JHS Svendgaard Laboratories Ltd Management Discussions.

AN ECONOMIC OVERVIEW GLOBAL ECONOMY

COVID-19 has triggered a global crisis like no otheroa global health crisis that, in addition to an enormous human toll, is leading to the deepest global recession since the Second World War. The COVID-19 pandemic has spread with alarming speed, infecting millions and bringing economic activity to a near-standstill as countries imposed tight restrictions on movement to halt the spread of the virus. As the health and human toll grows, the economic damage is already evident and represents the largest economic shock the world has experienced in decades. While the ultimate growth outcome is still uncertain, and an even worse scenario is possible if it takes longer to bring the health crisis under control, the pandemic will result in output contractions across the vast majority of emerging market and developing economies. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020, the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support.

Historic contraction of per capita income

The pandemic is expected to plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. Advanced economies are projected to shrink 7 percent. That weakness will spill over to the outlook for emerging market and developing economies, who are forecast to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus. This would represent the weakest showing by this group of economies in at least sixty years. "The crisis highlights the need for urgent action to cushion the pandemics health and economic consequences, protect vulnerable populations, and set the stage for a lasting recovery."

 

INDIAN ECONOMY

The annual growth forecast for Indias FMCG sector is projected to be in the range of 5-6 per cent for the calendar year 2020, as the world grapples with the Covid-19 pandemic. The earlier predicted growth was in the range of 9-10 per cent for Indias FMCG sector for the full year of 2020.

The research and insights firm, which follows the January- December period as a fiscal year, pointed to macro-economic conditions such as lower GDP growth rate predictions, rising unemployment levels especially in rural region as well as the severe impact on economic activity across sectors and supply chains, due to the Covid-19 pandemic, as key reasons for this forecast.

It also said that the intensity, severity and longevity of the lockdown would have significant implications for multiple industries, including FMCG industry, which had begun witnessing signs of revival in the first two months of the year.

While manufacturers and brands are working to get back to normalcy as quickly as possible, there are pragmatic challenges as business performances are under extreme pressure.

A trajectory of silver lining

India has so far managed to keep a relatively flatter infection curve in its battle against the pandemic. When compared to other countries, it does appear to have a better chance of pulling off with lesser collateral damage, at least for the time being. However, several factors are already playing in, or might play out, during the course of these events, and these might prove to be favourable for India to become a major trade and commerce player in the world.

An outsourcing hub

The global economic slowdown will mean that first world economies - such as the US - will be looking out for low-cost outsourcing solutions. Whether it is IT, finance or non-core items, India can rise up to the challenge. Supply basket

Globally, buyers have already shifted to India to source ceramics, home, fashion, and lifestyle goods. The drive to look for alternatives can be beneficial for India to enter multiple trade channels as a supplier of raw materials and manufactured goods.

A shift in manufacturing

Around a thousand foreign manufacturers want to relocate their production to India, a country they see as an alternative to China. Reportedly, at least 300 are already talking with the Indian government for production in a wide range of sectors, including electronics, medicine, and textiles. Impact? Infrastructural development around manufacturing facilities and a boost to employment.

Supporting the cause

This year, the government has proposals to hike import duties on more than 300 products, such as an increase of 30% in furniture import from the current 25 % price. This can provide an opportunity for local production to break out within the market, especially OMEs, SMEs, and even the ever-so-varied handicrafts of India.

 

Source: https://www. worldbank. org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world

https://www. thehindubusinessline. com/economy/research-firm-nielsen-slashes-fmcg-growth-forecast-for-2020

Of dependencies and actions

Much of the world has had China as its resource, assembly and manufacturing hub, especially in the case of electronics and mobile accessories. However, given the source of pandemic and actions taken over it, the world is paying a heavy price. There is no easy way to put it: the pandemic has instilled a shift in consumer psychology, and the outcome will be an altered behaviour towards the market, especially China and its products. However, before India leaps to fill this global void, it needs to cut the shackles of its dependencies.

The shutdown of supply chains, however, has called for a need to shift the market or become independent. Thankfully, the government has planned to boost local production and emerge as a global alternate supplier.

For a long time, China has been in the top of Indiais imports list for a variety of items. It is no denying that, given the pandemic, the supply has been hit hard. But the Indian government is already exploring alternative countries for over 1,000 items to replace China as their supplier. Undoubtedly, there are many hitches to overcome, some which will require other countries to lift themselves up from the pandemic before entering trade negotiations.

