual average growth over the last five years reaching US$ 25 billion* in 2014. Apart from exports, steadily rising domestic demand has supported this momentum. This is further backed by faster GDP growth, domestic demand attaining critical mass, low-cost manufacturing, and enhanced focus on process R&D and engineering capabilities. More importantly, several bulk chemical producers have started moving up the value chain to manufacture speciality chemicals with applications across consumer, industrial and infrastructure segments which are driven by the overall growth of the economy. On the other hand, exports have been growing rapidly as India is becoming an important manufacturing hub for such chemicals. Tightening environmental norms in developed countries and slowdown in China (in certain segments) are key contributors to export-led growth.

The road ahead looks encouraging with healthy double-digit growth expected in the end-user industries, which will help the Indian speciality chemical industry to continue to deliver robust growth. The 'Make in India' initiative of the Government of India is also likely to add impetus to the emergence of India as a manufacturing hub for the chemical industry in the medium term. Overall, the Indian speciality chemical space is set to emerge as the fastest growing globally and is projected to reach US$ 80-100 billion* by FY 2023.

COMPANY PERFORMANCE

For the Financial Year (FY) 2015-16, your Company reported Total Income of Rs. 1,335.73 crore, an increase of 0.6% against Rs. 1,327.16 crore in FY 2014-15. The prices of crude oil and related petrochemical intermediates, which form an important source of raw materials for your Company declined significantly over the past one year thereby impacting top-line growth. Despite this, overall volume growth stood healthy at 9% driven by balanced growth across all the segments. Export volumes also increased during the year on the back of higher quantities being shipped to international customers.

EBITDA for FY 2015-16 improved by 20.01% to Rs. 168.22 crore from Rs. 140.17 crore in FY 2014-15. Your Company was able to maintain the sbrad in key products despite the reduction in selling prices of certain products, namely those that are linked to petrochemical intermediates. A combination of factors including favourable product mix, efficiency gains and better realisations across key products also contributed to better EBITDA performance.

Profit Before Tax came in at Rs. 91.33 crore, higher by 34.8% compared to Rs. 67.74 crore in FY 2014-15. Profit After Tax increased to Rs. 65.15 crore against Rs. 53.44 crore in the brvious year, rebrsenting a growth of 21.9%. This was achieved despite the increase in interest and debrciation due to investments in de-bottlenecking and post full commissioning of the Dahej facility. Debrciation and finance cost during the year increased to Rs. 39.45 crore and Rs. 37.45 crore respectively.

Financial Year 2015-16 was a challenging year for the industry owing to slowdown in emerging markets combined with lower commodity prices. However, your Company was able to maintain its trend of steady growth in profitability  and delivered a healthy performance backed by focus on value-added products. Further, your Company forayed into high-potential segments of pharma and personal care intermediates expanding the scope of the Fine and Speciality segment. During the year, deeper customer engagement in FWA segment and finalisation of the plan for Phenol & Acetone project has been other notable achievements. Your Company sustained the dividend paying track record during the year and the Board of Directors recommended a dividend of Rs. 1.20 (Rupee One and Paisa Twenty only) per Equity Share of a Face Value of Rs. 2/- (Rupees Two only) each. Your Company also received the Supplier Excellence Award in the Outstanding Performance category from Bayer Crop Science for the year  2015.

PERFORMANCE OF STRATEGIC BUSINESS UNITS

Bulk Chemicals and Commodities

In Bulk Chemicals and Commodities (BCC), your Company manufactures Nitro Toluenes, Fuel Additives and Sodium Nitrite. These chemicals find application across colourants, rubber chemicals, explosives, dyes, pigments, food colours, pharma, petrol & diesel blending and agrochemicals among others. These are commodity chemicals supplied in high volumes. Your Company manufactures these chemicals as per standard specifications, with better quality through process excellence across product offerings. Cost leadership is the chief objective in order to enhance volumes & drive profitability.

