MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW Summary View: The world economy witnessed a slowdown during the fiscal, primarily characterized by volatility and uncertainty across major markets, global trade and key asset prices. Global economic growth decelerated from 3.4% in 2014 to an estimated 3.2% in 2015, undermined by weak global visibility. India was relatively unscathed from the global distress. GDP growth rate has been fairly stable and remains among the highest in the world. According to IMF, India emerged to be one of the brightest spots among major emerging markets, mirroring the country's strong domestic growth and fundamentally-driven economic foundation. The GDP increased from 6.6% in 2013-14 to 7.2% in 2014-15 and further is projected to reach 7.6% in 2015-16 by the IMF. Positives: India has been one of the beneficiaries of the fall in commodity prices especially in crude oil, globally. This has been supplemented by the several steps taken to improve the investment climate in the country. The Government's pro-investment reforms coupled with lower crude oil prices and increase in Foreign Direct Investment are some of the key positive domestic highlights of the year. Additionally, the increasing focus towards public infrastructure investment, financial inclusion, strengthening of manufacturing and leveraging of technology in governance has been welcome initiatives towards more sustainable growth. Key Concern Areas: However, It has not been a smooth ride thus far. Two successive years of poor monsoon resulted in a lower farm output, thus hampering the agricultural growth. The efforts to stimulate core sectors of the economy are yet to deliver meaningful results. Combination of these factors along with an uneven rainfall continued geo-political tensions and the devastating Tamil Nadu floods have exerted brssure on the economic revival. Summary Conclusion: Despite setbacks in the agri-sector and stressed loans in banking, the outlook for the Indian economy showcased incrementals gains during the year. The key drivers to demand stimulation and sustained economic recovery will be the rains which will directly impact agricultural incomes, GST implementation, inflation control, easing of lending rates and long term solutions on the distressed loan portfolio. The growth projections remain optimistic with the Wold Bank pegging India's GDP growth rate at 7.9%, i.e., as the fastest growing large economy globally. Industry Structure and Developments - Kitchen Appliances Industry in India The Indian kitchen appliances market grew at a healthy double-digit rate over the last decade, driven by a host of factors such as increasing rural penetration, development in tier 2 and tier 3 cities, improved disposable incomes and a revolution in lifestyle standards, purchasing brferences and buying trends. However, in the last four years, the high growth of the past tapered off thus witnessing a sobering effect in the kitchen appliances industry. The key growth challenge encountered by the industry primarily came from the luke warm consumer sentiment and stagnation of incomes. The Tamil Nadu floods and shrinking of growth in South India only exacerbated this challenge. Fiscal 2016, however, saw a slight trend-reversal, with emergence of initial green shoots of revival noticed across various pockets of the industry. Factors such as the cascading fall in crude prices, some pick up in festive demand and signs of improving urban demand have translated into a slight elevation of the growth momentum of the industry. The Government has also aggressively implemented number of reform measures for stronger and more sustainable growth for the industry. The recent introduction of the 7th Pay Commission, implementation of One Rank One Pension system, Direct Benefit Transfer and other pro-active steps to ensure financial inclusion is expected to have a positive effect on the consumption pattern and benefits from the cyclical shift in interest rates, softening inflation controlled food and fuel inflation, better job creation will provide additional thrust to urban and rural consumerism. Growth Outlook in Kitchen Appliances Sector: The headline conclusion amongst market experts is positive with a large majority brdicting revival of growth sentiment led by good monsoons, OROP, Pay Commission implementation and macro economic factors such as inflation control and lower interest rate regimes. According to a market report by TechSci Research, the kitchen appliances market in India is projected to grow at a CAGR of more than 25% during 2015-19. The demand for kitchen appliances in the country is expected to continue growing on account of expanding base of middle class and affluent consumers, increasing working population and improving consumer lifestyle. A report by Boston Consulting Group (BCG) and the Confederation of Indian Industry (CII) states that India's robust economic growth and rising household incomes would increase consumer spending to US$ 3.6 trillion by 2020. The