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:

Transformers are required for generation, transmission and distribution of power and are filled with Transformer Oil which functions as an insulating medium. The market for transformer oils is based on the growth of installed power generation capacity, grid and distribution infrastructure. Hydrocarbon mineral oil is mainly used to fill the transformers. There are two major types of transformer oil used in the industry; naphthenic and paraffinic based. Bio based and ester based transformer oils have already gathered attention due to stringent safety and environmental issues but their usage is hampered because of higher prices.

Liquid paraffins are highly-refined mineral oils that are suitable for personal care product such as hair oils, body lotions, skin creams, etc. and even for oral ingestion. White Oils are manufactured from highly refined Base Oils. They are commonly used as blending base for cosmetics, personal care and pharmaceutical products. They lubricate, smoothen, soften, extend and resist moisture in many formulations. Demand for cosmetics, pharmaceutical and personal care products determine the demand for White Oil.

The lubricating oil market in the country, currently estimated to be 2.5 million tons, is now growing at a CAGR of 2.5% to 3%. Its the 3rd largest lube market after US & China. The growth of the market is squarely dependent on the economic and industrial growth in the country. Automotive market in India registered a good growth of 13.9% in 2017-2018 as compared to previous year. All segments, namely Passenger Cars (11%), Motorcycle & Scooter (14.5%) and Commercial Vehicles (19%) contributed handsomely.

However, Automotive and Lubricant Industry is faced with uphill task of meeting time lines for implementation of BS-VI norms. The Auto industry is responding to this challenge through designing more compact engines and this then creates a challenge for the lubricant manufacturers, since they are required to develop lubricants that last longer.

The Lubricant market in India is dominated by Automotive applications, which is estimated to be at 51% and Industrial application and Institutional business like Rail, Defence, ASRTUs, etc contribute to the extent of 49%. With the upgradation of hardware, Lubricants specifications are also getting upgraded. Higher Performance requirement, environment related issues, fuel economy & high drain intervals are key to development of new generation lubricants.

II. Wind Power:

It is important to note that massive burning of fossil fuels has been one of the key attributes to global warming. The resultant impact on the climate is unmistakable. A large part of global pollution comes from energy production during the burning of coal, oil and gas. For decades it has been clear that a transition from fossil fuels to renewable energy is critical in protecting the world from extreme weather conditions. Renewable energy sources play a critical role in addressing growing energy security and climate challenges. Presently, Indias energy basket is dominated by coal. Government is working towards increasing the share of renewables in its energy basket. India in its goal to arrest climate change, targets installation of 175 GW of renewable energy capacity by 2022 (including 100 GW of solar and 60 GW of wind capacity). Industries need to step up their efforts to address the climate change issues, commit to decreasing their carbon footprint and rely more on renewable energy sources.

During the year, India added 1.77 GW of wind power capacity against 5.2 GW capacity addition during previous year. This steep reduction is attributed due to transition of sector from feed-in tariff regime to tariff-based competitive auctions. The cumulative installed capacity as on 31.03.2018 for wind power in India now stands at 34.04 GW.

B. OPPORTUNITIES AND THREATS

I. Petroleum Products:

The Transformer Oil market globally is going to be driven by increasing demand for electricity in the emerging and developed countries, along with the increasing infrastructure investment for energy access. In India, rapid growth in rural electrification due to various government initiatives like "Power for All" which is expected to ensure continuous and uninterrupted electricity supply to all households, industries and commercial establishments is expected to impel the growth in demand of transformers which is subsequently projected to drive the demand for Transformer Oil.

The Indian Economy is expected to expand at a decent rate. Indian Government is investing and has also committed large sums in developing infrastructure, especially State and National highways. This is a clear stimulus to increased vehicle sales and Industrial production, which in turn will result in growing lubricant consumption. Higher GDP, Industrial growth, buoyant rural spending, power and higher infrastructural related investments all offer huge opportunities to lubricant industry in the coming days.

However, a constant threat to lubricant demand as well as Indian economy is the rising price of Crude Oil and the volatility of US Dollar rate. Higher Crude price impacts balance of payment for the country and would in turn impact economy which then impacts all sectors. These two factors also impact input costs of the lubricants. Electric vehicles will remain to be a future threat.

