ess dee aluminium ltd Management discussions

(Annexure B)

Industry Structure and Development Outlook

Ess Dee Aluminium is a fully integrated provider of comprehensive primary packaging solutions to the Healthcare, food and FMCG sectors. From our plants located pan India, we provide tailor made solutions that involve multiple processes like cold rolling of aluminium foil, lamination, extrusion, coating, printing, etc.

As per latest estimates, the Indian packaging industry is valued in excess of USD 33 Million with CARG @ 15 %. The per capita packaging consumption in India is quite low at 4.3 kgs, compared to countries like Germany and Taiwan where it is 42 kgs and 19 kgs respectively. This along with the projected growth of end use segments like FMCG, food and beverages, pharmaceuticals, provides immense opportunities for future growth. The environment friendly, barrier, dead fold, aesthetic and other properties of aluminium foil in isolation or in combination with various other substrates, polymers, resins and lacquers makes it a packaging material of choice.

According to the estimates of the World Packaging Organisation, the global packaging industry reports an annual turnover of about US$500 billion with CARG @ 5 %. Packaging materials used in the food and beverage come in close contact with edible materials. Pharmaceutical packaging plays an indispensable role in preventing biological contamination and enabling pharmaceutical formulations to retain their properties through the entire logistical and purchase cycle. Customer convenience is the top priority for the vendors in the global packaging market. Several packaging companies are focusing on new packaging designs or redesigning the existing packaging especially in consumer goods. Consumers prefer such packaging that requires minimum time and effort to open, carry, and store such as zippers re-closure, tear notches, peel-off lids, hang hole features, and microwavable pouches. Such packaging designs are being increasingly produced to meet the growing consumer demand for food and beverage products. Global growth is being shaped by emerging market demands and an increased purchase of packaged goods- we see the global consumption for packaging shift eastwards, driven by the populous Asia Pacific region which provides strongest regional performance for packaging, underpinned by a rising wealth in the region.

We are principally aligned with the Health Care, FMCG and Food segments having very strong fundamentals and massive growth opportunities

Pharmaceuticals

• Indian Pharmaceutical Industry is expected to expand at a Compound Annual Growth Rate (CAGR) of 15.92 per cent to US$ 55 billion by 2020 from US$ 20 billion in 2015.

• India’s cost of production is nearly 33 per cent lower than that of the US.

• Labour costs are 50 55 per cent cheaper than in Western countries. The cost of setting up a production plant in India is 40 per cent lower than in Western countries.

• Cost-efficiency continues to create opportunities for Indian companies in emerging markets and Africa.

• India has a skilled workforce as well as high managerial and technical competence in comparison to its peers in Asia.

• India has the 2nd largest number of USFDA-approved manufacturing plants outside the US.

• India has 2,633 FDA-approved drug products and has over 546 USFDA-approved company sites, the highest number outside the US.

• The Indian pharmaceutical market size is expected to grow to US$ 100 billion by 2025, driven by increasing consumer spending, rapid urbanisation, and raising healthcare insurance among others.

• Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as cardiovascular, anti-diabetes, anti-depressants and anti-cancer that are on the rise.

• The Indian government has taken many steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programmes, lifesaving drugs and preventive vaccines also augur well for the pharmaceutical companies.

• The implementation of the Goods and Services Tax (GST) is expected to be a game-changer for the Indian Pharmaceuticals industry. It will lead to tax-neutral inter-state transactions between two dealers, thereby reducing the dependency on multiple states and increasing the focus on regional hubs. It is expected to result in an efficient supply chain management, which is expected to reduce its cost considerably. The cost of technology and investment is expected to reduce on account of tax credit which can be availed now on the duties levied on import of costly machinery and equipment.

FMCG and Food Sectors

• Favourable demographics and rise in income level to boost FMCG market.

• FMCG market in India is expected to grow at a CAGR of 20.6 per cent and is expected to reach US$ 103.7 billion by 2020 from US$ 49 billion in 2016.

• Urbanization-Modern technology is now an integral part of nations society today with high-end package usage increasing rapidly. As consumerism is rising, rural India is also slowly changing into more of an urban society. The liberalization of the Indian economy, coupled with globalisation and the influx of the multinationals, has improved the quality of all types of primary and secondary packaging. Also industrialization and expected emergence of the organized retail industry is fuelling the growth of packaging industry.

• Increasing Health Consciousness- As people are becoming more health conscious, there is a growing trend towards well packed, branded products rather than the loose and unpackaged formats. Today even a common man is conscious about the food intake he consumes in day-to-day life.

• Indian Economy Experiencing Good Growth Prospects-The Indian economy is growing at a promising rate, with growth of outputs in agriculture, industry and tertiary sectors. Overall economic growth has proved to be beneficial for the consumer goods market, with more and more products becoming affordable to a larger section of the population.

• Changing Food Habits amongst Indians- Changing lifestyles and lesser time to spend in kitchens are resulting in more incidence of eating away from homes resulting in explosive growth of restaurants and fast food outlets all over the country. Indians are trying out newer cuisines and also purchasing similar food items for their homes. Therefore, the review period has seen new products like pasta, soups, noodles and ready to eat products being launched in India, fuelling the growth of packaging industry in India.

• Personal health consciousness amongst Indians- With growing awareness towards contagious diseases like AIDS and other STDs awareness towards usage of contraceptives and disposables syringes have increased the demand for packaging required for the same.

