MANAGEMENT DISCUSSION AND ANALYSIS

Fiscal year ended March 31, 2015 compared to fiscal year ended March 31, 2014

INDUSTRY STRUCTURE & OVERVIEW

Until 2005-06, films used to be largely distributed on reels in analogue form. This was a relatively costly affair as each reel cost around Rs. 60,000 to Rs. 70,000. Another major problem with analogue prints was the difficulty in physical distribution due to the cumbersome nature of the reels and the threat of their being stolen during transport for piracy. The prohibitive cost of the analogue prints restricted the number of prints that could be created for a movie. Typically, for big budget movies, distributors used to get 500 odd analogue prints made while for small budget or niche films, only 30-40 analogue prints were produced. This limited the reach of films and they could only be released in tranches across theatres - select theatres in the metropolitan/ tier I cities/ category A theatres first and then the next level of cities/ theatres. Due to the problems associated with physical distribution, many films were unable to reach a large number of screens especially in small towns and rural areas, thereby losing out on the revenues from these places. Further, this delay, coupled with the lack of any inherent security measures in celluloid prints to brvent piracy, meant that customers in those locations would generally have had access to the movies via pirated media, leading to potential loss of revenue for distributors and exhibitors and a poor viewing experience for audiences due to the viewing of low-quality pirated media. Also, since distributors were unable to brdict the actual demand for a movie, they were often unable to produce an optimal number of prints, either producing too few prints, leading to potential loss of revenue, or too many prints, leading to excess investment.

UFO's digitization and delivery model has been a key driver of the extensive digitisation of Indian cinemas and has enabled wide-sbrad, same day release of movies across India.

The digital integrator space is fairly consolidated

Of around 9,500-10,000 cinema screens in the country, around 9,200 screens have already been digitized. Out of these 9,200 digitized screens, around 2,100 screens are digitized using D-Cinema technology whereas the balance of around 7100 screens are digitized using E-Cinema technology.

Your Company (hereinafter in this section your company and its subsidiaries have been collectively referred to as "UFO"), is the market leader and relays movies to theatres across the country in MPEG 4 format, using satellites (E-Cinema), as well as in JPEG 2000 (D-Cinema) formats using physical devices through its subsidiary Scrabble Entertainment.

UFO operates India's largest satellite-based, digital cinema distribution network in terms of number of screens using its UFO-M4 platform, as well as India's largest D-Cinema

network in terms of the number of screens. In fiscal year 2015, UFO digitally delivered more than 1,600 movies in 33 languages to 5,032 screens with aggregate seating capacity of approximately 2.22 million viewers sbrad across 30 States and Union territories in India and in Nepal. Since the beginning of its operations, UFO has digitally delivered more than 8,800 movies in India until March 31, 2015. As at March 31, 2015, UFO's global network spans 6,636 screens worldwide, including 5,032 screens across India (including Nepal) and 1,604 screens across the Middle East, Israel, Mexico and the USA.

UFO adds value to all stakeholders in the movie value chain, spanning movie producers, distributors, exhibitors and the cinema-going audience. UFO provides value to movie producers and distributors by reducing distribution costs, providing reach to a wide network across India, providing a faster method of delivery of content, and reducing piracy through encryption and other security measures. UFO provides value to movie exhibitors throughout India by providing access to first day release of movies on its digital platform. Audiences benefit from faster access to new movie releases and a consistently high quality viewing experience

UFO has created a pan-India, high-impact, in-cinema advertising platform with generally long-term advertising rights to 3,784 screens, with an aggregate seating capacity of approximately 1.86 million viewers and a reach of over 1,900 locations across India, as at March 31, 2015. UFO's in-cinema advertising platform enables advertisers to reach a targeted, captive audience with high flexibility and control over the advertising process. UFO's in-cinema advertising platform offers a number of key advantages over traditional advertising methods, including (i) high levels of transparency, such as logging of actual advertisements played, which enhances advertiser confidence in the medium, (ii) remote capability which allows for last minute scheduling and content changes, and (iii) advanced technology, such as multi-lingual support. Further, the in-cinema advertising platform simplifies the logistics of advertising, as UFO controls and arranges advertising on its network, eliminating the need for advertisers to deal with a large and fragmented group of exhibitors. UFO has attracted 1,724 advertisers from private and government sectors in fiscal year 2015, compared with 1,056 advertisers in fiscal year 2014. UFO's in-cinema advertising platform also allows small exhibitors, who otherwise are not able to effectively monetise their advertising inventory due to their limited scale and reach, to receive a greater share of advertisement revenue than they are able to using traditional advertising methods.

