Savita Oil Technologies Ltd Management Discussions.

Management Discussion and Analysis covering segment-wise performance and outlook is given below:

A. INDUSTRY STRUCTURE AND DEVELOPMENT

I. Petroleum Products:

India is now the 3rd largest producer of electricity globally after China and USA. The current generation capacity in India at the end of March, 2019 stood at 356 GW. Electricity is the key constituent for the economic growth of any country. The rapid surge in demand for power in India is primarily due to increase in industrialization and urbanization. Transformers which are at the centre of power matrix are essentially used to change the voltage across electrical circuits either by stepping up or stepping down the voltage. There are primarily 2 types of Transformers based on function i.e. Power and Distribution Transformers. Transformer Oils are essentially used as insulating medium across both categories of transformers. These oils are highly refined mineral oils derived from Fossil Fuels such as Crude Oils. They may be naphthenic or paraffinic. In recent years, natural Ester (Bio-based) and synthetic ester based Transformer Oils have also been introduced.

White Oils and Liquid paraffin are highly refined, colorless and odorless mineral oils. These White Oils find applications in personal care, cosmetics, pharmaceuticals, textiles and a host of industrial applications such as polystyrene and thermo plastic elastomers.

Lubricating Oils are primarily used to reduce friction between moving parts. The automotive sector and industrial sector are the two key consumers of Lubricating Oil and employ them in variety of applications in the form of Engine oils, Transmission and Gear Box oils, Hydraulic and Turbine oils, etc. The long term importance of Lubricating Oils goes beyond friction reduction and these oils are designed to protect and enhance the life of the equipment itself.

II. Wind Power:

India is one of the fastest developing economies in the world. It is the third largest producer and third largest

consumer of electricity in the world. However, the economic growth of any country depends primarily on the long term availability of energy from sources that are affordable, accessible and sustainable. Renewable energy will thus play a key role. Government aims at growth in renewable energy capacity and to increase the share of renewables in the countrys energy mix. The energy landscape in India is rapidly transforming. Government of India is cognizant of the fact that scaling up of renewables is not a choice anymore but an imperative in addressing growing energy security and climate change challenges. The power sector, both conventional and renewable, witnessed poor capacity addition during the year 2018-2019 after maintaining a strong momentum in the past few years. Policy issues, arbitrary cancellations of renewable project tenders and transmission constraints were the key factors for the slow-down in the capacity addition in the clean energy sector during the year 2018-2019. However, Wind energy has been the largest contributor to the RE basket with around 36 GW installed capacity as on 31.03.2019.

The year 2018 was quite a tumultuous one for the Indian wind industry as it braved many challenges. Policy and regulatory uncertainties, institutional challenges, transmission constraints and macroeconomic issues have slowed down the rate of growth across all renewable energy segments. During the year, India added 1.58 GW of wind power capacity against 1.77 GW capacity addition during previous year. As of 31st March, 2019, the total installed wind power capacity was 35.62 GW.

B. OPPORTUNITIES AND THREATS

I. Petroleum Products:

As against Indias Power generation capacity of 356 GW at the end of March, 2019, Chinas power generation capacity was in excess of 1800 GW. This indicates that China has a capacity more than 5 times that of India for almost a similar population. So clearly the potential in the power sector for India is huge and will perhaps only be constrained by the amount of capital available to be deployed across the spectrum of power generation, transmission and distribution. Furthermore, the financial condition of Indias State run power utilities is in a very precarious condition with many of them having accumulated huge losses. This represents the most visible threat to the further growth in the Power Industry in India.

With a rising middle class and larger disposable income available, the consumer goods and FMCG sector has seen good growth over the last few years. With rapid urbanization continuing, consumer spending is likely to remain brisk over the next few years. This augurs well for the White Oil segment of your Company.

India is the 2nd largest Lubricating Oil consumer in Asia and 3rd in the world after the USA and China. India is also the 4th and 6th largest producer of commercial vehicles and passenger cars respectively. The Indian automotive industry accounts for around 7.1% of the countrys GDP. With rapid industrialization expected in India over the next few years, it is expected that the Lubricating Oil demand will continue to show healthy growth. Besides the industrialization, many automobile companies have shown a keen focus in entering rural markets and we are seeing an increasing share of vehicle sales originating from rural areas especially utility vehicles, SUVs, which are used for both transporting goods and passengers. The demand for two wheelers in rural area has also been strong over the past few years. The introduction of Electric Vehicles (EVs) which is now being promoted by the Government could however lead to a fall in requirements of engine oils; if in the years ahead the EVs do manage to become popular. However, the prohibitive cost of EVs and the lack of charging infrastructure remain a key hurdle in their rapid adoption.

II. Wind Power:

Over the past couple of years, the sector has changed dramatically, in terms of issues, challenges and opportunities. With increasing demand for clean energy, even the mature wind power segment is witnessing a technological transformation. The National Institute of Wind Energys (NIWE) latest estimate for Indias wind power potential is 302 GW at 100 metre hub height. Manufacturers are constantly working on increasing the rotor diameter and tower height of their wind turbines for higher efficiency. A lot of research is being done to improve the performance and reliability of blades. There have been technological advancements in rotor blades with continuous development of aerodynamically advanced and robust designs in order to harness optimum energy from wind.

The sector faces some tough challenges across the line which if not addressed immediately, can impede the potential growth of the industry. Introduction of auction based regime, inordinate payment delays from distribution companies facing financial stress, downward revision in Feed in Tariffs (FiTs) for projects already under long term PPA, non-availability of good wind potential sites, poor evacuation, regulatory constraints in open access segment, etc are all leading to an erosion of new capacity additions. Transmission constraints and non-availability of land have become the biggest obstacles. As the country moves towards a higher share of renewables, it is imperative for the grid to be aligned accordingly in order to handle a higher quantum of infirm power.

