MANAGEMENT DISCUSSION AND ANALYSIS BUSINESS ENVIRONMENT Global The Global economy continued to exude an uneven performance in FY 2014-15 with volatility and uncertainty being defining themes across the international economic landscape. Despite the efforts of various governments and multilateral agencies, most of the major economies were in the middle of a balancing act during the year as they attempted to revive growth in a sustainable manner while simultaneously addressing fiscal concerns. A welcoming relief to oil importing economies especially emerging economies like India was the sharp fall in crude oil prices globally towards the second half of the Financial Year though volatile commodity prices, continued low interest rates and slowing world trade have been pulling these economies in different direction. Emerging economies disappointed as a result of a less favourable investment climate and weak external demand with number of country specific challenges looming over them like infrastructure bottlenecks, increased financial risks and political tensions, though contributing about two-thirds of global growth. In the Euro area, a massive monetary expansion is being undertaken to reverse the deteriorating economic conditions and deflationary brssures. With lower oil prices, lower interest rates and Euro debrciation, the outlook for growth is moderate, along with subdued inflation. Though the legacies of financial crisis continued to linger over the developed economies of America and Asia as the potential growth rate remained lower than the early 2000s as a result of the aftermath of the financial crisis, these economies gathered positive momentum simultaneously for the first time since 2011 inspite of still being confronted by a number of challenges like high unemployment rates and structural bottlenecks. The United States is on an improving growth trajectory, with lower inflation and declining unemployment, which is expected to more than offset reduced net exports caused by dollar apbrciation catalysed by accommodative monetary policy and lower oil prices boosting domestic consumption demand. China's growth in the Financial Year (FY) 2015-16 will be affected by slower growth of exports and shift in the focus of domestic growth from an investment to a consumption oriented economy. As a result China, which grew at 7.4% in 2014 (its slowest rate in 24 years), has set its GDP growth for 2015 at about 7%. China's slower growth will have repercussions on growth prospects of emerging Asian countries. China's flooding of Asian markets, including that of India with metals (steel), Chemicals and electronic items is an area of concern. Overall, it is believed that the global economy has bottomed out after the global financial crisis of 2008 and may now consolidate before a sustained recovery takes place. All major advanced economies are expected to show improved growth in 2015 and 2016 though growth in major emerging and developing economies (except India) is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. However, there is a view that many of these emerging economies including India have put the worst behind them. Domestic India witnessed the largest single party political mandate at the Centre since 1984 in FY 2014-15 auguring a stable government with opportunity to return the economy to its strong growth trajectory of the brvious decade with a new perspective, renewed vigour and expectations of a new pace of rolling out of reforms and strong policies. The Indian economy grew by 7.3% in FY 2014-15 led by strong growth in the industrial and service sectors, despite slowdown in the agricultural sector due to poor monsoons, and is expected to further improve to 7.4% in FY 2015-16 and 7.5% in FY 2016-17 surpassing China, making India the fastest growing major economy in the world by 2016. The Government through policy reforms is not only aiming for short term objectives like control over inflation and external sector imbalances but is also focussing on medium to long term objectives for transformation and development by stimulating civil and social infrastructure projects across the Country. Measures for de-bottlenecking the economy are being carried out like land acquisition for development, ensuring availability of energy along with the rationalization of fuel prices and ending subsidy in the case of fuel with majority of measures already been executed, indicating the seriousness of the Government about the long-term economic goals of the Country. The 'Make in India' initiative of the Government to revive manufacturing in India with an object to lift the economy through job creation and skill enhancement by localisation of manufacturing across 25 identified key sectors complemented with removal and relaxation of foreign equity caps in various sectors and liberalisation of foreign direct investment in railways, insurance and defence, will give a major boost in this direction. The road ahead for India is encouraging with refreshing changes in foreign policy, tax