MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW Key global economic developments of the year 2014 included a sharp drop in crude prices, softened inflation and commodity prices and moderation in exports of manufactured goods from developing to advanced economies. International Monetary Fund (IMF) estimated global GDP growth to have remained flat at 3.4% for 2014, in its April 2015 World Economic Outlook. The IMF forecast for 2015 indicates a 10-bps increase in Global GDp growth to 3.5%. India moved to a new series of GDp estimation, making 2011-12 prices as the base price (factor cost). The GDp growth rate, as per this new series adopted by the Central Statistical Office (CSO) reached 7.3%. The growth was led by core sectors of manufacturing, utilities and construction. While services sector recorded a moderate growth, agricultural and allied activities recorded a muted growth of 0.2% as against a healthy 3.7% growth achieved in the brvious year. poor monsoon in 2014 coupled with rain and hailstorm during the last quarter of FY15 did impact the agriculture sector adversely. Return of a majority government at the centre, a slew of policy reforms, contained inflation for a major part of the year and two consecutive cuts of 25-bps each were the key economic developments of significance. The focus on infrastructure development, thrust on revival of manufacturing sector, large-scale construction of low cost toilets, financial inclusion of vast un-banked masses in rural and suburban geographies are some key initiatives meant to get structural strengthening of country's socio-economic fundamentals, the true impact of whom shall get visible with a lag effect. WORLD FOOD GRAIN OVERVIEW The total cereal production in the world is estimated at 2,548.3 million tons in 2014-15, up from 2,526.1 million tons in 2013-14, as per Food and Agriculture Organization's (FAO) May 2015 food outlook. The total trade for cereals was marginally lower at 351.4 million tons in 2014-15 from 357.8 million tons in 2013-14. The total consumption is also estimated to have grown from 2,433.8 million tons in 2013-14 to 2,496.0 million tons in 2014-15. For 2015-16, FAO forecasts the world cereal production to drop marginally to 2,509.2 million tons and consumption is to increase to 2,521.9 million tons. The FAO has projected global wheat production to be 719 million tons in 2014-15, just 10 million tons below the record production of 2013-14. The contraction is on account of lower production in the European Union (due to lower acreage), India (due to unfavorable weather condition) and the Russian Federation (due to lower spring sowing on account of higher input cost). The world rice production is estimated at 494.4 million tons in 2014-15, marginally down from 496.6 million tons in 2013-14. Continuing its growth trend, global rice consumption is estimated to reach 499.9 million tons in 2014-15, up from 491.2 million tons in 2013-14. Going forward, the FAO has forecast the world rice production and consumption both to increase to 500.1 million tons and 508.3 million tons respectively in 2015-16. With a 1.2% higher harvest, Asia is expected to be contributed most of this production growth. Indonesia and Sri Lanka are expected to witness higher production while China is expected to witness flat production. The looming fear of El Nino effect, however, can have an adverse impact on the overall production. The global trade for rice is forecasted to increase to 42.4 million tons, up from 41.4 million tons in 2014-15. Due to high consumption and lower production, the global inventory for rice is estimated to come down by 4.6% to 168.2 million tons. The world production of coarse grain is estimated to have been 1,324.4 million tons in 2014-15, marginally up from 1,312.3 million tons in 2013-14. The total consumption has also moved up in 2014-15 to 1,284.5 million tons from 1,247.4 million tons in the brvious year. FAo has further forecast that the global production for coarse grain will be marginally down in 2015-16 to 1,290 million tons due to lower production of maize in Us and barley in the European Union and Russia. However, consumption is projected to increase to 1,297.5 million tons in 2015-16. INDIA FOOD GRAIN OVERVIEW the total food grain production in India is estimated at 251.1 million tons during the crop season (July-June) 2014-15, down by 5.3% from the record production of 265.0 million tons in 2013-14, as per the 3rd advance estimates by Ministry of Agriculture. the lower production is attributed to poor monsoon which have adversely impacted the Kharif crop and unseasonal rain and hailstorm which impacted the Rabi crop the pulses segment is estimated to witness the biggest fall, down by 9.7% in 2014-15. the total production of wheat is expected to come down by 5.3% and rice by 3.9% in 2014-15. Continuing its upward trend, the total population of India is expected to reach 1.4 billion by 2026, as