MANAGEMENT DISCUSSION & ANALYSIS

In fiscal year 2014-15, the Indian economy started showing signs of revival, which was reflected in a higher GDP growth of 7.3%. This growth was aided by positive policy actions from the government and a significant drop in crude oil prices which also contributed to inflation dropping to single digits after a IMFL prolonged period of double digit inflationary conditions. Simultaneously, this enabled the government to contain current account deficit. As a result of all this, India started gaining recognition on the global landscape as one of the fastest growing economies and foreign investment picked up as a consequence.

Though these measures have not yet resulted in a visible increase in consumer spending, sentiment has clearly improved. Sustained lower inflation levels, higher GDP growth and government's initiatives on financial inclusion are expected to positively impact growth in consumption sectors.

INDIAN SPIRITS INDUSTRY

After experiencing rapid growth from 2001 to 2012, Indian spirits industry growth decelerated significantly to low single digit levels in 2013. The Indian consumption story was affected by falling disposable incomes and impact on spirits industry was even worse as state governments resorted to higher excise duties to shore up state revenues. However, with revival in the economy, the trend in the spirits sector too is expected to reverse. According to research firm IWSR, which tracks spirits/ IMFL industry, volume growth in the Indian spirits market is expected to be at 18.8% CAGR during 2014-19 (Source: TR Business).

Amongst a multitude of demographic and socio­economic factors driving growth, India's young demographic profile and low level of alcohol penetration are key growth drivers for the sector. In 2020, India will have one of the youngest populations in the world with average age at 29, compared to 37 in China, 45 in Western Europe and 48 in Japan.

The Indian Spirits industry consists of two distinctive markets differentiated on the basis of target audience, product characteristics and distribution network

1. Indian Made Indian Liquor (IMIL)

2. Indian Made Foreign Liquor (IMFL)

On the basis of reported volumes, share of IMIL and IMFL in the spirits industry is 43% and 57% respectively.

The IMIL market has witnessed healthy traction in volumes with 8.7% CAGR over FY2008-09 to FY2012-13 to reach ~230mn cases. This market has high degree of under­reporting; hence the actual market could be much higher.

IMFL Industry

After experiencing rapid growth during 2001 to 2011 period, growth in IMFL industry has slowed down to 7.3% CAGR over 2009-2013. The market at brsent is dominated by strong national brands at low price points  IMIL is evolving from a restricted quota-based, commoditized market to a consumer driven brand based industry. The main attractiveness of this market lies in its sizable base, comprising SEC-D and below which could translate into ~40% of total population (excluding Below Poverty Line).  

The growth in this segment is expected to be driven by growing consumer base, rising rural incomes and consumption, conversion from illicit/ toddy to IMIL with increasing awareness about health and quality, conducive regulatory policies and aided by growth in population. WHO, in 2005, estimated the illicit and unreported segment at ~3.3x the reported market. Though this percentage mayhave reduced since then, it would still be sizable rebrsentinga large opportunity for the IMIL industry. The StateGovernments are expected to play an important role in this conversion. While they are developing the organized IMIL market to brvent hooch tragedies, the excise revenue potential is also significant.

IMFL Industry

After experiencing rapid growth during 2001 to 2011 period,growth in IMFL industry has slowed down to 7.3% CAGRover 2009-2013. The market at brsent is dominated by strong national brands at low price points

The 300+ million cases market is undergoing a transformation with newer entrants, challenging the traditional labels and more so in the higher price points. There are high potential niche opportunities that are emerging in the space.

 Business Overview

In fiscal year 2014-15, your Company posted revenues of Rs. 585.7 crore up from Rs. 496.5 crore in the brvious year, translating to robust revenue growth at 18%. Net profit after taxwas at Rs. 7.1 crore up from Rs. 4.3 crore in fiscal year 2013-14.

This performance was against the backdrop of a highly competitive environment in one of your Company's main markets, i.e., Haryana and once again reinforced your Company's unique 360° business model, which ensures resilience from local disruptions enabling growth maximization.

During the year while both consumer and manufacturing verticals experienced healthy double-digit growth, higher growth in the manufacturing business led to its share in revenues increasing from 54% to 56% to reach Rs. 325.8 crore. The consumer business recorded revenue of Rs. 259.9 crore with 44% revenue share.

Your Company's plans to reduce geographical dependence by expanding to East India also picked up pace. Construction on greenfield facilities in both West Bengal and Bihar was initiated during the year, with both plants expected to get commissioned in fiscal year 2016-17

Manufacturing Business

The manufacturing business revenue, comprising (a) bulk alcohol manufacturing and (b) franchisee IMFL (third party bottling), grew by 22.5% to reach Rs.325.8 crore during FY2014- 15.

