MANAGEMENT DISCUSSION AND ANALYSIS
The year under review for food antioxidants TBHQ and BHA was a challenging one due tothe pricing volatility of key raw material; Hydroquinone (HQ). The escalation inHydroquinone prices forced the manufacturers of food antioxidants to protect their marginsand markets by adopting short term pricing strategy. This resulted in intense competitionfor market share. The situation was further worsened by currency fluctuations.
The Company has registered a high growth in this extremely volatile market situationand increased its market share of food antioxidants. This was possible by the focusedapproach on the stability of supplies and prices to the customers. The backwardintegration due to acquisition of an Italian Company Borregaard Italia S.p.A. (now knownas CFS Europe S.p.A.) helped the Company to ensure competitive pricing of key rawmaterial.
Business Strategy Analysis:
The Company started the year with the mission to be an integrated diphenol manufacturerafter the acquisition of CFS Europe S.p.A., a manufacturer of two basic raw materials, HQand Catechol.
The business strategy was focused on developing down stream products from HQ andCatechol having applications in the food and industrial segments.
The Company created two major business divisions, namely, Food and Industrial Products.These divisions were created to bring a sharper focus on developing diphenol down streamproducts. This strategic change has resulted in significant increase in market share ofboth Food and Industrial Products.
The Company also in the year under review, developed four new Diphenol down streamproducts namely
Vanillin, a flavor and aroma chemical having applications in the food industry.
Guaiacol, a chemical intermediate for manufacturing aroma chemical Vanillin and APIGuafenesin.
Tertiary Butyl Catechol (TBC), Polymerisation Inhibitor for Styrene and alliedmonomers.
Guethol, a chemical intermediate to manufacture aroma and chemical compound.
The Company has commercialized the down-stream products like Guaiacol, Veratrole andTBC during the year and will launch commercial Vanillin during the first half of FY2012-13.
The acquisition of CFS Europe S.p.A. was completed on 8th March, 2011. After initialshut-down, the Company is now fully operational and has reached 80% of the plant capacityduring the year. The volume of production during this period of 11 months of the currentfinancial year was 6990 MT. with value of around 23.66 million euro.
The Company wants to build upon its core strength in the food segment by expanding itsbasket of products and to emerge as a leading food ingredient and solution providingCompany to the food industry in the coming years.
The Company is expanding the capacity of the niche antioxidant, Ascorbyl Palmitate andFood antioxidants TBHQ and BHA to consolidate its position and improve market share.
In order to strengthen the food antioxidant portfolio, the Company is now focusing ondeveloping new products and specialized product systems to improve the shelf life ofprocessed foods.
The Company is in the process of setting up additional Distillation facility forenhancing its capacity of its existing and new products. This facility is expected to becommissioned in the first half of the financial year 2012-13. The Company is alsodeveloping a basket of new ingredients to be added in the areas of bakery, confectionery,dairy and beverages industry.
The Company is also setting up a state of art food application laboratory and testingfacility to offer developmental and solution providing capabilities to the customers offood industry in India. This will also enable the Company to penetrate other customers inAsia and Latin America and also to reach other customers worldwide.
The Company is targeting to increase its market share in evolving markets like India,China, Latin America, Middle East and South East Asia, where the food processing industryhas been growing at a rate of more than 10%. per annum. In the other markets globallywhich are expected to grow at around 3% per annum, the Company will consolidate itsposition in the existing markets like USA, Europe.
The customer centric focus:
The Company intends to have a deeper relationship with our customers and increase ourmarket presence to consolidate our position with customers with improved service.
Market Reach & Penetration:
The Company is keen to expand its reach in the growing markets like China, Middle East,Latin America, Asia and India. For this, the Company intends to set up marketing anddistribution hubs in these markets to ensure optimal logistical services to customers inthis region.
During the year the Company has opened a marketing office in Brazil, Latin America forcovering countries like Brazil, Argentina, Colombia, Chile, Peru and Ecuador. The Companyis in the process of creating a distribution hub for Latin America to further improve thecustomer reach and penetration.
Risks and Concerns:
Risk is intrinsic to business and it is the de-risking ability of the Company whichmarks it successful. The strategy given above would take care of any such risk associatedwith business.
The availability of key raw materials from international sources at the right quantityand at right price are also risk factors associated with the business of the Company.However Company has taken care of this risk by acquiring an international Company, namelyBorregaard Italia s.p.a (now known as CFS Europe S.p.A.), as a step towards backwardintegration, through its wholly owned subsidiary in Mauritius. The main raw materialsupplies will thus be available at the right quantity and at right price without anylimitation. The risk of over dependence on few overseas suppliers besides pricesensitivity has been mitigated by this acquisition.
Further, on the international currencies front, volatility of exchange rate is a matterof concern for a Company like us whose major sales are worldwide. However, the riskassociated with currency fluctuation has been mitigated by effective forex managementalong with judicious use of natural hedge provided by exports and the Company adopts avery conservative and cautious approach in forex operations.
Increase in the cost structure is a risk that threatens profitability. The Company hastaken suitable cost control steps at various levels and costs are being monitored toensure that they are commensurate with the increase in the business.
Lack of clarity on future Government policies continues to be an area of major concernfor the industry. The exact impact of this cannot be assessed until the proposed changesare actually introduced and implemented.
Internal Control Systems and their Adequacy:
The Company has adequate internal control procedures commensurate with its size andnature of business. The Company has clearly laid down policies, guidelines and proceduresthat form a part of the internal control systems. The adequacy of Internal ControlSystems, which encompass the Companys business processes and financial reportingsystems, is examined by the management as well as by its internal auditors at regularintervals. The internal auditors carry out audits at regular intervals in order toidentify weaknesses and suggest improvements for better functioning. The observations andrecommendations of the Internal Auditors are discussed by the Audit Committee, to ensureeffective corrective action.
Discussion on Financial Performance with Respect to Operational Performance:
Sales during the year ended 31st March, 2012 were higher at Rs. 25,206.23 Lacs asagainst Rs. 16,475.96 Lacs in the previous year. There was an increase of Rs. 8,730.27Lacs in sales over the previous year thereby registering a growth of 52.98%. Profit beforetax was Rs. 1,644.07 Lacs as against Rs. 841.85 Lacs showing an increase of Rs. 802.22Lacs over the previous year thereby registering a growth of 95.29%.
Human Resources and Industrial Relations:
The Company constantly facilitates and encourages its employees at all levels toenhance their knowledge and skills and continuously seeks to inculcate within itsemployees, a strong sense of business ethics and social responsibility. The Company hastaken HR initiatives and partnered with Deloitte, one of the major HR Consulting firms inthe world, to look at some critical areas in HR such as Organization Structure, Roles& Responsibilities, Performance Management System and Rewards Scheme and bring aboutchanges in these systems in line with leading practices in the sector. The associationwith Deloitte should bring in close integration and performance based approach amongst theemployees covered in the said exercise.
Relations with the employees at all levels remained cordial during the year. YourCompany has 206 permanent employees as on 31st March, 2012.
| ||For & On Behalf of the Board |
| ||ASHISH S. DANDEKAR |
| ||Managing Director |
|Place : Mumbai || |
|Dated : 24th May, 2012 || |