MANAGEMENT DISCUSSION AND ANALYSIS Global economic overview and outlook The global economy reported a growth of 3.1% in 2015, declining from 3.4% in 2014 following a slowdown in most emerging economies (accounting for 70% of global growth) and China. The advanced economies reported a growth of 1.9% in 2015 as against 1.8% in 2014. The gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services, declining crude and commodity prices and a gradual tightening of the monetary policy in the United States impacted the global economy. Despite a marked slowdown in the Chinese economy, which grew at its weakest pace in a quarter of a century, global growth is forecasted at 3.4% in 2016 and 3.6% in 2017. Indian economic overview and outlook Despite global headwinds and a truant monsoon, India registered robust growth of 7.6% in 2015-16 against 7.2% in 201415, becoming the fastest-growing major economy in the world. The agriculture sector remained subdued owing to a second successive year of sub-par monsoons. Services sector growth marginally declined but was offset by accelerated manufacturing sector growth. Even as the manufacturing sector in India accounted for ~15% of the country's GDP, the introduction of nation-building initiatives is expected to strengthen this to 25% by 2025. Global manufacturing sector overview With growth in the developing and emerging economies weakening, global manufacturing output rose merely 1.9% during the Q4FY15. Manufacturing output in industrialised economies rose 0.2% during the year (0.9% in North America and 0.6% in Europe). In Eastern Asia, manufacturing output declined 0.5% while a 0.6% contraction was observed in Japan. Manufacturing output declined in Korea and Singapore. During FY 2015-16, manufacturing output in developing and emerging industrial economies grew 4.6% in Q4, lower than the 5.2% registered in Q3. (Source: <http://www.unido.org>) PET resin industry Sectoral overview Crude oil prices continued to soften leading to the prices of two major raw materials for PET resin - MEG and PTA - decreasing by nearly 22% and 12% respectively (April 2015), which moderated PET resin realisations. Besides, a surplus due to Chinese overproduction aggravated the situation. Eventually, a number of Chinese capacities announced closures, exerting brssure on national and international markets. According to 'Future of PET Packaging to 2021', Polyethylene Terephthalate (PET) packaging amounted to just under 16.7 million tonnes in 2015, rebrsenting a 3.8% increase over 2014. Going into 2016, growth is projected at 4.8%, amounting to 17.5 million tonnes. A strong level of new product launches in under-developed markets such as brserved foods, thermoforming, fruit juice and other functional beverages, are projected to strengthen market demand. Over the next five years, the PET packaging market is forecast at 21.1 million tonnes in 2021, registering an average growth rate of 3.8% per annum during 2016-21. (Source: globenewswire.com) Overview PET (Polyethylene Terephthalate) is a thermoplastic resin manufactured in amorphous and semi-crystalline forms. The amorphous form of PET is transparent and ductile, its semi-crystalline form is an engineering plastic suited for bottle manufacturing. The Company produces various grades of PET resin used in the packaging of drinking water, carbonated and alcoholic beverages, edible oils, pharmaceuticals, dairy products and others. Benefits of PET over alternative packaging media Versatility: PET provides relatively better barrier properties, making it a popular choice for plastic bottles used for drinks, sauces and salad dressings as well as food trays and food packaging material. PET bottles do not shatter and weigh about a tenth of the glass equivalent, making them ideal for beverages and personal care products. Safety: PET bottles are considered safe for packaging medicines and food materials. PET is free from heavy metals like lead, arsenic, mercury, chromium, cadmium and nothing is leached above permissible limits from PET bottles. Recyclability: PET is easy to reprocess and readily breaks down into basic monomers. Recycled PET is a common ingredient in the manufacture of bottles, packaging, carpet fibres, luggage, insulation, furniture and healthcare product containers. Eco-friendly: Environmentally, PET is the most benign of packaging options. A study by scientists at the University of Pittsburgh examined the environmental consequences of biopolymer production and ranked PET lowest in terms of negative impact based on biodegradability, recycled proportion, life cycle health hazards and life cycle energy use. Economical: PET-based packaging is one of the most economical media for the packaging and transportation of food and beverages. It is light, durable and robust brventing loss in transit damage and breakage. This property has prompted food and beverage manufacturers to shift from alternative packaging forms to PET. Macroeconomic