Gulf Oil Lubricants India Ltd Management Discussions.

Economic overview Global economy

The year 2017 was marked by a broad-based improvement in global economic growth. During the year, global economy grew by 3.8% [Source: International Monetary Fund (IMF)], which was the fastest since 2011. Upswing in investment, stable corporate earnings and favourable monetary policies adopted by leading economies were the primary catalysts behind this recovery.

Emerging market economies continued to outpace the rest of the world during the year and registered 4.8% growth. This indicates a healthy improvement over the growth registered in 2016. Among emerging market economies, China benefited from the momentum in world trade and recorded its highest growth since 2015. India, on the other hand, demonstrated healthy resilience against temporary headwinds and emerged as the sixth largest economy in the world. A major highlight of the year gone by was the improvement seen in the economic growth of advanced markets such as the US and eurozone.

Global oil demand remained on a firm footing in 2017 and grew by 1.6 million barrels per day owing to revival in demand from China, India and the Organisation for Economic Cooperation and Development (OECD) countries. Following production cuts by both Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries, crude oil prices surged to close at $66.97 per barrel - its highest level since 2013. Crude oil is currently hovering in the range of $70-80 per barrel.

During the year, the Federal Reserve (the Fed) undertook three rate hikes keeping in mind the improving US economy and labour markets. Given that the Feds rate hikes were well-communicated to market participants, they were priced inadequately without disrupting the flows significantly. In 2018, the Fed plans to undertake three more rate hikes to prudently balance the improving US growth with inflation.

Outlook

The IMF has raised the global growth forecast for both 2018 and 2019 to 3.9%. These forecasts are based on the premise that the trends of robust investments as well as strong global trade are likely to continue.

Indian economy

Despite short-term headwinds, the Indian economy continued to be one of the worlds fastest-growing major economies during the year. It grew by 7.7% in the fourth quarter, after the twin impacts of demonetisation and the Goods and Services Tax (GST) began to wane. The economy grew by 6.7% for the entire fiscal.

The eight core sectors of coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity grew by 4.3% during the year on the back of a strong momentum in the cement, coal and steel sectors. Indias fiscal deficit stood at 3.53% during the year and was broadly in line with the revised target of 3.5%. The government expects to bring it down further to 3.3% of GDP for FY 2018-19. Indias foreign exchange reserves as at March end stood at a comfortable level of $424 billion. This fact reflects the continued optimism and faith that foreign investors have in the economy.

Another notable highlight of the year was that India moved up higher to the 100th spot in the global ease of doing business vis-a-vis its 142nd rank about four years back. Inflation remained under check during the year with the Consumer Price Inflation declining to 4.28% in March 2018, supported by stable prices and the prudent monetary policy adopted by the Reserve Bank of India (RBI).

The government continued to undertake multiple reforms during the year for promoting inclusive growth, improving the business climate and addressing indigenous challenges of the Indian economy. The highlight of FY 2017-18 was the implementation of the long-awaited GST with effect from July 1, 2017. This new tax reform made the One Nation, One Tax theme a reality, paved way for integrated taxation and ease of doing business and will have far-reaching benefits on the Indian economy going forward. Higher spending on social schemes such as National Rural Employment Guarantee Act (NREGA), continued thrust on rural infrastructure projects, rise in minimum support prices, implementation of salary hikes under the Seventh Pay Commission across states and the One Rank, One Pension scheme are likely to lead to higher disposable income in the hands of Indian consumers.

Two successive years of favourable monsoon, burgeoning youth population (over 60% of the population is below the age of 35) and rising urbanisation are other macro growth drivers of the economy.

Outlook

Amid expectations of a pick-up in private sector investment, and in the manufacturing and construction sectors, the Indian economy is likely to grow by 7.4% during FY 2018-19 (Source: The RBI).

Continued momentum in global trade would augur well for exports in the near-term. In view of rising inflationary pressures, the RBI hiked the repo rate by 25 basis points in June 2018;further hikes during the on-going fiscal cannot be ruled out. Going forward, higher interest rates would help to keep inflation under control. However, the key challenge will be to achieve a fine balance between inflation, growth and employment generation. Increasing emphasis on energy efficiency and implementation of environment-friendly policies are pushing India Inc. to realign their processes around this theme. This emerging trend will benefit lubricant companies in India significantly.

Industry overview

India follows the US and China to be the third largest lubricant market globally. It is one of the fastest-growing lubricant markets in the world. The Indian lubricant market can be broadly classified under the three heads of automotive, industrial and process/white oils. Process oils constitute one-third of the total lube market. Automotive and industrial together form two-thirds of the market in terms of volume, followed by industrial oils such as transmission and hydraulic fluids, general industrial oils, gear oils, greases and so on. Automotive engine oils form the largest pie of the Indian lubricant market, excluding process oils.

