shree bhawani paper mills ltd Management discussions

Overall Economic overview

The Indian economy has certainly performed creditably compared to the most developed and emerging markets of the world in the past year, growing in excess of 7% in FY16. Macro economic conditions are stable, consumer price inflation is well under control and the wholesale price inflation is in negative territory. The largest estimates of the Central Statistical Organization and the IMF suggest that India’s GDP growth in FY17 will be at around 7.5%, which is highest amongst the emerging economies. All this augurs well for the cement industry.

The world economy slowed down further in calendar year 2015 on account of lower global economic growth, compared with calendar year 2014. Global activity continued to decelerate, triggered by slowing growth in emerging and developing markets as they contribute to about 70% of the global growth.

The paper Industry in India is growing in a rapid speed with demand increment and opportunity creation and attraction to the international players. The forecasted demand of Indian paper is 10 million tons and 33 percent of this demand is for P&W papers. Even though India has covered 15% of population in world, the paper consumption levels stands at very low which is 3 to 5 percent. The key challenges to be met is market conditions which are poor and technology obsolete, lacking ability in achieving economy scale and lack of skilled labor. Enabling a overall management and the holistic change which can incorporate better standards for the organizational efficiency.

Opportunities & Threats

The following competitive weaknesses and threats confront the Industry:

• Inadequate availability of virgin fibre resulting in high cost of raw materials.

• Small and fragmented industry structure.

• Environmental problems of most of the small pulp mills.

• High energy consumption and costs.

• Likely closures, owing to increasingly stringent environmental regulations.

• Paper manufacturers had to cope with several pressures including the depreciating rupee, high inflation, rising input prices, short supply of grid power, low liquidity, high interest rates, low demand growth and global recessionary trends.

Risk & Concerns

• The revival of the Company is dependent approval of Draft Rehabilitation Scheme at the earliest.

• The paper industry is one of the 18 highly polluting categories of industries, strict Pollution control norms are deterrent to the growth of paper industry.

• Undue fluctuation in the exchange rate between Indian Rupee and US Dollar will impact the margins of the Company.

• The Central Pollution Control Board (CPCB) vide its Letter No.D-23012/1/PCI-III/5944-5948 has stopped the production on all the three paper machines of the Company.

• The Company has installed state-of-art manufacturing facilities at the plant (nearly 75% of the total net block is brand new) including the De-inking plant, co-generation plant, CRP and the newly installed paper mill.

Operations & Reason for losses

The Central Pollution Control Board (CPCB) vide its Letter No.D-23012/1/PCI-III/5944-5948 has stopped the production on all the three paper machines of the Company in October, 2014. Conditional clearance of the same was received in March, 2015. Due to which, the financial position has further deteriorated. The Company is exploring various avenues to infuse the funds for revival of the Company.

Revival Plan

The Paper Mill of the Company is closed since October 2014 due to order by CPCB order to make modification in the Pollution Control Plant. This requires investment of nearly Rs. 2 Crores.

In the meanwhile, Government of Uttar Pradesh has issued Government Order (GO) no 1701/77-1-2015-10(BIFR)/ 09TC dated 7th December, 2015 which offers various benefits to eligible units, we are eligible and benefits available to us are as follows:

• Refund of 85% of paid VAT, CST (in case of GST, 85% of State Government share) including aforesaid taxes paid on raw material for 10 years.

• Total Electricity and other State Dues net of interest, surcharges be allowed to be repaid in 10 equal yearly installments after 2 years moratorium.

• To allow the sale of surplus land with land use conversion.

Our Company is in a position to avail the benefits provided we arrange funds for the Scheme and get Reliefs/ Settlement with our Lenders. The Company is in advance stage of finalizing and submitting a Rehabilitation Scheme to Bank of Baroda, the Operating Agency appointed by BIFR. In the meanwhile, BOB and JM Financial ARC Private Limited have sent a notice under Sub section (2) of Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Looking into the urgency of the situation and in view of the cyclical natures of Paper Industry, the management is of the view, that the restructuring of the Company is only possible with fresh infusion of funds and also by sale of surplus land and machinery of the Company. The new paper machine and DIP has been sparingly used and has a long residual life. Therefore, the production should be restarted based on the new machines.

The pollution load of waste paper plant is much lower and can easily meet NGT standard. In the light, the profitability of Agro pulping and old paper machine should be reviewed to decide future course of action. The new paper machine can also be restarted with minimum gestation period. Proposal will be made to the lenders based on sustainable debt and relief will be sought accordingly. Part of dues of Secured Creditors can be paid over a short period of time by sale of surplus assets and land if the scheme is approved by PICUP and permission given by lenders.

Internal Control System and their adequacy

The Company has an adequate system of Internal Control implemented by the management to ensure proper safeguarding of the assets and protection against loss from unauthorized use or disposition. The Internal Control System is devised to ensure that the financial and other records are reliable for preparing financial statements and other data and for maintaining the accountability of assets.

In addition, the Internal Audit work is conducted by independent professional firm of Chartered Accountants. The Internal Auditors have consistently expressed their satisfaction about adequacy of internal control systems and procedures followed by the Company for conducting its business efficiency. All issues raised by Internal Auditors are being suitably dealt with and rectified under the close monitoring of the Audit Committee.

Cautionary Statement

Statements in this Report on Management Discussion and Analysis describing the Company’s, objective, projections estimates, expectations or predictions may be "forward looking statements" with the meaning of applicable securities law or regulations. These statements are based on certain assumptions and expectation of future events. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company’s operations include global and domestic demand supply conditions, finished goods prices, raw materials cost and availability, changes in government regulations, tax regimes, economic developments within India and other factors such as litigation and industrial relations. The Company assumes no responsibility to publicly amend, modify or reverse any forward looking statements, on the basis of any subsequent developments, information or events.