MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial year of 2009-10 was a year of sustainability & growth for GokulRefoils and Solvent Limited. During this year, turnover has increased to Rs. 281628 lacsas compared to Rs. 273163 lacs in the last year with a significant increase in the profitafter tax (PAT) by 66% as compared to previous year. Company has made a net profit aftertax of Rs. 4255 lacs in current year as compared to net profit after tax of Rs.2568 lacsin the previous year. This is mainly because of operational efficiency at all levelsincluding saving in material cost through effective procurement, better realisationthrough retail market and branding efforts and saving in financial cost on account ofbetter fund management. Further the Company cemented its strategy of creating anintegrated, sustainable food company by capacity expansion through new manufacturingplants and deeper penetration into urban and rural India through a retail distributionnetwork.
World s consumption of edible oil was to the tune of 82 million MT in 1990-91. It hasdoubled in the two decades. Palm, Soya and Rapeseed oil/ Mustard oil are expected toconstitute 64% of the total global oil consumption. For the last two decade, global Palmoil consumption is growing faster than the global edible oil consumption. Global palm oilconsumption has grown by 8.7% CAGR from 1999 to 2008, where as global edible oilconsumption has grown by 4.4% only.
Palm oil is more popular oil because of its lowest production cost per ton as well asits worldwide acceptability. The proportion of Palm oil out of total world s oilconsumption is increased from 13.8% in 1990-91 to 29% in 2009-10.
India is the 4th largest edible oil economy after U.S, China and Brazil. As we can seethat Asian Industries have emerged as the most promising industry at the world and theGlobal cues suggest that the next round of growth will come from Asian economies likeChina and India which have a growing population to feed, younger demographics, betterlifestyle choices and increased purchasing power due to local development.
The future for food companies will be fortified by giving the discerning consumer asustainable, healthy and value added choice to create a better life. Edible oil companieswill create customer loyalty through sustained brand building efforts by catering to thelocal tastes of the consumers. Increased R&D spend for value added, healthierinnovation and reduced input costs by owning the backend supply chain will be critical tocreate value for customers and shareholders alike.
The Promising Indian Market- Increasing demand of Palm Oil
India is a Country which represents the Asian Industry at globally as the mostpromising and under-penetrated consumer markets in the world. Being a developing countryIndia has proved and achieved a lot and yet initiates its firm and steady steps to carryout a strong growth and leave its deep impact at the Global level. As on today, almosthalf of the Indian population is of young blood and constantly increased spending power ofthe consumers and awareness of healthy living. With the creation of an information age andtelecom and television reaching out to most corners of the country, a new opportunityarises in tapping the semi-urban and rural populace.
The Indian edible oil market is currently growing at a rate of 5% to 6% per annum butstill present Indian per capita consumption of edible oil is approx 12.8 kg/annum only,which is very low as compared to the world average of 20 kg/annum. The developed westernworld has a per consumer consumption of 40-50 kg/annum. The edible oil sector in India islargely unorganized with a few organized players. There is a lot of potential andopportunity for organized players in Indian market because of growing population to feed,younger demographics, better lifestyle choices and increased purchasing power due to localdevelopment.
Palm oil has the highest consumption in India among various edible oils,, followed bysoybean and Mustard. Palm oil is the cheapest and hence most affordable. The very factthat a large number of Indians have included palm oil in their regular dietary pattern andeating habits shows that oil is being accepted as a regular nutrient to healthy living. Webelieve that palm and soya has the proportion of 42% and 15% respectively out of totaledible oil consumption of India. Today over 50% of the India s edible oil demand is metthrough imports primary of Crude Palm oil and Degummed Soybean oil. Crude palm oilrequirement in India is almost entirely imported from Indonesia and Malaysia.
Change in Indian culture- Focus on Branded Segment
The Indian housewife, both in the urban and rural sector is becoming increasinglyconscious about quality and purity, thus demanding branded edible oil products. This hasresulted in a shift of the Indian consumer from loose and adulterated edible oils tobranded offerings. Branded segment of the Indian edible oil market is expected to register25-30% growth per annum in the next few years.
