Sukhjit Starch & Chemicals Ltd Management Discussions.

Global Economy Outlook

Global economic activity continues to firm up. Global output is estimated to have grown by 3.7 percent in 2017, which is 0.1 percentage point faster than projected in the fall and percentage point higher than in 2016. The pickup in growth has been broad based, with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upward by 0.2 percentage point to 3.9 percent. The revision reflects increased global growth momentum,as per January 2018 World Economic Outlook (WEO) forecast. The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010. Among advanced economies, growth in the third quarter of 2017 was higher than projected in the fall, notably in Germany, Japan, Korea, and the United States. Key emerging market and developing economies, including Brazil, China, and South Africa, also posted third-quarter growth stronger than the fall forecasts. High-frequency hard data and sentiment indicators point to a continuation of strong momentum in the fourth quarter. World trade has grown strongly in recent months, supported by a pickup in investment, particularly among advanced economies, and increased manufacturing output in Asia in the run up to the launch of new smartphone models. Purchasing managers indices indicate firm manufacturing activity ahead, consistent with strong consumer confidence pointing to a healthy final demand.

Indian Economy Outlook

Indias economic growth will accelerate in the current and next fiscal years, the International Monetary Fund (IMF) projects the countrys position as the worlds fastest-growing major economy and opening a wider gap with China, which is projected to slow.

Indias economy is forecast to grow 7.4% in the current fiscal from 6.7% in FY18 and accelerate further in FY19 to 7.8%. There will be a gradual increase in Indias growth rate as structural reforms raise potential output. China is forecast to slow from 6.9% in 2017 to 6.6% in 2018 and further to 6.4% in 2019.

Growth in India is projected to be lifted by strong private consumption as well as fading transitory effects of the currency exchange initiative and implementation of the national goods and services tax. Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivise private investment. The Reserve Bank of India also expects the economy to grow 7.4% this fiscal. India has made progress on structural reforms in the recent past and the implementation of the goods and services tax will help reduce internal barriers to trade, increase efficiency and improve tax compliance. The corporate debt overhang and associated banking sector credit quality concerns have exerted a drag on investment in India. Further, the re-capitalization will improve the banking sectors ability to support growth.

Additionally, the beginning of 2017 had a slow start because of the effects of demonetization that made consumers restrict their consumption. There was a slow revival of consumption with the urban market being more resilient compared to rural India. Towards the middle of the year, the economic growth improved. Inflation in the country continued to be moderate during 2017-18, Consumer Price Index was the lowest in the last six financial years. GST was introduced in India that should positively impact the economic environment in the long term, but created short term challenges in the trade.

Considerable steps were taken by the government to bolster the food-processing sector. The Ministry of Food Processing Industries organized World Food India 2017 (WFI 2017), Indias first ever platform that positions India as a preferred investment destination and manufacturing hub for the global food industry. As per the government of India data, WFI 2017 attracted an investment intent of USD 13.56 billion from domestic and foreign investors for the food processing sector. Government initiatives were rolled-out to increase the capacities in the entire supply chain of food processing.

Multilateral agencies have been positive about Indias growth story. This was evident, as India jumped 30 spots on the World Banks Ease of Doing Business rankings. Indias ranking in the world has improved by a position to 126, as its per capita GDP in PPP terms increased from USD 6,690 in 2016 to USD 7,170 in 2017, as per data from International Monetary Fund (IMF).

Opportunities

Private consumption combined with ongoing structural reforms are expected to continue to boost economic activity in India. More transparent regulatory environment and evolving food laws are making India emerge as an attractive business destination, creating opportunities for investment and growth especially in the processed foods sector.

Consumers in India are fast evolving; they are young, aspirational and have higher disposable income. The young India is more health and fitness conscious. Rise in lifestyle diseases has also prompted the Indian consumers to evaluate their food habits more closely and make lifestyle changes, where required.

A faster pace of growth in manufacturing at 9.1 per cent, compared with 6.1 per cent a year ago, helped lift overall economic growth in the Jan-March quarter.

The farm sector also grew at a healthy rate of 4.5 per cent, while construction activity, powered by government investments in the highways sector, clocked a double digit growth of 11.5 per cent to give a fillup to the economy.

