MANAGEMENT DISCUSSION AND ANALYSIS

Overview

The world economy continued to face headwinds with growth in 2014 at 3.3% almost same as brvious year. Global growth prospects remain subdued with forecasts revised downwards to 3.S% in 20IS and 3.7% in 2016.While US economy has shown sufficient growth rebound, growth amongst other developed countries, most notably EU and Japan remains weak. The scenario is not much different in the emerging markets, with China witnessing significantly lower growth - around 7% vis-^-vis more than 10% a few years back, with leading indicators pointing to further slowdown. The lower oil prices and increased geopolitical tensions have had a significant adverse impact on Russian economy, whose growth is forecast to be in the negative in the next 2 years. As such, IMF has estimated that growth in emerging world will be around 4.3% in 20IS, a sharp scale-down from 7.5% in 2010.

In India, it was hoped that new Government formation with a clear majority, will usher in a series of changes to improve upon the ease of doing business in the country and steer fresh round of investments. The Government has shown its willingness towards reforms but results are taking longer to show up. Overall demand still remains weak as consumer spending, particularly on discretionary items is being postponed deterring private investments.

While the Rupee has remained range-bound, largely due to RBI's intervention, it is hurting exports that are already curtailed by tepid overseas demand. With US Federal Reserve most likely to raise interest rates later in the year, the robust foreign inflows could reverse or taper off.

Impact of Global Development on Indian Paper and Board Industry

The slowdown in global economy had its effect on the Indian economy as well. As per IMF forecasts, India's GDP growth which stood at 6.9% in 2013 improved marginally to 7.2% and is further expected reach to 7.S% in 201S. Consequently, the Indian paper and board industry was impacted by cost cutting by corporate sector and other end use sectors. The global Paper and Board industry is experiencing a shift in growth pattern with the markets moving from developed regions to Asia, mainly China and India. Similarly Brazil and Indonesia are emerging as power centres for pulp manufacturing due to abundant availability of raw material. The large scale pulp capacities being setup in these countries would ensure stability in global pulp prices in time to come. Indian paper industry has been passing through a challenging phase due to the tough market conditions and rising input costs especially raw materials and energy. Industry's pricing power has been limited due to domestic surplus and influx of zero duty imports under ASEAN FTA, while rising domestic costs have put brssure on profit margins. Indonesian Rupiah has debrciated more than the Indian Rupee in the current year further affecting the prospects of Indian paper industry. The paper industry has invested in technology and scale to face these challenges and remain competitive. The sharp drop in crude oil prices has resulted in decrease in landed cost of some inputs to partially offset input cost increases. The Indian Paper and Board market has continued to grow despite all these challenges and is still considered to be one of the fastest growing markets in the world. International paper companies experiencing decline in their own markets are finding the Indian market attractive due its future potential and are trying to get a toehold. This is likely to trigger a round of consolidation in the domestic paper industry which so far has been largely fragmented.

During the year, Indian Rupee was relatively stable against the USD. However notable developments in the past year were the starkly different monetary policy stance of the FED on one hand and ECB and Bank of Japan on the other. This resulted in apbrciation of the USD against these major currencies. Disinflationary brssures in developed economies gave continued slump across commodities especially crude which in turn helped Indian economy as a whole. Rupee debrciated by 4% against the Dollar over the year, whereas against Euro, Rupee apbrciated by 18%. Due to the sharp volatility in Euro/Rupee, the Company adopted a hedging policy which takes into account the sharp movement of Euro in short term.

Supply and Demand Scenario in Indian Paper & Board Industry

The Indian Paper and Board market is the i 5th largest market in the world. With a growth rate of 7% it is also one of the fastest growing markets with further potential for growth due to large population base and lower per capita consumption compared to world average. Greater thrust on literacy and education, changing lifestyle, growth in organised retail and higher disposable income in rural areas will fuel paper and board demand in the country. The industry which is fragmented was handicapped by technology and scale as compared to global producers. Moreover the shortage in domestic supplies was creating an opportunity for international players to export and target this lucrative market This had triggered a round of investments in the last 5-7 years to achieve contemporary technology and remain competitive with respect to cost and quality vis-a-vis global producers

This led to capacity addition at a rate faster than the demand creating a momentary surplus in uncoated paper. This also led to closure of some mills that could not compete under the changed market scenario thus creating some space for capacity absorption. At the current growth rate we expect the capacity to get absorbed during the latter part of the current year.

The Coated Paper market has not witnessed any capacity additions for many years in spite of the market opportunity due to cheap imports from China. The situation is less likely to improve without Government's intervention to regulate the imports. The Packaging Board capacity remained balanced in the current year in spite of the recent capacity addition in the industry.