certainty, efforts to attract FDI and in the auction of natural resources. The Government has taken necessary steps to revive growth resulting in reduction in the Current Account Deficit(CAD) and pick-up in net exports with lower net outflows under primary income supported by lower oil prices reducing the Import bill. The Union Budget FY 2015-16 has focused on increasing expenditure towards capital formation, which would have a multiplier effect on the economy. It has recognised the need to revive growth in infrastructure sectors and manufacturing in line with the 'Make in India' initiative. The increase in public investment would encourage private sector investment. Recognising that agricultural incomes are under stress, the Finance Minister has taken measures to increase agricultural productivity through higher investment in rural infrastructure, thus ensuring that rural people get employment, which will help fuel demand to that extent. Micro-irrigation, watershed programmes and the Pradhan Mantri Gram Sinchai Yojana (PMGSY), which aims to ensure irrigation for every field and improve water usage efficiency to provide "more crops per drop", will lead to a higher demand for fertilisers and pesticides. CHEMICAL INDUSTRY OVERVIEW, STRUCTURE AND RECENT DEVELOPMENTS Chemical industry is a knowledge as well as capital intensive industry. It plays a significant role in the global economic and social development. It is also a human resource intensive industry and hence employs a large number of people. Globally, more than 20 million people are expected to be employed in this industry. The diversification within the chemical industry is large and covers more than eighty thousand commercial products. With a large talent pool available, the focus has also been towards investments in R&D. India's competence in this knowledge intensive industry is increasing; however the tapped potential is very limited. The current low per capita consumption suggests that the demand potential is also yet to be realized. Moreover India has a very strong outlook for the key end user industries hence, going ahead the demand of chemical products is expected to surge. The Chemical Industry is divided in the following segments: The chemical industry is dependent on the progress of its key customers, i.e. the manufacturing sector for growth. FY 2014-15 was a soft year for chemical companies as the global manufacturing sector was affected by slowdown in China and other emerging economies. Recovery in the United States along with growing demand for higher value and innovative products were the key driving factors for growth in FY 2014-15. As we move into FY 2015-16, there are indications of an upturn in the global industrial cycle with the United States continuing to witness growth momentum. In fact, due to the competitive advantage of shell gas extraction, North America will continue to witness sustained growth. However, the most promising prospects were found in emerging economies of Asia, Africa and Middle East. Sustained recovery in the manufacturing sector and shift in competitiveness will result in driving the global economic growth. As a result, the size of the global chemical industry will become $4.7 trillion by 2018 and $5.8 trillion by 2021. Despite the slowdown in export markets and lacklustre growth in domestic markets, the Indian chemical industry expanded and constituted about 3.5% of the global chemical industry. The chemical industry contributed about 19% of the manufacturing sectors' GDP and about 11% of total exports. Of the total size of the chemical industry, bulk chemicals form about 39% of the market share while agro chemicals is about 20% and specialty chemicals is at about 19% of the market share. The balance 21% is held by Pharmaceuticals and Biotechnology. Bulk chemicals which comprise of organic and inorganic chemicals are projected to grow by 7.3% CAGR over the next five years taking it to $25.7 billion by 2018. Organic chemicals, which form 34% of the bulk chemicals market are expected to grow at 9%, driven by strong demand in the end-user market. As a result, plants manufacturing organic chemicals are expected to achieve full capacity utilisation by 2018. Inorganic chemicals are expected to grow by about 6-7% CAGR over the next five years driven by strong demand from the end user industries like alumina, textiles, paper and detergents. Utilization rate will touch 92% by 2018. Specialty Chemicals Specialty chemicals are defined as a "group of relatively high value, low volume chemicals known for their end use applications and/or performance enhancing properties." In contrast to base or commodity chemicals, specialty chemicals are recognized for 'what they do' and not 'what they are'. Specialty chemicals provide the required 'solution' to meet the customer application needs. It is a highly knowledge driven industry. The key specialty segments in India are: The Indian Specialty chemicals are the fastest growing segment with strong demand from end user industries and have