C. SEGMENT WISE PERFORMANCE

I. Petroleum Products:

The sales turnover of your Company during the year under review stood at 2,24,583 lac against 1,80,861 lac during the previous year, showing a healthy increase of 24% in value terms. The sales volume for your Company stood at a record high of 3,46,256 KLs/MTs during the year under review against 3,00,303 KLs/MTs during the previous year, resulting in an increase of 15.30% in volume terms. The gross profit (before tax) and net profit (after tax) of your Company for the year under review were at 16,271 lac and 11,427 lac respectively as against 15,608 lac and 12,620 lac respectively during the previous year 2017-2018.

II. Wind Power:

The total installed capacity in Wind Power Division of your Company stands at 54.15 MW.

During the FY 2018-2019, your Companys Wind Power Plants situated in the states of Maharashtra, Karnataka and Tamil Nadu generated 89.11 MU against 90.37 MU generated in the previous year.

D. FUTURE OUTLOOK I. Petroleum Products:

The 13th National Electricity Plan of the Government of India targets 479 GW of power generation capacity by the FY 2022-2023. This includes 243 GW of thermal and 175 GW of renewable capacity. In addition, the Government has set an ambitious target of railway electrification as well. The Government also intends to create a National Grid for distribution of power. All of the above will imply that the demand for transformers and in turn transformer oil will remain robust in the years to come. In addition to fresh capacity being added, significant demand for transformer oils will also come from the replacement market where transformers installed 10-15 years ago would need their oil to be replaced.

The automobile industry in India has witnessed robust growth over the past many years. India is already preparing to leapfrog from the BS-IV emission norms that are now in force to the BS-VI norms by 2020. With the new regulations, there are a lot of technological changes that will occur in the vehicles which will have a significant impact on pricing of these vehicles as well as the way they function. Some of the major changes in the automobile segment under the wake of BS-VI norms will be fitment of DPF (diesel particulate filter), SCR (selective catalytic reduction) module, etc. The real challenge posed by BS-VI is in meeting the chemical requirements of modern aftertreatment devices which need low sulphated ash, phosphorus and sulphur (SAPS) oils. After treatment systems required for BS-VI (Euro VI), engines will require oils with stringent chemical limits (e.g.: lower SAPS) and also higher performance characteristics. This technical challenge must be met in addition to remaining competitive in a very cost-conscious market and maintaining stability in some very demanding driving conditions.

II. Wind Power:

Looking ahead, for the Governments Renewable energy targets to be met, it will require significant institutional and regulatory interventions. Wind energy is leading Indias transition to a Green economy. New market incentives are needed to ramp up the capacities. It is also important to focus on the DISCOMS, which remain a weak link in the system and remain quite vulnerable. The mature Wind power segment is trying to realign itself to changing market dynamics. Power transmission is vital for the development of the energy sector. Forecasting the electricity demand is important, as it can help the decision makers to keep up with the pace of the growing demands of the economy and to reduce power outages thereby providing grid stability. Grid enhancement and management are key for the integration of power. In order to facilitate large scale renewable generation capacity, Government of India is implementing Green Energy Corridors (GEC) project. The GEC comprises the Intra-State Transmission System (InSTS0) and the Inter-State Transmission System (ISTS). The Ujwal DISCOM Assurance Yojna (UDAY) has been implemented for financial turnaround and a revival package for state electricity distribution companies (DISCOMs). Policy execution is a challenge and better synergy between Centre and States will help in faster roll-out and commissioning of projects. Repowering of old wind turbines at high wind sites with technologically advanced higher capacity turbines, can contribute immensely in achieving the targets set by Government. The offshore wind sector has remained dormant in the country with the government still putting policies in place for its development in the coming years. Once implemented, offshore wind power can add a new element into Indias renewable energy mix.

E. KEY FINANCIAL RATIOS

Particulars Change Remarks
Inventory Turnover Ratio +27.18% Increase in cost of material consumed due to increase in rate of major raw material (base oil).
Interest Coverage Ratio -39.11% Increase in interest expense is mainly on account of buyers credit.
Debt Equity Ratio -53.74% Part of the debt stands repaid.
Operating Profit Margin (%) -13.85% 1) Increase in the cost of materials consumed.
Net Profit Margin (%) -27.19% 2) Provision for tax written back in Previous Year of Rs 14.98 crore.
Return on Net Worth change -20.27% 3) Increase in exchange loss on foreign currency transactions.

F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Your Company understands that a robust internal control function is of paramount importance for any organisations consolidation and growth. Your

Company therefore has laid emphasis on establishing strong internal control systems over the years and for their implementation, has been taking help of external audit firm(s) from time to time. The validation reports of such agencies are reported to the Audit Committee

of your Company and in turn to the Board of Directors for their review and necessary corrective actions required if any. Your Company practices the flow of information and follow up action plans resulting out of such exercise both ways thereby ensuring their proper implementation.

G. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS

The industrial relations within your Company during the year under review remained very harmonious and peaceful. Not a single man day in any of the facilities of your Company was lost due to any mishap or eventuality during the year under review. Your Company has been consolidating its efforts in bringing continuous improvements in the employee performance management system introduced some years back. Continuous efforts to train and develop employees have been and will continue to be the focus area for your Company.

For and on behalf of the Board
Gautam N. Mehra
Mumbai Chairman & Managing Director
12th August, 2019 (DIN:00296615)