JHS Svendgaard Laboratories Ltd Management Discussions.

ECONOMIC OVERVIEW

A global perspective

At 3.8%, global growth in 2017 was the fastest since 2011. It was driven by an investment recovery in advanced economies, continued strong growth in emerging Asia, a notable upswing in emerging Europe, and signs of recovery in several commodity exporters. Two-thirds of countries accounting for about three-fourths of global output experienced faster growth in 2017 than in the previous year. What is even more interesting is that economic activity in 2017 ended on a high note. Growth in the second half of the year was above 4%, the strongest since the second half of 2010, supported by a recovery in investment. With broad-based momentum and expectations of a sizable fiscal expansion in the United States over this year and the next, global growth is now projected at 3.9% for 2018–19.

Future growth prospects look challenging indeed for advanced economies and many commodity exporters. In advanced economies, aging populations and lower projected advances in total factor productivity will make it hard to return to the pre-crisis pace for the average households income growth. Substantially raising middle and lower incomes appears even tougher. Moreover, growth rates will inevitably bend toward their weaker longer-term levels.

An Indian perspective

Fiscal 2017-18 was a defining year for the Indian economy. India took the bold step of completely resetting its indirect tax system to a comprehensive GST regime while continuing to experience the impact of the demonetisation shock of November 2016. Call them disruptions or structural reforms, the result of these two reforms was evident as Indias GDP growth dipped to 6.7% in 2017-18 against 7.1% in 2016-17. Even as economic progress remained throttled in the first half of the fiscal, India bounced back aggressively to report a 7%-plus growth in the second half of the year - 7.7% in the three months ended 31 March, the fastest pace in seven quarters, signaling a strong turnaround.

The turnaround in the economy was led by robust agriculture (4.5%) and manufacturing growth (9.1%) as well as double-digit growth in construction activities (11.5%) in the quarter ended March 2018. However, services sectors such as trade, hotels, transport (6.8%) and financial services (5%) decelerated from their levels in the third quarter, signaling a lingering impact from disruptions caused by hasty implementation of the goods and services tax (GST) as well as the state of the banking sector.

The economy, however, got a boost from higher government spending (13.3%) in the quarter ended March 2018. Gross fixed capital formation, a proxy for investment demand in the economy, expanded at a double-digit pace (14.4%) after a gap of seven quarters, signaling a revival in investment activities.

This underscores the reality that the Indian economy has moved past the disruptions triggered by demonetisation of high-value currencies and rollout of the Goods and Services Tax. The latest quarterly corporate earnings data suggest that consumer demand too is reviving.

The high points for 2017-18

• India emerged as the most competitive country in South Asia, appearing at No. 40 in the global competitiveness ranking of 137 countries by the World Economic Forum.

• India jumped up 30 notches into the top 100 rankings on the World Banks ‘ease of doing business index, consequent to major improvements in indicators such as resolving insolvency, paying taxes, protecting minority investors and getting credit.

• India topped management consulting firm AT Kearneys 2017 Global Services Location Index for the eighth consecutive year and extended its lead over other countries from 0.47 last year to 0.76 in 2017.

About tomorrow: In keeping with the cyclical upswing witnessed in 2017-18, Deutsche Bank estimates the country to clock a GDP growth of 7.5% in 2018-19 - tad higher than the RBI estimate of 7.4%. On the negative side though, higher global oil prices, risk of an earlier than anticipated rate hike cycle from the RBI and the potential negative impact of the banking sector frauds on credit and overall growth are some of the factors that pose downside risk to its baseline GDP estimate.

Over the long term

INDIAS ORAL CARE INDUSTRY

Indias oral hygiene market is one of the most dynamic, fastest growing and competitive component of the FMCG industry. However, the scenario has not been the same since its evolution. Over the time, it has changed from a static to dynamic, less competitive to more competitive, traditional to more organise and advanced one.