In FY 2015-16, revenues for Bulk Chemicals and Commodities stood at Rs. 674.56 crore compared to Rs. 749.59 crore for FY 2014-15. This segment contributed 51% to total revenues during the year, with EBIT margin of 11.8%, higher by 199 bps. A sharp fall in the prices of crude oil led to muted top-line, but the BCC volumes were higher as compared to the brvious year. Your Company witnessed balanced volume growth in domestic as well as export markets.

Fine and Speciality Chemicals

The Fine and Specialty Chemicals (FSC) segment includes niche products that require greater value addition. This business manufactures Specialty Agrochemicals, Xylidines, Oximes and Cumidines primarily used as intermediates in colorants, pigment, fuel additive, agrochemicals, personal care and pharma intermediaries. These products are manufactured in low volumes and enjoy higher value as they are customized to specific customer requirements. Due to the differentiation from standardized products, the focus is based on quality of product, long-term relationships, stable and sustainable operations and global best practices for suppliers and customers.

Revenues from Fine and Specialty Chemicals stood at Rs. 393.37 crore for FY 2015-16 compared to Rs. 326.20 crore for FY 2014-15. This segment contributed 29% to the total revenues during the year. FSC segment benefited from healthy traction in select products and contribution from newly introduced pharma and personal care intermediates, revenues for which stood at Rs. 30.87 crore. The EBIT margin stood at  24.7% in FY 2015-16, higher by 570 bps. The shift towards  higher contribution products in the overall product mix and traction from newly introduced products has been instrumental in the strong performance of this segment. Sales of established products positively contributed to the top-line of FSC segment.

Fluorescent Whitening Agent

Fluorescent Whitening Agent (FWA) is an application chemical and is commonly known as Optical Brightening Agent (OBA). FWA are brighteners, commonly used in industries like paper, detergents, textiles, coating applications in printing and photographic paper. These products are offered to the customers as per their desired specification across liquid, solid and powdered forms. Your Company is the only fully-integrated manufacturer of FWA having vertical integration from Toluene to PNT and further into DASDA and OBA. The FWA business is backed by a strong innovation focused team and application labs in all segments for testing and post-sales support. Your Company has an extensive global clientele for OBA supplies and enjoys an edge over peers due to vertical integration from Toluene to OBA. Thus, your Company customises the raw material at each stage depending upon the customer specification resulting in superior quality and enhanced profitability compared to other players that are dependent on suppliers for raw materials. Going forward, the Fluorescent Whitening Agents business will continue to capitalize on the upcoming demand in the end user industries, better acceptance of your Company's products, doubling the customer base and expanding the geographies. Your Company will maintain its strategy of creating a unique market positioning which would result in a sizeable market share globally.

Revenues from Fluorescent Whitening Agents stood at Rs. 273.68 crore in FY 2015-16 compared to Rs. 266.18 crore in FY 2014-15. This segment contributed 20% to total revenues during the year. Your Company witnessed healthy traction in FWA segment during the year with higher volumes reported in both domestic as well as export markets. Your Company is confident of maintaining the momentum in the ensuing year with steady increase in volumes.

Geographic Performance

Domestic revenues were higher by 0.9% to Rs. 794.58 crore, while export revenues improved by 2% to Rs. 525.75 crore in FY 2015-16. The proportion of domestic and exports markets stood at 60% and 40% respectively. Europe continues to be the largest export market for your Company, contributing close to 48% to the total export revenues, followed by USA and China, which contribute 23% and 8% respectively. Steady sales in Europe and USA led to higher exports contribution.

STRATEGIC INITIATIVES AND EXPANSION PLANS

Your Company is implementing a Greenfield project to manufacture Phenol and Acetone at Dahej in the State of Gujarat through its wholly owned subsidiary, viz. Deepak Phenolics Limited. The capacity of the Phenol Plant will be

200,000 MTPA and that of co-product Acetone will be 120,000 MTPA. The total capital outlay for this project would  be around Rs. 1,200 crore, which will be raised through a combination of debt and equity. The Company has already tied up the debt portion, while the equity funds will be raised in a progressive manner. During the year, your Company raised Rs. 83.31 crore through a Qualified Institutions Placement (QIP) from prominent domestic and foreign institutional investors.