Indias lubricant market constitutes over 20 organised players, including the MNCs, public sector oil marketing companies and other domestic companies. The market is dominated by the public sector oil marketing companies. In recent years, though, private players have started growing rapidly owing to their expanding reach and highly innovative products and services. This trend is likely to continue in the future as well. Encouraging prospects of the rural economy, focus on energy efficiency, higher brand consciousness and continuous advancement of engine technology are some macro enablers that will contribute to the growth of Indias lubricant market in the future.

Automotive segment

Automotive lubricants dominate the lubricant market in India, with specialised applications for Commercial Vehicles (CV), Passenger Vehicles (PV) and two-wheelers. Diesel

Engine Oils (DEO) lead the automotive lubricant market as they alone form about 45% of the total market, followed by Motorcycle Oils (MCO) and Passenger Car Motor Oils (PCMO). The demand for automotive lubricants is a direct function of vehicle movement on the roads, as well as growth of vehicle population and automobile sales, which have grown rapidly in recent years.

Indias production of vehicles crossed the 29-million mark during FY 2017-18. For the first time, the countrys PV and utility vehicle production crossed the 4-million mark each. These numbers indicate the inherent durability in the domestic demand for automobiles. The countrys automobile sales grew at a rapid pace during FY 2017-18 and India overtook Germany as the fourth largest global automotive market, right behind China, the US and Japan.

Sales

Category

April to March

2017-18 2016-17 % change
PV 32,87,965 30,47,582 7.89%
CV 8,56,453 7,14,082 19.94%
Three-wheelers 6,35,698 5,11,879 24.19%
Two-wheelers 2,01,92,672 1,75,89,738 14.80%
Total Domestic Sales 2,49,72,788 2,18,62,128 14.22%

This is commendable, especially when viewed in the context of the setback arising from the inventory realignment undertaken post the implementation of the GST. The industry revived quickly from the transitory pain witnessed by distributors post GST implementation and registered a healthy double-digit growth of 14% during the year.

Normal monsoon aided rural income during the year, thereby bolstering demand for two-wheelers, which grew at a healthy pace of 14.8%. This trend rubbed-off favourably on the sale of MCO in the lubricant industry.

On one hand, tractor sales too benefited from a buoyant rural economy and grew 22% during FY 2017-18 (Source: Tractor Manufacturers Association). While on the other hand, continued government push to the infrastructure sector, healthy momentum in the road construction and mining sectors as well as improving demand from the e-commerce and Fast-moving Consumer Goods (FMCG) sectors facilitated the growth of CV during FY 2017-18. This momentum was reflected in DEO sales, which bounced back during the year.

Growing in strong double digits, compact cars were at the forefront of the overall PV segment. Stable interest rates also supported the overall demand for PV in the year gone by. Consequently, PCMO witnessed healthy traction in sales.

Industrial segment

The industrial lubricant segment comprises hydraulic fluids, metal working fluids, greases and industrial gear oil. These products are used in the construction, manufacturing, textile, power generation, mining, food processing, light-heavy engineering, marine operations and metal working sectors.

Demand for industrial lubricant depends on the Index of Industrial Production (IIP) and overall growth trends in the economy. Besides, the demand for high-performance lubricants in the industrial segment is driven by the criticality of the application in which they are used, such as compressors, textile machinery, windmills, captive power plants, among others.

Infrastructure segment

The infrastructure segment can be classified separately as it leads the demand for both industrial and automotive lubricants through products finding application in both on- highway vehicles and off-highway construction equipment.

The Government of India has implemented multiple reforms and policies to facilitate and expedite the growth of the infrastructure sector in both rural and urban areas.

This, in turn, will lead to improved demand for lubricants from the infrastructure sector.

Some of the key policy measures aiding the prospects of this sector include:

Higher spending towards infrastructure through various road projects under the Ministry of Road [including National Highways Authority of India (NHAI)] and the Pradhan Mantri Gram Sadak Yojana

In the Union Budget of 2018-19, 71,00,000 lakhs was allocated for the construction of national highways across the nation

The Sagarmala Programme (involving investments worth around 8.5 trillion) to set up new mega ports, drive modernisation of Indias existing ports and facilitate the development of 14 Coastal Employment Zones (CEZs) and Coastal Employment Units

Adoption of new models such as the Hybrid Annuity Model (HAM) to propel investments into the sector

Implementation of various power sector reforms

Modification of the Mines and Mineral Development and Regulation (MMDR) Act to bring higher transparency

In conclusion, improving prospects of the infrastructure sector will benefit the domestic lubricant market. Companies having wider reach and significant positioning in the lubricant sector and focusing on innovation are well placed to benefit from the improving health of the infrastructure sector.

Gulf Oil Lubricants India Limited (GOLIL)

Company overview

Gulf Oil Lubricants India Limited (GOLIL), part of the Hinduja Group, is an established player in the Indian lubricant industry. Gulf Oil International, parent of GOLIL, owns the Gulf brand globally (except the US, Spain and Portugal) and the brand is present in more than 100 countries.