gathered enough momentum with expectation to do about $42 billion by 2018 owing to strong domestic demand. Exports are estimated to drive specialty chemicals growth owing to its competitive scale and low cost of production compared to other economies. The past growth has been due to growth in end use industries, which has resulted in increased consumption for specialty chemicals and is expected to grow around 2 times the GDP in coming years. India exports specialty chemicals to nearby Asia-Pacific countries which do not have competitive scale of production and to developed countries of Europe and USA where it leverages its low cost of production and quality talent pool complemented with compliance to global regulations. Looking forward, the Indian chemical industry is expected to deliver healthy gain from strong production volumes that will be consumed domestically as well as exported. India is also at the starting point of a new capital spending cycle as the 'Make in India' initiative kicks off which will not only expand production but also generate significant employment once the projects go online. The Indian chemical sector has the potential to become a global manufacturing hub similar to the Indian pharmaceutical industry. As the global economy recovers and external demand becomes more robust, chemical exports will further accelerate. FINANCIAL PERFORMANCE The Company's continued focus in expanding business in newer horizon's resulted significant growth in operations during the year. The Company has added another year of achievements in its success book. During the year, business delivered a record revenue performance near to Rs.25,000 lakhs marks for the first time. Net Sales during the year was X24,761.11 lakhs compared to X13,131 Lakhs in PY, reporting an increase by 89%. Your Company launched 5 new products and almost 91% Revenue was generated from Fine & Speciality Chemical Intermediates, followed Organic Chemical Intermediates contributing 6% & the Pharmaceuticals and Agrochemicals/Inorganic Chemicals finishing the top-line at 3% & 1% respectively. The new products launched continued to deliver double digit growth. Q3 witnessed marginally lower revenues due to sharp decline in International Crude Oil prices resulting in disruption of volume off-take by some customers, Segment Revenue For better understanding of Company's business, your Company has classified its business segments based on the respective end use of its products which does not have any financial impact, viz. Fine & Speciality Chemicals Revenues from this segment were Rs.22,559.84 Lakhs in FY 2014-15, compared to Rs.9,394.40 Lakhs in FY 2012-13, contributing 91% to total revenue during the year and demonstrating highest momentum in performance as several end-user segments continued to benefit from increased demand thereby professing bright future prospectus for this segment. Organic Intermediates Revenues from this segment end-user were at Rs.1,499.98 Lakhs for the year(PY Rs.2,632.32 Lakhs) thereby contributing 6% to total revenue during the current year. The lower revenues are due to conscious decision taken by your Company to leverage higher operating capacities for Fine & Speciality Chemicals segment however consolidation in prices of some key raw materials, improved realisations. Pharmaceuticals Intermediates Revenues from this segment end-users stood at Rs.658.57 Lakhs compared to Rs.744.60 Lakhs in PY contributing 3% to total revenue. Inorganic Intermediates Revenues from this segment end-user stood at Rs.34.23 Lakhs for FY15 compared to Rs.45.27 Lakhs in PY. The lower revenues from this segment were due to fall in the prices due to over-supply in the market, however the revenue contributed to only 0.14% in the Topline Agrochemical Intermediates Revenues from this segment end-users were low at Rs.8.49 Lakhs in FY15 compared to X 267.30 Lakhs in PY witnessing further shrink in revenues due to conscious view of limiting credit exposure to this segment end-user, taken by your Company since it warrants high credit cycle leading to higher working capital and related costs. Your Company demonstrated its versatility, adaptability anddynamism by focusing on Fine & Specialty Chemical segment end-users with higher profitability, higher volumes, stable and increasing demand thereby remarkably increasing the Top line and Bottom line growth of your Company Profitability EBITDA for FY 2014-15 was higher by 114% at Rs 3417 lakhs compared to Rs 1596 lakhs in PY. T he growth in EBITDA was driven by high value led growth from new products introduced in the Fine & Speciality Chemical segments with improved cost efficiencies and positive impact a s a result of de-bottlenecking initiatives. Profit Before Tax(PBT) was up 133% at Rs 1371 lakhs compared to Rs. 588 lakhs in PY. Profit After Tax(PAT) was higher by 288% at Rs 1303 lakhs in FY 2014-15 compared to Rs 336 lakhs in PY 2013-14. This growth has come about d espite significant increase in Interest and Debrciation cost on account of full commissioning