Phenol and Acetone are basic organic chemicals. Phenol is an aromatic compound derived from cumene, a benzene and propylene derivative. Phenol is primarily used in manufacturing of various commercial products and finds applications in laminates, paints and automobile lining among others, while Acetone finds applications in pharma, paints, adhesives & thinners, acrylic sheets, etc. India currently produces ~50,000 MT of Phenol while close to 225,000 MT is imported in order to meet the overall demand. Likewise, Indian Acetone production stands at ~30,000 MT whereas close to 140,000 MT is imported. The upcoming Phenol and Acetone plant will thus help bridge this gap and give your Company a market leadership position in India.

Kellogg, Brown & Root International, Inc. has been appointed for technology and engineering services while M/s. ThyssenKrupp Industrial Solutions (India) Pvt. Ltd. has been selected as the Engineering, Procurement, and Construction Management (EPCM) contractor. Most of the basic engineering work is completed and orders for major long lead items have already been placed or are in process of negotiation.

With an objective to test the Phenol market and also develop working relationships with major clients across India, Deepak Phenolics has already started seeding Phenol in the key markets and the response so far has been encouraging. Phenol imports remained strong and the country's current demand will absorb the entire capacity that the Company plans to install. Changing consumption trends of end-user industries will further boost this momentum.

SWOT ANALYSIS STRENGTH

Technical Expertise

Over the years, your Company has built and enriched its expertise of undertaking numerous chemical processes such as hydration, nitration and chlorination among others. Your Company executes complex and hazardous chemical processes with high success rates by leveraging its experience in indigenous development and capability in developing, managing, storing and handling various types of chemicals in quantities ranging from a few kilos to several tonnes. Your Company's expertise and competence provides customers the comfort that it will undertake these complex processes safely and in a cost competitive manner while adhering to the highest standards of quality. This is a key differentiator for your Company in the market place.

Experienced Management Team

Your Company is led by a strong and experienced management team with strong fundamental knowledge and keen awareness of the shifts in the industry landscape. The management team possesses a proven track record in the chemical intermediates industry and has been instrumental in formulating strategies to accelerate the growth momentum. They have contributed to your Company's consistent progress and the establishment of best-in-class global practices which have enabled your Company to enhance stakeholder value while adhering to the code of Responsible Care and ethical values.

Diversified Product Portfolio

Your Company has built a wide portfolio of products across various chemical intermediates thereby insulating itself from a sharp slowdown in a single product or category. Your Company's ability to produce a spectrum of chemicals combined with its expertise in custom manufacturing services provides it with a competitive edge and helps cater to a host of chemical majors across the globe. Quality infrastructure at multiple locations and balanced exposure in domestic and export markets have ensured steady growth for your Company.

Long Standing Client Relationships

Your Company is a brferred supplier to some of the leading companies, both in India & internationally. This has come about through a customer-centric approach with a focus on quality, safety and consistency over the last 4 decades. Your Company continues to follow this path and has developed long term working relations with all its clients and partners. Your Company has consistently received supplier excellence awards from its customers and has been acknowledged for its competence and quality.

Innovation Centric

Innovation is deep-rooted in the DNA of your Company. Your Company has a dedicated Research & Development facility which consistently evaluates existing products and processes to drive improvements in product quantity, process, higher efficiencies and cost savings. Over 50% of the incremental revenues over the past few years have come from products and processes developed indigenously by your Company. This has helped your Company to emerge as a market leader in several products both domestically and internationally.

WEAKNESSES

Non-availability of Alternate Energy Sources

Chemicals manufacturing Industry consistently requires high amount of energy in production processes. Your Company uses conventional fuels like coal, furnace oil, etc. for generation of power. Use of non-conventional energy like wind power, solar power or natural gas becomes unfeasible as these alternate fuels have shortcomings like lack of reliability of continual supply, inability to generate energy in large quantity, sizeable capital expenditure, availability at higher costs, etc. However, being amongst one of the 'Responsible Care' certified company, your Company continues to focus sharply on improving power efficiencies at its facilities along with widening its scope of Green Endeavours.

