MANAGEMENT DISCUSSION AND ANALYSIS REPORT1.0 OVERVIEW OF AGRICULTURAL SECTOR
The story of India remains encouraging. These are challenging times: the economy isgoing through a phase of slowing growth and high inflation combined with a global prospectthat is not entirely supportive of economic enhancement. Despite these factors, the GDPgrowth for 2011-12 is estimated at 6.5%, which will support further growth in theagriculture sector.
The agricultural sector has continued its steady growth, estimated to be around 3%, for‘agriculture and allied activities’, according to the Central StatisticalOrganisation. The main impetus for growth during 2011-12 emanated from agriculture, whichshowed an above-trend growth rate, thanks to a normal monsoon. The year also witnessedrecord production in wheat, coarse cereals, pulses and cotton.
With the announcement made by the Planning Commission, growth in the agriculturalsector has made up for the shortfall in industrial output.
The second advance estimates released by the Ministry of Agriculture, state that Indiais likely to produce 250.4 million tonnes of foodgrain compared to 232.1 million tonneslast year, which in itself was considered as an all-time record. Wheat production isexpected to reach 88.3 million tonnes, pulses 17.3 million tonnes, oilseeds 30.5 milliontonnes and rice is estimated at 102.8 million tonnes. Production of cotton reached arecord of 34.1 million bales (of 170 kg each) this year.
Various initiatives launched by the Government of India such as Rashtriya Krishi VikasYojana (launched in 2007) to boost agricultural growth rate are showing significantresults. In addition, the Government of India’s encouragement towards incentivisingstates to increase public investment in agriculture, extending the Green Revolution toeastern states such as West Bengal and Assam, the National Horticultural Mission topromote fruits and vegetables and the increased Minimum Support Prices (MSP) for farmershave been contributing to the holistic development in this sector.
The above initiatives, coupled with private sector participation, have shownsignificant improvement. These are expected to boost the growth of Indian agriculturalsector in 2012.
2.0 INDUSTRY DEVELOPMENT
The Indian crop protection market has been growing steadily at nearly 14% during thelast 4 years. However, in 2011-12, the crop protection season has slowed down to asingle digit growth rate, mainly due to the uneven spread of the south west monsoon,relatively less favorable commodity prices and especially critical cropping conditionduring the recent Rabi season. It is important to emphasise that the overall positivemarket trends in the agricultural sector are fully in place and the agrochemicals industryis well synchronized to match with them. A number of reasons have been attributed to thelong-term positive market trend, such as good commodity prices and Minimum Support Pricefrom the Government of India, that has been helping farmers to choose qualitative inputsas well as increasing awareness amongst farmers about development in cropping patterns.
Indian agrochemical companies have been contributing substantially towards generatingawareness among farmers about sound crop protection practices. Diversity of crops acrossnewer geographical areas has brought in a gainful period for the agricultural sector andin particular to the crop protection industry.
Newer chemistry is entering the markets, as companies focus on innovation. Farmerstoday are more educated and their acceptance towards newer trends is much higher than everbefore. Quality has become a watchword for farmers, as exports of fruits and vegetablesare increasingly offering price advantages to them. Their power of choice has alsocontributed to an ever-expanding range of crop protection products.
The option for greater use of herbicides is on account of labour shortage spurred byMahatma Gandhi National Rural Employment Guarantee Scheme as also greater employmentoppurtinities in the manufacturing and service sectors across the country.
There is also a higher acceptance for new products. Farmers are now well aware aboutthe demand for quality of produce in fruit and vegetable segments and are increasinglyopting for fungicides, which has remarkably spurred the growth of this segment.
The Public Health business segment in India grew during the financial year 2011-12because of continued incidences of vector borne diseases like malaria and dengue. Bednetshave emerged as the most significant new category due to increase in global funding inorder to cover the rural population susceptible to malaria. Local Bodies on the other handhave continued practicing ‘Larvicides & Space Spraying’ in order to protectthe urban citizens from malaria as well as dengue. Indoor Residual Spraying as a practicewas observed mostly in the form of ‘DDT’ in areas like Bihar and Orissa prone to‘Kala Azar’.
Professional Pest Control (PPC) business also continued its positive growth curve inboth commercial and residential segments. Synthetic pyrethroids are still used for activetreatments of various pests. A latent demand for ‘natural / alternativeproducts’ is met by unbranded products in the unorganised sector. Termite controlproducts business keeps growing with the increase in new constructions. Bedbugs are posinga major threat to households and hospitality industry and are emerging as a key segmentapart from roaches and rodents. The segment grew overall by 12% as compared to last year.
3.0 REVIEW OF FINANCIAL AND OPERATIONAL PERFORMANCE
Total revenue for the financial year ended March 31, 2012 amounted to Rs. 23,176Millions as compared to Rs. 21,578 Millions for the last financial year and profit aftertax for the financial year increased toRs. 1,390 Millions as against Rs. 1,316 Millionsfor the last financial year.
As a key player in the agricultural industry, Bayer CropScience plays an important rolein driving innovation to improve agricultural productivity. The Company has investedsignificantly in partnerships with premier global research institutes on key staple cropssuch as wheat and rice. Such collaboration has already led to visible results that willenable these crops to better withstand disease and provide enhanced yields.
