MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Indian economy overview

The Indian economy has been one of the few that remained strong in 2015-16, at a time when the global outlook remained bleak. India's GDP grew by 7.6%, compared to 7.3% recorded in 2014-15. Strong government reforms, focused inflation reduction measures by the RBI and falling commodity prices helped accelerate growth. Despite lower than average rainfall for the second consecutive year in 2015, the agriculture sector grew by 1.1%, aided by a growth in livestock population. Inflation reduced to 4.8% in Q4, in line with the government's target to keep it at 5% or lower by 2016-17. The sharpest upsurge came from electricity, gas and water generation (9.3% in Q4 FY16). Infrastructure output also grew by 8.5% in FY16, which was the highest ever in 17 months, indicating a growing economy.

The recent measures

undertaken by the Central Government to boost the  economy raised the GDP at factor cost constant (2011-12) prices in 2015-16 to Rs. 113.5 trillion, up from Rs.105.5 trillion in 2014-15. From a global perspective, India's economy remained buoyant, but to sustain growth, the Central Government needs to revive rural demand and rejuvenate public sector banks. Powered by inclusion of the masses in banking, technology adoption, urbanisation and other governmental reforms, the economy is projected to grow at an average of 8% between 2016-20. (Source: World Bank, CSO data, IBEF, Livemint)

Global tea industry overview

Tea enjoys worldwide consumer brference. As with any other commodity, tea was also affected by global trends in 2015. Demand for tea outpaced supply; was visible in the average auction prices which stood at $2.4 per kilogram as compared to $2.65 in 2012. Global tea production stood at approximately 5.2 million metric tonnes (MMT) in the calendar  year 2015 and domestic consumption in tea-producing countries left just 1.75 MMT for exports, or just 34% of total production. Kenya led the way on the export front, followed by China (18% of total exports), Sri Lanka (17% and India (12%). China also witnessed a 6.3% increase in tea consumption from 443 MMT in 2014, to 471 MMT in 2015. Chinese imports went up at a 15.7% CAGR. The year also witnessed Iran re-entering the tea export market after the lifting of sanctions on the country. Iran had a sustainable domestic consumption of 1.4 kg per person and progressively, the country is expected to improve its harvest and cultivation numbers which were stunted by climatic issues and economic embargoes thus far.

Another key development was the fact that the US emerged as one of the major tea-consuming and producing countries. The US had already become the third largest tea importer in 2014. While iced tea led consumption statistics  in restaurants in 2015, 54% of tea drinkers brferred making hot tea at home while 51% brferred iced tea at restaurants. The global tea industry is projected to grow at 4.6% CAGR between 2016-20, driven by consistent growth in demand in APAC, and rising growth in the U.S. and Europe. This is an encouraging medium-term outlook for the global tea industry. (Sources: World Tea News, Hindu Business Line)

African tea industry overview

Kenya is one of the largest tea producers in the world, trailing China and India. According to the Tea Board of Kenya, exports quadrupled in the past decade after disastrous droughts saw crops falter in 2006. The UK imports over 50% of its tea from Kenya. While India and China consume most of what they produce, Kenya exports most of its tea. The country is aided by the fact that its located right on the equator, which makes its teas non- seasonal. Kenya's tea industry reported a cumulative $1.38 billion in revenues in 2015. Domestic revenues contributed approximately $150 million and the rest came from exports. In terms of global exports, Kenya was the highest exporter in 2015, accounting for 25% of global exports. According to AFFA (Agriculture, Fisheries and Food Authority), the fastest -growing export markets for Kenya were Poland, Somalia and Nigeria. Malawi has some of the oldest tea plantations in Africa. More recently, in 2015, the Malawian region faced severe drought, and from an operational standpoint, a number of the country's estates suspended operations.

Indian tea industry overview

The estimated annual tea production in 2015-16 was pegged at 1,213 million kg against 1,197 million kg in 2014-15, registering a marginal increment of 1%. Although production was initially expected to decline due to climate changes and labour issues, West Bengal and Assam produced more  tea than in the brvious fiscal, leading to a marginal increase. Tea production in Southern India was lower than in the brvious year, but production in Northern India grew marginally by 8.22 million kg in the April-November period of FY16, helping compensate the reduction in tea production. BLF (bought leaf factories) which usually source not less than two-thirds of their tea leaf requirements from other tea growers, also registered an increased captive production (about 2.2%) across the nation. This indicated an increase in the share of small tea growers of the total production. Tea exports registered an imbrssive 10 million kg increase in 2015, with net export volume estimated at 217.67 million kg, as against 207.40 million in 2014. In 2015, India consumed 911 million kg of tea, or roughly 19% of the global consumption.