GOLIL operates mainly in the automotive and industrial segments with a leading presence as one of the top players in the open market (B2C/ Bazaar channel) through the distributor network. It also directly supplies to Original Equipment Manufacturers (OEMs) and other B2B customers (industries, infrastructure, mining and fleet customers, state transport and government undertakings). Its premium products, including automotive and industrial lubricants, are manufactured at the Companys state-of-the-art plants in Silvassa and Ennore, Chennai.

Manufacturing capabilities

Silvassa plant (Capacity: 90,000 KL)

Features

World-class blending plant High-speed automatic filling machine - OCME Superior automated blow moulding machines - Automa

Fully Automatic Storage & Retrieval System (ASRS) AdBlue manufacturing capacity of 12,000 KL Disaster management support

An in-house quality control laboratory, which supports operations in India and globally Key certifications:

* ISO 9001:2015 * ISO 14001:2015

* ITAF 16949:2009 * OHSAS 18001

Chennai plant (Capacity: 50,000 KL)

Commenced operations: in December 2017

Features

State-of-the-art technology from ABB France - Simultaneous Metered Blender (SMB), Automated Batch Blender (ABB), completely piggable lines and manifold and Drum Decanting Unit (DDU)

Advanced ASRS

A high-tech fire-fighting and disaster management system

100% provision for solar power, rainwater harvesting and natural lighting throughout the day Key certifications:

* ISO 9001:2015 from day 1

* IGBC Certification under process

New R&D centre - Gulfs biggest facility globally Customer Experience Centre, the first of its kind in India

Business review

During FY 2017-18, your Company continued to outpace the lubricant industry and recorded a volume growth of 14%, the highest in the last few years. This is more than three times the volume growth recorded by the domestic lubricant industry. During the year, your Company has moved up its positioning and is now amongst Indias Top 3 private lube players in terms of volume. Robust volume growth across both automotive and industrial businesses fuelled your Companys performance during the year. This performance is well reflected in the increasing market share of the Gulf brand in India. Based on an internal market research done in 2017, covering a wide section of consumers, mechanics and retailers, the Gulf oil brand has improved its position amongst the Top 3 lubricant brands in terms of brand awareness, purchase consideration and on other parameters as well.

This outstanding performance is an outcome of your Companys commitment to ensure efficient execution of its growth strategies. Detailed focus to grow each segment by offering differentiated customer value propositions was one of the growth enablers of your Company. Strengthening existing OEM and B2B partnerships along with forming new ones was another growth enabler. Your Company continued to make the requisite investments towards fortifying its brand equity and enhancing distribution across all its segments during the year. It also focused on providing superior services to its customers, right from sale origination to the servicing stage, thereby driving customer delight throughout the value chain.

In terms of financial performance, the revenues grew by 22.6% to 1,33,226 lakhs. EBITDA margin stood at 17.7% of sales during the year compared to 16.4% in the preceding year and was aided by a favourable product mix and higher cost efficiencies across the Company. The Profit After Tax (PAT) grew by 34.9% to 15,856 lakhs. Following the outstanding financial performance, the Board has recommended a final dividend of 6.5 per share compared to 5 in the preceding year. Including the interim dividend declared earlier during the year, the total dividend recommended/paid during the year stands at 10.5 per share i.e. 525% on the face value of 2 per share.

Impact of crude oil, base oil and the exchange rate movement

The price of crude oil has hit its highest level since 2013, crossing $70 per barrel, as Brent Crude, the international benchmark, has more than doubled in the past year.

Consequently, the prices of base oil, the primary raw material used by your Company, too headed north. Stability in the Indian Rupee provided some relief from increase in raw material cost. In order to protect its margins, the Company implemented price hikes in a calibrated manner during the year. Your Company has formed long-term contracts to ensure seamless supply of raw materials. Initiatives in procurement, inventory management, pricing negotiations, formulation optimisation and cost management are additional factors that protect the Companys margins.

Automotive segment

This business contributes approximately 60-65% to your Companys volumes and caters to two major categories, namely the personal mobility segment, which comprises two-wheeler and PCMO, and the commercial vehicle oils segment.

These products are distributed via two main channels:

1) Bazaar, which includes spare parts stores, exclusive lubricant stores and independent workshops/garages

2) OEM Franchise Workshops

1) Bazaar

The Bazaar channel represents more than one-third of the total lubricant market, excluding process oils. Your Company is the No. 2 lubricant player in this channel in terms of volume (as per internal estimates) and has further strengthened its distribution footprint across the country in the year gone by. Currently, it has a distribution network of 60,000+ retail touch points, 320+ auto distributors and 30+ depots. Your Companys distribution network also includes branded independent workshops for cars called Gulf Car Stops and for bikes called Gulf Bike Stops. It has over 7,000 such bike stops and more than 1,300 car stops and these numbers are growing rapidly. As a result, your Company witnessed a high single-digit growth in Bazaar last year.

