MANAGEMENT DISCUSSION AND ANALYSIS REPORT [Forming Part of the Board's Report for 2014-15] The Management Discussion & Analysis seeks to provide to the Shareholders of the Company an overview of each of the Strategic Business Units of SBUs of the Company and analyses the underlying economic factors, which have influenced or impacted the performance of the Company with focus on the financial year 2014-15. Also covered in the analysis are issues governing future outlook. At the outset, it may be observed that the economy is slowly but surely showing signs of looking up. The Indian economy in 2014-15 has emerged as one of the largest economies with a promising economic outlook on the back drop of controlled inflation, rise in domestic demand, increase in investments and decline in oil price among others. On the demand side, growth of private final consumption increased to 7.6% in 2014-15 from 6.5% in 2013-14 as per advanced estimates. Gross fixed capital formation increased from 3.0% in 2013-14 to 4.1% in 201415 but lost its share in aggregate demand. Export in 2014-15 recorded a growth of just 0.9% compared to 7.3% in 2013-14. Imports on the other hand, increased from -8.4% in 2013-14 to -0.5% in 2014-15, primarily due to the sharp decline in international oil prices that combrssed the oil imports bill. The Reserve Bank of India had tightened the monetary policy last year which helped contain the demand brssure, creating a buffer against any external shock and keeping volatility in the value of the rupee under check. During the last one year, the rupee remained relatively stable vis-a-vis the currency of peer emerging countries, which too had a sobering influence on inflation. With the easing of inflationary condition, the RBI signalled softening of the monetary policy. The industrial growth in 2013-14 stood at 4.5%. Also there was a growth of 1.4% in gross capital formation in industry during 2013-14. The index of industrial production suggests that the industrial sector is recovering slowly with a 2.1% growth in 2014-15 (April-December) over 0.1% increase in the same period last year. The recovery is led by infrastructure sectors: electricity, coal and cement. Manufacturing output increased by 3.9% in the first quarter and 0.4% in the second quarter. The low growth in manufacturing sector can be attributed to high interest rate, infrastructure bottlenecks and low domestic and external demand. The services sector accounting for 51.3% of India's GVA at basic price in 2013-14, grew by 9.1% compared to 6.6% total GVA growth and 6.9% GDP growth at market price. In 2013-14, services export grew by 4.0% and services imports declined by 2.8% resulting in net services of USD73.0 billion with 12.4% growth. The macroeconomic situation in India has improved during 2014-15. Also acceleration in service and manufacturing growth in the face of subdued global demand conditions point to the strengthening of domestic demand. However, concerns surrounding the construction and mining activities in the country still exist. Agriculture also suffered due to poor monsoon, but there are no indications of its spill over the next year. The Make in India campaign aimed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure and other recent initiatives taken to boost industrial growth such as "ease of doing business", E-biz project and skill development and in the light of governments commitment to reform the outlook for domestic macroeconomic parameters is generally optimistic and a growth of around 8.5% is in the realm of possibility in 2015-16. Against the aforesaid macro-economic backdrop, it would be seen from this Report read with the Directors' Report, that the core competency of the Company lies in its ability to handle multiple diversified businesses in a manner to keep its top and bottom-lines healthy despite cyclical fluctuations in any one or few of its business segments. The core competency is enmeshed in its management structure and Profit Centre based organizational structure for running its vastly diversified operations efficiently and effectively. 1. INDUSTRIAL PACKAGING [SBU-IP] Industry Structure and Developments SBU-Industrial Packaging is the largest manufacturer and market leader of 200 Ltr capacity Steel Drums in India. SBU has its brsence in meeting Steel Drum requirements also in neighbouring countries as well. The major clientele includes Global Transnational customers and also large Indian companies. Steel Drums are utilized for safe packaging and transportation of liquid / semi-liquid / pulp / Greases / powders etc. The Company effects sale on pan India basis through six Steel Drum manufacturing facilities close to major consumption centres. SBU has commenced commercial production at its state of art manufacturing facility in Navi Mumbai for manufacturing of 200 Ltr. Capacity Steel Drums effective July, 2014. The main drivers of rigid industrial packaging are : • Growth of underlying customer industries : Rigid Industrial Packaging demand is closely correlated with underlying growth of customer industries (chemical industry with largest influence) • Substitution across packaging segments shift between different materials due to changing customer needs. • Standardization of products : Standardization increases comparability between packaging products. Opportunities & Threats The major Opportunities for the SBU lie in: • Increase in product range. • Benefit from the "most brferred supplier" status from most of the large Steel Drum Buyers in India & neighbouring countries. • Moving up in value chain with customers. • Consolidation in the Industry. • Entry to new market and also entry to the markets where SBU does not have substantial brsence. Tender based supplies with wafer