Earlier, the domestic oral hygiene market was confined to the production of mostly primary oral care products which were considered essential like toothpastes and toothbrushes and hence held a nominal share of the FMCG sector. However, over the time, the oral hygiene market in India has gone through tremendous change on account of encouraging demand side and supply side factors along with supporting govt. policies. Over the last five years, Indias oral hygiene market has grown with a CAGR of 11.4% and has become a significant FMCG sector in India.

Currently, Indias oral hygiene market is dominated by the toothpaste category followed by toothbrush majorly including manual and electric toothbrushes. Toothpowder sales have declined due to changing consumer tastes. Advance oral care products such as mouthwashes, dental floss, teeth whitening products are at an early stage in India, catering mostly to urban consumers.

ORAL CARE MARKET IN INDIA

Future Outlook

The future outlook for the oral hygiene market of India appears to be very promising owing to various market conditions and educative initiatives on part of manufacturers and govt., which has led to increased demand from consumer side as well as offers great potential growth opportunities to the manufacturers.

Apart from demand for improved oral care products, Indian consumers are getting more inclined towards herbal products in recent years. Large rural population depends upon natural products like neem twigs etc. for oral hygiene.

Hence, through premiumisation and production of natural-herbal oral care products, a large market segment can be captured. Also, low market penetration both in terms of region (urban-rural) and product (primary and secondary oral care products), implies a largely untapped Indian oral care market with great opportunities to the manufacturers to expand and grow.

Moreover, in order to sustain in highly competitive India oral care products market, an increasing number of companies are introducing new and innovative oral care products in the country. Increasing marketing and promotional activities by leading oral care products manufactures through electronic as well as print media is anticipated to further aid growing sales of oral care products in India over the next five year

According to a recently released TechSci Research report, "India Oral Care Products Market By Product Type, Competition Forecast and Opportunities, 2011 – 2021", the oral care products market in India is projected to grow at a CAGR of over 6% during 2016 – 2021, on account of increasing purchasing power, growing urbanisation, higher levels of awareness among consumers about oral care, and surging demand from urban, semi-urban as well as rural areas of the country.

Considering the present market scenario, your company has already been equipped itself for last couple of years and continuously supplying its Ayurvedic and herbal toothpaste to leading player in the Ayurveda and herbal including Patanjali, Dabur on contract manufacturing basis.

Opportunities and threats

Various threats caused on account of potential risks and opportunities that arise from Political, Economic & Regulatory environment, Exchange Rate fluctuations, Technology Changes, Environment and Competition are being closely monitored by the Company. Following are some of the Business Sustainability risks identified by us from a business perspective and our approach towards addressing them.

Political & Macroeconomic Environment

The past couple of years have been tough for the Domestic industry facing severe headwinds. Packaged Consumer Products observed as silent in its demand growth despite good monsoon. Pre -GST regime also depressed customer sentiments and led to a massive destocking of products across the various trade channels.

Regulatory Framework

Frequent amendment in the existing laws proven to be the important challenges for any industry in India. Introduction of GST on July 1, 2017, the most ambitious tax reform since Independence also impacted the business of the Company during the year under review. The Company has followed all legal and regulatory requirements and has implemented all statutory requirements. In addition, it has also assisted its business associates, viz. distributors and vendors to prepare for compliance with the new GST regime.

Counterfeit Products

Counterfeiting of products are emerging as a global problem at enormous scale, impacting a lot in every sector. In India, FMCG was observed as one of Sector having the most counterfeiting product specifically tooth brushes, causing significant losses to the industry and the government. It was also reported that sales of fake consumer goods are growing faster than the overall consumer products market.

JHS has formulated a multi-pronged strategy to target the counterfeit products manufacturers as also label printers in a planned manner.

INFORMATION SECURITY

It has become important to any organisation to protect its digital assets from misuse, loss or unauthorised access. JHS maintained a strict vigilance regarding entry of laptops, mobile phones, hard drives and pen drives at all locations where its offices and facilities are situated. In day-today operations of the Company, JHS have put in place safeguards in order to ensure that information should not be misused by the employees having access to a variety of data and information inter-alia production plans, investment strategies and new product launches.