per a United Nations report. the population growth, coupled with rising per capita income and thereby consumption is expected to raise demand of food grains. As per the assessment of National Centre for Agricultural economics & policy Research (NCAp) and the Indian Council of Agricultural Research (ICAR), India needs to increase its annual food grain production by 1.3% every year to reach 280.6 million tons by 2020-21, in order to meet the rising demand for food grains in the country. INDIAN RICE INDUSTRY OVERVIEW India is the second largest producer and exporter of rice in the world. It exports basmati and non-basmati rice, mainly harvested in the northern parts of the country. As per the 3rd advance estimates of the Department of Agriculture & Cooperation, the total production of rice in india is estimated at 102.5 million tons in 2014-15, down by 4.1 million tons from the record harvest production of 106.6 million tons in 2013-14. the key factors affecting the drop in production include bad monsoons during the Kharif season and unseasonal rain and hailstorm in Rabi season. the lower production coupled with robust domestic demand is expected to take the rice surplus in india to its lowest level since 2009-10, as per BMi research. with a view to encourage higher cultivation of rice, the Cabinet Committee on economic Affairs (CCEA) has increased the Minimum support price (Msp) by Rs. 50 per quintal to Rs. 1410 for general and Rs. 1450 for superior variety for 2015-16 season. the Government has decided to abolish the levy rice procurement system from october 2015 making agencies such as Food Corporation of india (FCi) and state government-owned agencies entirely switch over to the Custom Milled Rice (CMR) mode. Rice Exports india is a leading exporter of rice, accounting for close to 25% of the global rice trade. According to All india Rice exporters Association (AIREA), india exported about 11.9 million tons of rice (basmati and non-basmati) in FY15, an increase of 9.4% from about 10.9 million tons during FY14. the export of basmati rice was lower due to lesser procurement from iran, the biggest buyer of basmati rice from india. export to African countries has been adversely impacted due to increased supplies from thailand and price competition from other exporting nations such as Vietnam and pakistan. india's rice exports to Nigeria, Africa's largest importer of rice, have been affected due to debrciation of its local currency against the US Dollar. The commerce ministry has decided to formulate a new, specific strategy, to promote export of rice including basmati and non-basmati to Africa and other regions. with rice-shelling and exporting units registered with the National plant protection Organisation (NppO) being declared infestation-free, india can now explore opportunities to export basmati rice to China. Trade enquiries have already started coming in and the Chinese government has invited indian rice exporters to visit the country to explore opportunities and understand the market. Besides China, South Africa and Mexico are the other new markets that hold good opportunity for export of basmati rice from india. The Finance Ministry has restored duty drawbacks after a span of nearly seven years. However, this time the duty drawback will be extended under the concept of brand rate basis. Under this revised mechanism, each exporter will have to separately apply to get a rate approved, thereby benefiting the larger players such as LT Foods. Duty drawback payments are made to exporters to compensate for the customs and excise duties paid on inputs used in the manufacture of exportable products. Such payments are either made as all-industry rates (fixed as a percentage of free-on-board) or as brand rates. BUSINESS OVERVIEW LT Foods is a diversified agribusiness and foods company with a dominant global portfolio of basmati rice and a promising portfolio of value-added staples and organic food products. Marketing its products in more than 65 countries, the Company owns leading brands such as Daawat, Devaaya, Heritage, Royal and ecolife. Key Business strengths A vibrant Brand portfolio daawat: With a rich legacy of over 30 years, Daawat is the flagship brand of the Company. Offering brmium quality basmati rice, it is the second largest brand in india, in terms of market share. The brand is also fast gaining market share in europe, Middle east and Australia etc. Being the fastest growing brand of the Company, Daawat has more than doubled its revenues in the last 4 years. its sub-brands, Rozana and Chef's secretz, are also gaining share in the market in economy & institutional segment. royal: it is the largest selling basmati rice brand in Us. sustaining an accelerated growth momentum, the brand has more than doubled its revenue over the last four years. Besides brmium basmati rice, the brand also offers Jasmine rice, Arborio rice, wheat flour and Couscous and expanding