Gokul Refoils performance in FY 2009-10 Sustainable and Profitable growth
The year 2009-10 has been very productive in terms of business growth andprofitability. Gokul Refoils registered sustainable growth in spite of lower realizationof sales prices of edible oils in the Indian market. The company posted sales of Rs.281628 lacs and profit after tax recorded a 66 % growth at Rs. 4255 lacs this year. GokulRefoils and Solvent Limited is following a threefold strategy of increasing sales,penetrating newer markets and strengthening the market share and brands in its currentmarkets. Its flagship brands Gokul and Zaika have performed exceptionally well among theconsumer class. The company continued to strengthen its position in areas of sourcing rawmaterials, capturing value in supply chain and logistics, expanding manufacturingcapabilities and increasing sales of branded products. It has a good presence being aserious player in the Palm Oil, Soya Oil, Mustard Oil and Cotton oil sectors in India.
Marketing & Distribution Strategy to build brand
The FMCG edible oil market can be divided in two sections in India - urban and rural.During the year, Gokul Refoils developed a twin strategy for both these markets. Also, itsees significant growth opportunity coming from urban areas which are currently under-penetrated and not exposed to its brands and products in the future. For the urban market,penetration levels and awareness are high. The company is reaching out to the discerninghousewife and family shopper through these retail chains where its products are wellstocked and displayed in front shelves. Regular promotions and discounts help inincreasing new consumer trials and repeat sales.
The semi-urban and rural markets are under-penetrated, scattered and operate throughmom and pop stores. Thus, distribution and reach are critical to ensure products reach theconsumers. Gokul Refoils is creating a pan-India distribution and retail network both incities and in the interior heartlands through a combination of C&F agents,distributors and local retailers. Semi-urban and rural India is riding on a good harvestand informed and effluent middle class consumers. With a growth in infrastructure and thegovernment s thrust on connecting rural India, physical infrastructure is available toplayers like us to ensure reach and distribution. The company s plan for creating a strongdistribution network is bearing results. Today it has a strength of 41 C&F agents/owned depots, 400 distributors and over 1,00,000 retailers in the states of North East,West Bengal, Bihar, Jharkhand, Orissa, Maharashtra, Uttar Pradesh, Uttaranchal, MadhyaPradesh, Delhi, Punjab & Haryana, Himachal Pradesh, J&K, Rajasthan and Gujarat,.The consumer response in new markets for the brands Gokul and Zaika has been encouragingand we see the demand for the products growing.
Gokul Refoils two flagship brands Gokul and Zaika performed exceptionally well in thecurrent year. Today, Gokul is positioned as the premium brand for the loyal housewifewhile Zaika is the mass, affordable brand and more popular in vanaspati. As per feedbackand response, we believe that consumers relate our brands with purity, smell and taste. Adetailed planning for all India television campaign, FM commercial and print media isgoing on for next year and it is expected to start in first half itself.
Financial Performance - A robust growth story
The company reported a net profit of Rs. 4255 lacs as compared to Rs. 2568 lacs of theprevious year, an increase of 66 %. The net sales also grew to Rs. 281628 lacs from Rs.273163 lacs as reported in the previous year. The company reported an EPS of Rs. 3.23 forthe year ended 31 March, 2010 as compared to Rs. 2.03 in the previous year. All majorbrands of Gokul Refoils reported robust growth for the year. Today, nearly 50% of thecompany s edible oil sales come from the branded segment and retail sales are alsosignificantly increasing in the proportion. Due to our economies of scale in import oilpurchases, our raw material costs are one of the lowest in the industry. With one of thebest procurement teams in place, we have developed deep relationships with the suppliers,farmers, intermediaries, and other market participants to ensure lowest cost, long termcontracts and best quality of raw material. During the year, we also initiated severalcost rationalization and optimization measures, which resulted in savings in operationcosts, leading to bottom line improvement.
The detalied financial review is as under: Standalone
Gokul delivered better financial performance with improvements across key parameters.Turnover achieved for the year ended 31 March, 2010 was Rs. 281628 lacs a growth of 3%over previous year.
Consumption of raw materials as compared to sales has reduced by 1.33% from 90.58% to89.25% as compared to previous year. The change is mainly on account of foreign exchangerate difference gain.
Employee cost was Rs. 1166 lacs for the year as against Rs. 829 lacs. The increase ison account of the staff employed at the Haldia unit of the Company and increase in year toyear employee cost of the Company.
EBITDA increased by 25 % from Rs.12024 lacs to Rs. 9631 lacs.
The interest cost of the Company has reduced by 20.25 % from Rs. 4080 lacs to Rs. 3254lacs. This is on account of better fund management by the Company. Depreciation (includingamortization) was higher at Rs. 2508.64 lacs as against Rs. 1775.90 lacs in the previousyear primarily on account of addition of Haldia Plant in the total assets of the Company.