maximum consumer spending is likely to occur in food, housing, consumer durables, transport and communication sectors. The report further stated that India's share of global consumption would expand more than twice to 5.8% by 2020. According to IBEF, the consumer durables sector market is expected to grow at CAGR of 13% from FY05 to FY2020. SWOT ANALYSIS Strengths Product Quality, the Butterfly Brand and its wide Product Portfolio: Butterfly products are a bench mark for quality in the kitchen appliances segment and that is the key strength of the Company. It is also very well known for its diverso product range with products designed for all income levels and all kitchen needs. This appeal to the consumer is the key to the success of your brand, Butterfly. These products rank in the range of choices, utility, functionality, quality and design. 'Butterfly' as a brand is synonymous with kitchen appliances and brand's popularity in South India is reflected in the facts that 85% of sales are derived from this geography. The wide portfolio allows the Company to gain foothold in new customer categories, while also allowing multiple opportunities for repeat customers. The wide portfolio allows the Company to gain foothold in new customer categories, while also allowing multiple opportunities for repeat customers. Professional team is the key strength and low attrition amongst them indicates a disciplined work force with strong job satisfaction levels: The management comprises of a combination of some members of the Promoter family and professionals with long standing reputation in the industry. This high performance management approach has worked very well as is evident in the branded sales growth in the last four years. Integrated Product Distribution: The Company has an expansive distribution network that reaches to about 18,000 retail points across India, fulfilling many customers' needs and demands. The Company operates through traditional distribution channels such as dealers and authorized distributors and also through institutional channels. The Company enjoys tie-ups with three major oil companies; IOCL, BPCL and HPCL for the co-branded distribution of the kitchen appliances. Over the years, the Company has consistently expanded its distribution network and is now sbrad across 400 distributors across the Indian map that display the entire range of Company's products under one roof. The Company is now also growing its market penetration across other key markets of non-South India, which will boost the distribution network even further. Weaknesses Concentrated market share: The Company enjoys a high market share in the South-India region. In FY16, 85% of revenues came from these markets. The Company recognizes the need to diversify its market share and has implemented steps to improve concentration of revenues from regions such as North, Central and East India. It will continue to grow revenues from the Southern markets, while simultaneously focusing on improving the contribution of other regions in the revenue mix as well. Seasonality in Business: The industry faces seasonal demand; the sales volumes are typically higher during the festive season. Ensuring timely and effective festival sales translates to higher operating costs. It thus remains challenging to correctly estimate and brpare for demand at a specific time of the year. Over-estimation leads to overstocking while under-estimation of demand leads to loss of potential revenue. High upfront cost for Expansion: Over the last few years, Butterfly Gandhimathi Appliances has widened its consumer base by penetrating into newer and high-potential markets. While doing so, the Company has had to undertake investments to appropriately set up operations for a long-term brsence in these markets and had to make additions to its human resources to formulate appropriate strategies to penetrate new markets. These upfront investments, the benefit of which will accrue over the next several years, have impacted the profitability for FY2015-16. Opportunities All India Market Reach: The Company has made significant efforts in investing in markets outside of South India. While it has spent significantly in this expansion, the positive benefits of these efforts will be felt in future with Butterfly as a brand reaching its consumers, All India and thus building a strong base for sustainable growth in future. With rising income levels, brand awareness and product accessibility, the market brsents and share of unorganised segment in kitchen appliances is expected to significantly reduce in future. Macro factors in India Affirmative action by the Government: The Government has undertaken numerous reform measures to build a sustainable growth in India. These measures coupled with the expectation of a good monsoon, macro economic stability through RBI measures, i.e., inflation control and dealing with stressed asset issue in banking, OROP and Pay Commission implementation will build a strong platform for boost in