its reach & product portfolio on continous basis. devaaya: Catering to the mid-price segment in india, Devaaya offers branded Basmati rice and also staples like Atta, suzi, Besan, Dalia, poha, and Maida. The brand stands for assured quality with products tested for and free from nearly 500 impurities. it is a recent introduction in india as well as in international market to the Company's brand portfolio and is gaining acceptance. Heritage: Heritage is a popular basmati rice brand catering to the mass segment and is widely accepted for its aroma and quality. Ecolife: ecolife, Company's organic foods brand is well accepted in advanced markets. its range includes rice, pulses, oil seeds, cereal grains, spices, nuts and fruits & vegetables. During the year under review, the brand got launched in few parts of india. Organic QCBR has also been recognised as innovative product of the year 2015. robust operational Framework The Company commands a robust operational framework across sourcing, processing/manufacturing and distribution. its widely sbrad and deeply entrenched sourcing network enables ready access to high-quality brmium foodgrains from a combination of growers and leading grain markets (mandisjacross india. This is one of the most critical functions on which the business is anchored. supplies to our global operations spanning more than 65 countries is done from a network of 10 strategically placed facilities (5 company owned, 5 third-party) across India. Company is making continues investments on improving productivity as well as yield. with the help of Mckinsey, the Company has also developed a tool for strengthening its paddy procurement process. in India, Company's wide range of brands is made available through a nationwide distribution network that sells packaged branded rice, wheat, pulses, spices, flax seeds, cashew nuts and other value-added products such as brown rice, besides a range of proprietary organic products. The growing popularity of retail superstores/malls is facilitating popularity of specialized varieties of brmium packaged foodgrains (esp. basmati rice). LT Foods has developed competencies in the retail trade to benefit from this trend. in the overseas markets, the Company has developed tie ups with clubs, the retail trade, within ethnic markets, food service companies and private labels. product/category innovation An evolving lifestyle in urban areas is translating into increased demand for high-end packaged food products such as organic foods and brown rice. in today's world, where a vast majority of food crops are cultivated using chemical inputs, Company's range of organic products under 'ecolife' brand provide great choice to health conscious consumers. The range brings with it the promise of natural freshness, nutrition and longer shelf life, all -without compromising on the taste. This range is being popularized in india by the Company. The Company has also launched 'Daawat Brown Rice' which is 100% whole grain and the least processed form of rice, as it retains the nutrition-rich bran layer, a source of 15 essential nutrients. Company R & D team is continuously working on developing more such products to address the need of the consumer. scientific methods and strong relationship with farmers gives an edge to the Company to procure high quality paddy at low prise. The Company is also following sustainibility practices with Bayer Crop sciences for pesticides free production of the crop. Dedicated team under spiC( strategic process improvement Cell) is focusing in improving the manufacturing practices and bringing efficiency on the processing side. Monthly snOp meetings, executive Committee Meetings and Business Review meeting help the Mangement to keep a track on loss of sale, inventory levels as well as Cause and effect analysis of any deviation from the AOp and rectify it well in time to achieve the aspired growth levels. Quality and Food safety The Company prides itself in making available an array of safe and improved quality of products to its esteemed customers. The Company has attained internationally recognized quality and food safety standards at all of its plants, appropriately certified by the globally renowned certification agencies. These systems are perpetually maintained and monitored by a team of experienced lead auditors of the Company. The Company puts in sincere efforts to improve the food safety systems to measure upto the upgraded version of international standards. This year, the Company achieved yet another milestone in fortifying its belief in social commitment by acquiring sA - 8000 certification, which is a standard based on international human rights norms and national labour laws. All the Food safety standards are based on HACCp, GHp and GMp formats. Business drivers LT Foods has embarked on a growth journey supported by its legacy and growth brands. A detailed overview of the various drivers of business