factors driving demand for PET-based products Rise in disposable incomes: Rising disposable income could strengthen the global market. The compounded per capita disposable income growth from 2011 to 2016 was 1.5% and is expected at 1.9% from 2016 to 2021 (Source: IBIS World). A resurging global economy and robust growth of rising economies like China, India and Brazil are likely to enhance disposable incomes, who are likely to spend more on conspicuous consumption products, with the PET resin industry expected to emerge as a major beneficiary. Retail boom: The Indian packaging industry constitutes about 4% of the global packaging industry. The per capita packaging consumption in India was a mere 4.3 kilograms, compared to countries like Germany and Taiwan where it was 42 kilograms and 19 kilograms, respectively. However, an e-commerce boom and organised retail segments have brightened growth prospects of PET offtake in India. Growing ubiquity: PET-based products have emerged as a material of choice in the packaging for sectors like FMCG, food and beverages and pharmaceuticals. PET-based products are used heavily in packaging due to their visual appeal and convenience. Additionally, they improve the hygiene quotient and shelf-life of products in the food and beverages segments. They enable the shipping of more products with less material, bringing down fuel consumption and transportation costs. Indian PET resin industry PET resin demand witnessed robust growth over the last five years on account of an increasing use in various end-user industries. Increased PET resin demand was also driven by the replacement of traditional packaging materials (glass, aluminium, paper and metal). The Indian PET resin market was highly consolidated and dominated by a few major players. Outlook With a turnover of $24.6 billion and a growth rate of 13% to 15% a year, the Indian packaging industry is expected to reach a size of $32 billion by 2020. Global annual packaging turnover is about $550 billion; India's share is about $16.5 billion. India's demographic profile shows that half the Indian population is at an average age of 29 years; an increasing number of Indians are joining the workforce. A sharp rise in disposable incomes and increased consumption propensity could catalyse FMCG demand. Consequently, PET resin manufacturers could emerge as significant beneficiaries. Management of business risks The management of the Company is cognizant of the numerous risks that the business is exposed to and the industry that it operates in. The Company reviews threats to its operating model and takes adequate measures to brvent their occurrence. Adequate recovery systems are in place to deal with threats, brvent any extended period of disruption and enable timely resumption of business. The Company's Board of Directors and management appraise various risks. They take decisions following a careful consideration of all relevant factors. The Company has in place a Risk Management committee, comprising members of the Board of Directors and senior executives, to evaluate critical processes and identify risks. Following a careful analysis, the committee discusses options to mitigate risks and monitors their implementation. These have been discussed in detail in the Risk Management Section of this Annual Report. Internal control system and their adequacy The Company has instituted a system of checks and balances to ensure that all assets are safeguarded and adequately protected against the chances of occurrences of any loss or damage whether foreseen or unforeseen. Internal Control Systems in the Company continues to be reviewed through Internal Audit. The internal control system is commensurate with the size and nature of the organisation. The Company regularly carries out checks to ensure that the internal controls are working satisfactorily. The internal control systems are monitored and reviewed on a regular basis by the Executive Chairman, Vice Chairman & Managing Director, Managing Director & CEO, Executive Director (Finance) & CFO. A seamless system has been put in place to ensure that any major discrepancies or lapse in controls are reported to the Audit Committee and Board of Directors of the Company and action is taken to control any breach. Discussion on financial performance with respect to operational performance This section is covered in the Board's Report under the section of financial results and performance. The financial review for the year has been covered specifically in a different section of this Annual Report. Human resource The Company has over the years invested in creating a strong human capital by retaining employees within the organisation and recruiting high-performing individuals from across the industry. The Company has successfully maintained harmonious industrial relations across its various operating locations and with its employees. The total employee strength as on March 31, 2016 stood at 324. |