income levels and thus sustainable growth. Add to that the favourable demographics in India, the building blocks for a prosperous and sustainable future is within the realm of possibility. Expectation of a strong revival in rural demand: With brdiction of a good monsoon in India, the rural demand is set to provide impetus to rural incomes, a key to rural off take. The macro factors of growing non-farm income, increasing electrification of rural areas, enhanced penetration through advertising will positively impact rural demand. Kitchen appliances such as LPG Stoves, Mixer and Table Top Wet Grinders, amongst others are now being perceived to be basic necessities and beefing of rural incomes will kick start a major growth cycle sooner than expected. Availability of easy consumer financing: The advent of 0% finance schemes, financial inclusion rural penetration of banking, credit cards and cash back schemes has changed the perception of consumers and the products that were once considered high-end and expensive are now considered to be accessible due to affordable monthly instalment payments. Threats Competitive Intensity: Due to the attractiveness of the opportunity and large potential, competition across the Kitchen appliances industry in India is rising significantly. The industry is highly fragmented in the hands of several organized and unorganized players. International companies that foray into the kitchen appliances space through mergers, acquisitions and joint ventures, have further intensified the competition in this space. Low entry barriers: Several competitors who are attracted to the growth and returns offered by this industry have emerged. These companies have short term agendas and are sourcing lower value/substandard quality products from China and participating in the Indian markets through unsustainable practices. This can cause temporary distortions in prices and demand, especially to long-term players who are focused on quality. High Inflation: Inflation rates in India have been high in recent years, which in turn are depleting the purchasing power of buyers. There is also upward brssure on other costs such as transportation, supplies, raw material costs and other expenses. Company Overview Your Company is a leading manufacturer of Domestic Kitchen and Domestic Electrical Appliances in India, established in 1986. The Company is ranked amongst the top three manufacturers in the domestic kitchen appliances sector. Headquartered in Tamil Nadu, the Company is a multi-product Company with state-of-the-art-manufacturing units, strong R&D and international industrial design facilities, mainly manufacturing LPG Stoves, Mixer Grinders, Table Top Wet Grinders and Pressure Cookers amongst others. Contribution from the new product categories added to its portfolio through business acquisition will enhance its revenue/profits from operation. Manufactured at our state of the art R&D facilities, with in-house design ability and advanced die-making tools, BGMAL products are recognized for their quality, safety and durability. The Company has emerged as a market leader for LPG stoves and Table Top Wet Grinders in India. BGMAL has a solid foothold in the Southern market and an extensive distribution network all over India. BGMAL also actively exports its products to the United Kingdom, United States of America, Mauritius, Sri Lanka, Japan and United Arab Emirates. Strategy Functionality, Aesthetics, Durability and Safety - these are the values that define brand 'Butterfly'. The Company strives for strong and sustainable growth and is driven by certain strategic priorities which are listed as below: Market Consolidation: The Company enjoys a strong brsence in the South India markets, which account for about 85% of total revenues. The Company has designed a three-dimensional growth strategy for its existing home markets across Tamil Nadu, Karnataka, Andhra Pradesh and Kerala, which will help leverage the leadership position even further. The strategy includes, Up-scaling engagements with existing customers through cross-selling products Promotional activity to help further enhance established market share Sharpening operating efficiency and customer service to attract new customers New Market Targeting: The Company has also been aggressively and strategically expanding its operations in other markets across Central, North & East India. In the non-south markets, the strategy is to strengthen the distribution network, thus augmenting improved market penetration. The Company's focus is towards leveraging its footprint in the existing markets, while aggressively yet cautiously expanding into other key new markets. Diversified range of products: The Company's product range is sbrad across a diversified and high-utility portfolio, comprising of key product categories such as LPG Stoves, Mixer Grinders, Table top wet grinders and Pressure Cookers, which are the key Kitchen necessity items. In addition to these, the Company offers a variety of other high-utility