II. Wind Power:

As India grapples with power shortage problems, Government believes renewable energy will be a feed- in for power sector. The potential for on-shore and offshore is tremendous in India. With better technology and MW series, CUF has increased substantially. The National Institute of Wind Energys (NIWE) latest estimate for Indias wind power potential is 302 GW at 100 metre hub height. Aerodynamics is the key to maximizing output from wind turbines and there is ongoing advancement in aerodynamics and material technology. Immense opportunity lies in repowering of old wind turbines at high wind sites. These can be repowered with technological advancements to maximize the potential of site for higher energy yield. The industry is also looking at setting up solar-wind- hybrids.

Distribution segment remains the weakest link in the power sector. Capacity additions on the generation side will fail to make the right impact if no distribution reforms are undertaken. Policy uncertainty is also a major challenge for the sector. Other challenges for most onshore installations in the country are land acquisition, clear title land, poor financial health with payment delays of up to one year or more by DISCOMs, non-availability of good wind potential sites, in-ordinate delays in signing power purchase agreements, etc.

C. SEGMENT WISE PERFORMANCE

I. Petroleum Products:

Your Companys sales turnover during the year 20172018 stood at 1,80,861 lac against 1,66,838 lac in the year 2016-2017, showing an increase of 8.4% in value terms. The sales volume stood at 3,00,304 KLs/MTs during the year 2017-2018 against 2,89,356 KLS/MTs during 2016-2017. In line with increased value and volume, the net profit of your Company increased from 9,362 lac for the previous year to 12,613 lac during the year under review.

II. Wind Power:

During the year 2017-2018, your Companys Wind Power Plants situated in the states of Maharashtra, Karnataka and Tamil Nadu generated 90.37 MU against 103.40 MU generated in the previous year. The generation during the year was affected largely due to low wind compared to previous year.

D. FUTURE OUTLOOK

I. Petroleum Products:

Economic growth is expected to revive after the temporary disruption due to demonetisation & GST. Further, the resolution of bad loans under the Bankruptcy Code, implementation of a bank recapitalization package for public sector banks and further liberalization of FDI scheme is expected to boost GDP growth. This strong GDP growth rate, increasing population & urbanization of households, and strong demand from energy consuming sectors is expected to fuel energy demand in India.

Having said that, the present geo-political uncertainties coupled with ongoing trade sanctions and counter sanctions are going to hurt every economy and India will not be an exception. These global developments could result in further uncertainty in Crude Oil and in turn Base Oil prices, depreciating rupee and growing inflation, all of which may adversely hit the overall demand.

II. Wind Power:

Wind power is one of the more mature sources of renewable energy. This stability along with the shift to competitive bidding from feed-in-tariff regime is helping the country move rapidly towards the 60 GW of Wind Power capacity by 2022. This transition has changed the sector dynamics. As the good wind sites are obsolete, the market is compelled to innovate and create better technology to harness untapped potential. The Ujwal Discom Assurance Yojna (UDAY) is launched for financial turnaround and revival package for state electricity distribution companies (DISCOMs). Forecasting and scheduling is a step towards better grid integration and stability. The need of the hour in India is a clean and renewable source of energy, in which offshore wind power can play a major role supported by countrys vast coastline of 7600 km.

E. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Having a strong internal control system is a pre-requisite for any growing organisation. Your Company had recognized this need a long time ago and had put in place internal control systems to monitor and evaluate compliances with operating systems, accounting processes and procedures. To strengthen this implementation, help from external expert auditing agencies is sought from time to time and the developments and reports resulting out of this exercise are reported to the Audit Committee for its scrutiny and timely remedial measures. The Audit Committee after in-depth scrutiny of such reports decides on the remedial measures through various agencies and departments within your Company to strengthen the internal control systems.

F. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS

Your Company has always given prime importance to existence of harmonious industrial relation within the organisation and the year under review was no exception. Your Company has always preferred to work within the budgeted manpower, optimising the resources made available from time to time. The employee performance management system introduced some years back has started showing positive results in all working spheres of your Company. Not to say the least, training and development are other areas where a constant focus is provided by the management of your Company.

For and on behalf of the Board
Gautam N. Mehra
Mumbai Managing Director
3rd August, 2018 (DIN:00296615)