ECONOMIC SCENARIO
Global economy: Despite tangible signs of recovery in 2015, the global economy remained
on a subdued growth path, growing 3.1% in 2016 against 3.4% in 2015. With a 6.8% growth
(against 6.6% in the previous year), the emerging and developing Asian countries were the
key contributors of the global growth, led by India and China.
Indian economy: Buoyed by positive policy initiatives, India has evolved as one of the
fastest-growing emerging market economies in the world. Increased private consumption, led
by rising incomes and declining oil prices, steered the Indian economic growth story
during 2015-16 to 7.6% real GDP growth from 7.2% in 2014-15.
BASMATI INDUSTRY SCENARIO
Rice is the staple diet for almost half the global population. Over 90% of the global
rice output and consumption is centered in Asia, with China and India both the
world’s largest producers and biggest consumers. India accounts for over 70% of the
world’s basmati rice output, which is a small portion of the total rice produced in
India. Rice production in India was expected at 103.36 million tonnes in 2015-16.
Among the varieties mentioned, basmati would be the most superior in terms of product
characteristics, which makes it the most premium variety of rice. In volume terms, basmati
rice accounts for less than 2% of the global rice industry, the size of which is pegged at
around 475 million metric tonnes (MMT) (milled basis). There are only two producers of
basmati rice in the world: India, which accounts for more than 70% of world’s basmati
rice production, and Pakistan, which accounts for the rest. For India, even though basmati
rice represents a small part of the total agro commodity basket, it offers high product
visibility in the global market. The Indian rice industry consists of both basmati rice
and non-basmati rice; however this note covers only the basmati rice industry in India.
BASMATI RICE INDUSTRY CONSOLIDATED FINANCIAL ANALYSIS
The industry has reported steady growth in its revenues till 201314 given the rising
demand in the market leading to high volume of sales and high realizations. However as
mentioned earlier 2014-15 reported decline in demand following the ban imposed by Iran on
import of rice which affected the exports from India. Consequently industry reported
decline in value of sales in 201415 and the trend is continuing in 2015-16. Decline in
demand impacted the realizations and hence the inventory positions of the players who were
not able to liquidate their stocks. This resulted in decline in profitability levels.
The industry remains vulnerable to inventory price risk given sizeable stock levels of
the players. As witnessed in 2014-15 weakness in demand led to correction in prices which
impacted the inventory positions of the players and hence their profitability. The decline
in profitability and industry’s inability to liquidate its sizeable stocks resulted
in increased working capital borrowings. Thus the industry reported increase in leverage
and weakness in coverage metrics in 2014-15.
The revenue and the profitability have been under pressure for last five quarters. The
significant impact was witnessed in quarter ending March 2015 when the sales did not grow
(unlike same quarters in previous years) and profitability & hence interest coverage
declined significantly. This was largely driven by decline in realizations in the
aftermath of ban imposed by Iran on import of rice.
FREE FALLING CURRENCY
Indian Rupee has seen its all time low in comparison with US Dollar. The Indian Rupee
has suffered more because of its greater dependence on volatile capital flows (FIIs and
short term debt) which makes Indian rupee more vulnerable. The falling currency has not
been successful in boosting demand for Indian Products in the International Market even as
the import Bills mount thereby affecting the balance of trade. The steady slide in the
Rupee has shaken the confidence thereby impacting economic activity.
OVERVIEW OF YOUR COMPANY PERFORMANCE
The overall gloomy scenario has had an impact on the Industry and REI Agro limited is
also not isolated from the effects of the high cost of financing with rising interest
costs and slow recovery in the economy has resulted in pressure on the bottom line of most
corporate especially in working capital intensive industries.
A steep fall in the price of basmati rice coupled with reduction in sales volume,
higher competition in the industry, and economic slowdown, this all has lead company into
a liquidity crunch. The Company has faced acute shortage of working capital funds,
shortage of raw material at the manufacturing units and shutdown of the production units
are some of the major challenges faced by the Company due to which the Company failed to
utilized its capacity of its processing units even up to a breakeven level. Several banks
started actions against the company under the provisions of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
("SARFAESI ACT").