products such as Electric Chimney, Power Hobs, Rice cooker, Toaster, Sandwich maker, etc., that enables it to capture a larger share of spend on Home and Kitchen Appliances than earlier. Further, supplying products such as Electric Irons, Fans, Water Heaters, Washers, etc., enhances utilization and asset returns of its logistics, distribution and sales & marketing units Focus on Value-added features: The Company has an optimal mix of products and product categories with varying attributes of styling, colours, price points and utility. The Company's R&D and international design capabilities have played a key role in the advancement and successful execution of new and innovative products in the marketplace. The Company's focus on an enhanced brand look is further complimented by a new and attractive product packaging. Through continuous innovations, the Company is driving penetration and increasing consumption in the core markets, as well as extending into attractive adjacent regions. Entry into newer business formats: The Company has commenced building its brsence in modern retail and ecommerce business formats, thus strengthening and widening its overall retail brsence. An improved distribution network will not only help in deepening and diversifying the brand reach, but will also provide an edge to brand 'Butterfly'. Address Multiple and Diverse Customer Taste: Positioned as a mass brmium brand name, brand 'Butterfly' caters to the needs of a variety of consumers across all income statuses and thus enjoys a widesbrad appeal. The Company boasts of an extensive portfolio of high-quality and reliable products, infused with striking features and colours. Multiple product categories with several SKUs, across varying price points, provide a thrust to product sales. The Company seeks to capture a greater share of market through this strategy, going ahead. Company performance The industry was marked by many crests and troughs during the fiscal. Although key macro-economic parameters like inflation, fiscal deficit and an overall consumer sentiment exhibited distinct signs of improvement, weak monsoons and Tamil Nadu floods coupled with moderated festival sales had a deleterious effect on the health of the industry during the year. Against such a scenario, the Company earned net revenue from operations at Rs.901 crore in FY16 as against Rs. 529 crore in the comparable period last year, which is higher by 70.3%. The year's performance when viewed against last year on a relative basis is not comparable as the government orders were absent for most of FY15, whereas major realisation of government orders took place in FY16. On the whole, the Company's performance during the year reflected the relative situation in the domestic kitchen appliances market in fiscal 2016. A coagulation of macro-factors such as slower issuance of new gas connections, cautious revival in institutional sales, dormant Southern markets and an overall subdued market sentiment, especially in Tamil Nadu due to the floods, caused a mild adverse effect on the branded sales performance of the Company. Branded sales (excluding components/spares) during the year stood at Rs.468.2 crore as against Rs. 444.7 crore in FY15, despite unfavourable market conditions. Government Sales during the year stood at Rs. 432.7 crore (net). The execution of Tamil Nadu Civil Supplies Corporation order, awarded in January 2015, and Pondicherry Co-Op. Wholesale Stores orders, awarded in August 2015, maintained a steady pace during the fiscal, which resulted in a positive impact on the financial performance of the Company. In line with the operational scale-up, the Company increased the total employee strength for most part of the year, which translated into marginally higher employee cost at Rs. 61.3 crore. The Advertisement, Publicity and Sales Promotions cost during the year stood at 6.8% of the total revenues during FY16, reflecting the Company's efforts towards enhancing Marketing and Brand Awareness Activities. During FY 2015-16, debrciation increased to Rs. 11.5 crore from Rs. 10.24 crore in FY 2014-15. Finance cost at Rs. 34.5 crore was higher compared to Rs. 29.6 crore for FY 2014-15. Other expenses stood at Rs. 157.9 crore, mainly due to increase in sale promotion activities on a Y-o-Y basis. The Company's long-term plan to derive higher amount of growth from its established southern markets, while also scaling up its non-south business is firmly on track. The proportion of sales from South states was at 85% in FY16, whereas the non-southern markets contributed to 15% of the total revenues. The Company now operates a network of over 400 distributors and is extensively brsent with over 18,000 retail touch points across the country. Your Company is working towards reviving the momentum across all its business lines with a view to deliver long-term growth in a sustainable manner, despite significant macro-economic volatility. Our business growth in this volatile environment has been driven by the many initiatives