kse Management discussions

1. Industry Structure and Development

India currently represents one of the fastest growing animal feed markets in the world. The increasing demand for animal protein and dairy products has resulted in a growing livestock population in India, which in turn has increased the demand for animal feed. Currently the poultry, aqua and dairy industry accounts for the major share of the Indian animal feed industry. Modern animal feed products are manufactured by carefully selecting and blending ingredients to impart highly nutritional diets that both increase the quality of its end products such as meat, milk, eggs and at the same time maintain the health of the animal.

Changing lifestyles and rising per capita income in India have resulted in a shift in the dietary habits in the country leading to increased consumption of milk, egg and meat. The animal population in India is expected to increase continuously in the medium and long terms. India has recorded higher growth of exotic and cross-bred variety of cows, which continue to be preferred by many dairy farmers due to their much higher yield as compared to the indigenous breeds of cows. The Indian government along with private initiatives are increasing the awareness of better feed practices among farmers. Farmers are becoming more aware of the animal health and the importance of a balanced and nutritional food for their animals. All this put together, results in growing demand for compounded animal feed.

2. Opportunities and Threats

The advantages to your Company in cattle feed and cake processing industries are (1) its vast experience in these industries of about 50 years (2) its leadership in the market (3) adherence to high quality standards and acceptability of the feed in the market (4) prompt after-sales service and good customer relation (5) a lot of prestigious awards and recognitions to prove consistent quality and leadership (6) good network of dealership (7) talented technical and marketing personnel (8) judicious purchase of materials and (9) financial strength of the Company leading to better purchasing power helping to build up stock on favourable situations. The threats to the Company in these two segments are (1) competition from other manufacturers in organised and unorganised sectors (2) probable entry of multinational entities (3) surge in the fuel prices leading to increase in the price of ingredients (4) the volatile rupee Vs. dollar situation acts as a non-stimulant in import transactions (5) granting of subsidy by the Government on animal feed selectively avoiding private manufacturers (6) indirect control by Government over price of milk acts as a blockade, at times, to pass on the cost escalation to the consumers (7) switching of crop by farmers from oil seeds and grains (from which our ingredients are derived) to other crops (8) severe shortage in availability of manual local labour leads to increase in the cost of labour as these two segments are highly labour oriented (9) import of cheaper oils for bulk consumption leading to fall in demand for refined coconut oil (10) failure of crop and shortage in production of grains and oil seeds due to failure of monsoon/seasonal rain (11) the raw materials used in the production of animal feed, like soybean meal, sorghum and maize, are being diverted for the consumption of humans, leading to a shortage in the feed industry. (12) recent increase in sea freights many fold on account of several reasons acts as deterrent to import of copra expeller cake and (13) the impact of Russias war on Ukraine and its impact on food and energy prices. Your Company is tackling these issues appropriately, by taking timely actions.

The advantages to your Company in Dairy segment are (1) reputation and brand image of the Company for the quality of its products and (2) financial strength of the Company helping to withstand the unhealthy market competitions. The threats to the industry are (1) outbreak of pandemic diseases requiring lock down of operations of factories and outlets (2) unhealthy competition from small players dealing with inferior quality products (3) entry of big players including multinational corporations in the segment catered by your Company.

3. Segmentwise Productwise Performance

The segmentwise revenue and year to year change are given hereunder:

Segments	2022-23		2021-22		Year to year change Percentage
	in lakhs	Percentage	in lakhs	Percentage
Animal Feed	141312.65	87.78	146687.10	87.83	(3.66)
Oil cake processing	14829.74	9.21	16840.79	10.09	(11.94)
Dairy	4845.97	3.01	3477.93	2.08	39.33
Total	160988.36	100.00	167005.82	100.00	(3.60)