Our Company operates in a highly working capital intensive industry and due to
liquidity crunch; it failed to meet its financial obligations towards lenders. The entire
net worth of the Company was eroded during the period ended on 31st December, 2014 and the
Company had become Sick Industrial Company as per the provisions of Sick Industrial
Companies (Special Provision) Act 1985 (SICA). The Company make a required reference with
the Board for Industrial and Financial Reconstruction (BIFR)
for registration of reference of the company with Hon’ble BIFR on 28th April, 2015
to study the reasons of Sickness and determination of measures to be adopted for revival
of the Company. The reference of the company is registered with Hon’ble BIFR as Case
No. 85/2015 under the provisions of SICA for adopting measures for the revival and
rehabilitation.
During the year under review, your Company has achieved a turnover of 52,179 lacs on
a standalone basis as against Rs. 185,576 lacs in the previous year. Further, due to
decrease in revenue from operations, heavy finance cost, slow recovery of dues etc. the
Company losses stood at 1,07,614 lacs during the year.
RISK & CONCERN
1) As in the case of other agricultural commodities, basmati paddy is also vulnerable
to cyclical price fluctuations. Higher prices in the market encourage higher basmati paddy
cultivation, which increases supply in the next season. This depresses the price, thereby
erasing gains and shifting farmers away from basmati paddy cultivation. Consequently,
supply declines and prices go up, restarting the cycle.
2) Basmati paddy prices are driven also by the anticipated international demand.
3) Our inability to meet the consistent quality requirements of our customers or a
change in customer preferences or discretionary spending could lead to lower consumption
of Basmati rice and affect our business.
4) We face significant competition from both Indian and international producers of
Basmati and other rice and food products.
5) We have substantial working capital requirements and will require additional
financing in the form of debt or equity to meet our working capital requirements.
Moreover, many of your company debts are already overdue and due to liquidity crunch the
Company failed to meet its financial obligations towards lenders. An inability to
restructure these debts or to procure additional funding can further impact the company
performance in the future.
6) Financial instability in other countries, particularly countries with emerging
markets, could disrupt the Indian markets and the Company’s business and cause the
trading price of the shares of the Company to decrease. Your company and its subsidiary
have borrowed in foreign exchange and an adverse movement in the currency can impact the
company adversely.
BASMATI RICE INDUSTRY OUTLOOK
The current scenario of excess supply (weak demand) is expected to continue in the near
term and exporters are likely to continue facing financial stress in the near term. Weak
sales growth and decline in profitability, along with inventory losses, are expected to be
the key trends in the financials (to be reported) of basmati rice players in 2015-16. This
is expected to further weaken the leverage profile of industry players. Any improvement in
the situation is likely only from the next basmati paddy harvest season, that is, the
second half of 2016-17. In the meantime, supply of basmati paddy is expected to witness
some moderation as farmers are likely to shift away from basmati, given the
non-remunerative prices in the last two crop cycles. Moreover, since Iran has removed the
ban on import of rice, demand is also expected to witness some improvement, going forward.
INTERNAL CONTROLS AND THEIR ADEQUACY
The Company has proper and adequate internal control systems to ensure that all the
assets are safeguarded and that all transactions are authorised, recorded and reported
correctly. Regular internal audits and checks are carried out to ensure that the
responsibilities are executed effectively and that the systems are adequate. Management
continuously reviews the internal control systems and procedures to ensure the efficient
conduct of business. The Audit Committee of the Board oversees the internal controls
within the organization.
HUMAN RESOURCES
The context in which Company operate today demands new and dynamic leadership and
management responses. Leadership development is therefore a strategic priority for REI.
Alongside our other initiatives to build a learning organization and leverage people
potential, we have embarked on a systematic process of developing global leadership
capabilities.
At REI, employee initiatives are constantly updated and modified to mark newer
beginnings. Our professional development programs are designed to cover every spectrum of
individual development. A competency-based model has been adopted which defines the
required competencies and employee development initiatives at various levels and
functions.
CAUTIONARY STATEMENT
Statement in the Management Discussion and Analysis describing the Company’s
objectives, projections, estimates, expectations may be ‘forward looking
statements’ within the meaning of applicable securities laws and regulations. Actual
results could differ materially from those expressed or implied. Important factors that
could influence the Company’s operations include economic developments within the
country, demand and supply conditions in the industry, input prices, changes in government
regulations, tax laws and other factors such as litigation and industrial relations.
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