However the market will witness two new capacities that will come on stream during FY 2015-16 and create some supply brssure.

MARKET FOR COMPANY'S PRODUCTS

Since inception, the Company has been striving to meet customers' expectations and aspirations. Customers' requirements are diverse and demand is for products at different price points. Our New Project at unit JKPM has not only enabled us to produce paper quality of global standards but also helped us reach wider markets and satisfy a larger range of customers through new brands and product categories.

Copier and Office Paper

Increasing needs for documentation, both from Corporate and personal use, shift towards hi-end printing and photocopying have led to rising demand for high quality Copier and Office paper. This has helped the market to absorb the enhanced volume coming from the new machine.

Establishing quality and reaching out to B & C class towns was an uphill task which the Company took up as a challenge. With our aggressive and strategic marketing efforts a growth of 31% could be achieved in the domestic market during the year. The quality of paper produced by the new machine being at par with global standards it could be quickly established in overseas markets as well. As a result export volumes have more than doubled during the year.

'JK Max' that was introduced last year as a value for money brand targeting the upcountry markets has gained significant grounds and is now established as a pan India brand. 'JK Sparkle' also showed a significant increase in volume in its respective segment. Company's leading brands JK Copier and JK Easy Copier also maintained their market share. The pigmented paper viz; 'JK Cedar', now produced at the new machine was aimed to meet the hi-end digital printing requirements performed extremely well.

Coated Paper

The coated paper segment has high demand growth potential. Given the limited domestic coated paper capacity vis-a-vis the demand, imports will continue to play an important role in meeting domestic requirements. The company has been able to maintain its market position because of its consistent quality of 'JK Cote' brand, customer relationship, and service.

Maplitho Paper

When Paper industry was content with producing ordinary Cream Wove paper, JK pioneered in 1962 the Surface sized Maplitho Paper popularly known as 'JK Maplitho' - a brmium quality printing paper ideally suited for the Litho Printing process. 'JK Maplitho' thus became an Industry Benchmark.

During the year, the company decided to re-enter the Maplitho segment as a strategic shift. This strategy originated as a result of increased availability of capacity from the new machine at unit JKPM and release of copier capacity from the old machine at unit CPM arising from shift in product mix.

The Company managed to leverage its goodwill to scale up quickly in this segment. To differentiate from the competition, the Company entered into niche segments of this category by introducing brands like JK Easy Draw for the drawing papers, Stiffener Board for Soaps, Blade wrappers and also 'JK Cedar' as pigmented Maplitho in large sheet format. JK Ultra Print, JK Finesse and JK Elektra which are our regular brands of Maplitho are also now well accepted at the market place.

Packaging Board

The demand for Packaging Board is a derived demand as it depends on the growth of end-user segments like FMCG, Pharma, etc. Due to weak economic conditions, consumers limited or reduced their discretionary spending. This along with global slowdown led to decline in consumer segments such as FMCG, and as a result market conditions were challenging.

The Company was able to overcome this situation by adopting various strategies. Product enhancement, better service and flexibility in production helped us to maintain capacity utilisation. The other factors such as direct contact, faster communication with the customers and our channel partners helped us in getting regular order flow.

Outsourcing

Outsourcing is being seen as a strategy to broaden product range and complement the Company's manufacturing operations. The Company has identified market opportunities which are attractive but could not be addressed due to manufacturing constraints. While doing so, care is taken to ensure conformance to JK's quality standards. The Company sees this as an important growth lever in its long term strategy. It is evaluating various other product opportunities to be covered through this route.

Branding and Distribution

JK Paper's strength lies in its aggressive branding efforts, building confidence in our channel partners and customers. Special efforts were made to improve logistics and supply chain management. To reach out to larger base of customers in the rural market, local depots were opened in some states that also helped in better order servicing. Our wholesalers were taken to the new machine at unit JKPM so as to familiarise them with new technology. To strengthen our distribution network, new distributors were appointed in unrebrsented areas. Market promotional schemes like 'Supersitare', Scratch Card" scheme for JK Easy Copier also helped in generating demand for our brands. Our efforts for reaching out to the direct customers, jobbers and dealers of paper continued through Road shows.

OPPORTUNITIES AND STRENGTHS OF THE COMPANY

Being a leading player in the value added and high growth segments of the market like Copier Paper, Coated Paper, Virgin Fibre Boards and High end Maplitho the Company will be a beneficiary of any upside in these segments. The growth of online retail is also creating new opportunities for paper and packaging consumption and the Company is gearing up to tap them. The wide distribution network of the company which is a source of strength for the Company as it plans to grow aggressively. The distribution network provides valuable feedback on market trends and customer expectations apart from providing wider visibility for its products. This distribution network will provide quicker access to the Company for its new products and facilitate a faster ramp up.