thin margins. • Public procurement policy of Government has restricted business to an extent of 2.0 million Drums per year for the SBU. • Competition from alternative packaging products like PE Drums, IBC/ISO Tankers/ Flexi- Tanks, etc. • Since HSE norms are not strict, ample number of Drums are getting recycled without proper treatment before going to the cost conscious customer. • Volatility in the steel Industry leading to unstable pricing. Segmentwise or Productwise Performance Sales were better during 2014-15 compared to 201314 and this has resulted in SBU achieving highest ever sales in 2014-15. This was achieved despite the fact that in the second half of the financial year SBU did not have any orders from the PSU Oil Companies or Government due to Government directives on procurement of Steel Drums from MSME. Outlook Indications of 2015-16 appears to be as positive as was in 2014-15 for the fruit segment business. There is likely to be no business from any Public Sector Oil Companies or Government in 2015-16. However, SBU is geared up to meet these challenges by aggressively positioning in the market by acquisition of new customers and improvement of market share from the existing customers. The new state of art Navi Mumbai plant is expected to provide competitive advantage to the SBU being located at the close proximity of one of the largest consumption centers for Steel Drums in Western Region. Risks & Concerns • Mushroom growth of new entrants in Gujarat and Chittoor (in and around the Fruit-pulp Market). • Escalation of inputs costs not reimbursed by customers due to competitive brssures. Internal Control Systems and their Adequacy The SBU is governed by performance budget system and internal control measures to monitor performance against targets/norms. BIS certificate is available for all plants of the SBU. All the six plants under the SBU are certified to ISO 9001:2000 Quality Management Systems and 4 plants are certified to ISO 14001:2004. Additional checks are maintained through Internal Audit, Vigilance Inspection, etc. Discussion on Financial Performance with respect to Operational Performance Due to severe competition in financial year 201415, margins were under brssure. Apart from this due to commissioning of Navi Mumbai plant, SBU had substantial burden of interest and debrciation. Despite adverse situation SBU clocked highest ever sales volume. Material Developments in Human Resources / Industrial Relations The SBU continues to enjoy cordial relationship with employees at all its units. 2. GREASES & LUBRICANTS (SBU-G&L) Industry Structure and Developments Indian lubricant market ranks amongst the six largest in the world and the second largest in Asia after China. The lubricant industry in India is estimated to be around 1.60 million MT (without Process/Transformer oils). About 67% of the lube market comprises Automotive Grades leaving the balance 33% for Industrial Grades. The market is highly competitive with a large number of players including PSU Oil Companies, global majors as well as small regional players and several units in the unorganized sector all in the fray. Prominent players in the lubricant market can be categorised as under: a) Major PSU Oil companies viz., Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum. b) Multinationals working directly or through their subsidiaries, such as Castrol, Mobil, Valvoline, Shell, Total, Petronas etc. c) Indian lubricant companies like Tide Water Oil, Gulf and Balmer Lawrie. d) Niche market players, who operate in selected segments such as Fuchs, Quaker and Bechem. Opportunities & Threats The major thrust area for the SBU has been R&D, which has a major role in developing and commercialising high-value products as well as speciality lubricants for niche markets including biodegradable and eco-friendly products. The R&D Centre provides the decisive cutting edge of technology enabling the Company to capitalize on the emerging opportunities. Using its own in-house R&D, SBU: Greases & Lubricants has successfully developed speciality lubricants, such as, synthetic gear oil, rolling oil, expander oil, fire resistant hydraulic fluid, synthetic mould oil and speciality greases. All these products constitute potential market for growth in the proximate future. Segment-wise or Product-wise Performance The business of SBU: G&L may be divided into: [a] Processing / Contract / Manufacturing Business and [b] Direct Sales or what the SBU refers to as "Balmerol" Sales segment. The "Balmerol" sale segment can, in turn, be classed into - (i) Institutional / Industrial Sales - basically sales to Railways, Defence, Steel and the Coal sectors, OEM, Sponge Iron, Power and Infrastructure. (ii) Retail Sales (iii) Export In 2014-15, due to challenging business environment and volatility in Lubricants' market and also falling base oil prices, the SBU recorded a 8.9% negative growth in turnover over the brvious year. This was achieved despite various constraints holding up growth of the manufacturing sector, although the bottom line was affected due to adverse market conditions. Outlook The SBU expects to achieve a significant improvement in Retail sales with a target of achieving a higher market share within the next couple of years. Currently, the Indian market has negligible brsence in eco-friendly / biodegradable lubricant, the Company aims increasingly to pioneer development of such value-added specialty products for niche markets particularly for the steel and the automobile sectors, which are poised for major takeoff. A detailed strategy for the period 2015-2020 has been worked out with a view to achieve a quantum growth in Retail Sector sales. The SBU has also been working for implementation of SAP for all the business