Profit after tax was Rs. 4255 lacs as against Rs. 2568.04 lacs for the previous year,an increase of 66%.
Earning per share (EPS) for the year has increased from Rs. 2.03 to Rs. 3.23 per share.
Gokul has achieved a consolidated turnover of Rs. 296165 lacs as for the year ended31st March, 2010 a growth of 3.08 % over previous year.
Consolidated consumption of raw materials as compared to sales has reduced by 1.12%from 90.62% to 89.50% as compared to previous year. The change is mainly on account offoreign exchange rate difference gain.
Consolidated employee cost was Rs. 1166 lacs for the year as against Rs. 837 lacs. Theincrease is on account of the staff employed at the Haldia unit of the Company andincrease in year to year employee cost of the Company.
Consolidated EBITDA increased by 7 % from Rs. 9236 lacs to Rs. 9903 lacs.
The consolidated interest cost of the Company has reduced by 17.45 % from Rs. 4323 lacsto Rs. 3569 lacs. This is on account of better fund management by the Company.
Consolidated depreciation (including amortization) was higher at Rs. 2516.86 lacs asagainst Rs. 1803.41 lacs in the previous year primarily on account of addition of HaldiaPlant in the total assets of the Company. Consolidated profit after tax was Rs. 3818 lacsas against Rs. 3110 lacs for the previous year, an increase of 22.76%.
Consolidated earning per share (EPS) for the year has increased from Rs. 2.46 to Rs.2.89 per share.
Building future scale and capabilities-Manufacturing Plants
Low capital requirements, sub-contracting of manufacturing and producing edible oil innon-standard conditions have been traits of the unorganized sector. Consumers today aredemanding purity, quality and tamper proof packaging. During the year, Gokul Refoils hasrolled out new state-of -the- art manufacturing facilities in Haldia at eastern coast ofIndia. This led to enhanced access and logistics efficiency in markets of the North East,West Bengal, Bihar, Jharkhand, Orissa and Uttar Pradesh. The refinery has given a boost tothe company s refined oil strategy by adding an additional capacity of 1100 metric tonnesper day. The refinery produces Palmolein and Soya Refined oil in Gokul and Zaika brandsfor the Eastern market.
Crude Palm Oil bought from international locations directly lands in the Haldiarefinery. It is processed and delivered to the Eastern markets. The state-of-the-artrefinery located in the Haldia port has a direct pipeline facility which ensure crude oildirect shippment from the ocean carriers to the plant storage area.
Today, the Company has two port based plants at Gandhidham and Haldia, along withmother plant at Sidhpur and one other plant at Surat. The strategic location of company splants provides logistic advantages in procurement of raw material as well as indistribution of its products. Gandhidham and Haldia plants are having port advantage forimport of crude oil and export of Company s products while Sidhpur enjoys advantage inprocurements of Mustard seed because of its proximity to oil seed cultivation belts ofRajasthan and Gujarat. With the refining capacity of 2900 MT per day, Seed processing& Extraction capacity of 2380 MT per day and Vanaspati capacity of 400 MT per day,Gokul Refoils is the one of the top five edible oil companies of India,
Company s plants are built on a technology which will ensure that at any given time,production can be switched between any type of crude oils as -Palm, Soya, Mustard andCastor. This will give real time and dynamic planning capability to the production teambased on market demand. Efficient use of machinery and layout make sure that each plantconsumes minimum energy, reduces waste and recycles inputs like water and other wastes.The plants are environment friendly and assure sustainable and green production methods.The time required for oil production and power consumption will thus be reducedsignificantly.
Building the Leadership Employee Initiatives
Human Resource is our key focus as it will lead to a competitive edge in the futurewith five core values as Customer Orientation, Excellence, Integrity, leadership andInnovation. All Gokul s employees are assigned a level under a particular band dependingupon their role, impact and criticality of job and the contribution to the Company sstrategy. Employee Capital and leadership development will be a key focus in the years tocome.
Responsible and Green Business - Backward Integration
As corporate citizens, we ensure that we manage our business in a responsible andsustainable way. Energy savings, green power generation, waste recycle and pollutionreduction are some of the key areas where we ensure strict internal control. We are carbonneutral and sensitive to sustainable development for the next generation. We strive tofacilitate an environment policy framework that enables sustainable development. TodayGokul Refoils has 4 Wind Turbine Generators (WTGs) with a total power generation capacityof 5 MW in the State of Gujarat along with co-generation captive power plant at Haldia andGandhidham with the total capacity of 3.4 MW. The investment in green power is with aim tocreate a cleaner and pollution free environment.