Over past five decades the Company has a track record of delivering consistent quality products and service and exceed customer expectations. This has resulted in gaining trust and loyality of all types of customers and established a JK brand equity that is enjoyed by none in the industry. The manufacturing plants of the Company are strategically located to benefit from nearness to raw material sources as well as ports for imported inputs. The new plant has further strengthened the Company's ability to produce high quality paper at competitive cost. The manufacturing plants being nearer to consumption centres also provide easy access to the domestic markets. In a industry craving for talent, the Company has a large pool of experienced and expert manpower that has consistently helped the Company to achieve higher standards of performance.

MAJOR CONCERNS

India continues to be a wood deficit country. As against paper industry requirement of 115 Lac tonnes of hardwood, the indigenous supply was much lower resulting in shortage. Diversion of wood to other competing industries like MDF & construction is causing a shortage for the paper industry. During the year, raw material prices ruled at the highest ever levels recorded. The industry had to import some quantities of wood/wood chips at higher price to meet the deficit.

The raw material supply is likely to improve as increasing quantity of wood is available from the farm forestry programme.

The widesbrad use of electronic media may reduce paper consumption in some segments. Initiatives like e-governance, paperless offices may also impact the growth of paper consumption. On the contrary, the emergence of online retail is creating new opportunities for paper and packaging growth.

The Paper industry has been witnessing increasing inflows of cheap imports in some segments due to Free Trade Agreements (FTA). As a result the industry is experiencing a pricing brssure in those segments. The industry has been making rebrsentations to the Government to regulate these imports but no action has been initiated yet.

The industry faces shortage of talented and experienced manpower due to scarcity of good institutes offering technical courses for the pulp and paper industry. For talent attraction, the paper industry has to compete with other industries that offer better compensation.

The industry also faces challenges for attracting new talent due to remote location of the mills. To address this, the Company provides best possible amenities including housing, recreation, medical and education at its plant locations.

RAW MATERIAL AND OTHER PURCHASES

With the help of imported supplies coupled with sharp decline in fuel prices company was able to effect some reduction in raw material prices during second half of the year.

In order to create adequate capacities aimed at long term availability of raw material, the Company increased its focus on social farm forestry within 200 KM area of the mill. A total area of 16,934 Ha area was covered during the year under this programme. Most of these are planted with Eucalyptus clones as per the requirement of our pulp mills. The planted area was 14% higher than brvious year thus taking the total coverage under this programme to 1,32,934 Ha. These plantations have resulted in better utilisation of low productive wasteland of tribals and farming community in the backwards regions of Central & South Gujarat, Northern Maharashtra, Western Madhya Pradesh, Odisha and North Andhra Pradesh. As per Global With an aim to focus on R&D, the in-house production from our advanced nurseries was increased to 20 million clonal plants at both the manufacturing locations. During the year, field trials of Casuarina clones, trials for Casuarinas equesetifolia provenance and Lucaenea ieucocephab provenance were started from Sept. '14 under cess approved IPMA project in collaboration with IFGTB, Coimbatore. Additionally, the Company has conducted Eucalyptus clonal trials for 130 clones sourced during the past 4 years. One of Eucalyptus clone is showing promising growth with maturity in shorter time span. All these efforts are likely to boost the raw material availability for the Company and hence control the raw material costs.

The year 2014-15 started with the big challenge of inflationary brssure. The political uncertainty due to the scheduled election in April 2014 for the new government added the brssure on pricing. The situation eased out after second quarter. The falling crude prices from June '14 onwards also arrested the rising trend and resulted in softening of prices of crude based chemicals and hence lower cost for the Company. The new capacity added at JKPM stabilized in the year 2014 resulting in increased scale of operations and purchases giving advantage in buying with better prices.

The weakening of the currency like Euro against Dollar reduced the pulp prices sourced from European pulp mills. Slowing demand from China in this period kept the prices supbrssed and touched the lowest levels of the recent years. The dollar parity with Rupee remained stable throughout the year and imports remained competitive and favourable for the Company. The pulp prices have again started moving northwards without justifiable basis, possibly because of dominant global players pricing mechanism.

The coal availability from linkage allotment remained better during the year. However, the brference to core sector by Railways in allotting rakes for the coal movement affected the stocks at our plants but the shortfall was fulfilled with imports. The Indonesian import coal prices remained low throughout the year due to weak demand from China.

