MANAGEMENT DISCUSSION ANALYSIS

Indian Fertilizer Industry Overview

The installed capacity has reached a level of 132.58 lakh MT of nitrogen and 70.60 lakh MT of phosphatic nutrient in the year 2014-15, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favourable policy environment facilitating, large investments in the public, co-operative and private sectors.

At brsent, there are 30 large size urea plants in the country manufacturing urea, 21 units produce DAP and complex fertilizers and 2 units manufacture Ammonium Sulphate as by-product. Besides, there are about 97 medium and small-scale units in operation producing Single Super Phosphate (SSP). The country is fully dependent on imports in Potassic sector and to the extent of 90% in Phosphatic sector in the form of either finished products or its raw material. Despite having very limited reserves of rock phosphate in the country, the total indigenous production of DAP, complex fertilizers and SSP have remained more or less stable.

Government has decided to decontrol movement of fertilizers. This will result in competition amongst the fertilizer companies making the fertilizers more affordable to farmers increasing consumption and production. Thus, the fertilizer industry is expected to have a better growth in the near future if the brsent trend of international prices of raw materials, intermediaries and finished products remain the same and there is no devaluation of Indian rupees

Over a period of time, many fertilizer companies having vintage technology suffered due to frequent break downs, higher cost of production, large workforce and financial reserves. Non-availability of domestic gas to many P&K fertilizer companies due to non-availability or non-creation of infrastructure for making available natural gas to these companies has affected growth of P&K fertilizer industry in the country. Irregular payment of subsidy or delay in payment of subsidy due to inadequate funds has also affected the functioning of P&K fertilizer industries in the country affecting their growth.

There are no incentives to indigenous fertilizer manufacturers in the country in the form of lower taxes or duty. Customs duty rates for both raw materials and finished products are at equal level. Importers and manufacturers are placed at equal footing in tax matters. At times the cost of finished fertilizers is lower in the international market as compared to raw materials resulting in lower production in the country. There are still many Government control such as, multiple controlling agencies at State and Central level, stringent penalties for failed samples of fertilizers, various conditions for release of subsidy also indirectly affecting growth of P&K fertilizer industry in the country.

For growth of indigenous P&K fertilizer industry in the country, the Dept. of Fertilizers had taken up with Ministry of Finance for customs duty reduction for imported raw materials. So far no decision has been taken. Allocation of funds for subsidy payment is not made as per the requirement leading to carried over liabilities. In order to meet the outstanding subsidy claims, the Department with the approval of Ministry of Finance has been putting in place special banking arrangement by availing loans from PSU banks since last two years. However, despite several requests, the Department could not get the required approval from Ministry of Finance leading to accumulation of subsidy claims. In the absence of natural resources in the country, limited funds availability and international prices scenario besides continued devaluation of Indian rupee, any step for growth of indigenous industry will not succeed.

Segmentwise and Productwise Performance

Despite the tough market conditions, the fertilizer sales of the company increased. The increase in the turnover is mainly on account of highest sales ever of NPK fertilizers and the increase in SSP sales as compared to last year. The production and sales figures of NPK and SSP for the last two years is shown in the following table:

The figures indicate, the company's production of SSP has increased by 36% as compared to last year and the production of NPK fertilizer has risen by 41%. The sales volume of fertilizers increased by 47% and 44% in case of SSP & NPK fertilizers respectively.

The increasing trend in the production and sales figures is not reflected in the earnings. The earnings of the company remained lower. The increased cost of raw materials, fall in prices of finished goods and the cut throat competition effected the PBT ratio which stood 2.72% as against 3.09% in the brvious year.

Outlook, Opportunities and Threats

With the introduction of NBS scheme from April 1, 2010 for various P&K fertilisers, prices of these fertilisers have increased due to lower subsidy. Higher prices along with difficult agro-climatic scenario, forex fluctuations and inventory build-up in the market had led to subdued performance of the P&K segment in recent years. DAP consumption declined by 37% over the period FY11-FY14. MOP declined by 47% over FY10-FY14, NP/NPK complexes' sales declined by 13% and SSP sales declined by 20% over FY12-FY14. In FY 13-FY14, the situation was exacerbated by high carryover inventory levels in the market and significant forex fluctuations leading to losses for the industry.

Nevertheless, the sales of P&K fertilisers industry has improved during FY15 with volumes growing by 13% to 23.24 MMT as system inventories were largely cleared as of end-Kharif 2014. However, import dependence, forex fluctuations, agro-climatic  risks and retail price differential of P&K fertilisers vis-a-vis urea continue to pose significant challenges for the industry, given that Indian soil is significantly deficient in these nutrients. However, there exists a significant long-term growth potential for P&K fertilisers in India as application of N nutrient has exceeded P and K nutrients due to lack of awareness and demand-supply related issues.

Single Super Phosphate (SSP) is the oldest chemical fertiliser manufactured in India and meets around 10% of total P2O5 requirement of the country. SSP is a low priced and multi nutrient fertiliser, as it contains P205 as primary nutrient, while sulphur & calcium as secondary nutrient, along with micro nutrients such as magnesium, zinc, boron, manganese, copper etc. SSP production is entirely domestically concentrated with SSP being produced by 97 manufacturing plants in the country with an installed capacity of 9.61 MMT. However, most of these players are small in size and are unable to enjoy economies of scale. The capacity utilisation has been low, at 43.4% in FY2014. Several large fertilizer manufacturers have planned greenfield foray into manufacture of SSP through significant capacity additions. Entry of large players should increase the market size for the product, which should help all the players in general. However, there is moderate risk of overcapacity over the medium term, despite strong expected growth in demand. Nevertheless, the projected surplus capacity could help in substituting DAP imports and hence SSP has significant potential in gaining higher share of phosphate demand over the medium to long term.

