MANAGEMENT DISCUSSION AND ANALYSIS Indian economy The Indian GDP grew by 7.4% during FY15 and is poised to grow by 8% in FY16, according to OECD forecasts. Compared to China, which is pegged to grow at 7% in both these years, India stands at a considerably better position. With increasing labour costs in China, India is expected to emerge as the fastest-growing major economy in 2015-16. India's per capita net national income during 2014-15 was estimated to be Rs.88,538 ($1,434) showing a rise of 10.1% as compared with Rs.80,388 ($1,302) during 2013-14 with the growth rate of 12.3%. The Indian FMCG industry The Indian FMCG sector is expected to reach US$ 135 billion by 2020 from US$ 44.9 billion in 2013. It is currently the fourth largest sector in the Indian economy and has grown at an annual rate of about 11% over the last decade. Food products, the leading market segment (43% of the overall revenues), along with personal care (at 22%), account for almost two-thirds of the sector's revenue. There is a lot of scope for growth in the FMCG sector with consumption expected to grow proportionately with brand penetration in the rural markets. Also, with per capita incomes projected to expand at a CAGR of 7.4% over the period 201319, the FMCG sector is anticipated to witness a pulsating growth. The growing purchasing power and the rising influence of social media have enhanced the Indian consumer's urge to splurge. A study conducted by a leading industry body and Yes Bank has concluded that consumer spending in India is expected to quadruple and reach US$ 4.2 trillion by 2017. India could become the world's largest middle class consumer market with a total consumer spend nearing US$ 13 trillion by 2030, as per a Deloitte report titled India Matters: Winning in Growth Markets. Consumer confidence: India's consumer confidence continues to remain ebullient and has shown visible improvement during the year gone by. This has largely transpired on the back of an increasingly improving economic environment and steady lowering of inflation. Nielsen's findings reveal that the consumer confidence of urban India increased by three points during Q4 in the brceding fiscal. With a score of 130 in Q4, urban India's consumer confidence is up by 9 points from the corresponding period of the brvious year (Q4 of 2013) when it stood at 121. At 130, India reached its highest level since 2011. The score was also the highest in the region and of the 60 countries measured in Nielsen's Global Consumer Confidence and Spending Intentions Survey. Confidence in India has been on the rise for six consecutive quarters. Nielsen Consumer Confidence Index - India Market size: The FMCG industry offers something for everyone, cutting across demographic and socio-economic boundaries and is likely to see a great boom in the near future with population levels soaring to new heights. The current population standing at 1.28 billion is expected to reach around 1.5 billion by 2030. Urbanisation: This revival in consumer sentiment has primarily been driven by urban India. Currently, 33% of Indian population is classified as 'urban'. This is a result of urban migration coupled with improvements in standards of living. With increasing awareness and disposable incomes, the same figure is pegged to reach 40%, a sharp increment of about 7% by 2030. Purchasing power: India's FMCG market is consumer-driven and its spending capacity is more than anticipated to double by 2025. The Indian consumer segment is broadly segregated into urban and rural markets, and is attracting FMCG majors from across the world. Global corporations view India as a hotbed of growth. India has a young demographic profile, with a median age of 29 and a proliferating middle-class with rising disposable incomes. If the country can sustain its current pace of growth, then average household incomes will triple over the next two decades and allow the country to emerge as the fifth largest consumer economy in the world by 2025, as per a study by the McKinsey Global Institute. Drivers of business Raw material management Raw materials account for a significant chunk of Emami's operational expenses. Key raw materials include menthol, LLP, MC Wax, zinc oxide and other packaging materials. A judicious procurement has been systematised, ensuring timely availability of raw materials and optimisation of costs. Highlights 2014-15 • The Company focused and established alternate raw material sources, diversifying the risk of hampering production due to unavailability of raw materials. • Imported a Bi-colour mould for the new Zandu container from Germany. • Entered into several partnerships with vendors in different parts of India to secure an uninterrupted supply of raw materials . • Established an effective inter-department communication mechanism enabling the purchases department to act according to production and sales forecasts for the forthcoming quarters to ensure optimum raw material procurement and better management of working capital. • The purchase department improvised the booking timings in line with consumption by the production department to reduce stock build-up. • Emami has a strict procedure for enrolling a vendor for purchases. The quality of the materials is tested by the R&D department before a vendor can be selected for purchase. Once selected, the vendor has to comply with the stated quality parameters. This ensures consistency in production quality and near-zero deviations between batches of the same product. • Every lot of raw materials purchased is tested by the R&D department and the Quality Control department before they can be rolled in for processing. • The Company organises a biannual vendor meet to maintain transparency and effective communication with all the vendors. An annual visit to the Company is also held for vendors where both the parties can discuss issues and strategies that can make the processes efficient. • The Company enjoyed the benefits of reduction in the price of packing materials during the year due to a fall in the crude prices. Way ahead Going ahead, the Company will look at ways and means to source raw materials more efficiently and economically, rationalising costs. Logistics Logistics plays an important role