Excel Crop Care Ltd Merged Management Discussions

1. Industry Structure & Developments:

The agro-chemicals industry is highly competitive, dynamic and fragmented. It operates in both the organized and unorganized sectors. The industry comprises of diverse players ranging from small and medium ones dealing in generic off-patent molecules to large multinationals with high-priced new generation and patented molecules. The industry has players who manufacture only technical grade pesticides as well as those who are pure formulators. It also has some balanced players who produce both – technical grade pesticides and their formulations. The Company is one of the major industry players with a balanced portfolio of technical as well as formulation products.

Low manufacturing costs and the ability and expertise in efficient handling of toxic and hazardous products and processes has made the Indian industry one of the large producers as well as exporters. India is the fourth largest producer of agrochemicals in the world. The Indian industry has built large capacities much beyond the domestic needs. Exports account for almost 40-50% of the industry production. Domestic market has been attracting multinationals due to good growth opportunity. The domestic segment has been witness to a steady increase in market acceptance of new generation molecules.

The Company has presence in all the product segments – insecticides, weedicides, fungicides, fumigants and rodenticides. The Companys product basket also includes plant growth nutrition products, bio-pesticides and plant growth promoters and regulators. The Company is one of the few industry players having both chemical and biological products in its portfolio.

The impact of climate change is causing major concern for agriculture sector. In view of the need to increase agricultural production, developing more sustainable agricultural practices is the need of the hour. In order to increase quality and quantity of farm produce in a sustainable manner, your Company has introduced a wide range of ‘Soil Health and ‘Plant Nutrition Products which are environment friendly and support farm eco-systems to enhance yield and improve produce quality. These include a range of bio-fertilizers, nutrients, plant growth promoters and bio-pesticides. These products work comparatively slow and need more efforts and hence the Company undertakes extensive work for demonstrating benefits of these products to the farmers.

In India, the gross area under cultivation is about 191 million hectares. However, its productivity diminishes due to fragmented land holdings to an extent that the farm size is rendered economically unviable. Division of land due to inheritance is the major reason for shrinking farm size. Agriculture instruments, implements and machineries cannot be used effectively on small farms.

2. Opportunities and Threats:

The Indian agriculture sector remains the backbone of the nations economy accounting for about 15% of the countrys Gross Domestic Product (GDP). Indian agriculture, however, is highly monsoon dependent and out of the 191 million hectares of net sown area, only 45% area has access to irrigation facilities. Apart from high dependency on monsoon and inadequate irrigation facilities, the situation becomes critical due to the fact that about 15-25% potential crop production is lost due to pests, weeds and diseases. Therefore, in order to meet the growing food demand borne out of increasing population, the productivity of farming and efficient utilization of the arable land become important and effective usage of pesticides plays a vital role in improving agricultural production and productivity.

The Indian pesticide industry is dominated by generic version products. The industry has a substantial opportunity to explore the drugs going off-patent during the years 2018-20. Globally, in regulated markets, patented products constitute about 20-22% of the total pesticide market which is expected to decrease to about 13-15% by 2020 as a result of patent cliff.

The Indian agrochemicals industry is faced with challenges such as abysmally low spending on R&D in comparison to the investment by foreign players, seasonal demand with about 70% of the pesticide consumption skewed in favour of kharif crop, low brand awareness resulting in sale of non-genuine products, inefficiencies in the supply chain and requirement of higher working capital investment due to elongated inventory and credit periods.

Erratic rainfall restricts growth of pesticides consumption. The year 2017, however, turned out to be a good monsoon year in India after two consecutive years of below normal monsoon. Indian Meteorological Department has predicted normal monsoon in 2018 as well.

Domestic pesticide market is expected to grow steadily as the farmers are taking to learning modern farming techniques which need increased use of pesticides to enhance crop production.

The Government of India has taken several initiatives for sustainable development of agriculture. Steps have been taken to improve soil fertility on a sustainable basis through the soil health card scheme, provision of improved access to irrigation and enhanced water efficiency through Pradhan Mantri Krishi Sinchai Yojana (PMKSY), support to organic farming through Paramparagat Krishi Vikas Yojana (PKVY) and support for creation of a unified national agriculture market to boost the income of farmers. The Government of India has also announced that Minimum Support Price (MSP) for agricultural produce will give to the farmers 50% margin over cost. These initiatives will increase farm income and thus will give impetus to consumption of agro inputs.

A long term strategic vision which puts in place a holistic framework to improve agriculture sector is the need of the hour. Key areas that need to be addressed include ‘Increasing Supplier Power, the ‘Producer – Consumer Linkages and ‘Customized Approach to Different Crop Groups. These, coupled with provision of quality infrastructure, education, R&D, technology, marketing and risk mitigation measures will give much needed boost to the agricultural sector.

China is a major player in global agrochemicals industry. It is a major supply source for raw materials and intermediates for the industry; it is also major supplier of finished products globally as well as the main consumer of agrochemicals. Chinas moves in the market and its policies – foreign trade policies, industry policies, currency policies and pricing policies – virtually determine trends in global agrochemicals market. Of late, China has taken several measures for tightening its industry licensing and pollution control policies. These measures have been taken under its ‘Blue Sky Policy. Several of these measures are sudden and harsh for its domestic chemicals industry and are leading to curtailment of production resulting in reduced supplies. This, coupled with increasing production costs, especially labour and effluent treatment costs, is blunting cost advantage of the Chinese players. The emerging trends in the Chinese industry pose challenges and also offer growth opportunities to the global agrochemicals industry.