When the world economy was under the grip of covid pandemic, during the years 2020-21 and 2021-22, the sales volume of cattle feed has recorded a growth of 6.61 % and 4.45% respectively and the sales volume of feed for the year 2021-22 has reached 620377 tons. We had to resort to frequent increase in the selling price of feed starting from March, 2021 to combat the steep increase in the ingredient prices and the ingredient prices are still ruling at very high level. During the pandemic situation, many lost their employment abroad and had to return back to Kerala. Further, local keralites also faced unemployment due to lock-downs and other restrictions. At that time such unemployed families found cattle rearing as a profitable avenue, and many switched to cattle rearing in Kerala. Thus, during the covid period there was a sudden spurt in the animal population in Kerala and we could take advantage of the additional demand by ensuring regular supply despite the restrictions imposed to tackle the pandemic. After regaining normalcy, many of the new entrants to cattle rearing in Kerala had either returned to their earlier profession or had found new avenues and left cattle rearing. Thus, there was a fall in the animal population in Kerala, and we were the one severely affected by the lower demand, as our feed price was ruling very high compared to other brands available in the market. When it is felt that the increase in raw material prices is likely to continue for a longer period, the Company had taken a bold decision to increase the feed prices to such levels to avoid losses. The other competing brands in the government sector did not increase the feed prices at that time. Upto November, 2022, the price of our feed compared to that of competing brands in the Government and Co-operative sector was more than 3500 per ton. In addition to the difference in price, the said competing brands were enjoying subsidy from Government, which was not available to our feed, as we operate in private sector. The State Government did not allow revision of milk price till November, 2022, and finally allowed an increase of about 5 per litre. Since the imminent revision of milk price was held back by the Government, many farmers found it difficult to manage and they left cattle rearing itself, as it became highly uneconomical. After revision of the milk price upward, by December, 2022 the above competing brands also increased their prices at par with that of our prices. However, by that time the damage was done and we had a dent in our market. As a result of all these factors, the sale volume of feed has reduced in 2022-23 by 12% from 6.20 lakh tons to 5.45 lakh tons. The annual turnover of animal feed also has registered a fall of 3.66%, compared to that of previous year.

The quantity of copra cake processed in the Cake Processing Division was 1,15,689 tons in year 2022-23, against 1,28,151 tons in the previous year. The copra cake, after extraction of oil, is being used in cattle feed as an ingredient. Since the volume of cattle feed registered a fall in year 2022-23, the processing of copra cake also has reduced by 9.72%. The average realisation on sale of coconut oil has reduced considerably. The average realisation for coconut oil is 1.19 lakhs per ton during the year 2022-23, whereas the same was 1.47 lakhs and 1.54 lakhs per ton respectively for years 2021-22 and 2020-21. In March, 2021 the coconut oil price was around 1.90 lakhs per ton which came down to the level of 1.15 lakhs per ton in March, 2023. Due to the steep fall in the price of refined coconut oil during the year 2022-23, the turnover of cake processing division has reduced by 11.94%.

The volume of sale of milk has increased by 23.76% compared to previous year. However, the Government influenced the market to keep the price of milk unchanged despite the steep increase in the cost of feed. At the same time the procurement price of milk at Tamil Nadu was high. Hence, the milk price in Kerala was not in harmony with our procurement rate. In 2021-22, we could recapture the volume of sale of Vesta ice cream to the level of pre-covid period, with an advertisement budget of around 2.50 crores. In that year, we also shifted our focus to premium segment, by cutting short the volume business of cheaper varieties of ice cream, wherein the margin is almost nil. In year 2022-23, we further spent 2.70 crores for advertisement of Vesta ice cream. By consistent efforts, the sales volume of ice cream has registered a growth of nearly 40% in the current year under report.

The year to year change in the volume of operation in different segments are discussed under

Segments	Units of measurement	2022-23	2021-22	Year to year change (Percentage)
		Quantity	Quantity
Cattle Feed	Tons	545611	620377	(12.05)
Deoiled cake	Tons	13751	12471	10.26
Refined coconut oil	Tons	9143	8751	4.48
Milk	Kilo Litres	5147	4159	23.76
Ice Cream	Kilo Litres	1675	1202	39.35

In the above table, the year to year volume of sale of animal feed has reduced by 12.05 %. The reason for the fall is mainly on account of farmers leaving cattle rearing due to uneconomical operations and the huge disparity in the price of our feed and that of other leading brands in Kerala. Since the price of our feed was very high compared with that of other competing brands for the first three quarters of year 2022-23, we had to bear the whole impact of the fall in demand.

