MANAGEMENT DISCUSSION AND ANALYSIS

I. INDIAN PAPER INDUSTRY

The Indian paper industry is one of the important industries in terms of socio-economic development of the country. India has nearly 17 percent of the world's population, but consumes less than 2 percent of the world's paper. The estimated turnover of the industry is Rs. 35,000 crore approximately and the industry provides employment to more than 370,000 people directly and 1,300,000 indirectly. Per capita consumption of paper has almost doubled in the last decade. Even though the per capita consumption in the country is 10-11 kgs which is lower as compared with 42 kgs in China, 350 kgs in developed countries and with global average at a healthy 58 kgs. Over the years, aspiration levels of the growing middle class, improving standards of living, better educational opportunities strong growth in sectors like fast-moving consumer goods (FMCG)—pharmaceuticals, liquor, cosmetics, and the like—and organized retailing and governmental support are some of the prime reasons for the rising trend in consumption. This trend is expected to continue. It is estimated that an increase in consumption by one kg per capita can potentially increase annual paper demand by a million tons.

The following key market segments cover most of the Indian paper market:

— Printing and writing

— Newsprint

— Paperboard and industrial packaging

— Specialty

Paper sector is dominated by small and medium size units; number of mills of capacity 50,000 MT per annum or more is not more than 25. The domestic demand for all varieties of paper in India is estimated at around 11.60 million tonnes per year. Of this, writing & printing paper accounts for approx. 4.20 million tonnes, packaging grades for approx. 5.05 million tonnes and newsprint for about 1.75 million tonnes apart from speciality grade about 0.60 million tonnes. In the industrial paper & paperboard category, 58% of the products such as kraft paper are used in tertiary packaging and the remaining 42% constitute consumer packaging. Paperboard and industrial packaging is the largest segment with about 46 percent of demand.

II. OPPORTUNITIES AND THREATS

Indian Paper and Board Industry, in particular is among the top 15 players globally. It has good growth potential given the low current per capita consumption.

We are one of the few kraft paper manufacturers. Main application of the kraft paper is in industrial packaging. It is largely used to manufacture corrugated boxes, bags, sacks, etc. Consumption of kraft paper is closely linked to growth in the packaging industry, industrial production and development in packaging technology and substitution by other materials. Packaging Industry has been growing steadily due to strong growth in the end use segments, substitution of plastic and wood cases with corrugated containers, organized retail, increasing urbanization and changing consumer patterns as also demand from sectors like FMCG Pharmaceuticals Food and Others and the company will be benefited by these tends and developments.

The Indian paper industry faces challenges like low economies of scale, environmental concerns, increasing cost of inputs & utilities and so on, which need to be addressed by the industry. Many mills have upgraded the technology and are expanding capacities through brownfield expansion/ new capacity additions and by focusing on cost control measures. The Company has improved significantly the operational efficiencies. Further, the Mill Expansion Programme envisaging setting up of co-generation power plant and installation of new capacity of finished paper and other capital expenditure projects will enable the Company to have an edge in quality and further improve the efficiencies.

III. OUTLOOK

Looking to the current demand-supply gap and growing literacy and population is expected to accelerate the growth of the industry to over 8% in the coming years. Over the past few months, the corporate sector is abuzz with news on expansions, acquisitions and fund-raising by Companies in Paper Industry. The M&A activity is catching up in paper industry as well. India is the fastest growing paper market in the world with growth in the range of 8-10%. The acquisition of controlling stake in The Andhra Pradesh Paper Mills Ltd., by International Paper Company, USA, is likely to lead to a revamping of paper industry with a positive outlook.

IV. RISKS AND CONCERNS

The Company is deriving 82.60% of its revenue from paper business and 17.33% from steel business. Environmental issues, continuous availability of raw materials & fuels and increasing interest rates are the important issues concerning the paper industry.

The paper industry is one of the highly polluting categories of industries today. The Company is meeting all the norms as brscribed under Environment Protection Act, 1986 and other environmental laws consistently.

VI. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Your Company has evolved a system of internal controls to ensure that the assets are safeguarded and transactions are authorised, recorded and correctly reported. The internal control system is supplemented by management reviews and independent periodical reviews by the outside chartered accountancy firms which evaluate the functioning and quality of internal controls and provides assurance of its adequacy and effectiveness. The scope of internal audit covers a wide variety of operational methods and, as a minimum, ensures compliance with specified standards with regard to availability and suitability of policies and procedures, extent of adherence, reliability of management information system and authorization procedures including steps for safeguarding of assets. The Reports of internal audit are placed before Audit Committee of the Directors. Audit Committee reviews such audit findings and the adequacy of internal control systems. The Statutory Auditors, Internal Auditors and the Cost Auditors of the Company also interact with the Audit Committee to share their findings and the status of corrective actions under implementation.

VII. HUMAN RESOURCES

The Company's industrial relations are cordial. The Company lays great emphasis on proper management of human resources and believes that this is the most important ingredient for achieving excellence in performance and sustainable growth. The management constantly reviews the skill mix and takes appropriate steps to achieve desired skill mix. For upgrading the skill, special emphasis is laid on training. Selective and intensive training is being imparted to employees at various levels.

VIII. CAUTIONARYSTATEMENT

Statements in this "Management's Discussions and Analysis" describing the Company's objectives, projections, estimates, expectations or brdictions may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include global and Indian demand supply conditions, finished goods prices, raw material availability and prices, cyclical demand, changes in Government regulations, environmental laws, tax regimes, economic developments within India and abroad and other factors such as litigation, industrial relations and other unforeseen events.