In 2011, your Company launched two herbicides Accord Plus – a post emergentherbicide that is an excellent Resistant Phalaris Management tool in wheat and Solitude aHerbicide that rids Soybean fields from weeds. Both these products have been well acceptedby the farmers in India. This was the first year after Bayer CropScience proactivelyphased out WHO Class 1 products in 2010, while offering more innovative and safersolutions.
Plans are on anvil to launch two new innovative products Lesenta and Solomon, bothinsecticides, in the second half of 2012. These products are expected to grow rapidlyacross various geographic regions and create value for both farmers and shareholders.
Through innovative products and services, your Company has established itself as acomprehensive solutions provider offering ‘Seed to Shelf’ products.
Your Company has launched a novel rice hybrid – Arize 6444 Gold, which verysuccessfully complemented the seed portfolio. The First-of-its-kind in India, Arize 6444Gold offers a holistic solution to rice farmers by assuring a high yield advantage andoffering protection from BLB (Bacterial Leaf Blight), a dreaded rice disease causingconsiderable yield loss (20-60%) annually. Arize 6444 Gold was very well accepted by thefarmers.
The Food Chain Partnership is an innovative business model of your Company that hasachieved significant milestones in the last couple of years of implementation. Throughthis programme, your Company is working closely with the farming community, advising themabout sustainable agricultural practices, the proper use of crop protection products andpest monitoring.
For traceability and record management, a "passport" was developed in locallanguages by your Company, which was issued to every project farmer. As a result, farmershave been able to increase the production of high-quality vegetables and fruits likepotatoes and grapes in a sustainable manner. Food Chain companies have been able toincrease the availability of fresh and healthy vegetables, meeting the consumer’srequirements of food quality, safety, traceability and sustainability.
A global Food Chain Partnership project between your Company and UNIVEG Group has bornenew fruit with the successful first shipment of high-quality grapes from India to Europe.This milestone reflects your Company’s commitment to generating value for itspartners in the entire food value chain.
Your Company has also been implementing many exceptional business excellenceinitiatives. These initiatives are giving us deeper knowledge of markets that arecontributing actively in increasing the business and adding to our competitive edge.
The Environmental Science Division maintains its position as the market leader in theareas of public health and PPC. The sales of the business division grew by 10% in the year2011 vs. 2010. Your Company continued to sponsor major symposia and seminars to promotegeneral awareness, product knowledge and international trends in vector borne diseasemanagement. These activities helped the Company increase its reach amongst ‘LocalBodies’, thus reflecting a growth in the vector control segment, inspite of a limitedportfolio of products. Further, your Company also made major inroads in new segments likePoultry – helping its core brand in the segment ‘Bilarve’ grow well.
In the PPC segment, your Company increased its footprint, by focusing on expansion ofreach and engaging directly with large Pest Managment Professionals (PMPs). Theseactivities yielded good results in growing the Pest Control Operations (PCO) business forthe Company. While the PCO category grew by just 11%, Bayer outgrew the category bygrowing at 23%. Your Company’s pilot ‘Bayer Network’ has yielded goodresults. The Company has been able to increase its sales by 200% among the ‘BayerNetwork’ PCOs in comparison to 65% growth in sales to PCO’s in the pilot town– Delhi.
4.0 OPPORTUNITIES AND OUTLOOK
The outlook for crop protection companies continues to be positive. Innovation-drivencompanies will achieve better consolidation in terms of value capture, say experts. Betterquality molecules and the range of products well-suited for high-value agriculture willensure growth. Swelling farm incomes, encouraged by good commodity prices, will furtherembolden farmers in spending on qualitative and innovative crop protection products.
Increasing employment opportunities in rural areas, encouraged by progressivegovernment policies and actions and coupled with high economic growth, are expected toinfluence labour availability for agricultural business. Usage of selective andnon-selective herbicides consequently, will get a major impetus due to this phenomenon.
Quality-conscious consumers will impact the market. This will boost fungicides segmentand create opportunities for the crop protection products in Horticultural cropcultivation.
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 Company’s focus on innovation will ensure that itbenefits from the existing growth trends.
With more than 3,500 sales managers and field advisers, as well as a large distributionnetwork, your Company has the deepest reach in the Indian market. This helps in providingnecessary insight into farmer needs and the capability to respond accordingly.
An increased reach, focus on large and medium sized customers as Key Accounts and agrowing PMP segment are some of the main contributors that will help Bayer consolidate itsposition in 2012 and onwards. This year the outlook seems bright, as your Company isreintroducing some earlier products, as also launching new ones. Bayer is also introducingnew tools like the ‘Safety Card’ to help the Company make further inroads in thePMP segment.
5.0 RISKS, CONCERNS AND THREATS
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.
Globally, the parent company of Bayer CropScience is currently restructuring its CropProtection business – by phasing out older products, increasing its focus on keybrand families, extending its geographic presence further into emerging markets anddeveloping its supply chain operations to a position of industry leadership. The Indianentity is sure to benefit from this development.
Your Company is striving to leverage customer-centric approach across the value chainto deliver solutions from seed-to-shelf. This involves increased grower orientation andadvisory, improved channel management practices as well as state-of-the-art customerrelationship tools, leveraging the trusted expertise of the Bayer brand.
A plethora of Generics is the biggest concern for the Environmental Science Division.
6.0 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 and,accordingly, audit observations and follow-up actions are discussed with the Management ofthe Company as well as the Audit Committee.
7.0 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.
CAUTIONARY STATEMENT
The statements in the "Management Discussion and Analysis Report" describethe Company’s 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.