NTC Industries Ltd Management Discussions

INDUSTRY STRUCTURE AND DEVELOPMENTS

The global economy proved more resilient than expected in the first half of 2023, but the growth outlook remains weak. With monetary policy becoming increasingly visible and a weaker-than-expected recovery in China, global growth in 2024 is projected to be lower than in 2023. While headline inflation has been declining, core inflation remains persistent, driven by the services sector and still relatively tight labour markets. Risks continue to be tilted to the downside. Inflation could continue to prove more persistent than anticipated, with further disruptions to energy and food markets still possible. A sharper slowdown in China would drag on growth around the world even further. Public debt remains elevated in many countries.

The world economy is expected to grow by 3.0% in 2023, before slowing down to 2.7% in 2024. A disproportionate share of global growth in 2023-24 is expected to continue to come from Asia, despite the weaker-than-expected recovery in China.

In India, legal cigarettes account for only 8% of the total tobacco consumption and this is in complete contrast with rest of the world where 90% of the tobacco is in the form of cigarettes. The remaining 92% contribution is from other traditional products, like chewing tobacco, bidis, Khaini etc. and other illegal cigarettes. A 16% hike in National Calamity Contingent Duty (NCCD) was announced in the Union Budget on 1^st February, 2023. This has resulted in an increase of about 1.6% on the overall tax. Illegal non-duty paid cigarettes remain a threat for legal players as they continue to benefit from a large price gap versus fully taxed cigarettes. Due to the above high volatile and discriminatory taxation policy, all the market players are facing margin and volume problems.

STRENGTHS & OPPORTUNITIES

India is the second largest tobacco producer behind China. The country has around 0.45 million hectares of area under tobacco cultivation. About 10% of the total area under tobacco cultivation is in India. Globally, it accounts for 9% of the total tobacco production. The average production for the last 5 years of the country for tobacco crops was around 800 million kg. India has a long history of tobacco use, with cultural and traditional practices contributing to steady demand for tobacco products like bidis and chewing tobacco. The country produces various types of tobacco: Flue-cured Virginia (FCV) tobacco, Country tobacco, Burley tobacco, Bidi tobacco, Rustica tobacco, Hookah, Cigar rapped, Oriental, Chewing tobacco, etc. The diversity of Indian tobaccos has enabled the country to export tobacco to over 100 countries across the globe.

India is the second largest exporter of tobacco behind Brazil. It exports various types of tobacco and tobacco products such as stripped, wholly stemmed, cigar cheroots, smoking tobacco, homogenized, flue-cured, sun-cured, extract and essence, FCV tobacco, unmanufactured tobacco and various tobacco products.

India is the only country which produces tobacco in two seasons. It exports to more than 115 countries throughout the world. The country exports tobacco mainly to Belgium, Philippines, UAE, Indonesia, Russian Federation, Egypt, USA and many more countries worldwide. In 2023-24 (until February 2024) Out of these countries, Belgium is the biggest importer of tobacco at around 19.58% of the total exports from India. UAE and Indonesia are one of the largest tobacco export destinations for India importing around 19.16% and 6.21% of the total. The country also exports to Indonesia, France, Russia, Korea, Sri Lanka, Malaysia, Venezuela, Ethiopia, and Nigeria.

During 2023-24, India exported 1,10,361 tonnes of FCV tobacco valued at Rs. 4,524 crore. The exports of unmanufactured tobacco during 2023-24 were 2,20,873 tonnes valued at Rs. 6,808 crores. Tobacco & Tobacco Products are a large contributor to the National exchequer by way of Central and State taxes. Cigarettes which bear the brunt of taxation in India are the major revenue contributor from the Tobacco sector. Despite just 8% share of tobacco consumption, legal cigarettes contribute 80% of tax revenue.

The tobacco industry of India employs about 45.7 million people in farming, labour activities, manufacturing, processing, and export activities. Tobacco is a highly remunerative crop providing economic/social benefits to farmers in the tobacco growing regions. Compared with other tobacco manufacturing countries, India has low production, farming and export cost, making it a popular industry. This shows that India has significant opportunity for cigarette industry to extend and consolidate its position in international market due to some recent trend like withdrawal/reduction of agricultural subsidy and escalating costing in the traditional cigarette exporting countries.

It is your Companys continuous endeavor to maintain the taste and preferences of its customers at domestic and international while upgrading and developing new brands.

THREATS, RISKS AND CONCERNS

The Company has a proper mechanism in place for identifying, assessing, monitoring and mitigating various business related risks. The Board of Directors of the Company are regularly informed and updated bout the risk assessments and minimization procedures. In the course of its business, the Company is exposed to stiff competition from other established developers in the market and is exposed to a wide variety of risks such as:

While India is the worlds second largest tobacco producer and a major exporter, tobacco control measures in India is the most stringent in the world. The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COPTA) is the principal comprehensive law governing tobacco control in India.

As compared to other countries the tax rates applicable on cigarettes are much higher in India. Consequently, per capita cigarette consumption of India is lowest in the world.

The Union Ministry of Health & Family Welfare has mandated the size of pictorial warnings on front of the packs of 85% on both sides with effect from 1^st April, 2016. Such an extreme position on warnings overlooking the huge livelihood dependency and enormous socio-economic benefits of Tobacco in India. These warnings act as a visual reminder of the potential harm caused by tobacco products.

Extremely high tax rates and constantly increasing tax rates on Cigarettes provide a profitable opportunity for tax evasion by illegal trade in both international smuggled and domestic tax evaded cigarettes. Moreover, in the current market situation there is a stiff competition from big players with regard to marketing of new brands.

Advertising through most forms of mass media is prohibited. There are restrictions to tobacco sponsorship and the publicity of such sponsorship.

