CDI International Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

INDUSTRY STRUCTURE AND DEVELOPMENTS

The Indian Media & Entertainment (M&E) industry registered a growth of 11.8 per cent over 2012 and touched INR 918 billon. The overall growth rate remained muted, with a slow GDP growth and a weak rupee. Lower GDP meant lower demand from the consumer and this impacted advertising. At the same time, the industry began to see some benefits from the digitization of media products and services, and growth in regional media. Gaming and digital advertising were the two prominent industry sub-sectors which recorded a strong growth in 2013 compared to the previous year, albeit on a smaller base. For projections till 2018, digital advertising is expected to have the highest CAGR of 27.7 per cent while all other sub-sectors are expected to grow at a CAGR in the range of 9 to 18 per cent. Overall, the industry is expected to register a CAGR of 14.2 percent to touch INR 1785.8 billion by 2018. The Indian M&E sector showed some resilience and began to grapple seriously with some structural issues it has long talked about but not engaged with. These include TV and Print industry measurement, advertising volumes, inventory and rates, actions to see digitization through and reap its benefits, working out the MSO-LCO relationship, copyright laws and operational efficiency. Many of these remain alive and will take a few years to sort through. Others, like phase III of radio - are still pending regulatory action.

OVERALL INDUSTRY SIZE AND PROJECTIONS:

Overall industry size (INR billion) 2008 2009 2010 2011 2012 2013 Growth in 2013 over 2014p 2015p 2012 2016p 2017p 2018p (2013-18)
TV 241.0 257.0 297.0 329.0 370.1 417.2 12.7% 478.9 567.4 672.4 771.9 885.0 16.2%
Print 172.0 175.2 192.9 208.8 224.1 243.1 8.5% 264.0 287.0 313.0 343.0 374.0 9.0%
Films 104.4 89.3 83.3 92.9 112.4 125.3 11.5% 138.0 158.3 181.3 200.0 219.8 11.9%
Radio 8.4 8.3 10.0 11.5 12.7 14.6 15.0% 16.6 19.0 23.0 27.8 33.6 18.1%
Music 7.4 7.8 8.6 9.0 10.6 9.6 -9.9% 10.1 11.3 13.2 15.1 17.8 13.2%
OOH 16.1 13.7 16.5 17.8 18.2 19.3 5.9% 21.2 23.1 25.2 27.5 30.0 9.2%
Animation and VFX 17.5 20.1 23.7 31.0 35.3 39.7 12.5% 45.0 51.7 60.0 70.2 82.9 15.9%
Gaming 7.0 8.0 10.0 13.0 15.3 19.2 25.5% 23.5 28.0 32.3 36.1 40.6 16.2%
Digital Advertising 6.0 8.0 10.0 15.4 21.7 30.1 38.7% 41.2 55.1 69.7 88.1 102.2 27.7%
Total 580 587 652 728 821 918 11.8% 1039 1201 1390 1580 1786 14.2%

KEY TRENDS

The significant changes which shaped the industry in the last few years were:

• The shift from a pure off shoring services industry to the growth of domestic consumer market. In gaming, the mobile and console segments contributed to domestic consumption and animation entertainment Segment took early steps towards domestic box office success.

• The services market, on the back of successful project deliveries moved up the value chain especially in animation with end to end animation movies being produced in India.

• Growth of sub sectors like custom content development where animation is used for education, training and simulation purposes and also the console gaming market with the entry of global majors like Sony & Microsoft.

OPPORTUNITIES

In this era of globalization, crossover movies emerge. Indian animation and entertainment industry move towards the foreign companies for making movies. Popularity of the mall concept ensuring steady footballs to theatres/multiplexes located within, increasing the demand of animated movies (Children films), increasing the demand of India-oriented entertainment in abroad, and huge overseas box office collections. Looking beyond the obvious, discovering new ways of doing things and finding new distribution channels is essential in todays fluctuating economic climate. New distribution channels observe for providing services in better way like mobiles and internet have opened up the doors of new opportunities in the sector. Rise in the viewership and advertising expenditure also considerable in entertainment and animation sector.

THREATS

Capital continues to remain the primary challenge for most animation companies in India. While a high quality animated production is far more expensive to create than a live action film, given the wider appeal of the genre, it has the potential to be monetized not only in India, but across several international markets as well. However, there is a significantly high cost involved in promoting and distributing this content across multiple markets. Also, post the economic slowdown, many of the projects were green lit with limited funding options resulting in such projects either being delayed or shelved. Persistent escalations in the cost of production further drives up break even points and studios therefore find it difficult to find distribution partners.

OUTLOOK

Increasing digitization across sub-sectors of Media & Entertainment Industry, rate increases in TV, channel packaging by MSO, innovative strategies to monetize digital content, rapid growth of new media powered by increasing Smartphone penetration, and campaign spending during the general elections are likely to be the key levers of growth for the Indian M&E industry in 2014. A well thought out, consistent and long term outlook on regulation is also the key to create an M&E industry that is world class in scale and plays its part in transforming India.

RISKS & CONCERNS

Despite the significant progress made by the industry the growth is shackled by many issues and challenges. In the animation sector prominent challenges are:

• Lack of quality resources, limited training institutions and non standardization of curriculum resulting in talent crunch.

• Limited domestic demand for animation due to limited promotional budgets and restricted theatrical distribution.

• Lack of funding for the sector and scarcity of long-term project financing for animated movies.

• High infrastructure costs for studio layout, pipeline setup, render farms etc. restricting scale of animation companies.

• Lack of incentive to develop local IP with the economics favoring offshore development versus investments in indigenous IP creation.

• Majority of the animated content in television is adapted foreign animation leading to low uptake of domestic TV animated serials

• Lack of wider distribution and retail points for animated home video/DVD content.

• Relatively smaller VFX budgets and restricted use of VFX in Bollywood and regional cinema.

Timely and effective risk management is of prime importance to our continued success. The risk for the Company arises mainly out of the risks associated with the operations we carry. Experienced professionals review and monitor risks in our Company. We have comprehensive risk management policies and processes to mitigate the risks that are encountered in conducting business activities. The management also periodically reviews the policies and procedures and formulates plans for control of identified risks and improvements in the system.

INTERNAL CONTROL SYSYTEMS AND THEIR ADEQUACY

The Company has an adequate system of internal controls in place. It has documented procedures covering all financial and operating functions. These controls have been designed to provide a reasonable assurance With regard to maintaining of proper accounting controls, monitoring of operations, protecting assets from unauthorized use or losses, compliances with regulations and for ensuring reliability of financial reporting. The Company has continued its efforts to align all its processes and controls with global best practices in these areas as well. The Audit Committee of the Board reviewed issues raised by Auditors.

HUMAN RESOURCE

Your Company takes pride in the commitment, competence and dedication shown by its employees (including outsourced) in all areas of business. Various Human Resource initiatives are taken to align the HR policies to the growing requirements of the business of the Company. Your Company has the credit of having produced high "Value Human Asset" during the last decade up to this period.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE & SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE.

The market condition and various factors have affected the Company Operations and have hugely suffered the performance of the Company.

The Company is yet to make significant recovery. However as the entire industry is dealing with similar problems, it is expected that progress shall be made once the problems faced by the industry are resolved.

CAUTIONARY STATEMENT

The Statements in this Managements Discussion and Analysis Report describing the Companys objectives, Projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual Results might differ materially from those expressed or implied.

The Company is not under any obligation to publicly amend, modify or revise any forward looking statements on the basis of any subsequent developments, information or events.