The sales volume of milk and ice cream registered considerable growth as a result of measures taken by the management in the form of engaging additional marketing force, exploration of new markets and expenditure on advertisement as discussed in earlier paragraphs in detail.

The segmentwise earnings before interest and tax are furnished below:

Segments	2022-23	2021-22	Year to year change in lakhs
	in lakhs	in lakhs
Animal Feed	791.06	1288.03	(496.97)
Oil cake processing	(513.73)	224.71	(738.44)
Dairy	(641.64)	(373.40)	(268.24)
Unallocated income net of expenditure including interest income	155.12	263.32	(108.20)
Total profit / (loss) before exceptional items, interest and tax	(209.19)	1402.66	(1611.85)

In year 2022-23, the annual average raw material cost of feed has gone up by 9.80 % over that of previous year. This is after registering an increase of 16.75 % in the annual average raw material cost of feed in the year 2021-22 compared to previous year. In year 2021-22, the average selling price of feed has increased by around 7.30 % compared to year 2020-21. It was further increased by 9.30% in the year 2022-23, in order to avoid loss. The ingredient prices were stable till February, 2021 and started increasing constantly, gaining the momentum in the last quarter of year 2021-22 and thereafter. Upto February, 2021, the average cost of ingredients was around 18,000 per ton, which has gone up to 22,500 per ton by March, 2022, and it further increased to 23,500 per ton for most part of the year 2022-23. Thus the increase in the price of feed ingredients over the period of the said 26 months is over 30%. We had increased the selling price of feed in several tranches to make up the loss. The average realisation on sale of feed in March, 2021 was 21,880 per ton and that in March, 2023 it is 25,909 per ton, that is, the selling price was hiked by around 18.40 % over a period of 26 months. As a result of the abnormal increase in the ingredient prices, which could not be matched with equal increase in the selling rates, the profit of the Animal Feed Division has reduced drastically.

In the cake processing division, local supply of copra cake was in short during the year 2022-23. We had to depend heavily on imported cake as in last year. However, as a result of short supply in Indonesia and Philippines, the imported copra cake has become costlier by around 25%. Due to scarcity of local supply of copra cake, the domestic price for copra cake was also on the higher side. The year to year annual average rate of consumption of cake has not varied much. However, compared to the average rate of 24,000 in the year 2020-21, the increase in the rate of average consumption of copra cake is around 17%. The average consumption rate of copra cake as on March, 2021 was 24,000, which has gone up to the level of 29,671 per ton, by the end of the year 2022-23. Contrary to the above, the coconut oil price had a free fall from 190/kg. in April, 2021 to 115/ kg. by the end of year 2022-23. At present, the coconut oil is cheaper compared to most of the other substitutes. All these put together, the profitability of cake processing division has further eroded considerably during the year under report.

There is no margin on the milk division and the procurement rate of milk in Tamil Nadu is ruling very high. At the same time, the selling price of milk is still low, even after the increase in the milk price in November, 2022. As such we had incurred loss of 121 lakhs in the milk division compared to 104 lakhs in the previous year. We have improved the markets with premium varieties and are pushing ahead to capture more market share. The main ingredient for ice cream is milk and cream there from. Since the cost of milk has gone up, the cost of production of ice cream also has gone up. To capture the markets, we have kept the price of all varieties of ice cream slightly lower than other competing brands, at the same time keeping the quality as the best, and thus had booked loss during the year 2022-23.

4. Outlook

The cost of ingredients used in the manufacture of animal feed like rice bran, maize, cotton seed deoiled cake, groundnut cake etc. has gone up and still continuing at the same high levels. The situation is expected to continue for a few months. We have increased the selling price of feed to cover-up the cost and the feed division is generating slight margins. We will be making appropriate adjustments in the selling price, according to the ingredient prices keeping in consideration all the related situations. The indirect control of the Government on the procurement price of milk places the farmers into a lot of hardship and while taking pricing decisions, we have to weigh this fact in the best interest of the Company. Since the price of milk is artificially kept low for the time being, there is no scope for further increase in the price of feed in the short term. The demand for the feed is now showing an increasing trend which will be helpful to us to utilise the production capacity and maintain the revenue.