Further, Campaigning by various NGOs and Forums against the use and consumption of tobacco remains a big threat to the industry. The passing of various bans on smoking is also supplementing these threats.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

NTC has a robust system of internal financial control, commensurate with the size and complexity of its business operations. The Corporate Governance Policy guides the conduct of the affairs of your Company and clearly delineates the roles, responsibilities at each level of its key functionaries involved in governance. It safeguarding its assets, ensuring transactions are in accordance with the policies, and are duly authorised to identify possible risk areas and to prevent possibilities of frauds or other irregularities.

The Company has an external and independent firm of Internal Auditors that scrutinizes the financials and other operations of the Company. Internal Auditors directly report to the Audit Committee. The Audit committee review the adequacy and effectiveness of internal control system of the Company and keeps the Board of Directors informed of its major observations from time to time. Based on the findings of Internal Auditors, process owners undertake corrective actions in their respective areas. During the year and at the year-end, no reportable material weakness or significant deficiency was observed in the design or operations. Your company is also ISO 9001:2008 certified for its internal audit function.

FINANCIAL PERFORMANCE OF THE COMPANY

The financial highlight including the operational performance of the Company is stated hereunder, in brief: (Rs. in Lakhs)

SEGMENT WISE / PRODUCT WISE PERFORMANCE

Your Company considers "Manufacturing of Cigarette and Smoking Mixture" as the primary business segment. The Company has achieved an overall total turnover of Rs. 3598.71 Lakhs as compared to Rs. 4318.39 Lakhs in the previous year reflecting the downtrend of 16.67%. The export sales increased to Rs. 2112.40 Lakhs from Rs. 1070.30 Lakhs. Your company has a Profit Before Tax of Rs. 459.28 Lakhs as compared to Rs. 246.28 Lakhs in the previous year. During the year under review, your Company generated a revenue of Rs. 3186.56 Lakhs from sale and manufacturing of Cigarettes and sale of FMCG products as compared to Rs. 2113.60 Lakhs. The Company also generated revenue out of Rental Services of Rs. 412.15 Lakhs during the year under review as compared to Rs. 457.13 Lakhs. Though the market conditions were not favorable and the same was challenging for the Company. Further, domestic demand continued to be sluggish in throughout the year due to trade disruption and geo-political uncertainties yet your Company managed to achieve better results across the different markets especially international.

Your Companys main focus is the affordable segment but the continuous excise hike is making your companys foothold weak in the segment. Tobacco Institute of India (TII), the association that lobbies for cigarette companies, has long been vocal about high tax structure which it said has created the market for smuggled foreign cigarette impacting the legal cigarette manufacturers. Health warning labels are pictorial and text; cover 85 percent of the front and back panels of the tobacco product package parallel to the top edge; and are rotated every 12 months. The discriminatory taxation policy, increased harsh pictorial warning and availability of cheaper non duty paid cigarettes, impacting your Companys performance. However, in the abovementioned adverse scenarios, your Company is dedicated to its customers and taking all the available efforts to regain its lost place in the industry by improving its portfolio and technologies. During the year under review, the Company focused on improving quality variation and productivity, reducing costs and utilized its cash flows most effectively. Statement of Segment-wise Revenue, Results, Assets and Liabilities for the year ended 31^st March, 2024 are disclosed in Note No. 32 of Notes on Financial Statements in the Annual Report.

CHANGES IN KEY FINANCIAL RATIOS

Pursuant to the provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, the details of key financial ratios along with the reasons for significant changes therein are given below:

1. Above ratios are based on the standalone financial statements of the Company.

2. Significant change means a change of 25% or more as compared to the immediately preceding financial year. 3. The figures of previous year have been reclassified and regrouped wherever considered necessary.

Details of change in return on net worth as compared to the immediately preceding financial year:

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT

At NTC, we follow a culture that provides a platform for continuous learning and development to meet the challenges posed by ever-changing market realities. The most valuable resources of the company are its employees and the Management recognizes them as the prime machinery of the organization. They are always given the first priority and are provided with all the basic requirements and safety measures for good health and well-being. The Management, in order to create enduring value, has fostered a culture of feeling of being togetherness and attachment amongst the employees through participative management practices, open interaction and mutual respect.

Your Companys human resource management systems and processes aim to enhance organizational capability and vitality to seize emerging market opportunities. The strategy of the organization and its ongoing emphasis on developing and nurturing distributed leadership has ensured that each of your Companys business is managed by a team of competent, passionate and inspiring leaders. As on 31^st March, 2024 your Company has a total of 73 employees.

Your Companys belief in the mutuality of interests of key stakeholders binds all employees to a shared vision and purpose. The Company enjoyed amiable relationship with workers and employees at all levels and did not report any sort of strike or lockout that would have impacted Companys operations.

FUTURE OUTLOOK

Despite the uncertain economic outlook, there are opportunities for an accelerated recovery if significant risks such as inflation and geopolitical conflicts are adequately addressed. Countries across the world must proactively mitigate inflationary pressures and provide fiscal support to vulnerable segments of society. Implementation of structural reforms in domestic market and enhancing international cooperation will play a vital role in addressing concerns such as supply chain constraints, commodity price increases, energy shortages, while preventing excessive debt in low-income countries. The Indian tobacco industry plays a significant role in the countrys economy, contributing to significant employment opportunities, revenue generation, and foreign exchange earnings. The industry is influenced by various factors that shape its supply and demand dynamics. The price of tobacco significantly impacts demand, as higher prices reduce affordability and subsequently decrease consumer demand. Additionally, the ease of availability and accessibility spurs increase in demand.

CAUTIONARY STATEMENT

For and on behalf of the Board