• * Imbibing a culture of operational

• • excellence

It is your Companys constant endeavour to drive cost efficiencies and operational excellence across all its functions. Over the years, every employee has embraced this culture and your Companys performance is a strong testimony of these efforts. Following are some of the highlights on this front in the Bazaar segment:

• Migrated the entire retail business on an Enterprise Resource Planning (ERP) system

• 1 million+ invoices on Tally for its distributors

• Empowered the sales team with analytical tools such as the Gulf Konnect platform

• Brought down the time for reimbursement and incentive schemes from 3 months to 1 month

• Connected 6,000+ key retailers through the Gulf Unnati mobile app

GOLIL is implementing similar initiatives in the B2B segment as well.

Personal mobility

The year began on a weak note as the industry grappled with the disruption caused by the implementation of GST. This had some bearing on the consumption of PCMO as well as MCO in the initial months of the year. However, with its focused strategies, suitably backed by distribution and marketing initiatives, your Company was able to grow at a healthy pace in the months of April and May. Despite the destocking and inventory reduction carried out by the distributors and retailers, the Companys overall volume in personal mobility still grew at 10% in the first quarter of the year.

The impact was the highest in the PCMO segment, which has high-value products. The MCO segment, though, was much more resilient to the aftershocks of GST and continued to grow in double digits across the entire year.

During the year, your Company undertook aggressive marketing campaigns through outdoor, radio and below-the-line (BTL) activities and also engaged in above-the-line (ATL) advertising to create higher awareness about its brands in the PCMO as well as MCO segments.

I nvestments in the brand continued to gain strength as your Companys internationally developed TV campaign featuring Manchester United, with whom brand Gulf is associated globally, was unveiled with a unique proposition of high performance under pressure. This Pressure Moves You campaign was extended through BTL activations in metros. It helped improve conversions at point of sale and drove growth for PCMO during the year.

Association with Manchester United was further leveraged with an innovative concept of the Gulf Fan Academy throughout the year. With #GulfFanAcademy, your Companys digital presence broke new ground. Additionally, your Companys association with the Indian Premier League franchise cricket team Chennai Super Kings (CSK), with an extensive 360-degree campaign, was a grand success across India and further aided consumption demand in the personal mobility segment.

Gulf Oil Unnati, the Companys dealer loyalty programme, continued to gain traction among top retail partners in the year.

Overall, GOLILs multiple brand and distribution initiatives fuelled the growth of this segment in the year gone by. For the full year, the personal mobility segment registered a robust volume growth of 20% over the preceding year.

Commercial vehicle oils/ DEO

I t was a mixed year for the commercial vehicle oils segment. The implementation of GST led to some slowdown in the overall economic activity in the first half of the year. Your Companys DEO segment managed to outpace the industry despite the presence of challenges at the macro level.

However, in sync with the upswing in the economic growth, the DEO segment too gathered momentum and grew by almost 20% during the second half of the year. For the full year, DEO volumes grew 12%.

During the year, your Company rolled out a BTL campaign with the theme Gulf On Toh Tension Gone, targeting the trucking community. The campaign covered 29 cities and more than 40 trucking centres across India and was spread over 61 days. It helped to reach out to 10,000+ mechanics and created a huge buzz across the transport hubs and the cities covered by it.

Your Company conducted oil change camps in the farm segment and in the franchise workshops on a large scale during the year. These camps reached 30,000+ tractor owners and the Company believes that the benefits of these efforts would also flow in during FY 2018-19.

2) OEM Franchise Workshops

In recent years, OEM Franchise Workshops have become a prominent business segment for your Company. This segment recorded a high growth during the year, supported by encouraging traction in your Companys tie-ups with leading OEMs. During the year, your Company saw robust growth in its tie-ups with Mahindra and Bajaj, even as Ashok Leyland continued to remain a strong pillar of growth in the segment.

The Company also formed a new tie-up with a leading domestic automobile company - Force Motors. Going forward, your Company will continue to explore opportunities for such strategic tie-ups, which will act as strong engines of future growth.

Overall, the automotive segment registered a stellar performance during the year owing to strong momentum in both Bazaar and OEM Franchise Workshops.

Industrial segment

Your Company caters to the industrial segment through both direct and indirect channels (distributors). At the end of the year, its industrial network spanned across 200+ direct industry accounts and 50+ industrial distributors.

This segment registered a healthy all-round growth during the year, with the industrial distributor channel recording

a high double-digit growth during the year. Your Company has strengthened its focus on the core sectors of coal, steel, cement and electricity and ramped up its share of business with direct accounts. It added three more plants with JSW Steel during the year and further solidified its bond with one of Indias largest steel manufacturers.

Another highlight of the year was that your Company strengthened its positioning as a B2B brand through various technical seminars and customer meets. Furthermore, in a bid to ramp up its market shares and reach the targeted segments, significant time and resources were invested in training its B2B teams. Also, your Company is currently undertaking the exercise of implementing the Tally DMS software to support its industrial distributors.