functions which will lead to higher operational efficiency. The major risks in the business continues to emanate & arise from the control as well as stranglehold wielded by the PSU Oil Companies over base oil which is the major raw material for the SBU, as also cross subsidizing their finished products by some of the oil majors. Internal Control Systems and their Adequacy The SBU has adequate internal control systems suitable for its business needs. SAP implementation will further facilitate greater internal control mechanism. The SBU has a detailed Management Information & Control system to monitor performance against budget/ targets. The Quality & Environment Management System at all the three manufacturing plants are certified to ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 standards. Discussion on Financial Performance with respect to Operational Performance During 2014-15, the Sales turnover of the SBU experienced a de-growth of nearly 11%. This was mainly due to drop in market share in the retail segment where the SBU was in the process of re-organizing and revamping its entire retail distributor network in view of increased focus on this market segment. The bottom-line was affected due to the impact of sharp hike in base oil prices, (which only partially eased at the end of the reporting period) / which could not be fully passed on to the end users because of tough competition in the market. This coupled with the overall sluggishness in the Indian economy resulted in negative profits during the year. Material Developments in Human Resources / Industrial Relations The SBU continues to enjoy cordial relationship with employees at all units. 3. LEATHER CHEMICALS [SBU - LC] Industry Structure and Developments The International leather industry, especially tanning industry, has been shifting its base from Europe to Asia. The industry is also growing in Africa. As per International Council for Tanners (ICT ), CAGR in global leather production is 2.2% and 18.6 bsft in 1998 to 22.7 bsft in 2006 (source FAO 2008 and ICT) India is brsently having approx 8% share of world production. Global leather trade is estimated 200 bn USD in 2014 and India is having 3% share of the same .Global trade is estimated to grow to reach 245 bn USD in 2020. Leather production is shifting from developed countries to developing countries and from developing countries to under developed countries. Developing countries, which originally supplied un-finished and finished leather to Leather-product manufacturers in the West, are augmenting their capacity for value added products to derive maximum benefit in addition to creating employment opportunities. Chinese leather industry is going through a period of transformation. In India, many small scale industries have been closed for having failed to reach new regulation of environment. Industry is challenged by environment regulations and weak demand in the internal market and strong competition in international market. The Indian Leather Exports clocked USD 6494 million as reported by the Council of Leather Exports with almost growth of 9.7% over last year. Leather Chemicals Industry in India is led by MNCs like BASF, Clariant, Lanxess and Stahl. However, the industry is suffering heavily on account of devaluation of EURO and the persistent environmental issues. SBU has thrived to maintain its market share and maintained the growth over last year in the domestic market. Opportunities & Threats Top segment high performance fatliquors market is catered mainly by MNC, offering counter products at competitive prices. The overseas market potential appears to be promising and the SBU has made a headway into the China market which is the largest. The Company has a significant brsence in Bangladesh and Korean markets. New facility for production of syntans has been commissioned and put into operation to cater to both export and domestic markets. We have already introduced Beam-house chemicals in the market. The primary threat to Leather Industry is availability of Hides and Skins. Recent ban on Beef slaughter has made acute shortage of raw material in Indian market. Environmental issues continue to be the major issue of concern for this Industry. Price is always a concern for the SBU. Rupee apbrciation against Euro has made import of Chemicals cheaper resulting in tough competition for domestic chemical manufacture. This has kept margins under severe brssure. Segment-wise or product-wise performance The turnover during 2014-15 was 4% lower against last year. While, fatliquor volume has grown marginally, the Syntan volume has reduced by 9% against last year. The path forward for this SBU • Increase fatliquor volumes in top/brmium segment by replacing imported fatliquors in the domestic market. • Improve sales volume in the overseas markets. • Improve market share for syntan. • Increase market share in Beam house chemicals by introducing more new products in the market. Risks and concerns The continuous escalation of raw material prices and other input costs have squeezed the margins in the business. The applicability of REACH norms on products used in leather processing along with the tightening of pollution control norms in relation to tannery/effluents are other major concern areas for the SBU. The SBU has implemented SAP in this year to improve internal control systems. The manufacturing units, Product Development, marketing functions are certified for Integrated Management System comprising of ISO 9001:2008, ISO 14001:2004 and ISO 18001:2007 of TUV:SUD standards. Discussion on physical / operational performance linking the same with Financial Performance Sales volume and turnover vis-a-vis last financial year has marginally decreased in the current year due to factors as have been stated in earlier paragraphs. Material Developments in Human Resources / Industrial Relations The SBU continues to upgrade the skill of employees through inhouse training programmes. Industrial relationship continues to be satisfactory. 