In the cake processing division, we have to process around 1,25,000 tons of copra cake, to meet our requirements for deoiled copra cake, which is one of the major ingredients in our feed. The availability of local copra cake is still at strain as the price quoted are very high. The availability of copra cake from Philippines and Indonesia is also in short-supply, and the cost there of has increased by 20 to 30 %. The volatility in the exchange rate of dollar also makes the task highly tough. The coconut oil price is moving downward. This will add strain to the cake processing division, as the demand for coconut oil is very low. Since copra cake is a major ingredient for cattle feed, we have to operate the division, even if with low margins, for the time being. The operation of this division is expected to be challenging during the coming months, until the oil price improves or copra cake is available at reasonable cost.

Currently the procurement cost of milk is very high and the selling price of milk is still lower. As such the margin on milk is practically nil. We are expecting a reduction in the procurement price of milk during the monsoon season, when the availability of milk will improve.

There is good demand for Vesta ice cream and we are expecting the same to pick up further. We have made a significant shift from high volume-low price ice cream varieties like frozen dessert to the rich pure ice cream varieties, which are expected to bring in good returns. We are also offering credits to the dealers of ice cream in a controlled manner. We are confident that we can increase the margin for Vesta ice cream and the consumers will be ready to buy the premium product at a higher price. We are planning to improve the ice cream business at a slow and steady pace, without committing much heavy budgets on advertisement and capital expansion plans.

5. Risks and Concerns

The cattle feed raw material prices are likely to rule at very high levels and normalcy is not expected in the immediate future. We have tried to match the price of feed so far as possible to avoid losses. Under the current situation, the profitability of feed business will be under strain. We are concentrating on improving the market for our feed in Tamil Nadu, which is now showing good improvement. We expect that tapping of unexplored markets in Tamil Nadu will help us to regain the lost volumes. Since the price of competing brands are more or less matching with our price, we sincerely expect that the volume of feed sales in Kerala markets will improve considerably. As a result of maintaining high quality for the feed, the market acceptability for KS Brand cattle feed is very high in the States of Kerala and Tamil Nadu and we expect to improve the sales volume of feed.

The import cost of copra cake is at present very high and the exchange rate of the dollar also is highly volatile. We have to process around 1,25,000 tons of cake to meet the requirement of cattle feed division, wherein the deoiled cake is used as an ingredient. The coconut oil rates has decreased to the level of 115/kg. from an attractive level of 190/kg. about two years back. This will also add to the strain in the margins in cake processing division. We are hopeful that the situation may improve by the second half of the current year.

We are expecting the performance of Dairy division to improve with the backing of reasonable advertisement budget. We have already achieved good improvement in the volume of ice cream which is expected to further improve in the current year. Since we are planning to increase the price for all varieties of ice cream, maintaining the high quality intact, we expect to augment the performance of Dairy division and its profitability.

6. Internal Control Systems and their adequacy

The Company has adequate policies and procedures in place for its current size as well as the future growing needs. These policies and procedures play a pivotal role in the deployment of the internal controls. They are regularly reviewed to ensure both relevance and comprehensiveness, and compliance is ingrained into the management review process. There are adequate internal control systems in vogue in all spheres of operations of the Company so as to ensure safety of its assets against loss. These internal controls are designed in such a way to ensure adequate accounting and financial controls. The internal control system is being continuously reviewed by the management and adequate steps are taken for improvement, wherever felt. Internal audits are being carried out regularly in all the Units. The internal audit reports and the corrective actions taken for the shortcomings reported in those reports, if any, are being discussed in the meetings of the Audit Committee.