Your Company is constantly shaping relevant strategies in sync with emerging trends and the ever-evolving requirements of customers. The overarching culture of the organisation promotes innovation, which can be a source of competitive advantage. This is aptly reflected in the performance of your Companys key products in this segment during the year. These include AdBlue solution that helps vehicles meet Bharat Stage IV emission standards and the specialty grease products offered under exclusive dealership with the US-based manufacturer - Whitmore. The specialty grease products manufactured by Whitmore are used in high-pressure grease applications. While both these products saw healthy traction during the year, volumes of specialty grease products doubled, compared to last year, owing to strong demand from domestic steel and coal companies. AdBlue, on the other hand, will further benefit from 2020 when adoption of Euro VI norms will become mandatory for every vehicle. Similarly, the long drain hydraulic oils offered by the Company stand to be the early beneficiaries of consumers rising preference of such products across different industries.

Infrastructure, Mining & Fleet segment

Through its Infrastructure, Mining & Fleet business, your Company has adopted a focused approach to cater to the unique requirements of the infrastructure, mining, ports and fleet sectors. By providing better services and achieving greater customer satisfaction, your Company has been able to increase penetration across these sectors. These sectors recorded a double-digit volume growth last year. The Company has 300+ marquee customers, including the likes of L&T, Dilip Buildcon, Punj Lloyd, Oriental Engineers and Shapoorji Pallonji. The Company also formed a new tie- up with one of the top OEMs in the construction equipment sector - Kobelco.

Opportunities and threats

Your Companys business may be impacted by potential opportunities and threats.

Opportunities

Robust prospects of Indias automobile sector and

overall economic growth

Adoption of new emission norms and enhanced focus on fuel efficiency

Evolving technology as well as customer requirements

Significant potential to ramp up rural penetration of automobiles

Scope to improve the Companys market share in the PV and tractor segments

Expansion of the Companys reach across various channels and geographies

• * A buoyant rural economy, presence of

• • multiple enablers for consumption and a

• • favourable monetary policy environment

would aid the prospects of the automotive sector in the medium term.

Threats

High competitive intensity in the sector Possibility of aggressive pricing and discounts being offered by competitors

Sudden and sharp volatility in prices of key raw materials

Unprecedented high volatility in the forex market

Outlook

Automotive segment

The Indian automotive industry is set to further improve its performance and 2018-19 is expected to bring positive sentiments back into the market and rev up overall vehicle sales. A buoyant rural economy, presence of multiple enablers for consumption demand and a favourable monetary policy environment would aid the prospects of the automotive sector in the medium term. Accordingly, the overall lubricant demand is expected to improve in the current year.

Personal mobility

The growth in two-wheeler population is expected to continue in 2018-19, with scooters slated to deliver a better performance. Your Company will continue to strengthen its already prominent position in the MCO segment. The industry also forecasts a high sales growth in PV, with both utility vehicles and cars growing in the domestic market. This, along with the increasing adoption of high-value synthetic and semi-synthetic grades of oil and expanding footprint in the rural segment, will be the main growth catalysts of the personal mobility segment. PCMO is a high-potential category and your Company will continue its focus to garner additional market share in PCMO by tapping into these opportunities efficiently. The investments made by your Company in various brand initiatives such as the Manchester United campaign will also start yielding results this year. Your Company is looking to ramp up its independent workshop programme Gulf Car Stops to further boost its market share in this category.

Your Company is confident of delivering higher volume growth than the market in the personal mobility segment and further enhance its market share, going forward.

Commercial vehicle oils/ DEO

Indias CV sector is at an inflection point and is likely to benefit from improving economic growth, stronger replacement demand and growing operational efficiencies in the transportation, logistics and supply chain activities. The Government of Indias continued emphasis to drive Indias infrastructure sector will provide further impetus to the CV sector. Your Company has a healthy market share in this segment and is implementing appropriate strategies to capture these emerging opportunities and further expand its presence in this segment. The Companys focus on providing innovative products to cater to both existing and emerging needs of the CV sector, coupled with continued expansion of the distribution network in both Bazaar and OEM channels, will be the key enablers for growing its DEO business. Your Company is pioneering the long drain products in this and will launch longer drain greases also in the future. There is substantial scope to grow its market share in the tractor segment. Overall, the Company is confident of achieving high growth in the CV segment in the future.

Industrial segment

Going forward, your Company aspires to constantly develop innovative products and gradually ramp up the share of high-value products in overall revenues. It has formed a new category of products under the head specialty products, which includes Whitmore special greases. Your Company is also working on developing special greases (for the core sector), metal working fluids and synthetic oils. These products will play a crucial role in enabling the Company to stay ahead of the curve.

The strategic priorities of the industrial business include: Bolstering the dealer network and the customer base Lending higher stability and growth to the volumes

Infrastructure, Mining & Fleet segment

For the Infrastructure, Mining & Fleet business, the priority will be to continue to strengthen the relationship with existing customers and also add new customers to the business. Looking ahead, the Infrastructure, Mining & Fleet business will explore opportunities to scale up its revenues and also cater to construction sites of customers overseas. Your Company is closely monitoring new government initiatives and is well prepared to leverage emerging opportunities.