in driving growth in the Company by ensuring all-time availability of quality products in optimum quantities. Despite a fall in fuel prices, the year remained challenging as toll taxes increased across all routes, spiking overall logistics costs by 19.7%. Despite this, the Company undertook decisive measures to reduce logistic costs as a proportion of operating costs - from 3.5% in 2013-14 to 3.4% in 2014-15. Highlights 2014-15 • Reduced losses due to damages and shortages by using containerised vehicles. • Despite an increase in overall logistic costs, the Company maintained the proportion of logistic costs as a part of overall revenues at 2.6% through negotiation with transporters and adoption of a reverse auction process. • Reduced average inventory holding days to 21 days from 28 days in 2014-15 on the back of a cutting-edge IT platform allowing better demand visibility. • Ensured replenishment of stock in mother warehouses a day prior to order placement. • Implemented the 'first in first out' concept for FMCG products resulting in 95% stock freshness. • Reduced inter-depot transportation to minimise logistic costs and also worked on reducing dependency on fast modes of transportation as they attract higher freight costs. • Ensured GPS tracking of 70% of the vehicles used for goods transportation in order to ensure real-time tracking. Way forward Going ahead, the logistics team will work dedicatedly to remove distribution channel bottlenecks and reduce costs. Operations The Company has 7 domestic manufacturing facilities and 1 international manufacturing unit to address the needs of its consumers. Highlights 2014-15 • Achieved 98% of the rolling production plan • Increased operational efficiency through brventive maintenance, which, in turn, reduced plant downtime • Undertook capacity expansion initiatives across various units for various products - augmented Navratna Oil, BoroPlus Lotion and Vasocare Petroleum Jelly capacities at its Abhoypur plant and enhanced Pancharishtha capacity by 17% at its Vapi unit • Started manufacturing Navratna Oil at its Dongari manufacturing plant to cater to export requirements • Revamped Zandu manufacturing units to ensure GMP-compliance • Implemented TPM activities at the plant-level to improve operational efficiency • Improved productivity, reduced energy consumption and enhanced batch cycle time to cumulatively save nearly Rs.4.5 crore • Initiated setting up a new manufacturing unit under the North-East mega project scheme which is expected to commence operations in FY16 • Pantnagar Unit received the Gold Level of Recognition in the "2014 Healthy Workplace Award" by the Arogya World India Trust in partnership with Public Health Foundation of India for delivering quality products at zero discharge and integrating the same with structured employee growth • BT Road unit received the "Greentech Safety Award - 2014" in the Gold Category for outstanding achievement in fire and safety management Way forward Going ahead, the Company intends to fully operationalise its new plant in Assam and continue to enhance productivity at existing plants. Information technology A seamless flow of information across the business value chain is critical for an FMCG company. Emami has been one of the pioneers in investing in robust business IT capability, implementing SAP ECC, a leading enterprise resource planning application. All the Company's business processes and operations across the organisation are enabled by SAP. Highlights 2014-15 • Implemented new SAP modules including PLM, GRC, PO, BPM, among others • Chose HP as partner for revamping the IT Infrastructure • Introduced a cloud-based pay per use model • Adopted cutting-edge in-memory applications like SAP HANA • Achieved significant progress in reporting and analytical capability development • Began implementation of enterprise portal capability to foster in-house collaboration within and across functions and which in due course will be extended to business partners and customers • Sped up distributor claims settlement process and begun planning for enabling replenishment-based primary sales and ensured 97% coverage of CCD secondary sales • Resolved to extend distributor management solutions to healthcare and international marketing divisions • Planned implementation of sales force automation for all divisions • Expedited period closing and MIS brparation • Drove operational excellence by enabling better material procurement planning • Begun extending SAP to manufacturing partners • Streamlined payroll processes across all units and offices with SAP HR solution • Institutionalised efficient intra-enterprise business communication using a Microsoft platform Way ahead The Company intends to implement a strategic IT capability roadmap in the coming years so as to emulate competitive capabilities of best-in-class CPG companies. Sales and distribution Emami's success comes largely from an efficient sales and distribution team working indefatigably towards minimising logistical hindrances. It ensures that the right products are available at the right places in the right quantities, day in and day out. During the financial year, the Company was able to sell around 112 products every second across the globe. Highlights 2014-15 • Executed regular transactions with distributors to keep better track of the market conditions, reduced stock holding period, ensured better liquidity, maintained stock freshness and lowered distributor attrition • Revamped both urban and rural channels for better efficiency • Enhanced direct retail penetration to reach 6.4 lac retailers, an increase of 19,000 outlets over last year • Consolidated distributor network to reach 2,800 distributors • Consolidated our total indirect reach to ~4 mn outlets • Launched 4 new products during the year which were enthusiastically embraced by the market which, in turn, drove offtake of other products • Widened footprint to reach 6,040 villages with a population of under 10,000 people and 12,100 villages with a population of under 50,000 (as a part of Project Swadesh) Way ahead The team will continue the expansion of the Company's brsence across the country. Research and innovation Emami's Research and Innovation Centre comprises