Self control is the Best Control Corporate Governance
At the heart of the Company s Corporate Governance policy is the ideology oftransparency and openness. The senior leadership at Gokul Refoils, comprising of the Boardof Directors, sincerely believe that corporate accountability and corporate governanceenable wealth creation. It is believed that the imperative for good Corporate Governancelies not merely in drafting code of
Corporate Governance but in practicing it. Company s Philosophy on Corporate Governanceis built on rich legacy of fair, transparent and effective governance which includesstrong emphasis on human values, individual dignity and adherence to honest, ethical andprofessional conduct. Going ahead, we see qualitative participation from the IndependentDirectors in the board to ensure strategic inputs and world class governance practices.
Significant Developments subsequent to Last Financial Year
1. The Company has set up a new port based plant at Haldia in Eastern India with arefining capacity of 1100 MT per day. The production has already commenced in August,2009.
2. The Company has subdivided its share from face value of Rs. 10/- each to Rs. 2/-each with effect from 15th October, 2009.
3. During this year, the Company has strengthened its manufacturing facilities byexpanding its refining capacity by 400 TPD at Gandhidham.
4. The Company has started castor manufacturing facilities at Gandhidham by setting upa new castor refining facility of 200 TPD and by shifting Sidhpur s unutilized expellerand extraction capacities to Gandhidham plant. Now the company has castor seed processingcapacity 300 TPD, castor extraction capacity of 200 TPD and castor refining capacity of200 TPD at Gandhidham plant.
Risk and Concern
The main areas of concerns are:
1. The overall scenario is also imposed by volatility in commodity and currency prices.Your Company has designed a Risk Management Policy and it is being reviewed periodicallyby the management and appropriately modified wherever necessary based on expert advice andfuture outlook.
2. Your Company is trying to balance import and export gap as it provides natural hedgeso that currency risk is minimized. The company makes use of forward cover/hedge mechanismto manage these risks. The company s raw materials as well as finished products are tradedin futures market which gives opportunity to hedge the price risks related to raw materialand finished goods.
Internal Control System and their Adequacy
In view of the management, the Company has adequate internal control system for thebusiness processes followed by the Company. External and Internal Auditors carry outperiodical review of the functioning and suggest changes if required. The Company has alsoa sound budgetary control system with frequent reviews of actual performance as againstthose budgeted.
The Audit Committee of the Board meets periodically to review various aspects ofperformance of the company and also reviews the adequacy and effectiveness of the internalcontrol system and suggests improvement for strengthening them from time to time. ExternalAuditor also attends this meeting and conveys their views on the business process and alsoof the policies of financial disclosures. When found necessary, the Committee also givessuggestions on this matter.
The way ahead
Sustainable, profitable growth is the only way ahead. We have mission to become one ofIndia s leading FMCG led edible oil companies having reach to every kitchen of Indianfamily, pan India presence and operations across the globe, develop most preferred andadmired edible oil brands and create best value propositions to investors, vendor &society.
In India, we hope to continue to build strong and trustworthy food brands and expandmanufacturing capabilities to meet the demands of the one million plus market. We also aimto bring down our cost of inputs and raw materials. Continuous cost leadership in the backend, and profit margin expansion in the front end by building brands, will drive growthand create value for all stakeholders.
From creating a consumer connect to developing a deep distribution-cum-retail network,we will ensure that our two brands Gokul and Zaika have top-of-the-mind recall amongconsumers. A strong marketing initiative including ATL and BTL initiatives will belaunched to create a customer connect, increase product trials and enter new markets. Ourmanufacturing plants give us control over the entire production process thereby ensuringquality, quantity and packaging guarantee. We will use our manufacturing strength tocreate better customer experiences in purity, health and taste. As a retail led focus, wehave significantly invested in consumer packaging and will ensure that our products aremade available to the housewife in every size (quantity), shape (bottles or sachets) andsituation (high end malls to small kirana stores) she demands.
The statements made and figures given in the various section of Management Discussionand Analysis is keeping in the mind the Company s objectives, estimates and expectations.The actual results may differ from those expected, depending upon the economic conditions,changes in Government Regulations, tax regimes and other external and internal factors.