of the forward Integrated new products. Raw material cost stood at Rs 10,509 Lakhs compared to Rs 4026 Lakhs in PY, an increase of 161.03%, mainly due to increased volumes. Raw material prices nosedived sharply in the Q3 due to fall in International Crude Oil prices, however there were no Inventory losses due efficient Inventory Management and Price correction forecast by your Company. Employee Benefit Expenses increased to Rs 145 Lakhs from X 117 Lakhs(YOY) due to induction of new employees for Forward Integration Products Production Plants which were commissioned during brvious year. Finance cost was higher at Rs 122 Lakhs due to post commissioning interest cost against Long Term Loan and Short Term Working Capital Loan availed from Banks & Institutions for Forward Integration Products Production Plants which were commissioned during the year under review. Debrciation and Amortisation Expenses increased to Rs 888 Lakhs from Rs 354 Lakhs(YOY) due to post commissioning Debrciation expense of Forward Integration Products Production Plants which was commissioned during the year. Your Company has delivered strong and consistent record of revenue and profit growth yet again, demonstrating resilience in the current uncertain environment STRATEGIES FOR GROWTH Your Company has already initiated work for its upcoming projects integral to our existing business operations by embarking on a backward & forward integration project and capacity expansion of captive products. Once implemented, it will further strengthen your Company's sustainability and resilience. SEYA has envisaged its growth path, by a clear and defined vision to: • Invest locally with Scale and Size matching global norms and adopt cutting edge technology (developed or acquired) • Secure Feedstock and Technology • Become a coveted employer - Attract and Retain talent • Establish a targeted innovation platform, Invest more in R&D • Create a positive, consumer & environment friendly image Your Company is addressing cost issues of raw materials and its price volatility and high energy costs which shall result in reduction in energy and fixed costs, yield better cash flows and aid in debt reduction, all of which will result in long-term value creation for its stakeholders. Cash generation through operational excellence and to realize the synergies of being a fully integrated facility shall drive efficiencies and effectiveness in transitioning to value-added products. Your Company has adopted the multi-quadrant model for market penetration of its Products are expected to be major factors for competitiveness while Development of processes/ products which eliminate or reduce the use of hazardous substances could become the key priority of producers. Consumers would be expected to pay brmium for green chemistry and environmental brservation initiatives since stringent regulatory norms could further push the need to innovate cost effective industrial green chemicals. Your Company has re-assessed its SWOT for clutching the Opportunities and extenuating the Threats: SWOT ANALYSIS The Chemical industry is critical for the economic development of any country, providing products and enabling technical solutions in virtually all sectors of the economy. Specialty chemicals, which is a focus area of your company, provide the 'solution' to meet the customer application needs and is a highly knowledge driven industry with raw materials cost much lower than for commodity chemicals. Industries are cautiously optimistic about future growth prospects and working towards new products, innovative services, application developments, facilities expansion and most importantly, understanding the changing customer brferences and demands and fostering long term profitable relationship with customers. Going forward, innovation and sustainability initiatives INTERNAL CONTROL SYSTEMS & ITS ADEQUACY The Company has robust systems for internal audit, risk assessment and mitigation and well-established internal control and risk management processes both at the business and operational levels. The Internal Auditor reports directly to the Chairman of the Audit & Risk Management Committee of the Board of Directors, which ensures process independence. Internal audit function plays a key role in providing to both the operating management and to the Audit & Risk management Committee of the Board, an objective is to view and reassurance of the overall control systems and effectiveness of the risk management processes across the Company. Internal Audit also assesses opportunities for improvement in business processes, systems and controls and provides recommendations designed to add value to the operations. The scope and authority of the Internal Audit Department is derived from the Audit Charter approved by the Audit Committee. Internal Audits with respect to financial and compliance matters are performed by an internal Auditor and operational level internal audit is performed by the in house team of managers, engineers and project and production