The bulk alcohol division is the backbone of your Company's 360° business model and provides high quality Extra Neutral Alcohol to the other divisions, ensuring a sustainable competitive advantage. During the year, capacity utilization increased from 75% in FY 2013-14 to 77% in FY 2014-15 atyour Company's distilleries, resulting in production of 6.9 crore bulk alcohol litres. More than 50% of this was used for consumer business and franchisee bottling, balance remaining thereafter was sold externally. Bulk alcohol sales reported ~5% volume growth, exports showed excellent traction, growing to 3x over the brvious year. This partly offset adverse demand situation in Haryana caused by entry of new distilleries and slowdown in spirits off take. Your Company incorporated a subsidiary in UAE to facilitate the exports business.

Bulk alcohol realisations improved by 5% during the year. Input prices stabilized after a prolonged period of expansion. Your  Company continued its focus on productivity enhancement and witnessed improvement in yield levels.

Volumes in the franchisee IMFL business grew over 17% in FY2014-15 to reach 33 lakh cases, showing strong growth third year in a row. Your Company has robust quality management and performance reporting systems which coupled with captive high quality Extra Neutral Alcohol (ENA)gives unmatched value to India's top IMFL companies. This is reflected in increased franchisee volumes as customers consolidate bottling operations at our facilities.

Your Company has bottling contracts with ABD India, United Spirits and Jagatjit Industries to manufacture their flagship brands in the states of Haryana and Rajasthan. In a landmark achievement, your Company launched DDGS, a value added by-product, in India. Rich in protein and energy, the product partially replaces soya in animal feed. Within a short period of time, the product has already started experiencing strong traction and demand has been consistently outstripping supply. Your Company is focusing on building awareness about product uses and expects to reap benefits from this in form of higher realizations. FY15-16 will be first full year of operations for the new DDGS capacities set up in both Rajasthan and Haryana.

The consumer business comprising (a) Indian Made Indian Liquor and (b) Indian Made Foreign Liquor recovered from a decline in FY13-14 to post revenue growth of 13% in FY2014-15. This was driven by Rajasthan IMIL market, wherein volumes grew by 20%. Your Company also expanded its geographical brsence by entering Bihar IMIL market, thereby reducing dependence on North Indian states. Pursuant to a tender win, your Company has exclusive IMIL marketing rights in the largest district in Bihar for five years starting FY2014-15. Growth in volumes from these states, however, was partially offset by volume de-growth of 17% in the state of Haryana which continued to go through a rough phase facing high competitive intensity.

Your Company is amongst the largest IMIL players having ~3% market share all-India. Through its efforts to reinvent a traditional and commoditized market, it has established itself as a leading player in all three states in which it has operated historically - Haryana, Rajasthan and Delhi. With competitive intensity increasing, your Company has decided to focus on building strong brands with unique value proposition for the bottom of the pyramid consumer. It pioneered branding in IMIL in 2011 with the launch of Nimboo. The br-launch efforts in developing an innovative product with differentiated packaging and building a cohesive communication strategy showed immediate results with the product becoming an instant success.

Your Company has double digit market shares in all three states and is also the largest private IMIL Company in Rajasthan (with 25% market share) and second largest player in Haryana.

The consolidated IMIL sale stood at 8.6 million cases in FY2014-15, including 0.3 million cases sold in Bihar after commercialization of operations in the last quarter.

IMFL is a much younger business contributing ~2% of the consumer revenues. This was launched in FY2007-08. Your Company's IMFL strategy is to develop a portfolio of strong profitable brands. In the early stages of this business, your Company focused on creating a distribution network through launch of various economy brands. However, your Company is now re-orienting this strategy in line with the 'brmiumization' trend in the industry. New brand launches would be in niche categories, low volume and high growth. Your Company has begun the process of rationalization of brands in lower price categories.

East India Expansion

Your Company aims to become a Pan-India spirits company by providing innovative products and building brands that offer a unique value proposition.

The Eastern states are not only high bulk alcohol deficit states but are amongst the fastest growing IMIL markets in India providing an excellent platform for your company's 360°  model.

Your company has already procured distillery licenses for 3 states in East India and plans to establish Greenfield facilities in a phased manner. During FY2014-15, your company completed the process of land acquisition in West Bengal and Bihar and is well on track to establish distilleries in these states in FY2016-17.

Your company's entry in the Bihar IMIL market is a step towards gaining a foothold in the region.

