AVT Natural Products Ltd Management Discussions

Overview

The following operating and financial review is intended to convey the Managements perspective on the financial and operating performance of the Company at the end of the Financial Year 2023-24. This Report should be read in conjunction with the Companys financial statements, the schedules and notes thereto and other information included elsewhere in the Report. The Companys financial statements have been prepared in accordance with the Indian Accounting Standards (Ind AS) complying with the requirements of the Companies Act, 2013, as amended, and Regulations issued by the Securities and Exchange Board of India (SEBI) from time to time.

This report is an integral part of the Boards Report. Aspects on industry structure and developments, outlook, risks, internal control systems and their adequacy, material developments in human resources and industrial relations have been covered in the Boards Report and is incorporated herein by reference and forms an integral part of this report. Your attention is also drawn to sections on Strategy, Risk and Opportunities forming part of the Report. This section gives significant details on the performance of the Company.

Business Profile:

AVT Natural Products operates in the business segment of Food & Feed Ingredients from Natural Raw materials. There are five primary business categories:

• Marigold Extracts for Eye Care, Food Coloring & Poultry Pigmentation

• Spice oleoresins and Oils for Food Colouring and Flavouring

• Value added Teas - Decaffeinated Teas and Instant Teas

• Animal Health & Nutrition Products

• Agricultural Crop Inputs

The Company has three wholly owned subsidiaries, namely AVT Natural Europe Ltd, UK. AVT Natural S.A. De C.V., Mexico and AVT Natural FZCO, Dubai, AVT Natural Europe Ltd has 1 subsidiary, AVT Natural North America Inc.

The wholly owned subsidiaries are responsible for the sales and marketing activities of value-added teas, animal nutrition products and other natural extracts.

Financial Performance & Operational review:

For the year ended on 31^st March, 2024, the Company generated revenues of Rs. 503.31 crores as compared to Rs. 582.25 crores in 2022-23. The profit after tax was Rs.46.37 crores in 2023-24 against Rs 75.04 crores in the preceding year.

An El-nino year had a severe negative impact on the marigold crop cycle with adverse weather patterns impacting growing conditions and outputs. All major growing areas faced severe water shortages and lack of rains which negatively impacted crop yields and active levels.

In addition to the poor growing season, Chinese suppliers of marigold oleoresin continued to offer low pricing on their products with the aid of government subsidies. Despite these challenges, the company managed to achieve good numbers with a strong focus on operational efficiencies, product mixes and the introduction of new products.

Global demand for value added tea products continued to remain strong with tea infusions, natural flavoring, health & nutrition driving growth in this segment. Despite the Ukraine - Russia war continuing to impact EU sales, the overall market remained strong with increase in demand from premium segments and customers adopting new variants and offerings. The company continued to work closely with key accounts ensuring high quality product offerings coupled with a robust & reliable supply chain. Continued R&D and product development also allowed the company to make inroads with new customers in Korea, Thailand, Europe and North America. While raw material prices witnessed an increase, the company continued to focus on yield efficiencies and continuous process improvements, ensured a strong top and bottom line.

Spice Oleoresins and extracts continued to be an important division for the company. The Strong performance continued despite all time high raw material prices impacting offtake. The companys strong control over the supply chain with back ward integration and focus on higher margin ingredients helped ensure stable and healthy margins despite slowing market conditions.

The company continued to make inroads in the Animal Nutrition division. The products continue to be well received by existing customers, with many new customers completing trials and beginning to initiate commercial discussions. The spread of influenza and political challenges in key LATAM markets slowed the growth of the division but the strong product offering with a positive ROI proposition enabled us to continue growing our customer base.

The company also initiated successful test marketing of its agricultural crop inputs and will be planning to expand the commercialization in the coming financial year.

Concerns & Risks

Climate change and evolving weather patterns continue to be a concern. Competing high value vegetables, fruits and cash crops also pose a challenge for sustainable marigold acreages. In more recent years, stringent new regulation over pesticides usage and residue levels have created significant challenges in growing and compliance. A drastic shift in cultivation practices and re-education of farmers will help address the new regulatory norms over the coming years

The year also witnessed substantial increases in employee, input, and raw material costs in addition to increase in interest rates. The war in Ukraine and the Red Sea issues have also severely hindered shipping routes and increased supply chain costs and times.

In addition to the operational challenges, currency fluctuations also pose a continuous challenge which will be monitored and hedged on an ongoing basis.

The company will continue to invest in new growing technologies that can help lower production costs as well expand its growing area to ensure a sustainable growing program for marigold and other crops. A greater emphasis and focus will be placed on compliance and farming practices to adhere to new international regulatory norms. The new seeds being introduced from our hybrid program will ensure higher yields and higher Xanthophyll, which will help combat the rising growing costs. Our inhouse seed production will also make us more self-reliant on seeds and reduce outsourced requirements. Our Continuous improvement in farming practices, upskilling of growers, adaptation of best & new practices with modern techniques will help optimize inputs with twenty percent higher yields & better recoveries.

The company will also focus on strengthening its supply chain and improving its raw material procurement. Strategic buying and diversification of suppliers plays a key role in maintaining the companys cost competitiveness across different product segments. New backward integration projects will also ensure greater control over the whole supply chain and raw material.