Future, however is difficult to predict, but anticipating where a single seed can be planted to bear a massive fruit-bearing tree is what we need to do. The COVID-19 pandemic will, undoubtedly, continue to keep us all on our toes until a vaccine comes out. But hope is what we have, so it is what we shall use.

IMPACT OF COVID-19 ON FMCG SECTOR & CONSUMER BEHAVIOR

It is not established that life and our approach towards it will never be the same again. Naturally, such a change impacts some businesses adversely while giving an impetus to others.

In the immediate to medium term, lot of changes in consumer behaviour are expected, due to which FMCG companies will be forced to adapt their strategy for customer acquisition and retention. The composition of the consumption basket has changed due to COVID and some of these changes will be more permanent than others. An increased focus on health and hygiene will become the norm. Demand in the discretionary categories is likely to come back slowly but not immediately.

For the average consumer, we are seeing a surge in demand for products that enhance personal hygiene in and around homes and workplaces. Products such as soaps, handwashes, sanitisers, mouthwashes, disinfectants, wipes, toothpaste, masks, home cleaning products such as floor cleaners, kitchen cleaners, toilet cleaners are seeing a surge in demand and this trend is expected to continue into the future as cleanliness and hygiene are going to be the new mantras. FMCG companies servicing these requirements are likely to do well. Similarly, companies which focus on food staples, and convenience foods such as instant noodles, biscuits, frozen foods, flour, cooking oils, instant mixes, and nutrition are going to be in demand. Products that help in building immunity against illnesses are also in significant demand from the consumers. It will also be imperative to manage inventory better to avoid concerns surrounding freshness and expiry of products.

THE ORAL HEALTHCARE SPECTRUM

The oral care/ hygiene market is projected to reach USD 53.3 billion by 2025 from USD 45.8 billion in 2020, at a CAGR of 3.1%. The increase in the prevalence of dental caries, periodontal diseases, and other dental diseases, growing awareness about oral hygiene, rising dental healthcare expenditure, an increasing number of small/ private clinics with dental dispensaries are some of the factors contributing to the growth of this market. However, the competitive pricing pressure faced by prominent players is hampering the growth of the oral care/oral hygiene market.

Covid-19 Impact on the Oral Care/Oral Hygiene Market

The oral care/oral hygiene market is not expected to be significantly impacted by the Covid-19 pandemic in 20202021. However, there could be possible disruptions in the distribution channel during the period of lockdown and movement restrictions imposed globally to control the virus spread and flatten the curve. Social distancing protocols and quarantine measures have led to a shift in consumer purchasing patterns from in-store to online, which would be reflected in oral care/oral hygiene product sales as well. Major players in the market have continued their production activities during this period.

Driver: Growing awareness of the importance of maintaining oral hygiene

Oral hygiene awareness is one of the major contributors to market growth in the overall oral care/oral hygiene market through efforts made by dentists as well as key players in the market. These stakeholders conduct various seminars and programs to increase awareness of dental hygiene and demonstrate newly launched and technologically advanced products. This helps players to showcase their product portfolio, thereby raising the adoption of oral care products.

Restraint: Increased competition in the oral care/ oral hygiene market escalating price pressure

The oral care/oral hygiene market is highly competitive, with a growing number of players operating at the regional level. The emergence of local players in developing markets such as India, China, and Brazil further increases the pricing pressure on global players. Local/regional players offer oral care products at discounted prices as compared to the global players and sell their products through e-commerce channels at low prices, creating pricing pressure on global players.

Opportunity: Increasing online purchase of Oral Care Products

There has been a marked shift in the retailing of oral care products across the globe in recent years. Online retailers are gradually being preferred over traditional distributors, retailers, and pharmacies. Purchasing oral care products through e-commerce portals offers several advantages, such as the availability of multi-brand oral care products at relatively lower prices, ease of purchasing, and free shipping. The successful sale of oral care products through e-commerce has prompted increasing investment towards these channels by major market players.

Challenge: High Dependency on Retail/Consumer Stores

Prominent players in the oral care/oral hygiene market are highly dependent on retail stores as they are the immediate customers for manufacturers. Large stores/supermarkets such as Wal-Mart, Target, and Costco have high bargaining strength; the continued trend of consolidation among retailers could thus create a cost and margin pressure on manufacturers. Furthermore, the high bargaining power of buyers may negatively impact the business of manufacturers.