Irrigation: importance and practices

Over the recent years, while rainfall has mostly been plentiful in Assam, climate  change has emerged as a major problem. To counter this, The Tea Research Association along with Southampton University conducted studies to observe the effects of climate change on tea production and devise climate-smart agricultural and land management practices.

The most favoured practice was drip irrigation, which delivers water, plant nutrients and chemicals in the right places at the right time, in appropriate amounts and with the highest efficiency. It reduces soil loss, lowers labour costs, saves water and enhances yields. Another procedure that is used alongside drip irrigation is fertigation, a method of delivering plant nutrients brcisely in the crop root zone according to demand during the growing season. Shoots from fertigated plots regenerate faster than those from non-fertigated plots. Drought mortality rates also drop significantly when this method is used.

Reasons for optimism in the industry

Domestic demand and scope: India is the world's largest consumer of black tea, consuming four-fifths of the total tea it produces. On an annual per capita basis, India consumes approximately 326.5 grams of tea, which is lower than countries such as Turkey which leads per capita consumption at 3.15 kilograms, indicating an ample scope for improvement in terms of domestic consumption. Tea has always been an important part of the country's culture and the orthodox Assam tea has got a Geographical Indicator (GI) tag in India. A GI is attached to certain products which have become synonymous with a certain location. This tag also protects the product from imitations and helps brserve quality.

Health benefits: Tea helps combat cardiac ailments, controls cholesterol, protects the skin, keeps cancer at bay, strengthens bones and contains no calories, fat or salt. The increasing awareness of health advantages associated with tea intake (especially organic, white and green) rebrsents a strong demand driver.

Lifestyle: Tea is still the beverage of choice in India. Creative marketing and branding has also elevated the status of tea and brought it under the purview of a lifestyle choice. Constantly innovating with products such as iced tea, peppermint tea and the Indian favourite 'masala chai' to promote tea as a lifestyle product. Various industry startups are promoting tea by utilising technology to offer customised tea. Startups like Chai-point, Chotu chaiwala and Chaayos are revolutionising tea consumption by providing variety in flavours and the convenience of doorstep delivery.

Outlook for the industry

The stabilisation of domestic tea prices invariably increases export price realisations. However, the industry is  experiencing rising input costs, which is raising a few concerns. Rising labour costs are one of the factors which stand out as a challenge, and might start eating into profits. Besides this, climate change is also a factor which might make the overall scenario unsustainable. Strategic planning, estate mechanisation and irrigation are being considered as solutions for tackling these problems. Production and exports are largely expected to remain stable this year, but the first three quarters of FY17 will determine the road ahead for the industry.

Segment/product- wise performance

The Company's output during 2015-16 stood at 10.18 million kg compared to 9.74 million kg in 2014-15. The production in Malawi was less during the year, at 7.47 million kg in comparison to 8.50 million kg in the brvious year. The average tea realisation per kilo improved by 8% in India. In Africa, it was  marginally better than in the brvious year. The production of macadamia nuts during the year marginally lowered marginally to 0.58 million kg.

Risks and concerns

Risks are inevitable in any business. Being aware of this, the Company has a proper risk management system in place to counter them. A dedicated Risk Management Committee meets regularly to identify processes or areas of business exposed to risks and determine a strategy to mitigate them. This has been discussed in the risk management section of the Annual Report.

Internal control systems and their adequacy

The Company implemented internal control systems to ensure that all assets are safeguarded and protected against losses and all transactions are recorded and reported correctly. The internal control system is commensurate with the size  and nature of the Company's business. The systems are regularly reviewed for effectiveness.

Discussion on financial performance with respect to operational performance

This has been covered in the Director's Report Section, specifically under the section on financial results and operations.

Material developments on the human resources/industrial relations front, including number of people employed

The Company emphasises on training and development of personnel to derive optimum results. The Company strives to maintain healthy industrial relations across locations and employees. The number of people employed by the Company in India as on March 31, 2016 stood at 5,144 including 5,028 workers at the tea estates.