Jocil Ltd Management Discussions.
a. Industry Structure and Developments :
The Company is engaged in the manufacture of Stearic Acid, Fatty Acids, Refined Glycerine, Soap Noodles, Toilet Soap, Industrial Oxygen and in the generation of Power from biomass and wind. Nonedible vegetable oils and fatty acid distillates, both indigenous and imported, are used as raw materials for manufacturing the finished products. The products manufactured are marketed directly from the factory as well as through Depots and C&F Agents located in major cities across the country. The Company also undertakes to manufacture Soap Noodles and Toilet Soap on jobwork for reputed customers.
The Company is having 6 MW Biomass Cogeneration Captive Power Plant located within the factory premises and the surplus power is sold to APSPDCL. It is also having four Wind Energy Generators (WEGs) of total 6.30 MW set up in Tamil Nadu and the power generated from these plants is sold to Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO).
Majority of the Fatty Acids produced in the industry are consumed as raw material in Soap industry for making Toilet Soap. Hence performance of toilet soap industry will also have its impact on the demand for fatty acids. Stearic Acid is a chemical used in rubber, plastic, metal polish, cosmetics, paints and number of other industries and any changes in demand by the major user industries may lead to fluctuations in demand. Glycerine and Industrial Oxygen are by-products.
The country is short of both edible and non-edible vegetable oils. However, in India, refineries with huge capacities have been set up for processing Crude Vegetable Oils like Palm Oil mainly imported from Malaysia and Indonesia and some that is available domestically. By-products generated from these refineries viz., RBD Palm Stearine (RBDPS) and Palm Fatty Acid Distillate (PFAD) and imported Crude Palm Stearine, a blend of RBDPS & PFAD, are the raw materials to the Company. As a result, the Company indirectly depends on imports for its raw material supplies. Consequently the supply and demand position in the international market for vegetable oils influence the indigenous market.
The Malaysian and Indonesian Governments impose export duty varying from time to time on crude oil to encourage value addition prior to exports. This turns out as additional cost to consumers in India. Further, fluctuation in crude oil (fossil) prices also have impact on edible and non-edible oils due to their usage in production of biofuels.
Inverted duty structure for imports (higher duty for raw materials and lower duty for finished products) is a major problem for manufacturers of soap noodles. There is no customs duty on soap noodles imported (vide Customs Notification No. 46/2011 (as amended from time to time) imported from Asian Countries under Indian Free Trade Agreement) whereas lauric acid one of the major raw materials in the manufacture of soap noodles attracts customs duty at 7.5%. As a result indigenous manufacturers are placed at a disadvantage in competing with import of soap noodles.
The fuels intended for running the biomass power plant are Rice Husk, firewood like Cotton Stalk, Chili
Stalk, English Thumma etc., available in the surrounding areas. Their availability is seasonal and also depends on availability of labour and farm works during the season. Transportation and storage of biomass fuels are the other problems due to low bulk density. They are also fire hazardous. After carrying out the scheduled maintenance activity the capacity utilization of the power plant during the year has improved as compared to previous year. Steam and power requirements of Process Plants are met from the Biomass Power Plant. The Company constructed a Reservoir by spending about Rs.3.50 crores for storing water to meet part of its requirements during off season to save on cost and to reduce dependence on outside sources. Minor works relating to this are expected to be completed by end July 2019.
Continuous development efforts are being made to absorb the latest technologies and practices. Quality Management Systems (QMS) Standard ISO 9001:2015 obtained from a renowned certification agency, TUV SUD South Asia Pvt. Ltd., Mumbai is being followed by the Company, Det Norske Veritas (DNV) also confirmed ISO 22716:2007 on the Company for following GMP Guidelines of Standard in the manufacture of Glycerine.
With the implementation of SAP, an Enterprise Resource Planning (ERP) software, day-to-day reports, required data for filing GST returns etc., could be accurately and easily generated by the company. The initial problems that arose while implementation of the SAP have been sorted out and at present the system is functioning smoothly.
b. Opportunities and Threats :
Raw material cost is a major component in the cost of production of fatty acids and soap products. International market prices of edible oils and non-edible oils highly influence the raw material prices. During the year the market witnessed very wide fluctuations in raw material prices. Competitors having backward integration have an edge over the Company because of cheaper and secured source of raw materials. Volatility of raw material prices and demand by bulk consumers of fatty acids and soap products for contracts of large quantities for future delivery is a big challenge to the Company when similar facility for advance coverage of raw materials is not available to hedge the risks. Retention of high volume customers is considered very important and hence very competitive rates are having to be quoted with hidden risks.
GST refund/benefit for a few units is continuing in Himachal Pradesh & Uttarakhand States till March 31, 2020, for the residual period. Whereas, for the Northeast and Jammu & Kashmir States the benefit is upto March 31, 2027. In both cases the benefit is for 10 years from the commencement year of commercial production. However, manufacturing of low cost soap in Northeast for southern markets does not seem to be entirely viable. Due to the good rapport with FMCG Majors like HUL & ITC, our company is able to market the capacities much better now.
