Management Discussion and Analysis Report This discussion is on Agrochemical Business as it constitutes the main part of the revenues of the Company. Global Economic Scenario: The global economy is still under stress for gaining momentum as many high-income countries continue to grapple with the past impacts of the global financial crisis. The US economy witnessed gradual improvement while financial instability in the European Union (EU) continued to keep the Global economy volatile. Emerging economies continue to remain as less vibrant than in the past. The global economy in FY 2014-15 saw a steep decline in oil prices, which had significant impact on energy businesses. This coupled with slowing growth in some of the leading global economies impacted currencies. But, there was positive news in terms of faster-than-anticipated economic growth recovery in the United States, which provided momentum for the global economic recovery. According to International Monetary Fund, the global economy is expected to grow at 3.5% in 2015 and 3.8% in 2016. However, Global recovery will continue to be moderate and uneven. While developed economies are expected to strengthen, aided by lower oil prices and low interest rates, most emerging economies are expected to slow down moderately, due to country specific reasons, with India being an exception. The Indian economy is expected to grow by 7.5% in 2015-16. Growth in the demand for food grains owing to an increasing global population coupled with reducing per capita farm land due to surging urbanization and industrialization, were dominant drivers of the global agrochemicals market. Moreover, growth of horticulture and floriculture, increasing farmer literacy coupled with increasing awareness pertaining to the use of pesticides in major crop-producing countries, strengthened the global agrochemicals market. The global crop protection chemicals market is projected to reach US$ 69,614.3 million by 2019 with an estimated CAGR of 5.5% from 2014 to 2019. Indian Economy: The year 2014-15 was marked by modest growth and decline in inflation, and the external position was comfortable, helped by positive policies and lower global oil prices. After years of diminutive growth the reform momentum has picked up in India. The outlook for India is for economic strengthening through higher infrastructure spending, increased fiscal devolution to states, and continued reform to financial and monetary policy. The Government underscored its intention to move steadily to tackle politically difficult structural issues that have stalled investment and limited economic performance in recent years. India is set to become the World's fastest-growing major economy by 2016 ahead of China, as per the forecast of International Monetary Fund (IMF). Indian GDP grew by 7.3% in the financial year 2014-15 and is expected to grow at 6.3% in 2015, and 6.5% in 2016 by when it is likely to cross China's projected growth rate, the IMF said in the latest update of its World Economic Outlook. There are high expectations from the Government as is evidenced by the robust performance of Stock market and apbrciation of the rupee. However, IMF has suggested an important structural reform agenda for India to reap productivity gains. This includes removing infrastructure bottlenecks as well as reforms to education, labour, and product markets for raising labour force participation and productivity. Even as the Government is pushing forward with the subsidy reforms, the IMF said lower oil prices offer an opportunity to decrease energy subsidies and replace them with better-targeted programmes. Agricultural sector recorded a marginal growth of 0.2% in the financial year 2014-15 which has implications in terms of inflation in coming days and also employment & income in rural areas. On the contrary, the industrial sector grew by 6.1% during the financial year 2014-15 compared to 4.5% during the year 2013-14. The agriculture sector contributed just 15% of India's GDP (Gross Domestic Product), but over 50% of the population was still dependent on it. India emerged as a significant agricultural exporter in commodities like cotton, rice, meat, oil meals, pepper and sugar. The agricultural and allied sectors registered a growth of 1.1% during the current financial year. Despite the monsoon rainfall falling 12% short of expectations during 2014-15, the loss in production was contained at ~3.0% over 2013-14. The Union Budget for 2015-16 also recognized the need for increasing agricultural productivity and bettering farmer lives. Three important budgetary provisions (i) providing financial support to improve irrigation facilities and fertility for enhancing agricultural productivity; (ii) raising agricultural credit limits; and creating a unified national the budget exhibited a keen intent to support organic farming, micro-irrigation and watershed management are expected to positively impact agriculture. Industry Overview: Majority of the population of Inda is dependent on agriculture, which is