MANAGEMENT DISCUSSION AND ANALYSIS REPORT
1.0 OVERVIEW OF AGRICULTURAL SECTOR
Agriculture is an important sector of the Indian economy, accounting for 14% of thenations Gross Domestic Product (GDP). More than 50% of Indias population isdependent on agriculture. This sector also serves as a source of raw material for a largenumber of industries. Therefore, accelerating the growth of agricultural production isimportant, not only to achieve the overall GDP target of 8% during the 12thPlan and meet the rising demand for food, but also to increase incomes of those dependenton agriculture and ensure inclusiveness. As per the latest estimates, agriculture andallied sectors are estimated to grow at 1.8% during 2012-13 as against 3.6% during thelast year.
2012-13 was a challenging year for Indian Agriculture. Uneven southwest monsoon in mostparts of India resulted in reduced production during the Kharif (main) cropping season. Inits 3rd advance estimate for crop year 2012-13 (June-May), IndiasMinistry of Agriculture reported an overall foodgrain production of 255 Million Tonnes,four Million Tonnes less than last years peak output of 259 Million Tonnes.
Important crops, like Rice, saw substantial growth in production. As per the 3rdadvance estimates, Rice production in 2012-13 stood at 104 Million Tonnes, the secondhighest figures on record, despite the delayed monsoon last year and Wheat productionstood at 93.6 Million Tonnes. On the other side, Cotton and Millet acreages reduced due tounfavorable commodity prices and climatic conditions, thus shifting farmer preferencetowards lucrative cash crops such as Cluster bean.
Various initiatives launched by the Government of India, such as the National FoodSecurity Mission, supported by other programs and schemes and a conducive price policyregime, helped achieve a target of 20 Million Tonnes of additional food grains productionduring the 11th Five Year Plan.
To further improve agricultural growth, the Economic Survey 2013 underlines the needfor stable and consistent policies where markets play an appropriate role, privateinvestment in infrastructure is stepped up, food price, food stock management and fooddistribution improves and a predictable trade policy is adopted for agriculture.
Foreign Direct Investment (FDI) in retail allowed by the government is expected to pavethe way for investment in new technology and marketing of agricultural produce in India.Fast agricultural growth is vital for ensuring jobs, incomes and food security in India.The priority for the government will be to fight high inflation by reducing the fiscalimpetus to demand as well as by focusing on incentivising food production, throughmeasures other than price supports.
The above initiatives, coupled with private sector participation are expected to boostthe growth of Indian Agriculture in 2013.
2.0 INDUSTRY DEVELOPMENT
The global Seeds and Crop Protection market continued to show dynamic development in2012. Demand for high-value seeds rose considerably and the global Crop Protection marketalso posted significant growth.
In India, the Crop Protection and Hybrid Agri Seeds market have grown steadily over thelast 5 years, at a growth rate of 14% and 15% respectively. However, in 2012-13, growth inthe Crop Protection segment slowed down to an estimated single digit rate of about 5% andthe Hybrid Agri Seeds market recorded a de-growth by about 1%. This was mainly due todelayed and uneven distribution of southwest monsoon and crop shifts (mainly Cotton). Butlong term trends in Indian Agriculture continue to be positive for the Agrochemical andSeed Industry.
Growing food demand with limited farmland availability, attractive commodity prices,growth in horticulture and floriculture industries and increasing farmer awareness aboutdevelopments in cropping patterns and use of agrochemicals, will promote the use ofagri-inputs to increase productivity.
Limited mechanisation of farm operations, preference for non-agricultural work byyounger generation, coupled with the impact of MGNREGS (Mahatma Gandhi National RuralEmployment Guarantee Scheme) on availability of farm labour, has led to a shortage in farmlabour. To compensate the scarcity and high cost of labour, farmers will requireinnovative agri-inputs (in particular herbicides) to ensure remunerative and sustainablefarming.
Rising demand from consumer and retail companies for good quality farm products andgrowth of the organised retail sector is increasing quality consciousness among Indianfarmers, which in turn is resulting in growing demand for fungicides.
Increasingly, Agrochemical and Seed companies are stepping up their efforts on farmextension services to enhance awareness about the benefits of Crop Protection products andhybridisation in major field crops among the farming community. This is supported byincreased attention to farming needs by the government and an ever-increasing, progressivefarmer population that is focusing on increasing productivity by adopting innovativefarming solutions.
3.0 REVIEW OF FINANCIAL AND OPERATIONAL PERFORMANCE
Your Companys Revenue from Operation (Net) increased by 19.94%, from Rs. 22,723Millions in 2011-12 to Rs. 27,253 Millions in 2012-13. Profit before Exceptional Items andTax increased by 48.11%, from Rs. 2,623 Millions in 2011-12 to Rs. 3,855 Millions in2012-13.
Bayer CropScience, one of the leading innovation-driven companies in its industry,offers products and customer-oriented solutions to farmers for the production ofhigh-quality food, feed and fibre. Our goal is to raise agricultural productivity throughinnovation. Our strategy for future growth is built on four key elements: enhancing theCrop Protection portfolio, increasing customer centricity along the entire value chain,leading the way in innovation, and expanding our Seeds business.