The toothbrushes segment is expected to grow at the fastest rate in the forecast period.

The oral care/oral hygiene market is broadly segmented by product categorized into toothpaste, toothbrushes & accessories, mouthwashes/rinses, denture products, dental accessories/ancillaries, and dental prosthesis cleaning solutions. The toothbrush segment includes manual, electric (rechargeable), and battery-powered (non-rechargeable) toothbrushes. The toothbrushes

segment is expected to witness high growth forecast period of 2020n2025. The growth in this market is mainly due to growing awareness about oral health and technological innovations in the electric toothbrushes industry.

Consumer stores accounted for the largest share in the oral care/oral hygiene market in the year 2019.

Based on the distribution channel, the oral care/oral hygiene market is segmented into consumer stores, retail pharmacies, online distribution, and dental dispensaries. In 2019, the consumer store segment accounted for the oral care/oral hygiene market. The large share of consumer stores in case of oral care/oral hygiene products can be attributed to the large number of stores across the globe and their easy accessibility.

The Asia Pacific region is expected to show the highest growth rate during the forecast period of 2019-2025.

Geographically, the global oral care/oral hygiene market is segmented into North America, Europe, the Asia Pacific, Latin America, and the Middle East & Africa. Asia Pacific is expected to show the highest growth rate during the forecast period. The high growth rate of this region can mainly be attributed to the increase in the number of the geriatric population associated with edentulism, growing prevalence of dental caries and other periodontal diseases in children and adults, increasing healthcare expenditure (coupled with the rising disposable income), rising awareness about oral healthcare, and willingness to spend more on dental care. Moreover, increasing the focus of prominent players in emerging Asian countries will further support the growth of the market in this region.

COMPANY OVERVIEW

JHS Svendgaard Laboratories Ltd. is Indiais largest integrated manufacturer of oral care products that services the demanding requirements of leading Indian and global FMCG brands operating in Indian. Apart from contract manufacturing partnerships with domestic oral care brands, the Company manufactures proprietary brands as well. The Company manufactures the entire range of oral care product at its ISO-certified state of-the-art manufacturing facilities at Kala Amb (Himachal Pradesh).

PERFORMANCE REVIEW

The Companys revenues increased from Rs.125.44 Cr. in 2018-19 to Rs.144.71 Cr. in 2019-20, an increase of about 15%. The EBDITA margin increased from Rs.13.20 Cr. in

2018- 19 to Rs.21.14 Cr. in 2019-20, an increase of about 409 basis points. It reported a Net profit of Rs.1.75 Cr. in

2019- 20 due to exceptional expenditure [*Refer Note 35, for more details] against a Net Profit of Rs.3.65 Cr. in 2018-19.

EGMENT WISE REPORT

Particulars

Manufacturing Business

Other than Manufacturing Business

Retail Business

YTD March 2020 YTD March 2019 YTD March 2020 YTD March 2019 YTD March 2020 YTD March 2019
Sale to external customers 12,750.10 11,596.87 897.63 644.80 263.69 173.49
Revenue with other operating segment 545.50 369.21 0.82 0.91 - -
Depreciation 742.97 698.11 20.47 3.72 112.63 6.95
Cost of goods sold 9,707.87 8,479.25 587.14 444.90 205.93 135.09
Income tax expense/ (income) 2.10 161.70 (86.70) (194.77) (11.94) (3.71)
Total assets 22,908.71 21,830.59 1,460.33 1,191.62 1,197.81 641.06
Total liabilities 4,758.91 3,831.15 311.87 462.11 603.51 27.45

Significant changes i.e. change of 25% or more in the key financial ratios

In accordance with the amendments notified by SEBI in Regulation 17 of the SEBI (Listing Obligation and Disclosure Requirement) Regulation, 2015 on 9th May, 2018, the details of significant changes i.e. change of 25% or more in the key financial ratios as compared to the immediately previous financial year along with detailed explanations are reported hereunder:

Particulars FY 19 FY20 % of Change Reason for Change , if change 25% or more
Debtors Turnover Ratio 2.13 1.40 -35% The change In this ratio is primarily due to increased contribution of Exports Sales in the overall business of the company.
Inventory Turnover Ratio 16.77 42.91 156% As the novel coronavirus impact had started hinting early february2020, so the company had reduced the inventory holding levels considering the uncertainties of its related impact and measures at that point of time.
Current Ratio 2.49 2.59 4%
Debt Equity Ratio 0.03 0.00 -94% The company aiming towards being debt free has repaid majority of the working capital facility during the year.
Operating Profit Margin 29.14 26.98 -7%
Net Profit Margin 3.01 1.33 -56% The Company has identified certain plant and equipment which were not in active use having gross value and written down value of 1776.53 lakhs and 1073.69 lakhs respectively. Consequently these assets have been carried its net realisable value and recognized under the head
Return on Net Worth 2.00 0.98 -51% "Assets classified as held for Sale" at an estimated realisable value of 10.00 lakhs. Therefore, loss of 1063.69 lakhs has been charged to the statement of profit and loss shown as exceptional item.

ENVIRONMENT, HEALTH AND SAFETY

JHS strives to be an injury free and zero environmental incident organisation. For it firmly believes that a risk free environment results in improved productivity and superior performance. In line with the philosophy, the Company

has created a framework that focuses on eliminating the risk of injury or incidents. Subsystems and procedures have been institutionalised to facilitate risk-free operations. The Company incorporates the latest engineering standards and continually invests in contemporary safety hardware at all its facilities.

The Company ensures fair and regular audit 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 its key competitive advantage which differentiates the organisation from among the clutter. Hence, it remains committed in creating an engaging environment and a learning culture which facilitates each member to gather knowledge, sharpen their skills and deliver superior performance. During 201920, JHS focused on various strategic initiatives for engaging and motivating its team.

They include:

• Transparent review systems.

• Rewards for teams and partners.

• On-job training to sharpening technical and process skills.

As on March 31, 2020, the Company has 338 employees and Industrial relations remained cordial through the last financial year.

INFORMATION SECURITY

Since information technology has become a business imperative for efficient business operations, protecting digital assets, systems and infrastructure from misuse, loss or unauthorised access has also become a business mandate. JHS maintains a strict vigilance regarding entry of laptops, mobile phones, hard drives and pen drives at all operational locations. In daytoday operations, the Company has put in place adequate safeguards to prevent misuse of information. Further, the Company has instituted multi-layered security systems. This enables regulated access to company and business related information to select employees (as per hierarchy and need) which facilitates in data security.

INTERNAL CONTROL SYSTEM

According to Section 134(5) (e) of the Companies Act, 2013 the term Internal Financial Control (IFC) means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.

The Company has a well-placed, proper and adequate IFC system which ensures that all assets are safeguarded and protected and that the transactions are authorised, recorded and reported correctly. The Companys IFC system also comprises due compliances with Company s policies and

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Standard Operating Procedures (SOP s) and audit and compliance, supplemented by internal audit checks from M/s VSD & Associates, Chartered Accountants, the Internal Auditors. The Internal Auditors independently evaluate the adequacy of internal controls and concurrently audit the majority of the transactions in value terms. Independence of the audit and compliance is ensured by direct reporting of Internal Audit Division and Internal Auditors to the Audit Committee of the Board. Additionally during the year eM/s MAZARS Advisory Private Limitedi have also been engaged for providing assistance in improvising IFC framework (including preparation of Risk & Control Matrices for various processes) and deployment of Self-Assessment Tool.

The Companies Act, 2013 re-emphasizes the need for an effective Internal Financial Control system in the Company. The Board has adopted policies and procedures for ensuring the orderly and efficient conduct of its business, including adherence to the Companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial disclosures. The details in respect of internal financial control and their adequacy are included in the Management Discussion & Analysis, which forms part of this report.

STAKEHOLDER RELATIONSHIP

JHS appreciates and encourages a robust two-way communication with its stakeholders. JHS always believe in maintaining open, honest and clear communication with its stakeholders. JHS has mapped its internal and external stakeholders in a structured way, and carries out engagement programs 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 endeavours to disseminate accurate, transparent and timely information to all its stakeholders.

RISK AND CONCERNS

JHS aims to foster a risk-aware culture by adopting an integrated approach towards effective risk management. Its philosophy of risk management is underpinned by identifying, assessing, measuring and monitoring risks on an ongoing basis. The Company has an independent and dedicated risk management structure with clear goals compatible with the Companys vision and strategy.

The risk management department is guided by well- established policies and procedures that are continuously benchmarked with national and global best-practices. 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 JHSis 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.