undertaken by the Company, such as the on-going pan-India expansion, launch of additional products categories, focus on innovative hi-tech products, entry into modern retail formats and enhanced brand awareness activities, coupled with enhanced business agility and healthy execution. Branded Sales performance Total Branded sales (excluding components/spares) stood at Rs. 468.2 crore for FY16 as compared to Rs. 444.7 crore for FY15, an increase of 5.3% as compared to the brvious financial year. Branded sales contributed 54% to the total Net revenue for FY16. Key product categories of LPG stoves, Mixer Grinders and Table Top Wet Grinders and Pressure Cookers along with other products drove the overall performance during the fiscal. During the year, the sales of the retail channel remained challenged on account of a slow pick-up in demand environment, freebees distributed by the Governments of Tamil Nadu and Pondicherry and further decelerated by the devastating floods in Tamil Nadu during the festive season. On the flip side, institutional channel sales saw an anticipated healthy revival in demand, driven mainly by new issuance of LPG gas connections towards the latter half of the fiscal. Performance against Government Orders FY16 marked the best-ever performance in execution of Government orders by your Company. So far, the Company has successfully participated in four annual tenders of Tamil Nadu Civil Supplies Corporation (TNCSC). The fourth annual tender was awarded to the Company in the month of January 2015, worth Rs.510.0 crore for the supply of Table Top Wet Grinders. This tender marked the conclusion of the TNCSC scheme as envisaged by the government. During the year, the Company also won another order worth Rs. 90 crore from Pondicherry Co-op Wholesale Stores (PCWS) for the supply of Table Top Wet Grinders and mixer grinders. Due to the delay in awarding of TNCSC order for the major part of FY15, the sales from the 4th tender, which rebrsented combined order for two years, coupled with the PCWS order, were largely realised in fiscal 2016. This is the first time your Company executed orders from two separate governments simultaneously. Government order sales during FY16 contributed to 46% of revenues. The Company has derived several benefits from participation in the Government orders for the past five years. The business has enhanced manufacturing capabilities and widened the consumer base, while positively improving its delivery capabilities. The orders have delivered incremental contribution to profitability and the payment terms allow for a favourable impact on working capital requirements and cash flows. Large volumes associated with these orders also greatly enhanced the Company's negotiating power and status with suppliers and distributors. Supply to manifold consumers in Tamil Nadu has paved the way for enhanced customer base at the time of product replacement or upgradation, as most of the consumers are first-time users. Outlook Overall, the year in retrospect witnessed several challenges on the global and domestic economic environment front. Amid this trend, our net branded sales had a growth of 5.3% during the fiscal. We believe, the Company has a great deal of opportunities for future growth. There is enormous untapped potential across our established brand equity, target geographies and diversified product portfolio and we continue to take several steps towards capitalizing on these growth drivers. In sync with the geographical expansion strategy, the Company continues to deepen its brsence in key high-potential markets. In established markets of the South, a long string of efforts are undertaken to revitalize and fast-track growth, leveraging the leadership position and market dominance of 'Butterfly' more effectively. Laser-sharp focus is being directed towards the innovation of products, further complimented by improved packaging. We believe continual improvement in our business ways will help further increase efficiency and agility of brand 'Butterfly'. Similarly, the Company also continues to converge on improving business capabilities and enhancing growth levers. Improved R&D capabilities, enhanced retail format expansion, design abilities and better inventory management amongst others will help reinforce our competitive advantages, while simultaneously adding substantial value to brand 'Butterfly'. We are keenly focused on a compelling long-term shareholder value proposition for our investors. Our growth is driven by the many initiatives undertaken by the Company in the past few years such as geographical expansion, strengthening product offering, deriving value from brmiumisation of products, focus on marketing and brand awareness activities and entry into underpenetrated markets. In addition to internal drivers, macro-factors such as changing consumer shopping behaviours along with spending power of the consumer are also undergoing a profound transformation, which we believe, will help the Company accomplish its long-term