4. SBU: LOGISTICS Pursuant to strategic changes in the operations of SBU - Logistics Infrastructure and SBU - Logistics Services, have been merged and the same has been renamed as SBU: Logistics effective1st August, 2015 A. LOGISTICS INFRASTRUCTURE [SBU-LI] Industry Structure and Developments Logistics Infrastructure business comprises three main segments viz., Container Freight Station (CFS) typically set up in the vicinity of Ports, Warehousing & Distribution (W&D) and Temperature Controlled Warehouses (Cold Chains). CFS is a facility established for the handling and temporary storage of Exim Containers. It is an extension of Port with facility for custom clearance. These are set up primarily with a view to decongest ports. CFS provides an integrated platform for activities such as loading/unloading, transporting, stuffing/destuffing of containers. During 2014-15, container handling at top 12 Ports in India grew by 8% which is lower than the last year's growth of slightly over 10%. The increase was almost identical with exports and imports registering almost same level of growth. The total container throughput in India during 2014-15 was around 12 million TEUs while it was 11 million TEU's in 2013-14 inclusive of trans-shipment and empties. Presently, the SBU operates three state-of-the-art CFSs located at Nhava Sheva (Navi Mumbai), Chennai and Kolkata. Incidentally, these three ports account for nearly 59% of the total container traffic handled in Indian Ports which has gone down by 0.6% as compared to last year. The drop was mainly attributable to the frequent congestion at JNPT and better infrastructure facility and increase in vessel frequency at non major ports such as Mundra and Pipavav. Import volume in the three ports of JNPT, Kolkata and Chennai improved by 7.3% and the volumes moved to CFS from Port in these three cities rose sharply by 14% during 2014-15 as compared to the earlier year. Warehousing & Distribution facilities are brsently available at Kolkata and Coimbatore. Indian Warehousing industry of late has transformed itself into an active one by providing additional Value Added Services (VAS). Today they are designed and strategically positioned to facilitate procurement, distribution, transportation and storage activities of the supply chain. Unorganised players continue to dominate the industry accounting for almost 85% of the market share. However, with 3PL catching up, share of organized sector is likely to grow at a CAGR of 15% in the next 3 years. According to a report by the ASSOCHAM, Temperature Controlled Industry (TCL) was worth INR 236 Billion in 2013 and the Industry is expected to grow at 28% per annum to reach Rs. 640 billion by 2017. Opportunities & Threats For about 2 to 3 years till March 2014, CFS /ICD industry was facing tough times which got reflected in declining container volumes and Profit margins of operators primarily due to difficult global environment as well as issues on the domestic front. Issues like low technology utilization, cumbersome customs procedures, high establishment cost etc. need to be addressed to realise the full potential of this sector. UN forecasts that Global economy is likely to grow by 3.1% in 2015 and 3.4% in 2016, up from an estimated 2.6% in 2014. As a result shipping volume is expected to improve providing opportunities in this segment. Growth in CFS is primarily driven by an increase in container volumes and by the manufacturing sector and development of freight corridors. Containerisation is expected to get a boost from increasing share of engineering goods and chemical and related products in export trade. Factors such as your Company having its CFS in three major locations, the strength of relationship with major shipping companies, its efficiency of operations and ability to offer integrated and customized services are continuously providing opportunities for growth to the SBU. Emergence of new storage models such as MMLP (Multi Modal Logistics Park) are an evolved form of Modern warehousing offering various Value Added Services apart from traditional storage functions. These would improve quality of warehousing and storage space in the country. With the growth in India's industrial sector, the Industrial warehousing has also flourished. The size of the Industrial warehousing is estimated at 515 million square meter in 2014 with a market value of over Rs. 300 billion. Growth in outsourcing of Logistics and Warehousing Services, greater technology adoption, concept of Warehouse sharing, impending implementation of GST etc. are all likely to add to the buoyancy of this vertical. Factors such as growth in external trade, growth across major industry segments such as automobile, pharmaceuticals and FMCG and the emergence of organised retail have had favourable implications on the growth of the warehousing industry. Land acquisition issues, high capital investment, low technology penetration, lack of supporting infrastructure and fragmented market are collectively impeding the growth of this business segment. On the positive side, however, several growth drivers are expected to spur growth of industrial warehouse development. Support from Government in addressing long pending issues will quicken the growth momentum. Growth in share of Minor ports, higher efficiency in operations in private ports etc. may lead to volume getting diverted from the three major ports of JNPT, Kolkata and Chennai to nearby ports. This could affect the