largely dependent on the monsoon. The crop production volume growth in 2014-15 was muted due to variation and volatility in climatic factors. The southwest monsoon was erratic and had a delayed onset leading to slowing the pace of sowing of key crops. The Rabi season also witnessed unseasonal rains and hailstorms which impacted standing crop in large parts of northern and western India. Due to these unfavorable climatic conditions, overall farm productivity was impacted leading to poor yields and output. After the crop damage in India due to unseasonal rains in March and April in the year 2014-15, the forecasts of a weak monsoon is having a telling impact on the agrochemicals industry forcing Companies to start scaling down their expansion plans and shortening planned production period to two months instead of the regular three to four months. However, despite the focus on industrialization, agriculture remains a dominant sector of the Indian economy both in terms of contribution to Gross Domestic Product (GDP) as well as a source of employment to millions across the country. Being the World's fourth largest pesticide producing Country, Indian Agrochemicals market is estimated at over X 13,000 Crores, which is about 4% of the global agrochemicals market. It has reported about annual growth of 8% over last few years, and is likely to reach US$ 3.00 billion in 2018. Besides expected domestic demand growth of about 8%, the exports are expected to increase at 15% to 16 percent, facilitating the overall growth of the industry. Indian crop protection industry is largely dominated by insecticides which form about 65% of share of the industry. Other segments like herbicides, fungicides and other (rodenticides/ nematocides) form 18%, 16% and 6%, respectively. The Indian market is dominated with products which are off-patent, therefore distribution reach and strong brands are key to grow in this market. This market is also witnessing introduction of newer molecules and products for specific needs, leading to higher growth rates in recent times. The pesticide consumption of Indian Domestic market during the fiscal was impacted by the low demand in rabi season. The sector is also driven by a growing opportunity for exports through contract manufacturing and research among Indian players due to a large availability of technically skilled labour. Outlook: The global crop protection chemicals market is segmented into all major regions and further their key countries. In terms of regions, the market is segmented into North America, Europe, Asia-Pacific, Latin America, and rest of the World. Asia Pacific is likely to be an important market in the near future due to the increasing demand for food crops from its key countries such as India and China. The major drivers of agrochemicals industry are increasing demand for food with rising population and consumer awareness associated with the benefits of fertilizers and pesticides in crop production. Development in technology to boost farm production with increasing Government investments in agriculture to increase crop yields provides huge opportunities to this market. India's population, the second largest in the World is estimated to increase over time. Given the Government's initiative on food security, per-capita consumption of food grains and therefore the demand for them will only increase. Prevention of crop losses is the immediate requirement to bridge the demand-supply gap in food grains, which necessitates deeper penetration of agrochemicals. Additionally, factors such as decline in the availability and the increasing cost of farm labour, the limited availability of arable land, acceptance of modern farming changes in farming practices, and technology are growth drivers for the agrochemical sector. To capitalize on the growth trend in the global crop protection market, several leading Companies are investing in the development and manufacturing of crop protection chemicals. Global players are entering into strategic alliances for greater market reach. The growing demand for crop protection chemicals is compelling global players to widen their crop protection offerings and the market is witnessing acquisition of smaller Companies globally to diversify product portfolio. As the Indian farmers look for better agronomic practices and solutions, your Company has opportunity to provide these services into the future. Understanding farmer needs and developing the right solutions is the mainstay of your Company and along with building the strong relationship with farmers and partners will provide the platform for growth into the future. India is growing to become a brferred destination for manufacturing as global majors look for outsourcing a lot of their product requirements out of the country. Your Company is well placed in servicing this opportunity with its strong manufacturing and technical capability to become a reliable strategic outsourcing partner for these Companies. Opportunities: Given following positives, there exists a huge potential in the domestic and export markets for indigenous manufacturers: 1. The growth of Indian agriculture sector supplemented by several agriculture oriented policy and budget initiatives by Government of India, improving productivity, availability of credit to the agriculture sector; 2. A large population, and strong export demand. 