With limited land availability, productivity growth has remained an important driver for India in achieving growth in the foodgrain production. The productivity levels of Indian agriculture particularly in key food grains is way below global standards. Constraints on procuring additional farmland make it critical for the farmers to use high-quality inputs, fertilisers and agrochemicals to improve productivity and yield, which would be the major focus area going forward.

Further, demand for agro commodities are increasing due to increasing population, improved prosperity and increasing MSPs to make farming more lucrative opens up opportunities for Indian agri-input manufacturers. Hence, the demand outlook for agri-input producers remains favourable over the medium term to long term.

Domestically, the fertiliser industry is likely to register moderate growth in 2015-16 on account of improved crops MSPs and reduction in pipeline inventory. Shiva Global's focus for 2015-16 will be grabbing the opportunity by improving its market share in Fertiliser segment. Simultaneously, it has to face the lower import parity price of fertilizers, inadequate subsidy budget of government, imbalanced use of fertilizers, inability to enjoy the economies of scale and lower margins on products pose the threats to the company.

Risk and Concerns

? Adverse agro climatic conditions can impact the performance of the Company.

? Scanty rains because of monsoon failures resulting into high inventory and delayed realization.

? Inadequate subsidy budget by the government and delay in receipt of subsidy adversely impacts the profitability of the company.

? Entry of new players and broadening of product portfolios in the industry affects the marketing in the emerging scenario.

Internal control systems and their adequacy

The company has put in place adequate internal control measures in all areas for the purpose of protecting its resource against waste, fraud and inefficiency, ensuring accuracy and reliability in accounting and operating data and securing compliance with policies of the organization. These measures are in the form of codes, manuals and procedures, issue and reviewed by the management, covering all critical and important activities like Budget, Procurement, Material, Stores, Works, Finance, Personnel, etc.

The Company has its own corporate internal audit function to monitor and assess the adequacy and effectiveness of the Internal Controls and System across all key processes covering all the locations. Deviations are reviewed periodically and due compliance is ensured. Summary of Significant Audit Observations along with recommendations and its implementations are reviewed by the Audit Committee and concerns, if any, are reported to the Board.

Human Resources

Your Company values the human resources, their contribution and potential, as one of the foundational pillars for achieving the organizational vision. The human resources strategy enabled the Company to attract, integrate, develop and retain the best talent required for driving business growth. The Company has created a performance driven environment where innovation is encouraged, performance is recognized and employees are motivated to realize their potential. Our relentless pursuit to connect with employees on a regular basis, communicate in an open and transparent manner, provide opportunities to learn and grow within the organization are yielding desired results as is evident from the high retention rates and the motivation and engagement levels of our employees.

The Company continued to invest in enhancing its human capital through building skills and competencies for its associates. Efforts are made continuously to integrate differently-abled individuals into the workforce. We believe that our employee-induction techniques and strategies are in tune with our enterprise mission. We aim to induct professionals with a forward looking spirit and offer them a reasonable career progression plan.

We believe in investing in learning and skill development and the training programmes undertaken by us are meant to update skill sets at all levels. Further, to facilitate leadership development and groom individuals for larger leadership roles and overall competency enhancement and capacity building, during the year under review, your Company has organized various training programmes.

A number of non-work related employee engagement initiatives such as fun events, sports,cultural activities and volunteering for social causes were organized. The culture of volunteering helps employee bonding within the organization and reduces stress at work. Employees are also encouraged to involve their families in these activities.

Employee health and safety are of crucial importance. Health awareness sessions, periodic medical check-ups, are some of the important initiatives undertaken by the Company to encourage health consciousness. A number of events were organised throughout the year to enhance the awareness level of our employees towards road safety.

The Company regularly monitors the changes in legislation pertaining to employment, labour and immigration laws across the globe to ensure total compliance, assisted by regular audits. The key areas where Shiva needs to introduce new policies or modify the existing policies to remain compliant are identified and acted upon.

Corporate Social Responsibility

The Company's Corporate Social Responsibility & Sustainability activities reflect its philosophy of helping to build a better, more sustainable society by taking into account the societal needs of the community. We have been pursuing this on a sustained basis. At Shiva Global Agro we marry the latest agricultural practices with the efforts of farmers to help them higher yields. The awareness and education programme implemented in earlier years helped in educating farmers about the benefits of adoption of higher yield techniques in farming. The response has been overwhelming.

Apart from the infrastructural development of surrounding areas viz. construction/repairing of roads, organised medical camp, supplied drinking water, various sports and cultural events were organized at all the plants. Technical education and training are imparted at Nanded and Raibag. Emphasis was laid on creation of awareness amongst the villagers about the need to protect the environment. CSR activities carried out by the company have strengthened its relationship with local people.

We have organized training camps across various districts in Maharashtra such as Nanded, Hingoli, Parbhani, Beed, Latur, Yavatmal, Bhandara, Gondia, and Wani on crop wise requirements of fertilizer to obtain the best yield. Additionally, we also extend free soil -testing facilities that enable farmers to firm up their cropping patterns and specific agri-nourishment inputs. Educating famers about the fertilizer best management practices was taken up throughout the year. We provide financial support to non-profit institutions and also encourage contributions by our employees to such organizations. These actions emanate from our realization that giving back to society is the duty of an organization. Through programmes aimed at strengthening and modernizing farming practices in many parts of Maharashtra, we aim to improve the overall quality of life . It also is an affirmation of our belief in the sector and our goal to improve the living standards not just our employees but of a larger part of the society.