The significant expansion in GDP print has been powered by a broad-based upturn in farm output, improved manufacturing performance and a vibrant services sector. The rebound in growth reinforces that the economy is back on track and is set for a strong recovery after the period of disruptions sparked by demonetization and GST implementation.

On the production side, manufacturing, agriculture and construction were the main contributors to growth.

Government spending recorded the highest growth rate (16.8 percent compared to 6.8 percent in Q4), followed by gross fixed capital formation (14.4 percent compared to 9.1 percent), stocks (7.8 percent compared to 7.2 percent) and household consumption (6.7 percent compared to 5.9 percent). On the other hand, exports slowed (3.6 percent compared to 6.2 percent) and imports rose faster (10.9 percent compared to 10.5 percent). Household spending accounted for 54.6 percent of the GDP; gross fixed capital formation for 32.2 percent; public expenditure for 9.5 percent; and changes in stocks for 0.7 percent. Exports accounted for 19.5 percent while imports subtracted 20.9 percent.

Economic growth is projected to improve above 7%, gradually recovering from the transitory adverse impact of compliance and difficulties faced on rolling out the Goods and Services Tax (GST) and measures to choke off the black economy, including demonetization. It is expected that in the longer run, the GST will boost corporate investment, productivity and growth by creating a single market and transparency. Investment will be further supported by the plan to recapitalize public banks and enhancing the road infrastructure. Measures taken to digitalize the economy and improve tax compliances should boost tax revenues in the medium term.

Low crude oil prices in the last two years have helped India improve fiscal deficit situation however crude oil prices have seen a sharp recovery in the last few months and it may have an adverse impact on macro-economic situation in India

Government initiative on Make in India has still not shown any visible beginning or impact on manufacturing sector in India relevant to companys business.

Industry and Company Scenario

Corn Starch production in India is very fragmented as there are a large number variety of producers or manufacturers with different production capacities.

Despite India having abundant supply of maize as well as the other raw materials used in the processing or production of starch, the same remains untapped due to legal restrictions relating to the use of modified starches in the country. As such, raw materials needed for the growth of the industry is not the issue that has to be tackled. The annual maize or corn production in India is around 25 million tonne. The main percentage of maize produced is used in its unprocessed form and only a small portion goes into use for corn starch production.

The main process which is used in the corn starch processing is corn wet milling. In spite of the fact that small percentage of corn is used for corn starch production, the starch processing industry is one of the top 5 processing industries in the country. It is one of the few industries that have a development period of more than 15 years behind it. The growth of corn starch processing industry can be gauged from the very fact that about 40% of all the manufacturing companies involved in starch processing are new entrants to the field.

The corn starch market can be segmented into native starch, modified starch and sweeteners. The sweeteners segment currently dominates with a share of over 50% in the global corn starch market. The market for starch derivatives & sweeteners dominated in 2016, with the largest share in terms of volume consumption.

Basis application, the corn starch market is segmented into FMCG, Paper Industry, Pharmaceuticals, Textiles and others. In the recent years, the FMCGs food and beverages segment accounted for the highest share in the global corn starch market by application and is anticipated to continue to remain the leader during the next decade.

The growing consumption of convenience foods and the healthy year-on-year growth in the paper and textile industries are creating highly a fertile ground for the growth in corn starch sales in India. Consumers of corn starch are seeking alternatives to cane sugar that are cheaper yet seamlessly fit into various applications, which is translating into high demand for corn starch.

Additionally, Industrial starches are largely used as adhesives in paper and packaging material manufacturing, etc. There is an increase in the demand for the adhesive in the packaging industry, which is helping its growth.

In the context of the global starch industry, India is still a nascent production center as well as a market. The per capita consumption is much lower than the world average. Currently, the key users paper, pharma and food industry are doing extremely well. Textiles are also expected to show double digit growth in next few years.

With the growing awareness for nutritive and quality food by growing health conscious population, the demand for fast food is rising and will continue to rise with increase in global population and expandable income.We continued to believe that one of the first things that people aspired to have good quality food. So even as people are enjoying and developing new varieties of food and tastes, we were convinced that there was a really large consuming population that were yet to buy quality products with longer shelf life.