To address the concerns on increasing employee costs, the company has embarked on various internal programs to improve employee productivity and increase operational efficiencies. Costs are diligently monitored & cost reduction measures are taken wherever possible with automation. Process improvements & new technologies help offset potential cost increases. Automation also continues to be an area for investment.

Currency risk is mitigated through careful forex hedging. The company follows an appropriate hedging policy commensurate with the business needs.

Future Outlook

The Company maintains a very positive outlook of the future with its foray into new segments and the strengthening of the existing businesses.

Marigold will remain a key business segment, contributing to both the top and bottom line. Sustaining growth with a focus on efficiency is key with low marigold prices & renewed market competition from China. The company will continue to strengthen its agricultural growing base with addition of new areas while focusing on process and cost improvements. The company will invest continuously to increase capacity to cater to growth in this segment while also improving its compliance practices.

New hybrids will be rolled out in a phased manner to ensure sustainable growth in flower volumes. The adaptation of more sustainable agricultural and growing practices for marigold will also result in improved yields across our growing areas with a greater focus on a circular economy for carbon offsets.

In Spice oleoresins and extracts, the company continues to focus on expanding its customer base and geographical regions with increased focus on growing its market for value added specialty products. Greater emphasis will be placed on compliance to meet new global norms and differentiate our offerings in highly regulated markets.

The value-added tea segment continues to be major growth area for the company. We continue to work closely with large key accounts and expand into new regions. The company is investing in new capacity, to service our growing list of customers, with the aim of doubling the business in the coming years. Our growth will consolidate our position as a key player in the value-added tea market.

Despite ongoing market and political challenges in key markets the Companys foray into the Global animal nutrition market is bearing fruit. The products are making inroads in key markets, and we expect sustained growth over the next few years. The company will focus on expanding its operations in LATAM, South East Asia and North America, directly and through strategic partnerships, and will continue to invest in new products to round of the portfolio.

The company will, as always, continue to invest in R&D and new product development. We will leverage our knowledge and technology in botanicals to establish two new divisions for the company - Derma cosmetic ingredients and Nutraceuticals. Our focus will be on bringing science-based solutions with clinical data to these new markets. Pre-clinical, clinical trials and manufacturing trials are underway and the company aims to commercialize these products in phases over the next few years.

In the coming financial year, the company is introducing its range of Agro crop inputs with innovative biological product offering. The portfolio will focus on reducing pesticide usage and ensuring sustainable agriculture practices.

Internal Controls

The Company has effective and adequate internal audit and control systems, commensurate with the increasing business size to safeguard its assets and protect against loss from any un-authorized use or disposition. Regular internal & statutory audit visits are undertaken to ensure that highest standards of internal controls are maintained at all levels of the organization. The Companys internal controls are supplemented by an extensive program of internal audits which are periodically reviewed by the management. All policies, guidelines and procedures are well documented.

The summary of the Internal Audit findings and status of implementation of action plans for risk mitigation are submitted to the Audit Committee for review, and concerns if any, are reported to the Board. This process ensures robustness of internal control systems and compliance with applicable laws and regulations and ensures optimal resource utilization and system efficacy.

The company has implemented new SAP system across the organization streamlining much faster access to data and reports available in full compliance to SEBI while also building robust internal controls & systems in the coming years.

All Investment decisions are subjected to formal systematic detailed evaluation and approved by the relevant authority as defined in the delegation-of-authority mechanism. The Audit Committee reviews the plan for internal audit. It also reviews all significant internal audit observations and overall functioning of the Company on a periodic basis.

Revenue and capital expenditure are strictly governed by approved budgets and the expenditure approval levels are defined by a delegation-of-authority mechanism. Review of capital expenditure is undertaken based on the expected benefits for the Company.

Human Resources

The Company strongly believes that Human Resource is its most critical asset. We strive to offer our employees a dynamic and rewarding environment based on strong organizational values and the individuals ability. While the overall emphasis is on driving the organizations business goals, we encourage individuals entrepreneurial spirit coupled with a strong sense of accountability to achieve the objective contributing to every individuals growth together with building a strong business.

The Company continues to leverage its human capital by attracting the right talent as well as nurturing & developing its internal talent. The company has a carefully designed appraisal and performance rewarding system which fosters a growth mindset in its employees. We emphasize nurturing and rewarding our internal talent. In this endeavor, our employees undergo carefully designed training program which prepares them for the challenges ahead & developing future leaders. The company follows a structured and well-defined system of internal promotions which ensures high levels of employee satisfaction with adequate talent in the pipeline to sustain the business growth.

The company has been successful in building an internal talent pool at every level to cater for growth. Employees are provided cross-functional exposures, on-job training as well as carefully chosen external training programs to prepare them for their growth into higher roles. HR team works closely with the Superiors to assess the training needs of their subordinates. The Superiors are accountable for the continuous development and growth of their subordinates.

As we aggressively pursue new business opportunities, we have tapped into external talent pool as and when necessary. We are happy to note that the Company is an attractive destination to talented individuals. The company follows a carefully designed recruitment and staffing process to ensure that all employee addition is immediately value accretive. The process followed has helped the company to reduce the learning curve sharply while pursuing new businesses.

We continuously improve and update our HR systems to meet the demands of the changing business environment to ensure that the Company will remain an attractive destination for both its internal and external talent.

The company has enjoyed a very cordial and peaceful work environment with a committed, strong, supportive & co-operative work force on the Shop floor.