team. The internal audit department which operates on a decentralised basis continuously monitors the adequacy and effectiveness of the internal control environment across the Company and the status of compliance with operating systems, internal policies and regulatory requirements. The Audit & Risk Management Committee meets on a quarterly basis to review and discuss the reports submitted by the Internal Auditor and also review closure of all agreed actions. The Audit & Risk Management Committee also meets the Statutory Auditors separately to ascertain their views on the adequacy and efficiency of the internal control systems. RISK MANAGEMENT Managing Risk is an integral part of Seya's business. The Company operates a structured and continuous process of identifying, analysing, responding and mitigating the risk events that have the potential to generate adverse effect on the achievements of organisational objectives. This section discusses various dimensions of our enterprise risk management and is not exhaustive and is for information purpose only. Our business model is subject to uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements. The overall approach to Risk Management at Seya is based on the following principles: O Aims at value creation and protection O An integral part of processes and decision making O Addresses uncertainties explicitly O Is structured, dynamic and responsive to change Risk Categories & Mitigants The following broad categories of risks have been considered in the risk management framework: O Strategic Risk It includes the range of external events and trends (like government policies that can adversely impact the Company's strategic growth trajectory and destroy stakeholder value. Mitigant The applicable regulatory framework is continuously tracked by various teams within Seya. Appropriate action as necessary is being undertaken to ensure compliance with all regulatory requirements. O Operational Risk These are those risks which are associated with operational uncertainties like failure in critical equipment, attrition etc. Mitigant Hazop Study and Safety studies for Process risks are carried out at regular intervals through EHS initiatives and dedicated committee formed for Managing process related hazards and safety Financial Risk This covers financial risk facing the organisation in terms of internal systems, planning funding etc. Mitigant Apart from detailed review across levels and functions an independent risk team evaluates all deals before the approval. Reputational Risk Seya is expected to maintain global quality standards in manufacturing. Any deviation with regards to quality compliance of products would impact the Consumers and hence adversely affect the Company's performance. Mitigant Dedicated quality control and assurance team actively monitors the adherence to brscribed quality standards. Most stringent Quality Control and Quality Management systems are in place and reviewed periodically HUMAN RESOURCES Seya's talent base, as on March 31, 2015 stands at 136. With a view to equip the Company to address the business challenges of a dynamic economic environment, the HR function focused on retaining and attracting suitable talent, enhancing the technical / behavioral skills of employees and optimising employee costs. Learning and Development has been prioritized as a means of expanding the knowledge base of employees, which is seen as a key driver of growth. Taken together, these initiatives and processes are making a positive impact on talent attraction, retention and commitment. Managing the human asset for an Organization is a strategy that helps build the resources for a robust future. A ready second line of leadership; a highly engaged workforce; low manpower turnovers are few of the multiple gambits handled by the Human Resources Team. We hire high-calibre professionals to augment the current team to lead teams into the future, by building the base cadres, as well as, through induction of experienced professionals into senior leadership positions. Leadership development is considered as an essential requirement to Talent Management. The important aspect of building leadership is through alignment with the strategic learning and development agenda. Keeping the above in mind, there is an increasing focus on Strategic Leadership Planning to create a leadership and talent pipeline for the next 3 years for future readiness. We therefore focus on identifying the strengths of individuals and leverage them by providing relevant trainings and a successful career path. The strategy of leadership development has ensured that each of our businesses is managed by a team of competent, passionate and inspiring leaders. A productive and innovative workplace has been and will continue to remain a key requirement for successful business performance in the Company's perspective. Therefore, there is huge emphasis on Senior Leadership commitment for Human Resource Development practices that seek and nurture employee participation