Demand in Indian market is recovering steadily after disruptions caused by demonetization and GST and situation is normalizing. Company experienced sudden destocking measures taken by its customers around GST roll out which had a significant adverse impact on the growth of the Company in 2017 leading to lower than expected growth. Introduction of GST is expected to shift demand from unorganized businesses to organized business. Some of companys customers especially in Pharma, paper & food sectors are investing in expanding capacities in anticipation of increase in demand in the coming years.

Despite these issues and challenges, Company has delivered another year of satisfactory growth and posted profits on expected lines. Companys financial performance is a testimony of its strengths in the area of technology, people, efficient operations, customer centric approach and ability to execute the strategy.

Companys strong and consistent financial performance is a result of its continued focus on market, its customers and relentless focus on building its capabilities in the area of its operations, human resources, technology and processes while leveraging the long and unmatched brand equity of the promoter and their experience in starch industry.

As we are heading for the general elections and there are reasonable reasons for the government to increase the MSP of maize. This is a normal practice in the last 20 years. But the same move if happen will affect every next player in the industry and their profitability.

Our long term strategy has got the answers.

We firmly believe that the buying decision has been influenced by superior product quality. We are confident that our products are better in quality and in prices.

Our greatest success has been the strengthening of organizational talent and systems to manage the rapidly expanding business.

Our vision is to establish Sukhjit as a company known for its values, assertiveness and the acumen to adapt to an ever-changing environment.

In a transforming India, a new consumer was emerging.

A consumer willing to upgrade. Even an industry procurement head feels proud about what input is being used in his product and from which vendor it is being procured. The TRUST factor in our industry is most important and our VISION is to be no 1 in Market share of the TRUST factor.

We are working on long-term strategy to build capacities for high margin value added products while at the same time making short- term interventions.

Current Opportunity

--- We strengthened our portfolio by shedding businesses that did not meet our long-term financial objectives. --- We are changing the product mix and will focus more on higher-margin value added products --- We broadened our regional footprint. We are entering emerging regional geographies --- And, we aggressively managed our costs and capital.

This work allowed us to maintain our balanced approach to capital allocation, which is to invest between 70 to 75 percent of our annual cash flow in value-creating growth projects while deploying between 25 to 30 percent either for strategic M&A or for returning to shareholders in the form of dividends.

CREATING A ROBUST BUSINESS MODEL

The starch industry is one of the most challenging.

The sector is marked by diverse variables and low industry barriers on the one hand and a growing need for sustained increase in stakeholder value on the other.

The number of variables are many. Fluctuating raw material costs. Evolving consumer preferences. Changing cost of funds. Capital intensiveness. Need for R & D and quality control. MNCs entering the sector

At Sukhjit, we graduated to a business model that we believe is likely to generate multi- year growth across industry cycles, largely insulating the companys financials from external realities.

In a sector marked by scale, the company is still the third largest in production with focus on Financials. This perspective influenced the companys capital allocation, product mix and realizations strategy, virtually defining the companys personality. As a result, the company has compromised peak margins in exchange for sustained margins, strengthening corporate stability and ideal for a capital-intensive business in a high cost economy

EVOLVING PRODUCT MIX : Over the years we have evolved our product mix. This evolution has helped the company enhance productivity, improving return on employed capital and return on equity.

FISCAL CONSERVATISM : The company has selected to pursue an incremental model, preferring to plough accruals into asset building as against the conventional mobilisaton of large debt in building manufacturing scale. Over time, this preference for accrual- based investing has translated into a relatively small Balance Sheet and high interest cover in a traditionally working capital-intensive sector

Sukhjit is amongst the most competitive companies in the industry. This competitiveness has been derived from the ability of the company to procure abundant raw material around the best price-value proposition and competitive onward conversion into quality finished products.

The Company has developed an eco- system of cost-effective raw material providers, marked by high quality and consistency standards. All raw materials are tested before use.

KEY DIFFERENTIATORS

Customer satisfaction : Sukhjit delights customers through product innovation and price innovation, enhancing consumer value to their full satisfaction.

Relationship driven: Sukhjits relationship-driven approach is reflected in long-term associations with customers, vendors and employees.

Growth-focused: Sukhjit has focused on responsible growth: from an annual top line of 355 crores in 2012 to 713 crores in 2018.

Governance: Sukhjit believes in ethical business practices across all its stakeholders, employees, customers, vendors and the government among others, resulting in enhanced trust.