Financial Highlights

• Revenues at Rs. 585.7 crore

• EBITDA at Rs. 48.7 crore with EBITDA margin of 8.3%

• PAT at Rs. 7.1 crore, with margin of 1.2%. Impacted by accelerated amortization of Rs. 7.2 crore on Intangible assets

Environmental Compliance

Your Company is on its way to becoming a zero discharge company. We care for the environment as we believe in the philosophy of sustainable development. Air pollution is controlled through the installation of relevant control devices like ESPs which help in collection and purification of CO2. Following are the steps we have undertaken in the new expanded capacity:

Air Pollution

a) Step forward to achieving zero discharge (explained below)

b) Air Pollution control through installation of the relevant Control devices with ESPs

c) Air pollution control through collection, purification and sale of CO2. All Carbon dioxide generated in fermentation shall be collected purified and sold to  buyers including soft drink manufacturers and others thus abating air pollution.

d) Proper disposal of all effluent related products such as spent grain and fly ash. Spent Grain shall be sold as cattle feed (see below) and fly ash/ash disposed off for land fill or for brick making.

Details of Zero Discharge - Liquid Discharges

Achieved through the following steps

1. Separation of spent grain from spent wash: The spent wash emerging from distillation (waste) would be passed through suitable equipment for the separation of spent grain.

2. Evaporation of Spent Wash: The lean spent wash would then be evaporated and concentrated to syrup in an evaporator specially put for the purpose which is integrated with the Distillation plant. This would be required to enable its drying later.

3. Mixing the concentrated spent wash with spent grain: The syrup spent wash and the spent grain obtained would be mixed to form Wet Grain which can be disposed as cattle feed.

4. Drying the same to powder: To improve on the quality of the Wet grain produced above the same would be dried and sold as dried cattle feed.

Water Management

1. All water re-circulated to process with or without treatment thus no discharge of any water stream

2. Surplus water used in make ups or in the boiler and cooling towers after treatment

3. Condensate from process reused in the boiler as boiler feed water

4. Condensate from evaporator reused in the process after treatment

5. All cooling water is through recirculation

6. All bottle washing water reused after treatment in the process or used for horticulture

Thus, achievement of zero discharge on all streams as per requirement of the Pollution Boards.

R & D Activities in Globus (Technology)

a) Higher efficiencies of conversion: The expansion was done with the state of the art latest technologies to get the best conversions to alcohol at the highest efficiencies. This would be in lines with the best practices being followed. We are also working on improving conversions not only of starch but also to alcohol with new strain enzymes and yeasts.

b) Improving Distillation techniques and translating that to the plant in the expansion - Multi-brssure: To improve both on quality and energy consumption the distillation plant shall be of the multi-brssure design which would give us the benefit of both. The quality would be matched with the best alcohol available in the country.

c) Looking at alternate disposals of spent grain: To keep in lines with the requirements of government regulations we would look at the waste as cost center and are looking at alternative markets in the cattle feed segment for its best disposal at the best price. Branding of the product is also being examined.

d) Looking at better blends as final product diversification: With better quality alcohol available we are moving to higher segments in the potable alcohol sector with better blends and brands and would be launching further brands in the future to build our market.

e) Alternate uses of Biogas to derive greater value for additional power and so on: Power generation directly from biogas is being examined. While it is being used brsently for the generation of power through the steam route a direct more efficient system of power generation is also being examined through gas engines.

Risk Management

The nature of our business is such that it is subject to certain risks at different points of time. Some of these include escalation in the cost of raw materials and other inputs, increasing competitive intensity from other players, changes in regulation from central and state governments, changes in supplier-distributor relationship, labor shortage. Your company has always had a proactive approach when it comes to risk management where it periodically reviews  the risks and strives to develop appropriate risk mitigation measures for the same. To enhance this focus, your company has formed a Risk Management Committee to frame, implement and monitor risk management plan.

Internal Control Systems

Your Company has ensured that stringent and combrhensive controls are put in place to ensure the optimal and efficient utilization of resources and to ensure safety and protection of all assets from unauthorized use. An extensive program of of internal, external audits along with periodic reviews by the management is carried out to ensure compliance with the best practices.

Human Capital Overview

Your Company considers human capital a core area for sustainable growth and has been making conscious efforts to engage and develop human capital at all levels. The Human Resource Department of your Company is highly focused on enhancing stakeholder value by ensuring a fit between the management of an organization's employees, and the overall strategic direction of the company. Over the years your Company has been able to build a team of qualified, dedicated & motivated professionals. The working atmosphere provided to the employees is aimed at creating a sense of ownership which helps them to shoulder greater responsibilities. As on 31st March 2015, the employee (excluding casual) count for the company stood at 276 compared to 244 on 31st March 2014.

Disclaimer

Certain statements in this MDA may be forward looking within the meaning of applicable laws and regulations. Actual results may differ from those exbrssed or implied. Important developments that could affect the Company's operations include a downtrend in domestic industry, significant changes in the political environment, changes in tax laws & excise duties, litigation and labour relations.