• Rural Marketing Pushing Demand for Sachets- India comprises of a big rural market and there has been growing focus on rural marketing, whereby manufacturers are introducing low-priced goods in smaller pack sizes. Low priced sachets have proved to be extremely popular in smaller towns and villages, where people do not prefer to buy larger packs due to financial constraints

• Our focus is on aluminium foil based technologically superior barrier packaging solutions for household care, personal care, confectionery, prophylactic, food and beverages segments. Focus on protection, barrier, convenience, cost savings in materials, storage and transport, smaller units, aesthetics, environment friendly packaging

OPERATIONS

Your Company operates in the single segment i.e. Advanced Primary Packaging Solutions. The Company’s foil rolling capacity is 37,000 TPA. During the year the company has made provisions for Impairment of Fixed Assets Due to extended financial stress our operations have come to a standstill although we continue to execute regular technical audits to assess the health of the equipment so that we can recommence expeditiously once the restructuring is in place.

ESS DEE’s COMPETITIVE INDUSTRY POSITIONING:

Increasing Demand:

With improving lifestyles and better standard of living, people are becoming more health conscious resulting in a growing trend towards well-packed, branded products rather than the loose and unpackaged formats. Further the Company mainly caters to the Pharmaceutical and FMCG categories which are poised for huge growth thereby increasing the prospects for the Company’s products.

Strong Team :

The Company is putting in to place an experienced, relevant and enabled management team along with an effective implementation team so that the turnaround can be affected in the shortest possible lead time post the restructuring. It recognises the role played by the employees in its overall success and its HR policies are geared towards recruiting, training and retaining our employees.

Strong Product development capabilities:

Ess Dee has a track record of bringing in many firsts in terms of innovative and technologically advanced products to the market. Through continuous focus on research and development, the Company has demonstrated strong product development capabilities and achieved market leadership in India. With foreign collaborations this is expected to improve further and the Company is gearing up for establishing itself on the global front.

Strong Client Base and Distribution Network:

Ess Dee has a diversified customer base of over 300 companies in pharmaceuticals, food and FMCG sectors. It operates the sales and distribution network through a "hub and spoke" model which enables it to provide customised packaging solutions to customers across India. In addition to direct sales to domestic customers, Ess Dee has a robust network of distributors and selling agents to market and sell its products globally.

Highly Focussed on Quality:

Ess Dee has installed several online and standalone equipment for testing the quality of aluminium foil stock and other raw materials as well as the end product. The Company’s Daman Unit II has received ISO 22000:2005 certification from Equalitas and majority of other units have been awarded ISO 9001:2008 certification. It has also received DMF Type III registration with the United States Food and Drugs Administration authority and DMF Type II registration with the Canadian healthcare authorities for certain products. It has also received a BRC certification for "Global Standard for Packaging and Packaging Materials".

RISKS & CONCERNS:

The major risks and concerns attributed to the performance of the Company are: Increase in input costs The company imports majority of its raw materials and is making continuous efforts to keep its raw material costs under control. The Company is trying to mitigate this risk of LME price fluctuations as well as currency fluctuations by procuring ingots locally and manufacturing foil stock in-house.

Economic Headwinds:

Pharmaceutical and FMCG represent the two major segments from which Ess Dee derive its demand. While they remain relatively insulated from economic slowdown, going forward they are expected to do extremely well given the expectations of a revival in the Economy.

Regulatory Risks:

The Company caters to industries which require high standards of regulatory adherence. With increased focus on quality it has been the recipient of quality certifications which enables it to cater to diversified customer base.

Unorganised Market:

The Packaging industry in India continues to be plagued by unorganised players and at present, the pharmaceutical packaging sector is largely serviced by large number of players in the unorganised sector, with low investment in infrastructure, technology, no investment in R&D, primarily owner driven small scale units. Ess Dee with its backward integrated business model, single window solution providing capability, quality consciousness and technology focus has created a distinctive brand in the market.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY:

The Company has instituted an integral control system for all its units to ensure efficiency of operations, financial reporting, proper recording and safeguard of assets, compliance with applicable laws and regulations etc. The Company has also appointed a firm of Chartered Accountants as Internal Auditors, who review the various functions of the Company thoroughly and report to the Audit Committee. The Company uses an ERP package, which enhances the internal control mechanism.

INTELLECTUAL PROPERTY:

The Company and its Indian subsidiary are owners of several trademarks namely "Ess Dee", "Flex Art" and "IFL" registered under various classes of trademarks.

RECONCILIATION OF SHARE CAPITAL AUDIT:

In compliance of circular no. D&CC/FITTC/CIR-16/2002 dated 31st December, 2002 further amended by Circular No. CIR/MRD/DP/30/2010 dated 6th September, 2010 issued by the Securities and Exchange Board of India ("SEBI"), Reconciliation of Share Capital Audit has been carried out at the specified intervals by a Practising Company Secretary and have been submitted to the Stock Exchanges where the Company is listed within due dates.

CAUTIONARY STATEMENT:

Statements in this report, particularly those which relate to Management Discussion and Analysis, describing the Company’s objective, projections, estimates and expectations may constitute ‘forward looking statements’ within the meaning of applicable laws and regulations. Forward looking Statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised. The Company’s actual results, performance or achievements might differ materially from those either expressed or implied herein.