volumes for the Company. Growth in exports has been muted for the last few months. There is no perceptible improvement in Project activity in the country. These could affect the volumes. Excess capacity build up in the three locations where the Company has CFS is seen as negative growth drivers for the SBU. Segmentwise or Productwise Performance SBU: Logistics Infrastructure together with SBU Logistics Services which has lot of synergy with the former continues to remain the money spinner for the Company. During the year, the CFS business grew in volume, revenues and earnings as compared to the brvious year due to Company wresting some business which was lost to competition. Warehousing activity suffered a bit during the year due to lack of fixed contracts and lower utilization of space. Future Outlook Diversification of operations not only acts as a profitability driver but also as a hedging tool. The market is in need of one-stop logistic solution and would be willing to pay a brmium for such a service. SBU has initiated actions to offer a bouquet of services to the customers as a value added proposition. Considering the potential in Cold Chain Logistics, SBU has already started work in establishing three Temperature Controlled Warehouses at Hyderabad, Delhi NCR and Mumbai in the first phase. Work is in full swing for the commissioning of the TCW Project in Hyderabad later this year. Land has been acquired in Patalganga from MIDC for setting up a TCW. HSIIDC (Haryana State Industrial Infrastructure Development Corporation) has also allotted land in Rai, near Delhi for our establishing a TCW. Work will start in both these projects soon. Through these facilities, the Company will not only be providing reliable temperature controlled solution but also act as a differentiator in the domain. Based on MoU signed with VPT (Visakhapatnam Port Trust), a subsidiary company viz VPLPL has been formed. The said subsidiary was allotted 53 acres of land for putting up a Multi Modal Logistics Hub. In this Multi Modal Logistics Hub, facilities will be created for handling exim and domestic Cargo. It will have a Railhead, a Truck terminal, Warehouse facilities for storing both domestic and Exim cargo, a domestic and Exim cold storage, container repair facilities etc. Risks & Concerns Despite the fact that in the five year period between 2010 and 2014 the total number of functional CFS in India has grown from 137 to 140 (just an increase of 3 CFS), competition continues to be acute with 31 facilities in JNPT and over 28 registered CFS in Chennai. Lines seeking a huge incentive for moving their boxes to a particular CFS continue. Storage days per TEU has also been coming down in the last couple of years leading to a drop in earning. In view of the stiff competition, CFS is not able to pass on the increase in costs to the trade. Over the last few years, service levels being offered by a good number of CFS operators are almost similar with the users being indifferent to doing business with any particular CFS. Overall there is a reduction in earning per TEU for most of the CFS operators. Expansion of the existing CFS becomes difficult as acquiring a contiguous land with clear title in proximity is a time consuming and long drawn out process. Threat from substitutes is moderate as the volume moved to CFS can come down if there is increase in container yard capacity at the major ports. CFS business depends on the Exim trade of the country. Any fluctuation in trade directly impacts the container traffic volumes. Further there is a growing trend amongst large and well established importers to avail the green channel facility whereby direct delivery is taken of import laden boxes from the Port bypassing the CFSs as it is more cost effective. An area of concern is the lack of infrastructure development in and around Ports which results in traffic congestion and delay in transit times. All the aforesaid risks and concerns are faced by the entire CFS Industry. Through appropriate management intervention, employee involvement and improved processes these are being addressed. Internal Control Systems and their Adequacy The SBU through its Operation package "iComet" has built in high degree of control with checks and balances to conduct its operations effectively and efficiently. Finance and Accounts is in SAP. There is a periodic internal and external audit conducted for the SBU. During the year SBU introduced online payment facility for its customers. This coupled with the "Customer interface tool" introduced a year back helps the customers to do business with us from wherever they are as they can take out estimates of the bill for the service rendered, can ask for a quote for a service, know the status of arrival/ delivery of containers etc. through this feature. SBU has a very robust Performance Budget system whereby actual performance is weighed against the Business Plan developed before the commencement of the year. All the three units of the SBU are certified under ISO 9001:2008, ISO 14001:2004 and ISO 18001:2007. Discussion on Financial Performance with respect to physical / operational performance of SBU Import arrivals to our CFS were up by 23% compared to the brvious fiscal. Our Export volume too went up by 20% over the brvious year. Substantial improvement in the physical volumes helped the SBU to achieve a growth of 28% in Turnover and a growth of over 20% in Profitability. Material developments in Human Resources / Industrial Relations Industrial relations in all the units of CFS and WD remained cordial right through the year. (B) LOGISTICS SERVICES [SBU-LS] Industry Structure and Developments India being one of the fastest growing economies has great potential for growth in every sector. Logistics & supply chain industry is the backbone of development and a robust and emergent logistics sector is an indication of a healthy growth in an economy. India's logistics sector which has grown at a healthy rate of 12% in the last five years is poised for accelerated growth in the near future, led by GDP revival, ramp up in transport infrastructure, e-commerce penetration, impending GST implementation, and other initiatives like 'Make in India' . However, growth in sub-sectors varies, with the lowest being in basic trucking operations and highest in supply chain and e-tailing logistics. Some studies estimate the share of India's logistics spend in GDP at 13% (versus 7-8% in developed countries), implying overall size of $ 100150 billion. The Indian Freight Forwarding industry is also poised to witness considerable growth in the near future. The freight market is rapidly being aided by improved warehousing infrastructure and growth in containerized cargo, which necessitates a robust network. Amongst the segments, air and sea freight together contribute maximum to the market in terms of value. The current market is largely mulled by rising freight costs due to volatile fuel prices, lack of skilled manpower and infrastructural bottlenecks. However, a surge of government initiatives in the form of National Highways Development Project (NHDP), Special Accelerated Road Development Program in North East (SARDP-NE), development of Dedicated Freight Corridor of Indian Railways & Highways, port sector initiatives are providing the necessary impetus to the freight industry. Opportunities and Threats Continuing the trend of the recent past, air freight services constitute more than 50% of the total turnover of the SBU. According to industry reports, 80% of the freight forwarding in India is conducted through Ocean. Keeping this in mind, the SBU laid more emphasis towards the Ocean freight forwarding sector, and registered a growth of around 9% in the fiscal year 2014-15. The SBU is in the process of consolidating the business in Ocean segment through change in organization structure of Logistics Services and Logistics Infrastructure with a view to provide one stop logistics solutions. During the year, the Central Pricing Desk was also established, to enable us in getting highly competitive rates and enhance our associate relationship and management abilities which have resulted in increase in share of business from the private sector. Many large transnational logistics players are trying to get a foot hold in the Indian Logistics Industry which may lead to severe competition. Certain domestic players are also trying to penetrate deep in the already overcrowded market through acquisitions and mergers. Segment wise or Product wise Performance During the year Air Export and Ocean Export achieved a growth of around 100% and 44% respectively as compared to brvious year despite a dip in Air Import activity resulting in a nominal growth in top line. Nevertheless better product mix including increased handling of air export charter services crystallized into a growth of 5% in contribution over the brvious year. Outlook The financial year 2014-15 saw the SBU implementing some of the recommendations of the study undertaken for achieving operational excellence which included setting up of Central Pricing Desk to ensure economy in buying cost of services coupled with change in organization structure with a view to provide more focus to business and customer needs. The SBU is brsently undergoing a technology up-gradation of its existing IT system to make it compatible with the best in industry. This upgradation will aid us in further streamlining our operational services & provide for a better interface with our valued customers & associates. Risks and Concerns The competition in the logistics market is getting more intense in the coming days on account of mergers and acquisitions by some big players with a view to grab incremental market share. Customers are demanding enhanced value through single window services and this benefits multinational freight forwarders, as they have a global brsence and are thus, able to offer competitive rates. Shipping lines are now directly approaching customers, as well as opening up their own freight forwarding verticals and this has made them direct competitors in the Ocean cargo segment for door to door movements. The SBU is taking adequate steps to mitigate the challenges through our established and growing global associate network and offering our clients single window logistics solutions in association with SBU Logistics Infrastructure and with the support of one of our Joint Ventures. Internal Control Systems and their Adequacy The SBU has in place an effective Internal Control mechanism and during the year under review, a fairly large number of Internal Audits were carried in all branches and the findings were found to be satisfactory. All the branches of the SBU are ISO accredited and accreditations are successfully renewed every year. Discussion of Financial Performance with respect to Operational Performance The SBU during 2014-15 achieved the highest ever profit since inception of this SBU despite a nominal growth of 2% in top line as compared to brvious year. This was achieved primarily on account of better sales mix coupled with economy in cost of operation. Industrial relation continued to be cordial at all units of SBU : Logistics while operating in the optimum level of manpower. 