Volatility in Raw Materials Prices

Volatility in the prices of raw materials is the foremost challenges faced by the chemical industry. Volatility in the global prices of raw materials has to be managed well due to the time lag before price hikes or cost revision can be passed on to customers. While your Company has enhanced its inventory management procedure and regularly reviews prices with suppliers, this remains an inherent weakness in the industry.

OPPORTUNITIES

Import Substitution

Your Company was founded with the intention of capturing the opportunity of import substitution for Sodium Nitrite. The pursuit of such opportunities is in the DNA of your Company. Your Company is now implementing a Greenfield project at Dahej, for manufacture of Phenol and Acetone. Once operational, this project plan will change the demand-supply dynamics of Phenol and Acetone in India, as the country's current demand outpaces its supplies resulting in imports from various countries. Your Company remains confident of bridging this gap and delivering a robust performance in the ensuing period. There are several high potential opportunities for substituting imports in the country.

Make In India - Manufacturing Boost

The Government's ambitious 'Make in India' initiative has given tremendous boost to the Indian manufacturing sector. 'Make in India' was launched to encourage manufacturing in India with an objective to attract capital and technological investment in the country. This initiative will add impetus to the emergence of India as a manufacturing hub for the chemical industry in the medium term. Further, China's cost disadvantage is likely to benefit India by way of manufacturing shift. Given the cost competitiveness, your Company will capitalise on this opportunity and expand its brsence across the developed markets.

India's Export Potential

India's export competitiveness is expected to strengthen its position as a manufacturing hub for chemicals. A glimpse of India's emergence as a major export hub is already seen in various segments such as agrochemicals and colorants, in which a significant part of India's production is exported. Moreover, softening of Chinese chemical exports, with environmental issues leading to a shut down and relocation of chemical plants, adds zing to India's chemical exports potential for the next couple of years.

Supportive Government Policies

The Government has taken several steps to improve the productivity and efficiency in the chemical sector. Simplified procedures for FDIs with 100% permissible investments combined with tax deduction to promote Research & Development activities and formation of industrial clusters & parks will provide impetus to the sector. This along with export incentives and a number of other measures will improve the competitiveness of the sector and drive sustained growth.

THREATS

Lack of availability of skilled manpower

Despite having a favourable demographic profile, labour and skill shortage continues to be one of the key concerns for the Indian chemical industry. The Government along with Industry bodies are putting their best foot forward to have education and vocational training institution arming the manpower with appropriate skill set. The special mention for development of skilled manpower in the Union Budget 2015-16 is expected to resolve the dearth of skilled manpower. Your Company conducts regular training and development programs to upgrade its 'human capital' skills.

Obsolescence of Product and Processes

Obsolescence of products and current manufacturing processes pose a threat to the global chemical industry. Rapid technological advances, changes in materials and innovation-driven changes in manufacturing process render existing products and processes obsolete. Newer technologies can impact the overall market dynamics and on existing operations of the industry. Your Company continues to spend on up-gradation of Research and Development activities to enhance its existing products and processes.

OUTLOOK

The roadmap for FY 2016-17 looks encouraging, as your Company makes continued progress on value maximisation  to further elevate the performance across all the segments viz. Bulk Chemicals & Commodities, Fine & Speciality Chemicals & Fluorescent Whitening Agents. Moreover, with global crude oil prices having stabilised at the current levels there is limited further downside and a reduced degree of volatility of raw material prices.

During the year, your Company strengthened its Fine & Speciality Chemicals segment by successfully foraying into high-potential and fast-growing segments of pharma and personal care intermediates. Within pharma and personal care, your Company started offering multiple new drug intermediates for which your Company received favourable response from multinational companies. Owing to these additions, the FSC segment remains well placed to deliver upsides from end-user industries of agrochemicals, pharma and personal care.

