MANAGEMENT DISCUSSION AND ANALYSIS A. The Economy The Indian Economy registered a growth of 7.2% during the first half of 2015 - 16. That this has been attained, despite the highly tentative global economic environment that has not shown credible signs of improvement and despite sub-par monsoon rains that for the second year in succession resulted in low growth in agricultural sector, is an encouraging development. In addition to robust growth, the year thus far witnessed macro-economic stability aided by favorable factors such as confronting inflation indicators, benign fiscal situation and improving external current account balance. All these factors have resulted in India emerging as the fastest growing economy among the large economies and most agencies have brdicted that it will continue to remain so in the medium term. B. The Industry Chemical The largest contributor to the company's top line continues to be the sales and distribution of specialty and performance chemicals. These chemicals are mostly imported while some are indigenously procured.The company also manufactures acrylamide in South Asia's only acrylamide monomer plant in Jhagadia, Gujarat. The 10,000MT per annum capacity plant was established in 2013 under technology license from Mitsui Chemicals, Inc., of Japan. The company plans to double this capacity to 20,000MT, and necessary government approvals are in process. The Indian chemicals industry is an important contributor to the Indian economy and to the government's Make in India campaign. Not only does India have a strong domestic consumption of chemicals, it has a significant brsence in the global chemical industry too. Textile The company's operations in this sector are the manufacture of fabrics and textile made ups. The fabric produced is used for the manufacture of made-ups such as industrial safety gloves that are then sold domestically or exported. The Indian textile industry is a $108 billion industry and accounts for approximately 11% of India's total exports. Being a labour intensive activity, the sector plays an important role in generating employment. Competition from countries such as Myanmar, Bangladesh, and Vietnam is on the rise. Renewable Energy The company has two windmills of 0.8MW each, one in Rajasthan and the other in Gujarat, totaling 1.6MW. Power Purchase Agreements have been entered into with the respective State Electricity Boards and all power generated is sold accordingly. Wind has emerged as the most promising renewable energy source in India. As at 31st March, 2016, the country had an installed wind capacity of around 26,800 MW, making it the world's fourth-largest wind energy producer after China, United States of America, and Germany. C. Opportunities, Threats, and the Company's Response Chemical Distribution A major portion of the company's revenue comes from its chemical distribution business. The prices of the products sold by the company are affected by global prices of feedstock, foreign exchange rates, and market dynamics. Slowdown in the domestic or international economies, downturns in the user industries, volatility in foreign exchange rates, increase in interest rates, and tightening liquidity conditions may adversely affect margins, business, financial condition and results of operations. India is an importer of a wide range of chemicals starting from commodities to high performance materials. The company continually identifies products in the fields of specialty and performance chemicals to add to its range of offerings, with key consideration being given to a) the strength and competitiveness of the respective manufacturer principal, b) the market potential, and c) price volatility. During the year, new products were identified and necessary steps were taken to promote their sales. Chemical Manufacturing The domestic market demand of acrylamide monomer is approximately 6,500MT on a 100% solid basis, or 13,000MT on the basis of acrylamide 50% solution. The company produces and supplies acrylamide solution to this market. In addition to the domestic market, there is a strong export demand as well. The company plans to expand its capacity from 10,000MT to 20,000MT in order to meet both domestic and export market demand. The price of acrylamide is mainly affected by changes in the cost of its key raw material, acrylonitrile (also used to manufacture acrylic fiber and ABS polymers). Domestic market forces also affect acrylamide prices, as acrylamide in solid form is imported from China and sold by a number of commodity dealers locally. Imports from China are subject to a customs duty of 7.5%. Textiles There are good opportunities for India to grow in importance in the global textile industry, especially in the production of cotton-based textiles and in trade with Japan and other countries where India has an FTA. However, increasing labor costs and high transport and logistics costs are giving countries such as Bangladesh and Vietnam an edge over Indian businesses in some areas. Renewable Energy The revenue from this business depends on the quantum of power generation, which in turn depends on conditions of nature brvailing throughout the year. Although there are unlimited opportunities in the field of renewable energy, the company has no plans to enter into any further renewable energy projects at this time. D. Analysis of Performance Chemical Distribution Turnover of the chemical distribution business fell by 22%. This was not only due to reduced sales of ethanolamines, is opthalic acid, and cyanoacrylates, but mainly because of overall fall in sales price of chemicals resulting from reduced cost price. Good growth was seen in sales of meta cresol. The company added new products such as meta amino phenol, sulfolane and rubber chemicals in order to expand its offerings. Acrylamide Acrylamide revenue grew 30% despite the fall in prices of the product, and volumes increased 75%. The operation of the acrylamide plant reached 100% in Q4 of the year under review. Textiles The textile division's sale remained unchanged over the brvious year at Rs. 1.8 crores. Renewable Energy During the year under review, both the company's windmills performed according to the brvailing meteorological conditions. They generated a total 2,785,262 units of power as compared to 2,808,688 units in the brvious year. E. Outlook With the government's Make In India initiative, the global manufacturing industry has been shifting its focus to the Indian markets. The population has grown nearly as large as that of