We aim to enhance our Crop Protection portfolio by innovating and focusing onintegrated Crop Protection solutions. We have phased out all WHO Class I Insecticides fromour portfolio since 2011. In line with our commitment to sustainable agriculture, CropProtection products in this category are being replaced with new, user-friendly and moreenvironmentally compatible formulations. Key focus areas of your Companys globalresearch and development are: yield improvement, stress tolerance and improving planthealth.
Through our innovative products and services, your Company has established itself as acomprehensive provider of Seed to Shelf solutions. In the year 2012-13, BayerCropScience successfully grew its innovation portfolio with flagship Crop Protectionproducts like Nativo, Confidor, Regent and Fame, as well as launched new Hybrid Seeds inRice (Arize 6444 Gold), Mustard (ProAgro 5121) and Millet (ProAgro 7701 Gold, ProAgro -9450).
Wheat and Rice are the two most important staple food crops not just in India but alsoglobally. With a steadily increasing population, agricultural output will have toproportionately increase to feed the growing population. Neither farmers, nor governmentsnor manufacturers of agricultural inputs can achieve this on their own. Thats whyyour Company is investing in setting up research collaborations all over the world todrive research into Wheat and Rice.
Our comprehensive approach comprises of collaborations with agri-input suppliers alongthe entire value chain, from the seed to the consumer. They include regional and localprojects to help millions of farmers improve the production of staple foods. Among theseprojects are 240 Food Chain Partnerships in 30 countries for major fruit and vegetablecrops. We are working with our partners at the interfaces between biology and chemistry and between science and farming to develop tomorrows solutions.
In 2012, Food Chain Partnership projects in India were carried out with 32 leadingplayers in Food Processing, Exports and Food Retail. The project has benefitted more than68,000 farmers in the year. We aim to further strengthen our customer focus along theentire value-added chain. This involves boosting our commitment to farmers and improvingprocesses in distribution and field advisory.
In 2012, a global Food Chain Partnership project has been signed between your Companyand Jain Irrigation to produce high-quality white onion and mango.
Your Company has also been implementing many exceptional business excellenceinitiatives. These initiatives are giving us deeper knowledge of markets that arecontributing actively to increasing the business and adding to our competitive edge.
The Environmental Science business maintained its position as the market leader in theareas of public health and Professional Pest Control (PPC). Your Company continued tosponsor major symposia and seminars to promote general awareness, product knowledge andinternational trends in vector-borne disease management. These activities helped yourCompany increase its reach amongst Local Bodies, thus reflecting a growth inour vector control products, despite a limited product portfolio. Further, your Companyalso made inroads into new categories, like Poultry helping its core brand in thecategory, "Bilarv" grow well. One of the biggest achievements of your Companywas the approval from TAC Ministry of Health to use Diflubenzuron (Bilarv) in"National Vector Borne Disease Control Program" as larvicides for both pollutedand non-polluted water.
Under the Environmental Science business, your Company also started a rural projectunder "Rural Hygiene" in one of the coastal districts of Andhra Pradesh toprotect and improve the quality of farmers ecosystem.
4.0 OPPORTUNITIES AND OUTLOOK
The worlds population is expected to reach 9 Billions by 2050. As populationincreases, natural resources will become scarcer, mainly due to insufficient arable landreserves, increasing urbanisation and progressive climate change. The importance ofsustainable agriculture and of higher crop yields and quality in producing sufficient foodon a limited amount of land will increase in years to come. Therefore, the outlook forcompanies providing Crop Protection, Seeds and other agri-inputs continues to be positive.
Innovation-driven companies will achieve better consolidation in terms of valuecapture, say experts. Better quality molecules, hybrid seeds and the range of otherproducts well-suited for high-value agriculture will ensure growth. Swelling farm incomes,encouraged by good commodity prices, will further embolden farmers in spending onqualitative inputs for achieving higher yields, better quality and a more favorable returnon investment.
Increasing employment opportunities in rural areas, encouraged by progressivegovernment policies, coupled with high economic growth, are expected to influence labouravailability for the agricultural sector. Usage of selective and non-selective herbicideswill get a major impetus due to this phenomenon. Quality-conscious consumers will impactthe market. This will boost the fungicides segment and create opportunities for CropProtection products in Horticultural crop cultivation.
With the global acquisition of AgraQuest, Bayer CropScience has added bio-basedproducts "Biologics" as an integrated part to its Pest Control solutions. YourCompany and farmers in particular will benefit in mid and long term from these integratedoffers of Crop Protection and Biologics.
While the government has taken proactive steps to give remunerative prices to farmers,the full benefit will flow to them with the strengthening of procurement and improveddistribution systems.
Your Company is well positioned as an innovation leader in the industry. Byimplementing a comprehensive business strategy, your Company is poised strongly in themarket with an extensive pipeline of products that are being developed keeping in sightthe evolving market trends. Your Companys focus on innovation will ensure that itbenefits from the existing growth trends.