competent individuals working collectively to ensure qualitative excellence and design innovation. An invigorating synergy of Ayurveda and modern science has been the backbone of Emami's innovative product pipeline and this is expected to ensure sustainable growth over the years to come. Mission • To drive quality and innovation across products and services • To make Emami synonymous with natural beauty and health in the minds of the consumers by earning their respect and trust • To effectively manage talent and create a world-class innovation centre • To foster a strong sense of team ethos and feeling of unity within the Company Highlights 2014-15 • Introduced four new products in the CCD category • The Mumbai and Kolkata R&D centres are completely operational • Various interactions held with consumers by the R&I team members • Change in approach to focus more on technology • Created new development protocol which leads to assured outcome • Created infrastructure for clinical trials for deriving accurate product efficacy • Partnering with best organisations with the best people and technologies • Inducted people with expertise in particular fields to which they would be assigned. Road ahead The R&D department of the Company will be working towards bringing in new and innovative products based on ayurveda that will cater to the latent needs of the consumers. Human resource There has been a strategic shift in what the human resource management used to be perceived at Emami. A number of individuals were strategically hired with the clear intent of scaling up the business. These recruits would not only help the Company to meet its goals but will also escalate growth. Highlights 2014-15 • Conducted various training programmes spanning nearly 2,000 man-hours across the organisation • Increased employee base from 2,000 in 2010-11 to 2,660 in 2014-15 • Inducted quality personnel and undertook various talent management, performance management as well as training and development initiatives • Roped in a reputed consultant to enhance employee engagement as well as improving the quality of human resources • Inducted senior industry veterans in the Company with vast experience in the FMCG Sector Way forward The Company will strive to enhance the quality of its HR management practices. International marketing division Emami extended beyond the Indian geography successfully and positioned itself strongly in the international market. The Company has created a formidable brsence in countries like Russia, Nepal, Bangladesh and in the Middle East Countries among others. The Company also enjoys market leadership for a number of products in various countries it is brsent in. Initially, the division exported Indian products to Indian expats, but gradually the Company extended to the development of products to suit the needs of the region, extending into new categories and a widening product portfolio (skin care, personal care and healthcare, among others). Highlights 2014-15 • Increased prices to protect its bottomline following the debrciation of the rouble • Started airing the first ever advertisement in the Russian media and received positive response from them • Strengthened its brsence in Myanmar with Fair and Handsome and expects to register stronger growth in the coming years • Acquired Fravin Pty Ltd, an Australian organic personal care product major with proven expertise in the realm of R&D, to gain a strong foothold in the highly regulated Australian market Way forward Emami is bullish about its position in the international market and is mulling market-specific line extensions and new launches to consolidate its position in the international market. Ad campaigns to increase product visibility and distribution channel overhaul for better product availability are also on the radar. Quality management Being involved in the business of personal care and healthcare, it is of paramount importance to align products with stringent qualitative and performance-related parameters. Emami has made prudent investments to benchmark its products with those that are the best in the industry. Well-defined SOPs and brcise measurement procedures have helped identify bottlenecks and eliminate them, whereas benchmarking via a unified system has helped in establishing documental reference. All products coming out of the Emami stable undergo quality checks at different levels (br-process, in-process and post-process). Along with this, product stability studies are conducted on control samples on a routine basis to make sure that not even the smallest complaint goes unaddressed. Risk management Emami is exposed to various business risks, both internal as well as external. Key risks faced by the Company include those emanating as a result of macroeconomic slowdown - reduced disposable incomes, persistently high inflationary trends, unfavourable exchange rate fluctuations, increased competition from the peers, and reduced acceptance of products, among others. To guarantee enduring realisations, it is imperative to pinpoint, investigate and then mitigate risks through a seamless system of checks and balances. Emami has in place a combrhensive risk management platform integrated across all operations and entails the recording, monitoring, and controlling of enterprise risks and addressing them combrhensively and empirically. Some of the key risks faced by the Company are results of the low economic growth and continued inflationary trends which increase costs and also lead to decline in demand for FMCG products. Counterfeit products and brands can hamper the Company's growth as well. Increased competition can slowdown the offtake and may dent profitability in the long run. Besides, lower market acceptance of its new products could also impact the growth plans of the Company. Emami's seasoned risk management team appraises these risks and periodically modifies its combrhensive risk assessment and minimisation framework to ensure all risks are managed and mitigated in a timely manner. The risks are reviewed at every Board Meeting by the Board members as well as new risks are identified based on the new business initiatives and the same are assessed, controls are designed, implemented and enacted duly. |