5. TRAVEL & VACATIONS [SBU-T&V] Industry Structure & Development During the year, to benefit from the possible synergies, the Company merged two of its SBUs earlier known as "Tours & Travel" and "Tours -- Vacations Exotica" and renamed the combined strategic business unit as "Travel & Vacations" to build one seamless travel and vacations operation that offers end to end Travel & Vacation solutions to its wide sbrad customers. Travel & Vacations is one of the largest tours & travel operator in the country which provides end-to-end domestic and international travel, ticketing, tourism and MICE related services to its clients. It is one of the oldest IATA accredited travel agencies of India. Operating from more than 88 locations across 19 cities in the country Balmer Lawrie works round the clock to provide reliable and cost effective travel solutions to its customers. Our clients include major Central Government Ministries, Public Sector Undertakings, Autonomous Bodies and Corporate houses. Travel business in general is passing through difficult times. The Government of India, as an austerity measure, down scaled entitlement on Domestic sector of Government officials. Almost all domestic carriers have declared losses except Indigo. Financially challenged airlines offering lower or no commissions and minimal performance linked bonus (PLB). With relatively lower rate of occupancy and with increased competition, even hotels offering lower than average room price. Air price growth in India is expected to be the strongest in Asia Pacific in 2015 and prospects for market reforms exists that could lead to greater levels of business activity and a higher volume of business travel. International outbound (IOB) travel from India has been extremely volatile over the last few years. IOB spending grew at only about 4.8% in 2014 due to slower trade growth in the first half of the year. As it picked up the pace in the second half of 2014 and in 2015, IOB spending is likely to gain strength and is projected to grow at about 9.7% in 2015. Opportunities & Threats Travel & Tourism is one of the world's largest industries and the Indian Outbound Market is emerging as one of the fastest-growing sector. Absolute numbers and overall value of spending by travellers in the outbound travel sector in India is second only to China. Increase in disposable income has energized the sector to grow further and, accordingly, the outbound tourism is on positive growth. The size of the Indian middle class roughly stands at more than 350 million -- the size of the US population -- and is estimated to grow at the rate of 40-50 million annually. With ~ 17% of the world's population (and a median age of 25 years), India is ranked as one of the top five countries for potential outbound travel. Consequently, the number of Indians travelling abroad annually is set to rise from 17 million today to 50 million by 2020. Domestic business travel has grown rapidly in India over last 15 years as Indian standard of living have been boosted significantly by market liberalization. Business travel spending in India has crossed 1trillion mark in the year 2013 and growing at a rate of ~7%-~8% year on year. Corporates however is seeking new destinations for their meetings and incentive trips with unique experience to offer to their employees, customers and distributors. This should ideally offer immense opportunities for play to the SBU in the areas of MICE and Corporate Travel Solutions. However, the threats from Government withdrawing its support to the Company as one of the brferred agency for their travel needs still continue to remain as one of the threat to the SBU travel segment of the business besides others threats such as non-recovery of Airlines' poor financial health, increasing efforts from the Airlines for direct sale of tickets and further increase in competition in the sector due to very low entry barrier to the business. Segment-wise & Product-wise performance Despite the adverse environment, the SBU has continued to provide sizeable turnover from the ticketing business. Domestic travel accounted for ~57% of the turnover while international travel was around 22%. The revenue generated from the tours and other activities touched ~10% & of the turnover respectively. Travel being the major part of SBU's current business, the SBU faced with challenges to retain its margins during the year primarily due to reduction in credit period by the airlines, non-payments of service charges by most of the customers for a large part of the year and the airlines making commission virtually nil. With acquisition of Vacations Exotica, the SBU is currently trying to strengthen its position in leisure travel segment of the retail market that offers relatively better margins and better growth opportunities. The Online Portal of the SBU observed continuous increase in bookings. The SBU is also currently focusing on faster implementation of its Self-Booking Tool (SBT) at customer sites for providing better customer service and therefore retain its market share in the ticketing business. Future Outlook Low Cost Carriers (LCC) have started operating on both Domestic and International sectors and adding new Aircrafts, is poised to grow. Initiatives like Visa on Arrival and implementation of e-visas is making an important contribution to the Indian tourism industry as well. As per CAPA, domestic and international traffic is expected to grow at 4 - 6% and 10-12% respectively in 2015-16. Risks & Concerns In spite of 0% commission by some of the airlines and lower commission by others, the competition in the market is getting intense day by day as even small private sector operators with almost no operational overheads are offering / giving away commission and discounts to the clients. Client's expectations for free / add-on services and discount are also on increasing trend. The SBU is continuing to face acute issues in collecting debts mainly from various ministries, resulting in huge brssure on working capital