Managing risks in an evolving world

Today, businesses are operating in a dynamic environment. It is important for business houses to build a mechanism for proactively assessing and mitigating risks involving change in government policies, legislation, information technology, customer preferences, competitors,

initiatives, financial markets, among others. A prudent risk management framework offers an organised platform to identify, assess and manage potential risks and tap the unforeseen opportunities. It enables the management to make wise and informed decisions. An effective risk management framework brings in sustainability and safeguards the stakeholders interest that is associated with the organisation.

Your Company has set up a comprehensive Risk Management Policy, which is framed around a common as well as industry-specific understanding of various types of risks - corporate risk (strategic and residual risk), operational risk (specific business and functional risks, including economic and market risks) financial risk, Human Resources (HR) risk, legal and compliance risks, among others. Your Company has documented key identified risks in all these areas and also set up an effective mitigation plan for the same. In order to ensure a widespread understanding, Board members, all operational/business unit heads and managers and all staff are made aware of the principles of the Risk Management Policy and framework.

Your Company continued with the key risk mitigation actions identified in the earlier years such as putting in additional resources for the recently launched PCMO range, including synthetic oils, widening its distribution base to reach more consumers on the back of improving brand recall, among others. Getting new OEM/B2B customers and maintaining existing OEMs in a more structured way continues to be a focus area for your Company.

Your Company follows a structured forex hedging policy as per the advice of forex experts and continuously reviews its foreign exchange exposures on a fortnightly basis. Implementation of legal compliance software with exhaustive coverage of laws for timely and proper legal compliance under various acts, laws, rules and regulations applicable to your Company also helped the Company mitigate its compliance risk more effectively.

The Company is proactive while complying with legal requirements. The continuous process of audits and gap analysis helps your Company have a better compliance roadmap.

Motivated human assets

Salient features of the Human Capital strategy

i. Create a talent pipeline

ii. Instill and retain leadership

iii. Develop a performance culture

iv. Drive the organisation forward

Your Company places highest importance on the implementation of contemporary HR practices to enhance the overall employee effectiveness.

With a strong governance mechanism at its core, the code of conduct has been communicated to and implemented for all the employees.

Being an equal opportunity employer, your Company strives to implement programmes to promote various initiatives, including awareness of the Prevention of Sexual Harassment at Work Place Policy (POSH). There has been no complaint of sexual harassment at the workplace in FY 2017-18.

Your Company also consciously develops gender diversity amongst other things through its campus relationship programme. During the past few years, women formed 7% of the total workforce.

Your Company encourages regular communication through townhall and various digital platforms such as posters, danglers, communication meetings and e-mailers. The employee intranet portal acts as a good platform for employee engagement and connectivity.

Embracing digital HR processes

The Employee Self Service (ESS) platform enables employees to conduct their daily business on the go

ASPIRE (Align Strive Perform Inspire Reward Enable), the Companys web-based performance management system, enables managers and employees to conduct periodic:

1) Role reviews

2) Performance reviews

Rewards and recognitions

Your Company drives various rewards and recognition programmes. The passion and perseverance of your Companys people are recognised and appreciated through various rewards and recognition initiatives. 55 employees were honoured under the Long Service Award Programme for their loyalty and dedication towards the Company in FY 2017-18.

Employee benefits programme

Your Company has introduced a Critical Illness Cover for all its employees to support the additional medical expenses on account of any critical illness. It covers both Mediclaim and an optional top-up cover for employees, their families and parents. The term insurance and personal accident cover also continue to be in place.

Capability building

Employee capability enhancement is of great importance to the Company. Classroom programmes and the launch of the Gulf Oil Training and Development (GOLD) Academy have helped to deliver the capability development initiatives with the blended approach.

Functional competencies are defined for all the roles of the organisation and integrated with various HR processes. Specific capability development programmes are also designed and implemented with the help of this competency framework. This competency framework helps the Company to identify any gaps pro-actively and plan development interventions

Your Company continues to train employees to implement new ways of working, which have helped the sales organisation and the channel partners have better processes. Development of internal trainers has also been a focus area. The new ways of working modules have been successfully driven by such internal trainers. A total of 1,868 person-days were recorded during the year for training. Specific post-programme initiatives are planned to sustain the capability-building initiatives. Your Company plans to enhance its productivity across the organisation through its new performance management system ASPIRE to drive business growth.

Employee Stock-option Scheme (GOLIL ESOP 2015)

Your Company believes that equity-based compensation schemes are an effective tool to motivate and reward eligible employees. They create employee ownership, attract new talent and retain the key resources in the organisation. They offer significant benefits to the employees. In view of the above, the Company has instituted the GOLIL Employee Stock Option Scheme, 2015 for its eligible employees. The Company has granted options as per the following vesting schedule:

Vesting period (at the end of) % of total grant of the eligible employees
1 year 10%
2 years 15%
3 years 15%
4 years 60%

The Scheme now covers several critical positions below senior management as well. The options granted under the scheme shall be based on satisfaction of vesting conditions, which can thereafter be exercised, resulting in allotment/ issue of equity shares of the Company.