Overall, UFO receives revenues primarily from (i) advertisers, through in-cinema advertising, (ii) movie producers and distributors, for the secured delivery and screening of their movies and (iii) exhibitors, through equipment rental and sales for digital cinema equipment and consumables.

Operating direct costs

Operating direct costs in fiscal year ended March 31, 2014 increased by Rs. 218.03 million, a 12.84% increase over brvious year, which was principally attributable to (i) increased advertisement revenue share payments which has increased by Rs. 84.31 million from Rs. 309.58 million for the fiscal year ended March 31, 2014 to Rs. 393.89 million for the fiscal year ended March 31, 2015 and (ii) increased VPF D-Cinema share payments to D-Cinema exhibitors by Rs. 119.76 million from ^ 501.60 million the fiscal year 2014 to Rs. 621.36 million in the fiscal year 2015.

Earnings before interest, tax, debrciation and amortization  (EBITDA)

Consolidated EBITDA increased by 20.75% from Rs. 1,331.99 million in the fiscal year ended March 31, 2014 to Rs. 1,608.33 million in the fiscal year ended March 31, 2015. As a percentage of total revenue, the consolidated EBITDA increased from 31.34% in the fiscal year ended March 31, 2014 to 33.55% in the fiscal year ended March 31, 2015.

Profit before tax

Consolidated profit before tax increased 34.31% from Rs. 512.46 million in the fiscal year ended March 31, 2014 to Rs. 688.30 million in the fiscal year ended March 31, 2015. As a percentage of total revenue, the profit before tax increased from 12.06% in the fiscal year ended March 31, 2014 to 14.36% in the fiscal year ended March 31, 2015.

Profit for the year attributable to equity shareholders of the Company

Despite an increase of 34.31% in PBT, the PAT has increased merely 2.42%, from Rs. 476.61million in the fiscal year ended March 31, 2014 to Rs. 488.13 million in the fiscal year ended March 31, 2015. This is because year ended March 31, 2014 PAT had a total deferred tax credit of Rs. 109.46 million which resulted in increase in PAT, however correspondingly in year ended March 31, 2015 the PAT had a lower deferred tax credit of Rs. 59.66 million.

STRATEGIES & OUTLOOK

Leverage existing platform for growth of advertising business

UFO intends to grow the revenue from its advertising business through by deepening advertiser engagement, attracting new advertisers to its platform, expanding the on-screen advertising offerings, growing the advertising spot rates and monetizing below-the-line advertising opportunities. UFO has successfully proven the advertising monetization potential of its platform by increasing consolidated advertisement revenues from Rs. 9737 million in fiscal year 2010 to Rs. 1166.68million in fiscal year 2015.

UFO plans to deepen its relationships with its existing advertising clients and increase their usage of in-cinema advertising by making it establishing itself as an integral part of their overall advertising activities plan. UFO also seeks to to expand its advertising client base by attracting attract new advertising clients, both from the government and the private sector. UFO, and has dedicated teams to service its government and private sector advertising clients. Your Company and has been able to grow its advertising clients from 563 advertisers in fiscal year 2013 to 1,724 advertisers in fiscal year 2015.

In addition to selling advertising inventory to existing/ new clients As a complement to traditional on-screen advertising, UFO is also developing innovative products for mats such as movie brviews and screen savers to expand its advertising business.

In addition to maximizing its on-screen advertising inventory utilization, UFO also has the opportunity to monetize below-the-line advertising opportunities at each cinema. In majority of its advertising screens, UFO also has the rights to monetize exploitadditional commercial space.

Leverage existing platform for growth of exhibition business.

UFO has the opportunity to leverage its technology platform and its relationships with distributors and advertisers to expand the movie exhibition market in India through innovative models. India is an under-penetrated movie exhibition market relative to developed and other emerging markets. UFO's technology platform has improved the digitisation of the Indian exhibition sector and led to improved economics for exhibitors.

Given the potential growth of the exhibition business in India, UFO plans to facilitate the growth of innovative low capital expenditure exhibition and advertising models. For example, UFO has recently entered the Caravan Cinema and Club Cinema formats through the acquisition of Valuable Digital Screens Private Limited.