With more than 3,000 trained farm advisors and sales team as well as a largedistribution network, your Company has a deep reach in the Indian market. This helps ingetting necessary insights into farmer needs and deliver customised solutions to farmers.
Your Company launched "Indigro", an internal strategic initiative, to alignits planning with long-term trends in agriculture and design a comprehensive go-to-marketexecution plan to consolidate its leadership position in Crop Protection market with afocus on maximising return on sales and marketing investments and successful launch of newproducts.
5.0 RISKS, CONCERNS AND THREATS
With nearly 55% of the area under agriculture being rainfed, our main businesses Crop Protection and Seeds are influenced by the amount of rainfall, its spatialdistribution which has a direct impact on choice of crops by the farmer and totalcultivated area during the year.
Growth of generics will continue to put pressure on companies. This will create adownward pressure on prices and is expected to remain so in the short and medium term.Hence, Bayer CropScience will drive for value added pricing with its innovative portfolioand brands, as well as integrated crop solutions combined with services and advisory.
Availability of labour, credit/finance for small and marginal farmers, commodityprices, adoption of new farming techniques and timely implementation of irrigation andother major initiatives like post-harvest solutions as per 12th Five Year Planhas direct influence on demand for Seeds and Crop Protection products.
The regulatory frame work for the registration of new products in particular inscrutiny of tox files, costs and timelines as well as label extension to a broader cropspectrum remains challenging. Bayer CropScience seeks proactive collaboration withregulatory authorities to solve business constraints and ensure availability of modernCrop Protection products for the Indian farmer. While on one hand, increasing controls andrequirements from regulatory authorities could delay registration of new products and newlabel claims, on the other hand, it is very important for continuing the growth of theindustry and ensuring sustainable agriculture.
Product Stewardship in particular, the safe distribution and application of CropProtection products continues to be a difficult task for the Crop Protection Industry.Bayer CropScience is focusing on educating and advising channel partners and farmers onthe safe handling and usage of Crop Protection products. Your Company is also an activemember of the leading industry association CropLife India, affiliated to Crop LifeInternational, for driving initiatives to advise on the regulatory environment in Indiaand enhance Product Stewardship endeavors.
6.0 INITIATIVES TAKEN DURING 2012-13
In 2012-13, your Company initiated a number of new, long term projects. Together withour customers and value chain partners, we are working on increasing food production whileprotecting the environment and mitigating the impact of climate change, thus practicingsustainable agriculture.
Across India, Bayer CropScience projects have helped farmers raise productivity andenhance their livelihood. One such project is Direct Seeded Rice (DSR). Direct seedingavoids three resource intensive requirements, namely, puddling operation, transplantingand standing water, thereby saving water.
In India, Bayer CropScience initiated a project in partnership with Cereal SystemsInitiative for South Asia (CSISA) to promote complete package of DSR to save depletedwater resources resulting from the present practice of transplanted rice. The project wasundertaken on 500 acres in the state of Haryana wherein complete Seed to Harvest DSRpackage was demonstrated to the farmers.
Similarly, Bayer CropScience has envisaged a unique project the Rajasthan CottonCollaborative Project, which is a successful example of Public - Private Partnership. Theprincipal objective of the project is to improve Cotton Productivity of tribal farmers intwo districts Bhilwara district and Rajsamand district in Rajasthan. Theproject partners are: Tribal cotton growers, Confederation of Indian TextileIndustry-Cotton Development & Research Association (CITI-CDRA), the Central Government Directorate of Cotton Development, the State Government Department ofAgriculture, Regional Agriculture Research Station and the State Agricultural University.
The project approach was to guide tribal cotton farmers on modern technology and rightuse of appropriate inputs through Front Line Demonstrations and training. A tangibleoutcome from the project is that the tribal cotton farmers were able to double theiryield.
7.0 INTERNAL CONTROL SYSTEMS
The Company has appropriate internal control systems for business processes with regardto its operations, financial reporting and compliance with applicable laws andregulations. The Audit Committee of the Board of Directors approves the internal auditplan and internal audits are conducted at regular intervals across various locations andprocesses in line with the approved plan. Audit observations and follow-up actions arediscussed with the management of the Company as well as the Audit Committee.
8.0 MATERIAL DEVELOPMENT ON HUMAN RESOURCES AND INDUSTRIAL RELATIONS
The industrial relations situation was cordial and harmonious and continues to be so atpresent. Extensive training was given to workers on cross functional roles. Topicsincluded LIFE (Leadership, Integrity, Flexibility, Efficiency) values, energyconservation, personal effectiveness, corporate compliance, first aid, safe driving, QHSE,emergency handling & firefighting, health & employee safety and risk assessment.The Company appreciates the contributions and initiatives made by all employees towardsachieving improved productivity, flexibility in operations and overall businessperformance of your Company.
The statements in the "Management Discussion and Analysis Report" describethe Companys objectives, projections, estimates, expectations and predictions whichmay be "forward looking statements" within the meaning of applicable laws andregulations. The annual results can differ materially from those expressed or implied,depending upon the economic and climatic conditions, government policies and otherincidental factors.