Employee relations

Employee relations at the Silvassa and Chennai plants remained cordial during the year and most of the issues were resolved through mutual dialogue. Your Companys total workforce stood at 530+ during FY 2017-18.

Internal control systems and their adequacy

Your Companys internal control mechanism has been designed to provide for accurate recording of transactions with internal checks and prompt reporting, adherence to applicable accounting standards and policies and compliance with applicable statutes, policies and procedures, guidelines and authorisations.

Following implementation of the Companies Act, 2013 (Act), your Company has complied with the specific requirements in terms of Section 134 (5)(e) of the Act, calling for the establishment and implementation an Internal Financial Control (IFC) framework that supports compliance with requirements of the Act in relation to the Directors Responsibility Statement. The IFC framework document supports in evaluating the operative effectiveness of the controls in a consistent manner.

Your Company, through its own internal audit department, conducts periodic audits at all locations and functions based on the plan approved by the Audit Committee and brings out any deviation in internal control procedures. The observations, arising out of the audits, are periodically reviewed and compliances are ensured.

The summary of the internal audit observations and status of implementation is submitted to the Audit Committee every quarter for its review and concerns, if any, are reported to the Board.

Financial performance Key highlights

Revenue from operations (net of indirect taxes) increased to 1,33,226 lakhs from 1,08,679 lakhs (up by 22.6%).

EBIDTA stood at 23,572 lakhs (up by 32.6% as against 17,781 lakhs for FY 2016-17).

PAT stood at 15,856 lakhs (up by 34.9% as against 11,756 lakhs for FY 2016-17).

The Board has recommended a final dividend of 6.5 per equity share (i.e. 325% on face value of 2 each). During the year, the Board had declared and paid interim dividend of 4 per equity share (i.e. 200% of face value). With this, the total dividend for the year stands at 10.50 per share (i.e. 525% of face value of 2 per equity share).

* * Revenue from operations (net of indirect

* • taxes) increased to 1,33,226 lakhs from

* * 1,08,679 lakhs (up by 22.6%).

( lakhs)

Year ended March 31, 2018 Year ended March 31,2017 Growth %
Revenue (Net of Indirect Taxes) 1,33,226 1,08,679 22.6%
EBITDA 23,572 17,781 32.6%
PBT 24,286 18,108 34.1%
PAT 15,856 11,756 34.9%
EPS (Basic) FV- 2 per equity share 31.92 23.70

Revenues

Revenue (net of indirect taxes) stood at 1,33,226 lakhs in FY 2017-18 from 1,08,679 lakhs in FY 2016-17. Your Company achieved healthy revenue growth across all key segments on the back of an overall double-digit growth in volumes.

1) Breakup of various cost items as a % of sales

Year ended March 31, 2018

Year ended March 31, 2017

lakhs % lakhs %
Sales (Net of Indirect Taxes) 1,33,226 100 1,08,679 100
Cost of Goods Sold 69,768 52.4 59,434 54.7
Employee Benefit Expenses 8,256 6.2 7,078 6.5
Manufacturing & Other Expenses 31,630 23.7 24,386 22.4
Total Expenses 1,09,654 82.3 90,898 83.6
EBITDA 23,572 17.7 17,781 16.4
Other Income 2,610 1.9 2,035 1.9
Finance Costs 853 0.6 983 0.9
Depreciation/Amortisation 1,043 0.8 725 0.7
PBT (Profit before Tax) 24,286 18.2 18,108 16.7
Tax Expenses 8,430 6.3 6,352 5.8
PAT (Profit after Tax) 15,856 11.9 11,756 10.8

a) Cost of Goods Sold

Cost of goods sold increased by 17.4% to 69,768 lakhs in FY 2017-18 from 59,434 lakhs in FY 2016-17 in line with volume growth. Cost of goods sold as a percentage to net revenue has also decreased from 54.7% in FY 2016-17 to 52.4% in FY 2017-18 on account of continuous margin management efforts.

b) Manufacturing and Other Expenses

Manufacturing and other expenses increased by 29.7% to 31,630 lakhs in FY 2017-18 from 24,386 lakhs in FY 2016-17. This increase is mainly on account of increase in advertising and sales promotion by 1,719 lakhs, increase in selling and marketing expenses by 3,635 lakhs, increase in royalty by 418 lakhs and increase in freight and forwarding expenses by 746 lakhs, which is in line with the increase in volume/ value additions.

c) Employee Benefit Expenses

Employee benefit expenses increased by 16.6% to 8,256 lakhs in FY 2017-18 from 7,078 lakhs in FY 2016-17 mainly on account of increase in head count and usual increments resulting in increase in payroll cost by 1,178 lakhs.

d) Finance Costs

Finance costs decreased to 853 lakhs in FY 2017-18 from 983 lakhs in FY 2016-17 mainly due to lower net loss on foreign currency transactions and translations of 451 lakhs accounted in FY 2016-17.

e) Depreciation/Amortisation Charge

Depreciation/amortisation charges increased to 1,043 lakhs in FY 2017-18 from 725 lakhs in FY 2016-17 mainly on account of additions to fixed assets at the new plant facility at Chennai during the current year ended March 31,2018.