China, with its consuming middle class accounting for about a third of its population. Key end-user industries such as construction, automotive, packaging, and electronics are expected to drive demand immensely. Indian chemical indsutry players have been focusing on sustainable development. The industry is expected to register a growth of 8-9% in the next decade. Acrylamide Our acrylamide plant utilisation has achieved 100% in Q4 and we expect strong revenue and profit growth in the coming year. Major customer approvals have been obtained and more are being targeted, and exports are also increasing. The company expects to obtain government permission sometime in Q2 of FY2016-2017 for doubling the production capacity and will be well-positioned to meet any rise in demand. Chemical Distribution The company plans to focus on bottom line growth and targets to increase volumes on new products added. Textiles Revenues from this segment are expected to remain largely unchanged. Although the Indian economy is under stress due to high interest rates and global slowdown, the company expects to achieve a consolidated turnover in excess of Rs. 200 crores for the current year. F. Risk and Concerns The company has a risk identification and management frame work appropriate to it and to the business environment under which it operates. Risks are being identified at regularly intervals by the company's Board of Directors and key management personnel. The Company has a Risk Management Policy, which provides overall framework of Risk Management in the Company. The Board of Directors are responsible for the assessment, formulation and implementation of guidelines, managing key risks, risk minimisation procedures and periodicals review. Foreign exchange risk is arguably still continued to be the single largest area of risk for the company. Frameworks are in place to manage this risk and to take on larger than anticipated movements in currency markets. Key risks to which the company is exposed include: - Change in raw material prices Change raw material prices from time to time forces the company to revise the prices of its products periodically to reflect the variations in the material costs. Especially in case of imported raw materials, a fall in prices during transit may result in finished products being sold below initial price expectations. - Execution Execution depends on several factors including material availability, timely receipt of raw material, weather conditions and the absence of other contingencies. The company manages these adversities with a cautious approach and meticulous planning wherever possible. - Currency Volatility Imports constitute a major component of the company's total purchases. Hence,the operations are exposed to fluctuations of exchange rates that could affect the company's performance. In view of the above, the company reviews and revises the prices of its products in the event of significant currency movement. The company also has the policy of systematically hedging its trade and capital exposures using forward contracts. Wherever possible transactional currencies are aligned to the reporting currency in order to obviate exchange fluctuation impact. - Economic downturn Economic downturn could impact the company's markets, suppliers, customers and finance leading to business slow down, disruptions, and unhealthy competition. - Competition Competition could put brssure on volume growth and pricing. The company focuses on superior quality of products, shorter leadtime and high service level to maintain high levels of customer satisfaction. - Financing Inadequate funding resources and high interest costs may impact regular business and operations. The company has sufficient funding and reserves to operate smoothly and regularly negotiates with its bankers and financiers to reduce finance costs. - Attracting and retaining talent Our success depends in large part on our management team and key personnel and the company takes all necessary steps to attract and retain them. G. Internal Control Systems The company has in place adequate internal control systems and procedures covering all the operational, financial, legal, and compliance functions. The company constantly monitors and improves its internal control systems to ensure that all company policies, procedures and guidelines are in place and also to make certain that all transactions are authorised, recorded and reported correctly. However, the Companies Act, 2013 has significantly expanded the scope of Internal Controls to be considered by the management of the companies to cover all aspects of the operations of the company, thus, the management is in a process of updating and establishing effective implementation of the existing internal controls system with the help of internal and external consultations and is confident that the same will be fully implemented within few months. The Company uses an ERP package with an approval-based work-flow system. Access to data is strictly controlled on a departmental and hierarchical basis, and on a need-to-know basis. Further, the Company has in place structured internal audit process charged with the task of ensuring reliability and accuracy of the accounting and of the other operational data. The internal audit department reports to the Audit Committee constituted by the Board of Directors of the Company. The Company has a system of monthly review of businesses as a key operational control wherein the performance of units is reviewed against budgets and corrective actions are taken. H. Development in Human Resources Industrial Relations The company believes that human resources are a critical factor for its growth. The company invests in its employees for the growth of their skills and talents so as to meet the growth aspirations of the business. The emphasis is on grooming in-house talent enabling them to take on larger responsibilities. The senior management team spends considerable time in reviewing the existing talent base and processes used for honing the skills of the members in the talent pool and assessing their brparedness for taking on new assignments. No man-days were lost on account of strike or dispute during the year. The relations with the employees and workers remained cordial and harmonious throughout the year. I. Capital Expenditure and Expansion Plans The company is planning to expand its manufacturing of acrylamide from the existing 10,000MT to 20,000MT. The expected capital expenditure towards this is Rs. 4.0 - 5.0 crores. |