Aqua Logistics Ltd Management Discussions.

Management Discussion and Analysis

1. Economic Outlook

Indias struggling economy is likely to grow even more slowly this fiscal year than the decade low of 5 percent struck last year, as investment will stay weak due to inadequate reforms and uncertainty ahead of a looming election.The parlous state of Asias third largest economy was reflected in the rupees 18 percent plunge against the dollar to all time lows since May, when signals emerged that the U.S. Federal Reserve was considering winding down an easy money strategy that had benefitted emerging markets like India. Burdened with a record high current account deficit, the rupee has suffered a far steeper fall than other emerging market currencies, and investors doubt whether Prime Minister Manmohan Singhs minority government will take bold enough steps needed to remedy the economy with an election due within nine months.

Indias growth slowed to 5 percent in the 2012/13 fiscal year that ended in March, its worst performance since it grew by 3.9 percent in 2002/03. However, some economists are more optimistic. They are hopeful that upbeat farm output prospects on the back of plentiful rainfall this year, benefits of a weak rupee for exports, a pick-up in investments following approvals to several large projects in recent months and improvement in the global economy, will combine to deliver more favorable outcome than anticipated.

According to the India 2020 - Economy Outlook launched by Dun & Bradstreet in association with Life Insurance Company (LIC), the Indian economy is expected to recover from the current phase of slowdown by FY’14 and is expected to gather pace by FY15.

2. Indian Logistics Industry

Logistics cost in India is estimated to be 13% of GDP, which is much higher than the developed economies like USA which spends around 10% of its GDP as logistics cost and Japan which spends 11% of its GDP for the same. The reason for this high spending is attributed to poor infrastructure facilities, lack of implementation of IT in logistics and unnecessary check points at the National highways which wastefully increases the transportation costs. India can save upto US$ 7.13 Billion each year in the event of a reduction in logistics cost by 1%.

Indian logistics industry is approx. 3% of the global logistics and is highly fragmented so far. Logistics industry comprises of three major segments - transportation, storage and value added services. Based on the analysis of various sub-segments in the Indian context on various comparative factors, Companies in the storage and the value added service segments are well-placed to capitalize on growing Indian economy.

Growth Drivers

The evolving business landscape and increasing competition across industries, is creating the need for more efficient and reliable logistics services than what exists today. The growth drivers for the Industry can be summarized as follows –

GDP growth and rise of 3PL services – Most companies across industries like automotive, electronics, FMCG and pharmaceutical sectors are increasingly opting to outsource their logistics requirements to specialized 3PLs. This has created a demand for a range of logistics services which will benefit the productivity and efficiency of the customers supply chains.

Investments in infrastructure – Given the current thrust on infrastructure investments, the growth and efficiency of Logistics Service Providers as well as their customers will be positively impacted. The government has planned investments in infrastructure development amounting Rs. 20,00,000 Crore in the next 5 years. This will prove to be a major benefit for the logistics industry.

Qualified work force – There has been a sudden transformation in the scale and scope of activities within the logistics sector. This growth rate needs to be supported with a parallel growth of skilled and trained manpower. Attracting and retaining talent is a major problem faced by Companies in the logistics business. There is a need to incorporate a high degree of professionalism in the functioning and approach of the Companies in this business.

GST Implementation to Accelerate India’s growth on Logistics front – Goods & Services Tax (GST) to be implemented in FY13 would do away with multiple taxations and other complexities that the logistics providers have to deal with in different states of India. This will boost investments in large warehouses with latest technologies thereby gaining economies of scale. This in turn will increase the attractiveness of integrated logistics companies, which can provide end-to-end logistics solutions.

Emergence of new Storage Models – Several players in India such as Multimodal Logistics Park (MMLP), Mega Food Parks (MFP) and Free Trade Warehousing Zones (FTWZ), have announced next generation storage models. These large scale projects are expected to significantly improve the quality of warehousing and storage space in the Country, while allowing the Customers to reduce costs through economies of scale, government incentives offered and optimal usage of multiple modes of transportation.

3. Risks and Concerns

Adequate measures have been adopted by your Company to combat various risks, including business risks (competition, consumer preferences, technology changes), financial risks (cost, credit, liquidity, foreign exchange), operational risks (system, process, people) and regulatory and compliance risks.

Your Company has a well-established risk management framework which covers aspects of financial and operational controls. Risks are identified through formal Risk management discussions with the active involvement of functional managers and senior management personnel at both operational and corporate level.

4. Internal Control Systems and their adequacy

Your Company has appropriate internal control system for business processes, with regards to efficiency of operations, financial reporting, compliance with applicable laws and regulations.

Clearly defined roles and responsibilities down the line for all managerial positions have been institutionalised. All operating parameters are monitored and controlled. The Company has also put in place a well - defined organisation structure, clear authority levels and detailed internal guidelines for conducting business transactions.

5. Material developments in Human Resources

People are one of your Companys biggest strength. Your Company has been able to fine-tune talent with modern technologies and ever changing corporate environment. Your Company firmly believes that people make the organisation and that a sense of belonging would inculcate the spirit of dedication and loyalty amongst them. Your Company recruits professionals of high academic achievement, experience and behavioural competencies across operations, supply chain consulting and marketing functions.

6. Cautionary Statement

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and other issues may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections, and so on, whether express or implied. Several factors could make a significant difference to the Companys operations. Important development that could affect your Companys operations include climatic conditions, macro-economic conditions affecting demand and supply, government regulations, taxation, natural calamities and so on, over which the Company does not have any direct control.