is brsented below: Focus on branded business: The Company has consciously raised its focus and attention on branded segment of basmati rice and other products. Besides india, the Company intensified its brand promotion activities in international markets also during the year under review. The momentum of brand focus and investment is going to accelerate, going forward. developing key export markets: The Company deploys a slew of organic and inorganic routes to develop potential export markets. Taking the acquisition route in north America has paid rich dividends in form of the market-leader brand, a diverse non-basmati product portfolio and sustained accelerated growth in revenues and profitability. Company's recent focus on the Middle East and Europe has also been yielding decisive roots for future business growth. increasing brand investments in India as well as in international markets is poised to further strengthen its business prospects. Further company has attained leadership position in Australia, iraq, israel, Mauritius, Trinidad & Tobago. Adding 6 new countries into its folds, the Company's products are now marketed in more than 65 countries. pursuing operational excellence: The rich legacy of brands is supported by world-class manufacturing/processing facilities at Haryana (Bahalgarh & sonepat), Madhya pradesh (Mandideep) and punjab (Varpal & Bhiwikind). LT Foods thus has strong brsence in major rice producing regions in the country; from where it also undertakes supplies for its global operations. The U.s. market is supported by a packaging plant locally. The underlying corporate philosophy is to be brsent close to both key growing/trading markets as well in proximity to areas of key customer demand where possible. LT Foods' worldwide operation adheres to global best practices for safety, hygiene and quality with each of these parameters holding significance to the smooth conduct of business. LT Foods' quality control and testing infrastructure is best-in-class and is aligned to support the growing role of the branded business. The Company operates state-of-the-art R&D facilities as well, that have supported its foray into novel categories of branded food products. diversifying procurement: The Company has long-recognised the importance of a robust working relationship with farmers and growers who supply it with quality produce. Farmer connect initiatives like inculcating best agro-practices, providing high quality seeds and agri-inputs etc. are being pursued by the Company vigorously in order to maintain superior farm output and consistent quality. agri-infrastructure: Following it earlier success in Punjab, the Company developed and delivering two state-of-the-art grain silos to Madhya Pradesh warehousing and Logistics Corporation (one each at Bhopal and Indore). The project got delivered within an extremely challenging timeline, helping the Company qualify to receive full storage charges for a guaranteed period. cost rationalization: The Company has rolled out a structured maintenance improvement program (Mip) across all its manufacturing units. in the first year of its introduction, Mip has resulted in substantial savings and improved the efficiencies at all levels of manufacturing process. Further, the Company has also created a Central procurement Cell to bring efficiencies at backend level and to stay competitive. Segment Performance The branded rice business in India, which is largely contributed by the Company's flagship brand Dawaat, has grown at an imbrssive CAGR in excess of 20% over FY11 to FY15 and has contributed more than one fourth of the overall sales. sustained and intensive brand promotion, further expansion of distribution network and increasing sales of brmium rice has been the drivers of growth. The Company's Us branded rice business is also witnessing a robust growth. The business has grown at an imbrssive CAGR in excess of 25% over FY11 to FY15 and contributed more than one fourth to the total sales. Continuous brand promotion activities and robust distribution network has been the key factors for the growth along with the quality of basmati rice. The non-UsA international business has also been growing at a steady CAGR in excess of 40% and has contributed 16% to overall sales. The Organic business of the Company has been one of the fastest growing segments with a CAGR in excess of 70% over FY11 to FY15 and contributed Rs. 174 crores in FY15. The institutional rice business has also being growing at a stable rate. CONSOLIDATED FINANCIAL REVIEW Net sales: The total sales for FY15 reached Rs. 2,779.78 crores, recording a growth of 11.5% over Rs. 2,492.68 crores achieved in FY14. The growth in sales was primarily on account of increase in domestic sales volume. operating expenses: Total operating expenses increased by 12% to reach Rs. 2471 crores, up from Rs. 2211 crores in FY14. The increase has been primarily on account of higher cost