requirement and high finance cost. Most airlines including the national carrier facing financial problems will remain as one of the concern for the industry and the SBU. Another area of concern is usage of technology whereby the customers are making their own bookings and gradually becoming less and less dependent on travel agents. With customers becoming more internet savvy, the corporate and individual retail customers will brfer using more and more Self Booking Tools that can offer them variety of options to choose from as per their convenience and individual brferences. Keeping in view of the changing trend in travel industry, the SBU has embarked on a major plan to upgrade its technology which will help it to improve its service levels and reduce overheads. The SBU is also in the process of consolidating travel related contents on the travel portal (Air/Train/Hotel/Cruise/Cars/Insurance and Visa Services), which are all under designing and implementation. Internal Control System and their Adequacy The SBU has adequate internal controls through various Standard Operating Procedure (SOPs), compliance reports and checks & balances. The major branches are certified under either ISO 9001:2000 or ISO 9001:2008. Material Developments in Human Resources / Industrial Relations Industrial relations continued to be cordial at all units of SBU T&V while operating with optimum level of manpower. 6. REFINERY & OIL FIELD SERVICES [SBU-ROFS] Industry Structure and Developments The SBU: Refinery & Oil Field Services is engaged in the activity of Mechanized Oil Tank Sludge Cleaning & Hydrocarbon Recovery Services. The SBU is also in other technology driven services such as Composite repair services, non - metallic technology for repair of pipelines & storage tanks to avoid unplanned shutdowns. This continues to be a nascent industry with a very limited number of players and the Company is a pioneer and leader in this nascent market. Opportunities and Threats The SBU continues to enjoy sizable market in the processing of oily sludge. Additional growth opportunity exists with the applicability of strict pollution norms in the Oil and other related industry. The market for Composite repair is still evolving and the same is expected to accelerate progressively with the increased awareness of users. The main threats visualized by the SBU relate to the likely emergence of new players in this niche market. Segment wise or Product wise Performance In 2014-15, the SBU could maintain its turnover on overall basis. However, overall growth in oily sludge processing could not be achieved on account of nonavailability of work in the power sector. Future Outlook In the near term, the SBU aims to widen its service portfolio - involving processing of hazardous sludge for other industries. The SBU nurtures plans for increasing market awareness as to the utility of composite repairing services both in pipelines & tankages. The SBU is weighing the factors pertaining to entry into Environmental Engineering particularly in the oily water waste management area, considering synergy with the existing operation of the SBU and expected to offer significant growth opportunities. Risk & Concerns The risk-profile of the SBU centers around emergence of competitive technology and processes. In order to manage risk, create product / service differentiation and take the technology to the next level, the SBU is endeavoring to bring forth technological evolution in its services so as to reduce human interferences. The major concern visualized by the SBU relate to the low crude oil prices making the commercial viability of the oil recovery under threat and many fold higher cost of Composite Repair work w.r.t. the conventional technology. Internal Control System and their Adequacy The SBU has well defined working procedures to control downtime of plant and machinery. The SBU is accredited with ISO 9001:2008. Procedures are reviewed periodically and upgraded for compliance. Discussion on Financial Performance with respect to Operational Performance In 2014-15, the SBU has achieved growth over the last year's turnover but there is a decrease in segmental profit. This is owing to overall sluggish business environment persisted throughout the year in the particular segment. Material Developments in Human Resources / Industrial Relations Industrial relations continued to be satisfactory during the financial year under report. Cautionary Note The statements in the Management Discussion & Analysis describing the Company's focal objectives, expectations and anticipations and those of its SBUs may be forward looking within the meaning of applicable statutory laws and regulations. Actual results may differ materially from the expectations exbrssed or implied in such forward looking statements. Important factors that could influence the Company's operations include global and domestic supply and demand conditions affecting selling prices of products, input availability and prices, changes in government regulations / tax laws, economic developments within the country and factors such as litigation and Industrial relations. The information and opinion stated in this section of the Annual Report essentially cover certain forward-looking statements, which the management believes to be true to the best of its knowledge at the time of its brparation. The management shall not be liable to any person or entity for any loss, which may arise as a result of any action taken on the basis of the information contained herein. The nature of opinions herein are such, that the same may not be disclosed, reproduced or used in whole or in part for any other purpose or furnished to any other person without the prior written permission of the Company. |