Caravan Cinema provides movie screenings with low capital expenditure in under-penetrated media, dark parts of rural India through its cinema-on-wheels solution, creating a unique opportunity for advertisers to reach a captive audiences by partnering with various brands. Currently, movies are screened free to viewers and Caravan Cinema derives its revenues through advertising. This is an effective advertisement platform for companies targeting rural markets.

Club Cinema provides movie screenings of recently released films in clubs and community centers at private screens, such as remote industrial townships, corporate auditoriums, housing complexes and educational institutions. By providing a complete digital cinema solution to such customers, UFO will be able to reach an untapped and niche segment of the Indian exhibition sector.

Continue to innovate in new areas that leverage its platforms.

UFO intends to continue innovative business development efforts which leverage its technology platform to add value to key stakeholders, such as distributors, exhibitors and advertisers. For example, UFO has the opportunity to work with content owners and exhibitors to screen high-impact alternate content, such as sport events and award nights. UFO believes that as one of the largest in-cinema advertising companies in India in terms of number of screens, It has opportunities to work with television, print and other media companies for advertising partnerships.

THREATS AND RISKS

This section lists key risks relating to operations of your Company.

UFO's digital cinema equipment rental contracts with exhibitors are usually for a fixed-monthly fee for duration of five to ten years and there is no assurance that these contracts will be renewed at existing or favour able commercial terms, or it at all. Further, these rental contracts generally allow termination rights to exhibitors after a certain period. UFO relies on its ability to create value and additional streams of revenue, including from advertising, to retain its exhibitor customers, but there is no assurance that exhibitors will not terminate the rental contracts prior to their expiration date or continue to renew their contracts with UFO.

UFO's rights to collect D-Cinema VPF under its agreements with major Hollywood studios (which forms part of its total D-Cinema VPF) are set to expire by June 2018. UFO does not expect to extend or renew these contracts and if these are not extended or renewed, UFO will be unable to continue to collect D-Cinema VPF from major Hollywood studios.

UFO is brsently involved in certain disputes with another company that competes with it in the field of digital cinema services in India wuth respect to certain patents held by that other company. The competitor's claim that UFO's business processes are covered by the patent of that company has been carefully examined by UFO. While your Company is confident upon legal advice that the business processes and methods deployed by UFO are clearly not covered by that company's patent, your Company is in an advanced stage of discussion with that company and believes that this issue will be amicably settled in the foreseeable future.

INTERNAL CONTROLS & THEIR ADEQUACY

Your Company has controls and procedures in place that are designed to provide reasonable assurance that material information relating to the Company is disclosed on a timely basis. Management has reviewed the Company's disclosure controls and has concluded that they were effective during the reporting period. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have evaluated the effectiveness of the Company's disclosure controls and procedures related to the brparation of Management's Discussion and Analysis and the consolidated financial statements.

The Company's management, with the participation of its CEO and CFO, is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the brparation of financial statements for external purposes in accordance with Indian GAAP. The company has robust financial controls in place through a combination of internal controls and processes. The controls ensure that transactions are recorded in timely manner, they are complete in all aspects, resources of the company are effectively utilized and its assets are adequately safeguarded.

Your Company has deployed a qualified independent firm as its Internal Auditor. The Internal Audit scope includes review of efficacy of the business processes and review of the procedures and policies in place as designed by the management across all functional areas, and assessing the internal control strength in all areas. Also the Internal Auditor findings are discussed with the process owners and corrective action is taken as necessary

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES & NUMBER OF PEOPLE EMPLOYED

The Human Resources (HR) function in UFO remains focused on developing human resources through improved organizational effectiveness and providing a conducive and ethical work place amidst a rapidly changing business environment such that employees can offer their best.

It is the Company's endeavor to promote a healthy and safe work environment for all the employees.

Material development in human resources:

Recruitment & Selection:

UFO has a talented pool of employees that prides itself in providing effective and efficient customer service to its clients.

The focused recruitment & selection process ensures that the Company hire the best talent for the job that aligns with the  overall goals of the organization. The Company takes pride in having a stable manpower strength coupled with low rate of attrition that gives it a strategic advantage to sustain long term business objectives.  As on March 31, 2015 the on roll employee strength was 430.

Training & Development:

The Company, from time to time, plans and arrange for training of its employees for their overall development to achieve long term business objectives of the Company.

Industrial Relations:

The Company believes in maintaining cordial and friendly relations with its employees and resolves conflict, controversies and disputes, if any, between the employees and management in an amicable manner.