Table: Balance Sheet ( lakhs)

Particulars As at March 31, 2018 As at March 31, 2017 Change
Assets
Fixed Assets 26,608 14,716 11,892
Other Non-current Assets 1,365 1,655 (290)
Cash and Bank Balances 32,619 28,957 3,662
Current Assets 42,301 28,494 13,807
Total 102,893 73,822 29,071
Equities and Liabilities
Shareholders Funds/Net Worth 46,742 35,413 11,329
Non-current Liabilities 1,546 881 665
Short-term Borrowings 24,806 17,849 6,957
Current Liabilities 29,799 19,679 10,120
Total 1,02,893 73,822 29,071

2. Capital Employed

During FY 2017-18, capital employed increased from 73,822 lakhs to 1,02,893 lakhs mainly due to an increase in fixed assets by 11,892 lakhs, especially capex spent at Chennai plant facilities, and increase in cash and bank balances by 3,662 lakhs.

3. Net Worth

Net worth at the end of FY 2017-18 increased by 11,329 lakhs to 46,742 lakhs from 35,413 lakhs in FY 2016-17. Share capital increased by 1 lakh in FY 2017-18 at 994 lakhs from 993 lakhs in FY 2016-17 mainly due to the issue of 66,115 shares under equity stock options. Other equity of the Company increased by 11,328 lakhs in FY 2017-18 at 45,748 lakhs from 34,420 lakhs in FY 2016-17 mainly on account of PAT of 15,856 lakhs for FY 2017-18 and net off payment of dividend and dividend distribution tax of 5,383 lakhs.

4. Non-current Liabilities

Non-current liabilities at the end of FY 2017-18 increased by 665 lakhs to 1,546 lakhs from 881 lakhs in FY 2016-17.

5. Current Liabilities (Including Short-term Borrowings)

Trade payables increased by 8,978 lakhs to 22,286 lakhs in FY 2017-18 from 13,308 lakhs in FY 2016-17.

Other financial liabilities increased mainly on account of increase in capex creditors (for the new Chennai plant) of 1,749 lakhs and increase in current tax liabilities of 680 lakhs. There was a decrease in other current liabilities mainly due to reduction in statutory dues payable by 1,185 lakhs.

Short-term borrowings also increased by 6,957 lakhs at the end of FY 2017-18 at 24,806 lakhs over 17,849 lakhs in the previous year.

However, the Company has net cash (net of short-term debts) of 7,812 lakhs as on March 31, 2018 as against net cash balance of 11,108 lakhs as on March 31, 2017. This demonstrates that the Company is Net Debt free as on March 31,2018.

6. Fixed Assets

Net block of fixed assets [including Capital Work in Progress (CWIP)] increased by 11,892 lakhs to 26,608 lakhs in FY 2017-18 from 14,716 lakhs in FY 2016-17. This mainly due to capex spent at the newly capitalised plant facilities at Chennai and also few assets capitalised at the Silvassa plant as a regular capex plan.

7. Other Non-current Assets

Other non-current assets at the end of FY 2017-18 marginally decreased by 290 lakhs to 1,365 lakhs from 1,655 lakhs at the end of FY 2016-17. This was mainly due to a drop in capital advances of 333 lakhs paid at the end of FY 2016-17 for the new Chennai plant facilities.

8. Cash and Bank Balances

Cash and bank balances increased significantly by 3,662 lakhs and stand at 32,619 lakhs at the end of FY 2017-18 as compared to 28,957 lakhs at the end of FY 2016-17.

9. Current Assets

The overall inventory increased by 8,687 lakhs to 23,680 lakhs in FY 2017-18 from 14,993 lakhs in FY 2016-17. Trade receivables increased by 2,500 lakhs from 10,962 lakhs in FY 2016 17 to 13,462 lakhs in FY 2017-18. Other current assets increased by 2,155 lakhs in FY 2017-18 mainly on account of increase in balances with government authorities.

10. Liquidity

The Company defines liquidity as its ability to generate sufficient funds from both internal and external sources to meet its obligations and commitments. The Companys primary liquidity requirements have been to finance its working capital requirements for its operations and for capital expenditures and investments. The Company has financed its capital requirements primarily through funds generated from its operations.

11. Cash Flows

The table below summarises the Companys cash flow for the periods indicated (Please refer cash flow statement for more details)

( lakhs)

March 31, 2018 March 31, 2017
Net Cash Generated from Operating Activities 11,008 13,386
Net Cash (Used) in Investing Activities (5,085) (1,001)
Net Cash Generate/ (Used) in Financing Activities 892 (5,909)
Net Change in Cash and Cash Equivalents 6,815 6,476