EICL Ltd Management Discussions

1. Competitive and External Environment

a. The domestic environment remained challenging during 2012-13 with slowing demand, high inflation and high interest rates and growing uncertainty. The global macroeconomic conditions deteriorated, with recession in the Eurozone, and slackening in the US economy. These factors resulted in a weak investment climate in India. The business environment remained challenging during the year with lower GDP growth and slowdown in investments.

b. The growth in manufacturing slowed down significantly to 3.2% from 3.9% last year. The industry segments of concern to EICL that were impacted adversely, were Paper & Board (throughout the year), and the continued recession in the Textile Industry. Superimposed on the above was the inception of the down turn in the Starch commodity cycle from October 2012 onwards, and the significant increase in industrial fuel prices.

c. The macro-economic environment is not very healthy. There is an increasing competition in Calcined Clay and Value added Clays Business segment from few smaller companies. The company has been focusing on the development of new products which is the key strength.

d. The Company has put on hold its Bhuj Project for setting up a manufacturing facility and is closely watching the economic changes.

e. The competition in the modified starch business segment from domestic players, who have migrated up the value chain, is increasing and is reflected by lower margins. The Company is responding by increased effort in developing of import substitution products and applications; also in development of export markets in Asia and Africa. The modern facility at Shimoga (Karnataka) has also not yet started paying back.

2. Overall Performance

a. Net Sales Turnover increased to Rs. 421 Cr., showing growth of 11% over the previous year. EBIDTA and PAT declined by 3% and 20% to Rs. 55 Cr. and Rs. 12Cr. respectively, mainly due to the adverse business environment.

b. The settlement expenses relating to workers of the closed operations have been provided in the P&L statement.

c. The land bank of Kaolin raw material at Kerala continued to be augmented. Total committed during the year was approx. Rs. 5 Cr. In addition, various opportunities are explored outside Kerala and outside India.

d. The Companys R&D Unit continued to play a key role in developing new products, and new applications; also in offering application support to the customers. The various new products have been developed and expected to be marketed in FY 2013-14 in both the segments.

3. Segment Wise Business Performance

						(Rs. Crores)
	2011-12			2012-13
	Starch	Clay	Total	Starch	Clay	Total
Net Sales	172.75	205.33	378.08	186.37	235.14	421.51
EBIDTA	8.20	49.19	57.39	1.62	48.75	50.37
EBIT	3.90	40.67	44.57	(3.32)	39.16	35.84

The un-allocable expenses for the year were Rs. 1.48 Cr and profit on sale of assets of Puducherry plant is Rs. 5.50 Cr.

a. Clay

i. The Sales of the Clay Business were higher in volume and value terms by 7% and 14% respectively due to better product mix. Export volumes grow by about 14%.

ii. The margins reduced substantially due to fuel and chemicals price increase and increase in fixed cost, which could not be fully passed on.

iii. The commercialization of delaminated Clay products developed by in-house R&D augers well for future growth.

iv. The plant at Kollam, acquired from Wolkem, has been found to be unviable due to various external and internal factors. The plant and machinery related to this plant are being transferred to other locations for effective use and the land and buildings will be put-up for sale.

b. Starch

i. The Sales of the Starch Business were higher in volume and value terms by 3% and 8% respectively due to increase in sales realization.

ii. The margins reduced very significantly due to high spurt in prices of raw material (Corn) which could not be passed on due to the depressed off-take from the paper and other industry segments; also due to the slow pace of product approval from the newly commissioned Shimoga plant, which incurred EBIDTA loss during the Financial Year.

iii. The land related to Pondicherry plant was sold at a profit of Rs. 5.50 Cr which is not included in the above EBIDTA.

4. Outlook for 2013-14

a. The macro economic environment has shown some sign of recovery and the market growth forecast has been estimated to be 8% for Clays and 5% for modified Starches.

It is expected that there would be further currency devaluation leading to higher fuel and chemical prices.

Interest rates may reduce marginally during the course of the year.

b. The competitive environment is expected to remain at the present level with no significant capacity increase during the coming year, other than in Calcined Clay and in Paper Starches.

c. Considering the above factors, no significant capacity increase is being planned during the year. Focus will be on consolidation, improving the operating efficiency and capacity utilization.

d. Shimoga plant is expected to reach 70% capacity utilization by end of FY 2013-14, thereafter no longer incurring cash losses.

e. Overall, we expect to recover from the dip experienced during 2012-13, in both businesses.

f. Various areas of diversification and growth are under study and there are expected to take shape by end of FY 2013-14, for following year implementation.

5. Internal Control Systems

The Company has a structured system of internal controls to ensure compliance with applicable statutory laws and regulations as also internal policies. The Company has in place the following mechanism:

a. Monthly and Quarterly Reviews of each Divisions performance by Senior and Top Management.

b. Biannual Internal Audits of all Divisions.

c. Quarterly Review of efficacy of Internal Audits and Company performance by the Audit Committee of the Board.

d. Regular reporting to the Board on investor related matters as well as fulfillment of SEBI

Listing Agreement requirements and other Corporate Laws.

e. All Units are linked and operating on SAP ERP.

f. All Divisions (other than new Unit at Shimoga) continued to be certified for ISO 9001:2000 compliance and Yamunanagar Starch division is also certified for Operational HACCP Specification MI-H02.

6. Human Resources

Recruitment and Retention of human resource capital is a major challenge in India today, more so for smaller companies and at factory location.

In order to meet the strategic objective of profitable growth, following initiatives have been taken up and continued.

1. Structured training on Managerial Skill Development for Middle and Senior Management.

2. Development of leadership capabilities amongst Senior Management team, through training, exposure, job rotation etc.

3. Recruitment of young managers (including Management and Engineering trainees) as a corporate pool.

4. Induction of Senior Management professionals in critical gap areas.

7. Risks and Concerns

a. The companys risk profile is renewed bi-annually by a Risk Audit Committee comprising of three Board Members.

b. Both businesses are sensitive to energy prices due to high level of fuel intensiveness. Various energy conservation measures have been implemented and being implemented, to mitigate the impact of the rising energy cost.

c. The economic slowdown has resulted in supply exceeding demand in Starch business. Simultaneously, the entry of new players in the Clay market has created further competitive pressure. The company is focusing on exports and on new application development to reduce the impact of these external factors.

d. There is a public hostility on mining activity. The company is spending considerable effort in carrying out mining in a safe and environment friendly way, and in addition taking care of the needs of the community.

8. Corporate Social Responsibilities

a) The Company continued to pursue its agenda on social responsibility during the year. The Rain Water Harvesting scheme is working efficiently and the water stored in the reservoir is shared with surrounding villages.

b) The Company also regularly conducts Medical Camps for the villages around the various Mines and factories.

9. Statement of Caution

Representations and statements made under Management Discussions and Analysis is based on the projection and expectation on the basis of the present market conditions. Actual results may materially differ due to several factors which could influence the Companys business operations such as demand and supply conditions, prices of input, changes in Government levies and regulations, industrial relations and other economic developments in the country.