Mcleod Russel India Ltd

INDUSTRY STRUCTURE AND DEVELOPMENT

India, the world's largest black tea producer produced approximately 967 million kgs.during the calendar year 2010 representing 38% of global black tea production. Black teaproduction by other main tea producers during 2010 was Kenya (399 million kgs), Sri Lanka(329 million kgs), other African countries (172 million kgs), Vietnam (145 million kgs).Indonesia (72 million kgs.) and Bangladesh (59 million kgs).

Kenya and Sri Lanka had favourable weather conditions during 2010 gaining over 100million kgs. of crop of black tea over 2009 production. India, however, lost 13 millionkgs. of crop during 2010 as compared to the previous year due to unfavourable weathercondition and pest attack in North East India. Low inventory, lower production andcontinuous strong consumption growth has helped in maintaining prices during the year.Prices in the global market were also stable to positive despite record crop in Kenya andSri Lanka. Cost in India has gone up by Rs.10/- per kg. on lower crop, increase in wagesand other input costs.

OPPORTUNITIES AND THREATS

Indian exports fell by 5 million kgs. during 2010 on the back of strong domestic demandand production shortfall. Domestic consumption is estimated to be around 860 million kgs.during 2010. Since no addition to the land under tea cultivation by organized sector hastaken place in last 5 years and uprooting and replanting of low yielding section takes 3-5years to materialize, the production in next few years is estimated to be stagnant to veryinsignificant growth. Demand for Orthodox teas by CIS and Middle East countries during2010 was very strong. However, financial imbargo on Iran may affect the export of orthodoxteas in coming years. Stable currency in India during 2010 had a positive impact onprices. However, any reversal of the trend may impact export realisation

RISKS AND CONCERNS

The Tea Industry is largely dependent on the vagaries of nature. The Industry is highlylabour intensive and is subject to stringent labour laws. Comparatively high labour costs,high social cost over most other tea producing countries, high infrastructure costs andincreasing energy and other input costs remain the major problems for the Indian TeaIndustry. Shortage of labour during peak season in some pockets is also a cause forconcern.

These problems need to be addressed by improved productivity and energy conservation.The Tea Industry both in Assam and West Bengal have discussed with the Trade Unions andimplemented productivity linked wages for the tea workers with a view to regain theindustry's competitiveness in the global market.

The Special Purpose Tea Fund (SPTF) has been set up by Commerce Ministry to implementuprooting and replanting programme which would help improvement in the productivity andyield thereby reduce cost in the coming years.

The small tea growers and bought leaf factories form a considerable part of theIndustry. A recent compilation of figures show a total production of around 100 millionkgs. through these bought leaf factories in North India. There is a need to regulate thesefactories to maintain the quality. The Industry is also subject to taxation from Ihe StateGovernment as well as Central Government and while the level of direct taxes has come downover a period, some of the State levies like cess on green leaf in Assam and substantialincrease in Land Revenue charges put the industry at a very disadvantageous position.

To mitigate various types of risks that the company has to face, the Board of Directorsof the Company has adopted a Risk Management Policy and implemented the same at the TeaEstates and at Head Office of the Company. The Company has introduced Hazard Analysis andCritical Control Points (HACCP) at all the Tea Factories to ensure better quality product.

OUTLOOK

Dry weather condition in Kenya and other African countries during the first four monthsof the current year has affected the production. Tea production in these countries isestimated to be lower by 35 million kgs. upto April. Production shortfall in India during2010 has further depleted the inventory level. However, production in 2011 in India isexpected to be normal based on the current weather conditions. Lower inventory in India,production shortfall in Kenya and other African countries, strong consumption growthshould have positive impact on prices during 2011. Tea prices in India are currentlyruling higher by Rs.10/- to Rs.15/- per kg. as compared to the same period last year. Withthe revision of wages, normal increase in input costs should get offset with revival ofproduction in North India. Cost per kg. is expected to increase marginally during 2011-12.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has in place adequate systems of internal control commensurate with itssize and the nature of its operations. These have been designed to provide reasonableassurance with regard to recording and providing reliable financial and operationalinformation, complying with applicable statutes, safeguarding assets from unauthorized useor losses, executing transactions with proper authorization and ensuring compliance ofcorporate policies. Three independent firms of Chartered Accountants carry out internalaudit at the Tea Estates on a regular basis. Another firm of Chartered Accountantsconducts internal audit at the Head Office.

The Company has an Audit Committee, the details of which have been provided in theCorporate Governance Report. The Audit Committee reviews Audit Reports submitted by theInternal Auditors. Suggestions for improvement are considered and the Audit Committeefollows up the implementation of corrective actions. The Committee also meets theCompany's statutory auditors to ascertain, inter alia, their views on the adequacy ofinternal control systems in the Company and keeps the Board of Directors informed of itsmajor observations from time to time. The Risk Management Policy adopted by the Companyhas further strengthened the internal control system.

FINANCES

Financial ratios have improved substantially over last couple of years. Gross debt(consolidated) as on 31st March 2011 amounted to Rs. 316 crores as compared to Rs. 402crores as on 31st March, 2010. Internal generations have been used to reduce the debt byRs.86 cores during the year.

HUMAN RESOURCES

Tea Industry is highly labour intensive. The Company employs over 80,000 personnel atits Tea Estates and other establishments in India. Employee relations remainedsatisfactory during the period under review. The Company would like to record appreciationof the wholehearted support and dedication from employees at all levels in maintainingsmooth production and manufacture of tea from all the Tea Estates during the year.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis Report in regard to projections,estimates and expectations have been made in good faith. Many unforeseen factors may comeinto play and affect the actual results, which could be different from what the Directorsenvisage in terms of future performance and outlook. Market data and product informationcontained in this Report have been based on information gathered from various publishedand unpublished reports, and their accuracy, reliability and completeness cannot beassured.