Myths and Truths about Sukhjit

Myth : we are in a commodity business.

Truth: we are in value added business although our raw material is around 60/63 % of the total cost

Myth: we are a family run business/company.

Truth: we are a company headed by family owned professionals and a team of other professionals.

Myth: our growth depends on Monsoon.

Truth: our growth in sales PARTIALLY depends on Monsoon but our bottom-line depends on the strategic procurement of raw material during the season, creditworthiness in the market and sales of value added products.

Myth: our EBITDA margins are below industry average

Truth: we just focus on quality which can only be matched by international players. Plus we do our business with 100% transparency and with ethics. We believe that buyers trust is impossible without consistency in quality improvement, new innovative products and standard business practices based on ethics & integrity.

Threats

Change in Government Policies: Your Company has threat from any substantial change of government policy that has direct or indirect effect to our business.

Technology advancement: New technological disruption in present scenario is always threat to an ongoing business. We try to minimize the threat by continuously evolving and advancing our technology to latest to improve efficiency in the work operations.

Investments by new players and MNCs to build bigger capacities

Human Resources

Human Capital has always been the most important and valuable assets to us as the Company believes in retaining its employees. The Company takes pride in commitment, competence and dedication shown by its employees at all areas of business. Various HR initiatives are taken to align HR policies to the growing requirements of the business.

The Company has a structured process and management development programs to upgrade skills of managers.

The Company has strengthened the deployment of high quality employees in key functions, through recruitments and selections. The Company firmly believes that in house human capital will see organization through success in todays highly competitive global environment. Industrial relations were cordial throughout the year and would likely to continue in future also.

Internal Control Systems and Adequacy

The Company has an internal control system, which ensures that all transactions are recorded satisfactorily and reported and that all assets are protected against loss from unauthorized use or otherwise. The internal control systems are supplemented by an internal audit system carried out by a team under the direct supervision of the Head of Internal Audit. The findings of such internal audits are periodically reviewed by the management and suitable actions taken to address the gaps, if any. The Audit Committee of the Board meets at regular intervals and addresses significant issues raised by both the Internal Auditors and the Statutory Auditors. The process of internal control and systems, statutory compliance, information technology, risk analysis and risk management are interwoven to provide a meaningful support to the management of the business.

Corporate Social Responsibility (CSR)

The Company is committed to its stakeholders to conduct business in an economically, socially and environmentally sustainable manner that is transparent and ethical.

The Company is committed to inclusive, sustainable development and contributing to building and sustaining economic, social and environmental capital and to pursue CSR projects, as and when required, that are replicable, scalable and sustainable with a significant multiplier impact on sustainable livelihood creation and environmental replenishment.

Risk Factors

Government policies, mandates, and regulations specifically affecting the agricultural sector and related industries; regulatory policies or matters that affect a variety of businesses; and political instability could adversely affect the Companys operating results.

Agricultural production and trade flows are subject to government policies, mandates, and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, foreign exchange rates, and import and export restrictions on agricultural commodities and commodity products, including policies related to genetically modified organisms, product safety and labeling, renewable fuels, and low carbon fuel mandates, can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, the availability and competitiveness of feed stocks as raw materials, the viability and volume of production of certain of the Company s products, and industry profitability.

The Companys operating results could be affected by changes in other governmental policies, mandates, and regulations including monetary, fiscal and environmental policies, laws, regulations, acquisition approvals, and other activities of governments, agencies, and similar organizations. These risks include but are not limited to changes in a countrys or regions economic or political conditions, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, currency exchange fluctuations, burdensome taxes and tariffs, enforceability of legal agreements and judgments.

The Companys strategy involves expanding the volume and diversity of products it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. Government policies, including anti-trust and competition law, trade restrictions, food safety regulations, and other government regulations and mandates, can impact the Companys ability to execute this strategy successfully.

Cautionary Statement

The Management discussion and analysis report contains forward looking statements based upon the data available with the Company, assumptions with regard to global economic conditions, the government policies etc. The Company cannot guarantee the accuracy of assumptions and performance of the Company in future. Therefore, the actual results, performance or achievements could thus differ materially from those projected in any such forward looking statement. The Company assumes no responsibility to publically amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events.