PERFORMANCE REVIEW

The Companys revenues increased from Rs. 105.05 crores in 2016-17 to Rs. 140.73 crores in 2017-18, a growth of 35%. An increase in the proportion of value - added products and improving operating efficiencies helped in a 76% increase in EBIDTA – from Rs. 12.12 crore in 2016-17 to Rs. 21.38 crore in 2017-18.

ENVIRONMENT, HEALTH AND SAFETY

Environment, Health and Safety (EHS) is a core focus area for the Company. We strive to be an ‘injury free and ‘zero environmental incident organisation.

In line with the vision, the Company has created a framework for operations which ensures minimal risk of injury or incidents. Sub- systems and procedures are also structured to be operable in greater safety and comfort. JHS has been incorporating the latest engineering standards and investing in active safety hardware across all facilities. The EHS Management Standards ensure fair and regular audits of all operations and guidelines for assessment. This ensures compliance to all applicable Environment and Health and Safety regulations.

HUMAN RESOURCE

JHS believes that ‘great people create great organisations. As a result, it considers its human resources as an intellectual capital to be proven as the key competitive advantage which differentiates the organisation from among the clutter. Hence, the Company remains committed in creating an engaging environment and a learning culture which facilitates each member to gather knowledge, sharpen their skills and and deliver superior performance.

During 2017-18, JHS focused on various strategic learning programmes, employee engagement and health management initiatives aimed at the overall development of our dynamic workforce. The team intensified its training initiative by increasing the training sessions in which knowledge was imparted by renowned experts in each field.

The Company also focused on key strategic issues such as building a leadership pipeline and succession planning. The team has identified star performers and is working on developing a fast-track career development journey which empowers them for larger roles within the organisation.

INTERNAL CONTROL SYSTEM

JHS has a well-defined internal control system which is structured around the business and its operations. The system is well tested and certified internally as well as externally to prevent escalation of risk. The Audit Committee is in charge of reviewing the efficiency of the control environment and also monitoring the implementation of key recommendations. A robust ERP system accentuates the control system by offering furthering control and analytics of the Companys operations. The Audit recommendations and follow-up action plans are also discussed with the Board of Directors of the organisation and Senior Management of the Company along with the Audit Committee to ensure strategic action and adequacy of the control system.

STAKEHOLDER RELATIONSHIP

JHS appreciates and encourages a robust two-way communication with its stakeholders. JHS always believe in maintaining an open, honest and clear communication with its stakeholders. JHS has mapped its internal and external stakeholders in a structured way, and carry out engagements with them on a regular and ongoing basis. Currently, around 55.83% of the Companys equity are being held publicly and traded on stock exchanges. JHS endeavors to disseminate an accurate, transparent and timely information to its stakeholders.

RISK AND CONCERNS

As with any organisation, JHS is also exposed to business risks which might affect its interests if left unchecked. The Company has a comprehensive risk management system, which analyses the nature of the risk and prepare mitigation strategies. The Senior Management oversees the risk management framework and sets the risk culture and response. This framework ensures efficient risk monitoring, identification, assessment and mitigation of external as well as internal risk. The Board of Directors provides oversight and also reviews the Risk Management Policy. Additionally, an independent audit by internal auditors offers a second assessment on potential risks and mitigation measures.

CAUTIONARY STATEMENT

Statements in this Management and discussion and Analysis describing the JHSs objectives, projections, estimates and expectations might be construed as forward looking statement within the meaning of applicable laws and regulations.

Actual results may differ substantially or materially from those expressed or implied. Important developments that could affect the Company operations include a downward trend in the Oral Care Industry, rise in input costs, exchange rate fluctuation and significant changes in political and economic environment, environment standards, tax laws, litigations and labour relations.