3. Per capita consumption of chemicals in India being lower than western countries, a trend that appears to be correcting. 4. Rise in GDP and purchasing power generates growing domestic potential. 5. World-class engineering, R&D capabilities and skilled science professionals. 6. India exporting about 50% of its production; exports likely to remain a key revenue component. 7. Chinese agrochemical industry being continued to go through the phase of stricter and tightened pollution control norms, restricts its manufacturing facilities, thereby affecting the imports from China. It gives an opportunity for India to produce Active Ingredients (AIs) and to be competitive in global markets. 8. India becomes fast emerging given the emergence of Asia as a global manufacturing hub. 9. A focus on new segments like specialty and knowledge chemicals 10. Low-cost manufacturing capability. Availability of cheap labour and low processing costs have provided an edge to the domestic pesticides industry to stay competitive in the global market. Keeping the above in view, your Company is gearing up to seize these opportunities and in this regard, it has emphasized focus in re-strategizing to improve productivity and capacity utilization in its plants and to better leveraging its strength of large pan India dealer network / channel partners and brand value. Threats, Risk and Concerns: 1. With large number of end users sbrad across the geography, managing inventory & distribution costs is a challenge for the industry players. Effectiveness of current Supply Chain Management (SCM) practices in agrochemicals is another area of concern for the industry. 2. Rising sale of spurious pesticides and spiked bio-pesticides pose major threats to industry growth. 3. Issues due to seasonal nature of demand and unbrdictability of pest attacks, requires additional capacity building up and robust supply chain management. 4. Concern on pesticides residues in the agricultural produce due to non judicious usage of pesticides. 5. Dependency on monsoons and vagaries of climate are major risk factors for agriculture. 6. Non availability of key raw materials, regulatory changes in pesticides registration system to give protection to molecules which are already out of patent in India & World over. Non availability of credit insurance & wild currency fluctuation also remains the major risks. Internal Control System: The Company has proper and adequate systems of internal controls which ensure that all the assets are safeguarded and are structured to provide adequate support and controls for the business of the Company. The Company's internal audit systems are geared towards ensuring adequate Internal controls to meet the size and needs of business, for safeguarding the assets of the Company, evaluating reliability of financial and operational information, identifying weaknesses and areas of improvement and to meet with all compliances. Financial Performance: For the year 2014-15, the total Income at Rs. 771.47 Crores was 18% higher than brvious year. The EBIT and Cash Profit stood at Rs. 45.41 Crores and Rs. 35.14 Crores respectively compared to Rs. 7.92 Crores and Rs. 1.81 Crores last year. The interest cost at Rs. 34.92 Crores was 25% higher compared to brvious year due to increase in working capital and additional loans. The performance of the Company during the year under review reflects the spillover effect of closure of fire affected Block-5 of the Srikakulam plant. The said Block has been re-commissioned successfully in the month of March, 2014. Given its full fledged operations during the current financial year and the domestic market being upbeat in achieving the newer heights, the Company is expected to do well during financial year 2015-16. Industrial Relations and Human Resources Development: The number of employees in the Company as on the 31st March, 2015 was 1143. The Company enjoys cordial and harmonious industrial relations. Training programs and various initiatives are being taken to create an environment to enhance individual and team performance. Cautionary Statement: The Statement in the Report of the Board of Directors and Management Discussion & Analysis Report describing the Company's projections, estimates, exceptions or brdiction may be forward looking statement within meaning of applicable of Securities Laws and Regulations. Actual results could differ materially from those exbrssed implied since the Company's operations are influenced by many external and internal factors beyond the control of Company. For and on behalf of the Board K.S.Raju Chairman(DIN:00008177) V.Vijay Shankar Managing Director (DIN:00015366 Place : Hyderabad Dated : 07th August, 2015 |