and involvement in managing the shop floor by strengthening the employee engagement initiatives. Innovation is at the core of our business and at the very heart of everything that we do, be it in research, operations and this is true for HR as well. It is in the DNA of SEYA where employees are empowered with the ability to bring new ideas to the table. The Company believes in the conduct of affairs of the Company in a fair and transparent manner by adopting the highest standards of professionalism, honesty, integrity and ethical behaviour. With this aim, the Company has introduced the "Whistle Blower Policy/Vigil Mechanism" for Directors and Associates to report genuine concerns or grievances of unethical behaviour, actual or suspected fraud or violation of the Company's Code of Conduct or Ethics Policy. The main objective of the policy is to build and strengthen a culture of transparency and trust within the organisation. As per the requirement of The Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013 ('Act'), the Company has constituted Internal Complaints Committees (ICC) across all the locations which are responsible for redressal of complaints related to sexual harassment at respective locations. The objective of the Policy is to create and provide a work environment that is safer, civilized, free from any sort of hostility, supportive to the diversity & dignity of all Associates, where Associates feel secure at the workplace on the basis of natural justice and confidentiality. COMPANY OUTLOOK Your Company operates in the following segments: • Fine & Speciality Chemicals • Pharmaceutical Intermediates • Organic Chemical Intermediates • Agrochemical Intermediates and • In-organic Chemical Intermediates The demand for Specialty Chemicals industry is driven by a wide range of end use industries and the domestic market for Specialty Chemicals is expected to grow strongly, buoyed by the increased adoption of Specialty Chemicals and their increased usage in different products categories which results in almost ~2X GDP growth rate. Compared to developed markets, current usage of Specialty Chemicals in India is very low. With an increased focus on improving products and usage intensity of Specialty Chemicals, the industry is poised for strong growth in future. The Indian middle-class household is expected to grow five times by 2030, leading to a huge demand for Agrochemicals, Specialty Chemicals in Automotives, Water Treatment and construction, Paints Coating and Construction chemicals, Colorants, Active Pharmaceutical Ingredients (APIs), Personal & Health Care Chemicals and Flavors & Fragrances. The huge potential of domestic demand and low per capita consumption in each of its industry segments compared to world average provide a strong potential for overall performance. Accelerated trends of urbanization, infrastructure development, increasing economic wealth, technology enhancement etc. will lead to rise in demand for high performance products/ processes The Company's long term outlook continues to be promising given the: O Overall growth in the chemical Intermediate industry O Continued focus on R&D in regards to improve quality of the Products and increase in production O Company's reach in regulated market and continued efforts to enhance its brsence in emerging markets. To meet the increasing demand either the local production will have to ramp up or it will be met by imports. In the past decade, India didn't tap its manufacturing potential to the fullest which led to a surge in the chemical imports. Net imports have grown at ~20% between FY09 and FY13 where in the same period the domestic output has grown by ~4%. However, going forward, 'Made in India' could become the next big manufacturing growth story. The Government has set an ambitious plan of increasing the share of manufacturing in GDP from 16% to 25% by 2022. The recently introduced forward integrated products in the Fine and Speciality chemicals are expected to report good volumes. Increasing utilisation of these newly launched products will further propel volume growth and profitability. Going forward, your Company foresees stronger customer relations, higher efficiencies and robust growth in Fine & Speciality Chemicals end-user segment. Cautionary Statement The report contains forward-looking statements, identified by words like 'plans', 'expects', 'will', 'anticipates', 'believes', 'intends', 'projects', 'estimates' and so on. All statements that address expectations or projections about the future, but not limited to the Company's strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements. Since these are based on certain assumptions and expectations of future events, the Company cannot guarantee that these are accurate or will be realised. The Company's actual results, performance or achievements could thus differ from those projected in any forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any such statements on the basis of subsequent developments, information or events. |