of raw material and debrciation charges. EBITDA: The EBiTDA during the year stood at Rs. 309.02 crores in FY15, a growth of 9.6% as against Rs. 281.84 crores in FY14. EBiTDA growth was driven due to volume growth in high-margin branded segment and organic food segment. The EBiTDA margin for the year stood at 11.1% as against 11.3% in FY14. net profit: The net profit for the year stood at Rs. 76.41 crores, down by 9.79% as against Rs. 84.8 crores in FY14. The fall in profit has largely been due to higher finance cost. OPPORTUNITIES AND THREATS Given the rising population and increasing income levels, the opportunity landscape of quality food segment continues to grow. Company's strategic alignment with aspirational aspects of consumers such as brand, convenience, health and organic, etc. further strengthen its opportunities. Any deceleration in key economies of consequence, unfavorable weather conditions in basmati cultivating geographies, sudden fluctuation in exchange rates, any adverse change in refulations, etc. may pose a threat to company's business profitability. The Company has put in place a robust risk management framework for identification, appraisal and management of various risks on a timely manner. Although the Company has defined business objectives based on strategy for each of the businesses, its ability to achieve the expected results may get limited owing to some internal and external risks. Major risks identified by the businesses and functions are systematically addressed through mitigating actions on a continuing basis. climate risk: paddy, company's key input being a monsoon dependent crop in India, climate poses a major risk for the business. Erratic rainfall may negatively impact the quantity, quality and cost of paddy available for procurement and thereby the business. Mitigation: The Company maintains a healthy stock of surplus paddy to counter such shortages to a viable extent. Moreover, the realization goes up in such situations of short supply and thereby sets off the impact to some extent. Company's diversification into non-basmati rice and non-rice businesses also helps counter this risk to an extent. export risk: A significant part of Company's revenue comes from export. Any change in export/import policy and change in socio-economic environment in these countries can impact the business. mitigation: With established business brsence in 65 countries, the Company continues to expand its export markets by entering new markets and regions globally. its vertical expansion with new products such as packaged staples, snacks and organic products and further expansion of its core basmati business in the domestic market helps mitigate export risk. interest rate risk: With the cost of raw materials constituting about 75% of the total cost, the Company's business is working capital intensive and any rise in the cost of funds may impact its business adversely. mitigation: The Company maintains higher creditworthiness and cordial relations with its lenders. The Company derives its bank borrowing for working capital at one of the most competitive interest rates in the industry. currency risk: With a sizeable portion of company revenue coming from exports, volatility in exchange rate can affect company's business. Mitigation :The Company has a well-defined hedging policy in place. A team of professionals guides the management on currency risk and exchange position is frequently reviewed by the management. procurement risk: Any shortcoming in procurement of right quantity and quality of paddy at optimum prices may affect company's business and reputation of its brands. mitigation: The Company's engagement with the farming communities by way of providing quality seeds and propagation of best farming techniques translates into higher procurement of quality rice at optimum prices. Company's brsence in contract farming reduces its dependence on purchase from open market to some extent. Also, to ascertain, the quality of the paddy procured, the Company deploys its testing expertise. INTERNAL CONTROL SYSTEMS The Company has put in place an internal control system commensurate with the size and nature of its business. The system covers internal audit and corporate risk assessment and mitigation. The internal audit plan for factories, sales offices, warehouses, businesses and centrally controlled functions is approved by the Audit Committee at the beginning of every year. Thereafter, as part of the ongoing process, the Audit Committee is apprised of the key control issues and actions taken on past issues on quarterly basis. The efficacy of the system is tested by its ability to monitor operating systems and policies, their compliance and deviations thereof. This is done with a view to identify and assess the various risks and develop suitable mechanisms to mitigate them. periodic reviews and development of time-bound action plans to improve operations and