The Fluorescent Whitening Agent business delivered steady performance during the year assisted by better customer acceptance and steadily higher offtake from end-user industries. We expect this trend to continue in the ensuing year which will increase plant utilisation rates and improve the profitability profile. Furthermore, your Company anticipates strong demand in the export markets which would drive overall sales.

The above initiatives have favourably positioned your Company to drive sustainable growth in medium-term in both domestic and exports market. In addition, your Company has announced a Greenfield expansion through its Wholly Owned Subsidiary in Dahej for manufacture of Phenol and Acetone. This will provide further impetus to the growth prospects of your Company.

RISK MANAGEMENT

Your Company regularly identifies and evaluates multiple risk factors and implements strategies to mitigate the impact of the same. The risk management function is vital to your Company and its objectives includes ensuring that critical risks are continuously identified, monitored and managed effectively in order to protect your Company's business. It ensures that the business processes undertaken by your Company are undertaken within a well-defined framework. Your Company has laid down vigorous risk management framework to ensure steady flow of operations adhering to stringent guidelines.

Your Company's risk management strategy emphasises a high level of safety for employees, especially factory workers, who perform complex chemical processes. In order to ensure high level of safety and security, your Company's plant and machinery undergoes real time monitoring and regular inspection and upgradation to ensure smooth functioning and to mitigate any potential threat that may lead to accidents at the workplace. The work place is periodically re-assessed to ensure that all equipment and processes are in prime condition and best in class procedures and protocols are implemented regularly.

Credit Risk is a threat to any company and in order to mitigate this, your Company undertakes a systematic assessment of the financial health of its customers. Raw material price risks are mitigated through well planned and timely purchases and also by entering into formula-based pricing with customers. Currency fluctuation risks are proactively managed through simple hedge with forward contracts/option, while the environmental risk is managed through multiple measures by way of reducing the emissions and treatment of effluents. Your Company has over the years built a solid risk management strategy with focus on reducing the overall risk, at the same time delivering a robust performance with better product quality.

INTERNAL CONTROLS

Your Company has implemented a combrhensive internal control system to drive adoption of global best practices with an objective to monitor, measure and optimise its resources. Proper internal control helps in assessing, evaluating, safeguarding and shielding your Company from losses and unauthorised use or deposition of assets. The internal control has been established by standardising and documenting policies and procedures for all major processes, to ensure the reliability of financial reporting, timely feedback on the achievement of operational and strategic goals and compliance with laws and regulations. Your Company periodically reviews and enhances its internal controls to ensure management effectiveness and efficiencies of operating procedures. Strong and robust management information system provides timely and detailed metrics to the management team. This is reinforced by regular internal audits. Verification of processes and systems by customers further validates the robustness of operations of your Company.

HUMAN RESOURCES

Talented manpower is an important enabler for your Company to grow and maintain competitiveness. Your Company continues to maintain cordial relationship with all its employees across various levels and locations. Human resources are considered as most significant and valuable asset for your Company and continuous commitment towards upgrading  skills is a vital part of the human resource development programme of your Company. In order to maintain its leadership position in the industry, your Company focuses on technical expertise, innovation and customer satisfaction. This can be achieved through rigorous selection process which is implemented to attract skilled talent, followed by upgradation of their competencies.

Your Company values human talent and lays great emphasis on retention of employees. The retention rate of your Company is one of the highest in the industry and this is on the back of continued focus on various development activities as well as employee satisfaction programs. Your Company continues to train employees across several functions connected to technical, behavioural/general and health, safety and general environment and ISO certification standards among others. The total employee strength including top management stood  at 1,405 as on March 31, 2016.

CAUTIONARY STATEMENT

Certain Statements made in the Management Discussion and Analysis Report relating to the Company's objectives, projections, outlook, expectations, estimates and others may constitute 'forward looking statements' within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on whether exbrss or implied. Several factors could make a significant difference to the Company's operations. These include climatic conditions and macroeconomic conditions affecting demand and supply, government regulations and taxation, natural calamities and so on, over which the Company does not have any direct control.