7. Financial and Operational Performance

The Revenue from Operations has a slight fall of 3.60 % to 1610 crores from 1670 crores, compared to previous year. The fall in turnover is mainly due to the reduction in the sales volume of cattle feed. For the reasons already discussed the volume of sale of cattle feed decreased by 12 % and realisation on the sale of coconut oil also registered a fall. However, on increasing the selling price of feed, the reduction in the turnover has been partly compensated. For the reasons explained above, the Company has incurred a loss of 2.33 cores compared to an after tax profit of 6.89 cores in the previous year.

The sales volume of feed has registered a fall of 12 % to 5.45 lakhs tons from 6.20 lakhs tons in the previous year. The ingredient prices had increased by over 30% in a two year span. Though the selling price of feed has been increased as far as possible to avoid loss, there was limitation in increasing the selling price on the fear of losing the market. As a result of this, the profit of Animal feed division further decreased compared to mediocre performance in the previous year. The feed division reported a profit of 7.91 crores compared to the previous year profit of 12.88 crores.

We processed 1.15 lakh tons of copra cake in the year 2022-23 as against 1.28 lakh tons of copra cake in the previous year. With the reduction in the volume of feed produced, the volume of cake processed also reduced, since we are using the deoiled cake as an ingredient to feed. The selling price of coconut oil had reduced considerably and at the same time due to scarcity of domestic and imported copra cake, the cost of copra cake has gone up very high. The cake processing division reported a loss of 5.14 crores as against previous year profit of 2.25 crores.

The volume of sales of ice cream improved to 1675 kl. in the year 2022-23 as against 1202 kl. in the year 2021-22. As a result of sales promotion efforts supported by good advertisement budget coupled with a soft selling price and high quality, based on a considered decision to establish the market for ice cream, and also due to the loss in milk division discussed earlier, the loss of Dairy division increased from 373.40 lakhs in year 2021-22 to 641.64 lakhs in the year under report.

8. Key Financial Ratios

The Key Financial Ratios are given below with comparative figures for the previous year:

Key Financial Ratios	Method of calculation	2022-23	2021-22
Debtors Turnover	Revenue / Average Trade Receivables	1176.58 times	2075.27 times
Inventory Turnover	Revenue /Average Inventory	11.30 times	10.05 times
Interest Coverage Ratio	EBIT/Finance Cost	(0.44) times	7.40 times
Current Ratio	Current assets/Current liabilities	5.29 times	5.21 times
Debt Equity Ratio	Total borrowings/Shareholders Equity	0.09 times	0.09 times
Operating Profit Margin	EBIT/Revenue	(0.06) %	0.84 %
Net Profit Margin	PAT/Revenue	(0.15) %	0.39 %
Return on Net Worth	PAT/Shareholders Equity	(1.11) %	2.95 %

The reason for variation in Debtors Turnover is mainly due to the increase in trade receivables in years 2021-22 and 2022-23, due to the shift in marketing strategy in favour of sanctioning credits, especially to ice cream dealers. The reasons for the loss in the year 2022-23 as compared to the profit of previous year has been discussed in detail in the earlier paragraphs of this report and that explains the change in the ratios that are related to profit.

9. Industrial Relation

The Company has 786 employees on its rolls as on 31.03.2023. The Company is an exception to the adverse labour conditions existing in Kerala. All the Units of the Company functioned without any labour issues during the finacial year 2022-23. In that year long-term settlement with Unions of Irinjalakuda Unit effective from 01.04.2022, that of Palakkad Unit effective from 01.08.2022 and that of Konikkara Unit effective from 01.06.2021 has been completed. The long term settlement with unions of Koratty Unit due from 01.01.2023, that of Vedagiri Unit effective from 01.04.2023 and that of Swaminathapuram Unit effective from 01.05.2023 are in progress and we are expecting to conclude the same on an early date. The management continues to maintain cordial industrial relations with all the employees of the Company, attending to their grievances with an open mind.

10. Caution

The views and statements expressed or implied in the Management Discussion and Analysis are based on the current available information, experience and our own judgement. There could be possibilities for alteration of situations. The Companys actual performance may differ as a result of unforeseen events on which the management has no direct control.

	By Order of the Board
	Sd/-
	Tom Jose
Irinjalakuda	(DIN : 01971467)
May 25, 2023	Chairman