efficiencies are part of the Company's internal control system. HUMAN RESOURCE DEVELOPMENT With a strength of more than 1200 growth parners, the mission of the HR Function at LT Foods is to partner business and attract and nurture talent to succeed. The HR function is also the custodian of LT Foods's culture and governance standards. This year the function took on several initiatives to strengthen the organization culture, build talent capability, enhance connect with members and potential talent and implement new governance standards. This included initiatives to integrate the international geographies with the LT Foods Way of Working while valuing the cultural aspects of each country. • Performance Management System: PRIDE is LT Foods's performance management process that aligns individual and team goals with the organizational thrust areas with focus to enable individual development.. • Talent Development: Personal Development Planning (pDp) is a career development process, distinct from performance management process. it provides a platform to members to discuss their career aspirations, identify their strengths and development areas and work towards enhancing individual competence. The process also helps in creating a Talent pipeline and succession plan for key roles in the organization. • Leadership Development: LT Foods invests in leadership development at front line, middle and senior leadership levels. Multiple development options are leveraged such as job rotation, classroom training, coaching and attending management development programmes at reputed institutes like indian school of Business to address specific individual development needs. LT Foods facilitates, encourages, rewards and recognizes employees as the Company believes that its people are the key source of competitive advantage. LT Foods's Talent Value proposition (TVp) reflects the significant offerings the organization has for its members. LT Foods's TVp is "to continuously challenge, enrich and fulfil the aspirations of employee so that they can maximise their true potential to Make a Difference CORPORATE SOCIAL RESPONSIBILITY Company's subsidiary, Nature Bio-Foods Ltd, is engaged in uplifting the socio-economic parameters of its operating geographies through its environment friendly organic farming agenda. The Company assists the economically backward farmers by financing for seeds, organic fertilizers and plant protection materials and adoption of new technologies. The Company has adopted over 3,000 tribal farming families. The Company imparts education on sustainable farming practices, provides technical assistance to encourage them for production of food grains and promotes the use of ecologically sound agriculture technologies for various crops including rice and wheat. The Company also covers 9 villages for its women empowerment programme and provides training in cutting, stitching, designing and embroidery works on clothes. With a view to make a positive difference in the lives of the children in the remote areas of Ramnagar (Betalghat), the Company runs a Computer Education Centre at Amel village. The center provides quality career-focused education and 19 students have already passed the 6 month training course while another 15 students are undergoing the course currently. On the surface, the enrolment number might appear small. But, considering the geographical aspect of this small topography, the initial impact of the center is very encouraging. With the size and enthusiasm of the volunteer team growing, the Company is aiming to reach out to every child of nearby villages. The model of the computer centre is self-sustainable and was established by Fair Farming Foundation (CsR wing of NBFL) last year. OUTLOOK LT Foods' performance in the coming years is going to be anchored by the branded business. supporting this growth will the world-class operating backbone that has been created in india. The broad drivers of outlook are as follows: • Exports market where demand for LT Foods products/ brands is expected to maintain momentum. North America will continue to anchor the overseas expansion given growing apbrciation for quality basmati rice under the Royal brand. The Middle East, Europe geography is another emerging market that has the Company's focus • Domestic demand for quality basmati rice and packaged staples that will be supported by favourable demographics. LT Foods' leading portfolio of brands including Daawat, continue to show robust enhancement in business YoY. Young brands like Devaaya to tap opportunities in popular segment • LT Foods' foray into organic foods through the Ecolife brand, recently launched in india • The new product pipeline remains promising and will continue to feed exciting new products into the global ecosystem of LT Foods' branded business • Strengthening the agri-infrastructure in Punjab and Madhya pradesh that will support better performance going forward |