3. Segment-wise performance and outlook:

The Companys domestic sale in 2017-18 increased to Rs. 841.29 crore from Rs. 758.55 crore in 2016-17. Exports also increased to Rs. 320.99 crore as compared to Rs. 265.69 crore in 2016-17.

The Company continues to focus on promotion of its branded products in order to increase its customer interface.

4. Risks and Concerns:

Global growth in food grain production has changed the market dynamics leading to price pressure on Indian grain produce. While produce prices are constantly under pressure, costs are rising continuously thereby impacting farmers income, debt repayment capacity and their overall wellbeing. Making matters worse, farmers bear almost the entire risk in the farm to market cycle – be it outbreak of pests, losses in storage and transportation or price uncertainty in the market – the risk is not distributed evenly amongst other stakeholders like grain traders, aggregators or processors.

There is a disconnect in consumer linkage-between what the Indian farmer produces and what the consumer demands. The farmer is not connected to aggregators, food processors and retail chains and does not know the farm produce in demand in the market. As a result, farm produce remains the same year after year, largely driven by the governments MSP program.

The farmer is not equipped with the latest technology, techniques and practices nor trained to adopt them expeditiously. Lack of new technology solutions keeps the farmer from gaining an equal footing globally.

Policy framework across different crops remain the same whether they are basic food grains, pulses and oilseeds that meet staple dietary requirements and food security needs of the country or commercial crops like cotton, sugarcane, chilies or vegetables and fruits for domestic or export consumption or export crops – the same broad policy measures are used across all the segments.

Less than 1% of the agricultural GDP in India is spent on agricultural research which is abysmal considering the fact that this sector is critical to food security of the country and provides livelihood to 60% of the countrys population.

The increasing prospects of introduction of genetically modified seeds for different crops would drastically change the industry landscape. Genetically modified crops are immune to specific pests or are tolerant to specific agrochemicals. Presently, the only genetically modified crop permitted in India is cotton.

Non-genuine pesticide products account for significant share in the Indian market. Such pesticides include counterfeit, spurious, adulterated or sub-standard products. These products are ineffective in pest control and end up harming soil and environment resulting in crop losses and damage to soil fertility. Rising sale of spurious pesticides and spiked bio-pesticides pose major threat to the industry growth.

Several NGOs continue to put pressure on Governments to ban use of chemical pesticides. These NGOs also indulge in litigation for restricting use of pesticides. Adverse media coverage leads to negative image and several affordable generic pesticides are put under unwarranted review by regulators. A part of farmer distress prevailing in several parts of the country is attributed to improper use / application and unwarranted use of pesticides. This again finds way in media leading to bad publicity for the industry and pressure on government agencies for action. As a result, several state and district level authorities are taking actions against specific pesticides, including prohibition or restrictive use of these products. Many a times such actions are knee jerk reactions and not founded on logical, technical or scientific reasons. Many such directives are also not in consonance with legal framework of the country for regulating pesticides use and trade.

The industry has large imports and exports and therefore currency fluctuation risk is a major risk for the industry. Efficient and effective management of this risk is important for the industry. The Company has a policy not to keep open foreign currency risk and all its foreign currency transactions are covered under Forward Contracts / Options.

Africa and South America account for a significant share in the Companys exports. These markets, however, carry higher credit, economic and political risks. The Company addresses these risks by following appropriate credit policies and by taking credit insurance.

5. Internal control systems and their adequacy:

The Company has proper and adequate system of internal audit and controls which ensure that all the assets are safeguarded against loss from unauthorised use or disposition and that all transactions are authorised, recorded and reported correctly.

The Company continuously strives to improve upon/evolve and implement best practices for each of its major functional areas with a view to strengthen its internal control systems.

The Company has assigned internal audit function to a leading firm of Chartered Accountants. Regular internal audit and checks are carried out to ensure that the responsibilities are discharged effectively. All major findings and suggestions arising out of internal audit are reported and reviewed by the Audit Committee. The Management ensures implementation of these suggestions and reviews them periodically.

6. Financial Performance & Analysis:

The sales for the year under review are Rs. 1162.28 crore as compared to Rs. 1024.24 crore in the previous year. The profit before tax for the year under review is Rs. 121.62 crore as compared to Rs. 84.17 crore in the previous year. The profit after tax is Rs. 81.31 crore in the current year as against profit after tax and exceptional items of Rs. 70.44 crore in the previous year.

7. Human Resource Development/Industrial Relations:

In the current age of dynamic, challenging and changing business environment, your Company believes that its ‘People i.e. ‘Human Capital is its important and vital asset. Your Company continues to harness and improve competencies and skills of its Human Capital through training and development programs.

Your Company has established an effective "Goal Setting & Performance Management System" which links employee goals with corporate business goals and rewards employees on the basis of performance. Your Company has well established performance based compensation system which helps to attract and retain talent.

The Company has generally enjoyed cordial relations with its employees. Workers and staff employees are paid remuneration in accordance with wage agreements reached with the Trade Unions.

The employee strength of the Company as on 31st March, 2018 was 1064.

8. Cautionary Statement:

Statements in this report on Management Discussion and Analysis relating to the Companys objectives, projections, estimates, expectations or prediction may be forward looking within the meaning of applicable securities laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results might differ materially from those expressed or implied depending upon factors such as climatic conditions, global and domestic demand-supply conditions, raw materials cost, availability and prices of finished goods, foreign exchange market movements, changes in Government regulations, tax structure, economic and political developments within India and the countries where the Company conducts its business and other factors such as litigation and industrial relations.

The Company assumes no responsibility in respect of forward looking statements herein which may undergo changes in future on the basis of subsequent developments, information or events.