growth objectives. Risk Management Risk management is an integral function and is embedded across all of the business processes undertaken by the Company. Your Company believes it is essential to identify and manage risks to reduce uncertainties and ensure continuity of operations. To manage risks, the Company's Risk Management team continuously assesses and monitors business practices, ensuring the smooth flow of operations and adhering to stringent guidelines. The Company has a risk management framework in place, with processes to strategize, monitor, identify, assess and mitigate risks that could impact sustainability of business operations. The Company implements combrhensive risk management practices across its operations. We are committed to providing the highest degree of safety to our employees, especially at factories. Regular machinery inspections are important to ensure that the functionality of the machinery is up to date and does not impose any potential hazards that could cause accidents at the workplace. Periodic maintenance checks to equipment are conducted to assure that they meet acceptable safety requirements. The Company also actively manages risks arising from credit, raw material price fluctuation and foreign exchange volatility Internal Control Systems The Company and the Management has adequate internal control systems in place to safeguard and shield the Company from losses and, unofficial use or deposition of assets. This also ensures that the Company's assets and interests are carefully protected and all the transactions are appropriately authorized, recorded and brsented to the management. The Company always adheres to brscribed guidelines and follows all Accounting Standards brscribed for maintenance of books of accounts and reporting of financial statements. The appointed independent internal auditors monitor and report on the effectiveness of the internal control systems of the various areas of operations Key matters that are reported in the Internal Audit are brought to the notice of the Audit Committee of the Board of Directors and corrective measures are recommended and appropriate actions are taken. The Internal Control systems ensure the business operations function efficiently and the applicable laws, rules, regulations, policies of the Company are followed, in addition to safeguarding the reliability of financial reporting. Capital Expenditure During FY16, Rs.8.9 crore capital expenditure was incurred towards enhancing our manufacturing capacity. For FY17, a capital expenditure of Rs.6.5 crore is envisaged for modernisation of infrastructure facilities, machinery/equipments and tools/dies. Balance Sheet There was no fresh issuance of equity capital during the year. Debt increased as the Company opted for Long-term Borrowings in order to meet its business requirements and also to improve the current ratio. Short-term borrowings reduced mainly due to transfer of short-term debt to long-term debt and also better management of working capital. Despite a marginal improvement in total borrowings due to large government order received in Q4FY15, the debt equity ratio was constant on a y-o-y basis. Government order completion led to reduction in inventory at the end of the fiscal. The total debtors as on 31st March, 2016 of Rs.257.4 crore has increased significantly on a y-o-y basis due to increase in government supplies in current year. Accounting Treatment In the brparation of financial statements, the Company has not followed a treatment different from that brscribed in Accounting Standards. Human Resources The Company strives to maintain a cordial relationship and healthy atmosphere with its employees at all levels. Human resources are considered the most important and valuable asset of the Company. Continuous commitment to upgrading skills is an integral part of the human resource development policy of the Company. The focus has always been towards creating a rewarding and nurturing environment for employees. The Company is an equal opportunity employer and promotes diversity in its workforce. Equal opportunities are given to optimize their potential and improve their standard of living. The Company lays great emphasis on retention of its human talents. The Company invests in human resources intangibles from time to time by providing on the job training, in-house and external training programs and workshops related to technical/functional, behavioural/general and health and safety ISO certification standards, etc., which motivates employee productivity and skills. Competitive remuneration is awarded to employees on a timely basis and the Company ably maintains cordial industrial relations at all plants. As at March 31, 2016 the total workforce of the Company, stood at 1290 employees. 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 macro-economic conditions affecting demand and supply, government regulations and taxation, natural calamities and so on, over which the company does not have any direct control. |