The Company achieved a production of 4.14 Lac tonnes and sales of 3.98 Lac tonnes during the year. Operating profit (PBIDT) of the Company during the year stood at 12% while PBDT stood at 3%. Though the Company increased its selling prices during the year, it was not commensurate with the increase in input costs. However the increased operating efficiency with increased capacity utilisation has resulted in improvement in operating margin during the year, The Company reported a net loss of Rs. 12.74 Crore for the Current Year as against net loss of Rs. 77.19 Cr in Previous Year.

The moderation in inflationary brssures prompted RBI to finally usher in repo rate cuts in 2 phases by a cumulative 50 basis points to 7.5 per cent after maintaining it at 8 per cent for the whole of 2014. However, the commercial banks are yet to fully pass on the benefit to the industry. Moreover oil prices are again on the rise, up more than 40 per cent since Jan 2015 to over U5$68 per barrel. This coupled with unseasonal rains in Feb- March affecting Rabi crops and deficient monsoon forecasts are likely to play spoilsport over containing food inflation. These could lead to some acceleration in inflation thereby making it harder for RBI to cut interest rates any further soon. As a result, cost of capital for industry will reman high for the time being. The Company has managed to achieve relatively lower overall cost of funding due to appropriate mix of rupee loan and foreign currency loan in total debt portfolio.

During the year our new capacity was fully operational and increased production and sales volume has resulted in increased working capital requirement The Company has managed its increased working capital requirement with better inventory management and credit control with receivables coming down from 35 days to 28 days in the current year. Cost of working capital funds was also managed well despite high interest cost scenario by using optimum utilisation of working capital limits in vendor financing, buyer's credit facilities and Working Capital Demand Loan.

ENVIRONMENT AND NEIGHBOURHOOD

Protection of the environment has been utmost priority of the Company. It strives not only to adhere to the stringent compliance standards but exceed them on a sustained basis to ensure that the environment and the surrounding communities are not subjected to any kind of risks. Conscious efforts are made to conserve the natural resources like Coal, water and wood, which are vital inputs for our plant operations. Our new plant at Unit JKPM is an evidence of the Company's efforts towards achieving this.

The company is also committed to the welfare of the neighbouring communities at all locations where it operates. The company undertakes various initiatives for inclusive growth of neighbouring communities by providing education, livelihood and healthcare opportunities for them. The Company follows high standards of health, safety and environment to protect interests of all its stakeholders. The Company's efforts in these areas have been widely apbrciated at various forums which provides motivation to pursue them further.

HUMAN RESOURCE MANAGEMENT

In the backdrop of startup and stabilization of the new expansion project at JKPM, Rayagada, the Human Resources function played a crucial role to keep the morale of workforce high. Along with the plant team, the Human resources team identified the gaps in operating structure of the new plant and bridged them with a mix of new recruits from the industry and existing talent. Suitable training and development programs were also coordinated for operations of the new plant.

The result of our continuous effort to optimize the manpower deployment showed up during the year when the ratio of employee cost to net sales came down significantly from 9.2% in 2013-14 to 7.8% in 2014-15.

The ratio today stands among the best in the industry. The organisation structure at Unit CPM was revamped to have seamless integration of Packaging Board Plant with rest of the Pulp and Paper facilities. This has resulted in better planning and management of operations at the unit

The annual "Udaan" competition which has been initiated to unleash the innovative potential of young talents in the Company witnessed highly enthusiastic participation across all locations. Some of the ideas thrown up by the young employees were found to be promising and will be implemented in course of time.

The senior management team participated in the Group's biennial Top Management Conference (TMC) in February 2015 at Chennai. With a theme titled "Leadership Challenges in a Fast Changing World", the TMC was directed by highly sought after Coach of CEOs of many Fortune 100 companies and business transformation consultant, Professor Ram Charan.

There are several high impact learnings from the Conference and the JK Paper team is now diligently implementing some of them. Maximising engagement of employees at workplace has been a top priority for Human Resources function. To ensure this, the company is following many contemporary practices like competency Assessment focused learning and development and career planning for identified talent pool. These initiatives are used as a build up for fast track growth, Rewards and Recognition and Succession Planning. To track the level of engagement, an Employee Satisfaction Survey (ESS) is administered once in every two years. The result of this survey which was completed in March 2015 is very satisfying and it will be our endeavour to improve employee engagement further.

CAUTIONARY STATEMENT

"Management Discussion and Analysis Report" contains forward-looking statements, which may be identified by the use of words in that direction or connoting the same. All statements that address expectation or projections about the future, including, but not limited to statements about the Company's strategy for growth, product development, market position, expenditures and financial results are forward looking statements.

The Company's actual results, performance or achievement could thus differ materially from those projected in any such forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events.