MTZ Polyfilms Ltd Management Discussions

MTZ POLYFILMS LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL PERFORMANCE AND OPERATIONS - PET FILM: For the year ended 31st March, 2010, the Company achieved a gross turnover of Rs. 10126.64 lacs, an increase of 9% over the prior year. Net of excise duty, which was levied at a lower rate during the year under report, turnover increased by 12% in 2009-10. This increase is principally due to the 21% increase in plant throughout to 11,658 MT during the year and a substantial decline in job-working which was accretive to turnover. Partially offsetting the above gains was a 12% reduction in the average selling price of PET Film during the year. Despite the aforementioned increase in sales volumes and a tight control on production costs, the Company posted an operating loss for the year of Rs.230.35 lacs as against an operating profit of Rs. 68.70 lacs in the previous year. This is almost entirely on account of the lower differential that existed during the year between PET Film and its raw material, Polyester Chips. The reduced differential was caused by a number of factors. Firstly, the selling prices of PET Film were lower during the year due to less buoyant demand growth from certain user segments in the domestic market together with incremental supply from newly commissioned competing production capacity towards the end of the year. Secondly, raw material costs were higher and more volatile during the year. Lastly, due to differing end market dynamics, PET Film prices could not match up to those of Polyester Chips on several occasions and differentials got squeezed as as result. Commensurate with the higher operating loss, the Companys net loss after interest and depreciation increased to Rs. 1952.89 lacs from Rs. 1871.63 lacs in the earlier year. Notwithstanding this financial result, which is largely due to market forces beyond the control of the Company, management is encouraged with the progress made on the capacity utilization front, particularly after October 2009. This was made possible by the introduction of new suppliers for Polyester Chips with favorable payment terms and diversification of the customer base to include smaller customers with lower order quantities, thereby enabling a faster turnaround of working capital. The domestic market for PET Film continued to grow but not at the rate witnessed before the 2008 economic crisis. The Indian flexible packaging sector, by far the largest end market for PET Film, remained in a growth phase, aided by the increase in demand for packaged food and personal care products. Nonetheless, in order to avoid possible stock losses due to heightened volatility in PET Film pricing, which in turn was caused by raw material price fluctuations, purchases by end users remained cautious and need based. This had a curtailing effect on overall offtake. The Company, because of the paucity of working capital, remained aligned with non-credit availing customers within the Indian market for PET Film. Hence, the global market situation for PET Film during the year under review was not of direct consequence to it. It is, however, pertinent to note that US and European demand for PET packaging films was in a recovery mode, particularly during the second half of the year. At the present time, since a fully tied-up financial restructuring plan is yet to be approved by the Companys bankers and secured creditors, business is being conducted on a holding-on basis. This has resulted in the vast majority of managements time being focused on ensuring continuity in plant operations and medium to long term improvement projects remaining on hold. FUTURE OUTLOOK - PET FILM: India is expected to remain a large and growing market for flexible packaging with the primary growth drivers being the countrys low per capita consumption of flexible packaging, expansion of the food processing and agri-business sector, thrust on organized retail initiatives, rise in disposable income of the consuming population which is facilitating lifestyle changes and growing user preference towards small-serve packs. This augurs well for domestic PET Film consumption which is projected to rise at around 15% annually going forward. Further, with the cost of producing PET Film having increased in developed countries, producers in these regions are increasingly shifting their production to higher end applications such as Films for flat panel display screens and photovoltaic solar cell systems. As a result, export opportunities for commodity PET Film producers based in lower cost countries like India have grown of late and are likely to remain in the forseeable future. It is therefore possible that exports could absorb a sizable part of the additional output from new capacities that have been created or are in the process of being created in India. Another positive development for the Indian PET Film industry could be the possible easing of trade barriers imposed by developed countries on imports of PET Film from India if a situation of constrained availability of the product arises in these countries due to inadequate local production. In view of the above and barring unforeseen circumstances, the business outlook for the Indian PET Film industry appears to be healthy. However, for the Company to derive benefit from this, an early understanding needs to be arrived at with its lenders and secured creditors such that modifications addressing its historical debt and future financial flexibility can be incorporated in the earlier sanctioned Rehabilitation Scheme. Discussions in this regard have been ongoing with all concerned agencies but these are yet to culminate in an approved restructuring plan being tabled before BIFR. RISKS AND CONCERNS - PET FILM: In the perception of the management, the principal risk factors affecting the Company are as follows: * The cyclical nature of the PET Film sector and the volatility in earnings that can arise therefrom. * Entry of new manufacturers both domestically and internationally and the destabilizing effect on the market/selling prices that can be caused as a result. * The loss of key customers in the Indian and export market and the resultant adverse effect on sales volumes. * Substitution of PET Film in certain applications by competing substrates such as BOPP Film, paper and aluminium foil. * The imposition of further anti-dumping and anti-subsidy duties by important export destinations such as USA and the EU on imports of PET Film from India. * Reduction in customs duty on import of PET Film into India and the decline in selling prices that can occur on account of this. * Foreign exchange and interest rate fluctuations and their negative impact on financial results. The Companys financial strength to withstand downturns in the PET Film sector. * The Companys ability to implement a revised financial and operational restructuring plan to reduce its leverage, improve its cost structure and de-bottleneck capacity. * The Company being able to continue funding its working capital/liquidity needs and, as being experienced currently, the negative impact on capacity utilization in the event of shortfalls in working capital availability. * The ability to source the required volume of raw materials and other inputs and disruptions that can occur in the supply chain if the Company is unable to meet its obligations to suppliers. * Significant and sudden increases in the price of raw materials and the Companys ability to pass these through to the market. PROJECT STATUS: POLYESTER CHIPS: The Polyester Chips project remains deferred on account of the lack of resources required to implement it. FORWARD-LOOKING STATEMENTS: Any forward-looking statements contained in the Directors Report represent your Companys expectations based on present information and assumptions. These statements are subject to various uncertainties and actual results could differ materially from those which are expected or projected. INTERNAL CONTROL SYSTEMS: The Company has a system of internal controls to ensure that all assets are protected against loss from unauthorized use or disposition and that all transactions are authorized, recorded and reported correctly. A program of management reviews supplements the process of internal controls. The Company also has an Audit Committee that interacts with its Auditors in dealing with matters within its terms of reference.