Toilet Soap market is dominated by a few well established brands and manufacturers. Toilet Soap being a consumer product requires extensive market network, brand image, advertisement etc., for successful marketing. Since the Company is not having its own brands it depends on brand owners for utilizing the capacity. Most of these brand owners are having their own facilities in GST benefited areas and approach the Company only when they find logistical advantage. However, the present market situation has improved and the Company obtained export orders for DFA and indigenous orders for Soap Noodles and Toilet Soap from some major customers. Accordingly, capacity utilisation of Soap Plant has improved during the year.
Export of Power generated from biomass to APSPDCL was stopped from 9 July 2018 to 21 July 2018 and from Jan 2019 to 13 Jan 2018 due to scheduled maintenance. APERC proposes to continue the same variable cost approved for FY 201 8-19 for Biomass units for future years from FY 2019-20 to FY 2023-24 due to non-availability of indicative fuel price escalation. Biomass Energy Development Association (BEDA) is representing the issue with the Commission.
The generation of power from WEGs has declined to 127.18 lakh units as against 148.51 lakh units in the previous year. As a result revenue from sale of power from Wind Energy Generators decreased to Rs.371.97 lakhs from Rs. 423.22 lakhs. It is mainly due to low wind of 49.95% when compared to 41.20% in the previous year in spite of reduction of grid failure from 5% to 4.49%. The Company continues to receive payments from TANGEDCO delayed by about 10 months after the due date.
c. Segment-wise or Product-wise performance :
Segment-wise performance of the Company is at Note No. 31 to the Accounts.
d. Outlook :
The Company expects the Government to recognize the inverted duty structure for soap noodles and correct the anomaly to enable the industry to face the competition from import of soap noodles effectively. In order to cater to the additional toilet soap requirements of major customer, M/s.HUL, the Company is in the process of modifying certain equipment in the existing finishing lines of Soap Plant to suit different requirements of customers and also to increase some capacity.
e. Risks and Concerns:
The wide fluctuations in raw material prices in the international market affect the prices of final products which may result in conditions sometimes favourable or at other times unfavourable to the Company, in spite of taking precautions to avoid risks in price fluctuations.
Generation of power by Biomass Power Plant depends on availability of biomass, its cost and willingness of AP TRANSCO to accept exports. Generation of power by wind mills depends on wind velocity and the policy of TANGEDCO to prioritize evacuation over the other sources of energy available to it. The profitability of Biomass Power Plant and Wind Energy Generators largely depends upon the purchase price fixed by the Governments for purchase of energy from renewable sources of energy as a promotional measure.
f. Internal Control System and their adequacy:
The Company has proper and adequate internal control procedures commensurate with its size and nature of business. These internal control procedures ensure protection to the resources of the Company and compliance with the policies, procedures and statutes.
The internal controls are supplemented by internal audit by M/s. Mastanaiah & Co., Chartered Accountants, Guntur. The internal controls and internal audit ensure that appropriate financial records are available for preparing financial statements and other data for maintaining accountability of assets. The Report of the Auditors on Internal Financial Controls under Sec.143(3)(i) of the Act is provided as Annexure - B to the Independent Auditors Report.
g. Discussion on Financial Performance with respect to Operational Performance:
The financial performance of the Company with respect to operational performance in 2018-19 is less satisfactory as compared to 2017-18. While the operations have improved by about 10%, the Profit Before Interest and Depreciation dropped by 36% due to extreme competition and unfavourable market conditions.
h. Material developments in Human Resources / Industrial Relations front, including number of people employed:
The Company employed 735 persons as on 31 March 2019 both in the factory and office. The Management of the Company maintains good relations with the employees. There have been no labour problems since the inception of the Company in 1980.
|Details of significant changes in key||2018-19||2017-18||Change %||Explanation for change|
|1) Debtors Turnover||7.47||4.94||51.21||Increase in turnover and decrease in accounts receivable|
|2) Inventory Turnover||24.54||20.30||20.89||-|
|3) Interest Coverage Ratio||2.06||4.85||-57.53||Decrease in earnings before interest and tax|
|4) Current Ratio||4.81||4.68||2.78||-|
|5) Debt Equity Ratio||0.05||0.04||25.00||Increase in debt|
|6) Operating Profit Margin (%)||0.006||0.018||-66.01||Decrease in opertating profit|
|7) Net Profit Margin (%)||0.008||0.012||-33.03||Decrease in net profit|
j. Details of change in Return on Net worth
|Ratio||2018-19||2017-18||Change %||Explanation for change|
|Return on net Worth||0.018||0.023||-22.90||Decrease in Profit after Tax due to very low margins arising out of extreme competition.|