Temptation Foods Ltd Liquidated Management Discussions

TEMPTATION FOODS LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS TFLs business consists of frozen food and processed food. The Company processes and individually quick freezes fruits, vegetables and marine food. TFLs other products are conserves, jams, marmalade, sauces, mayonnaise, salad dressings and honey. During the year, the Company has also forayed into the agri-infrastructure industry, initially with a major stake a Mega Food Park, in one of the largest fruit and vegetable producing states in the Country. THE INDIAN FOOD PROCESSING INDUSTRY: The food processing industry is one of the largest in India. Highly fragmented, most of the sectoral revenue comes from the unorganized sector. The small organised sector is growing at a fast pace. The sub-segments of the food processing sector are fruits and vegetables, milk and milk products, beer and alcoholic beverages, meat and poultry, marine products, grain processing, packaged or convenience food and packaged drinks. The subsegments in which TFL is present are fruits and vegetables, marine products and packaged or convenience foods. The largest component of household consumption expenditure is food and food products. Indias current food consumption is estimated to be at Rs 8,60,000 crore. Processed food accounts for Rs. 4,60,000 crore and primary processed food (includes packed fruits and vegetables, packed milk etc) accounts for Rs. 2,80,000 crore (source:www.ssrn.com). During the last five years, food processing has reduced the food wastage by Rs 8,000 crores and the current level of food wastage is Rs 50,000 crores annually. (source: Business Line, 18 February 2010). Indias fast food market is growing at 30-35% every year (source: Indian Fast Food Market Analysis by RNCOS). The food processing industry grew from 6% in 2009 to around 14.9% in 2010 (source: www.ibef.org). It is expected that the processed food sector will grow to over Rs. 13.50 trillion by 2015 from Rs. 8.2 trillion in 2009-10. The retail food sector is expected to grow to US$150 billion by 2025 (source: McKinsey Research). Indias total food production is likely to double in the next 10 years, leveraging an opportunity for large investments in food and food processing technologies, especially in areas of canning, dairy and food processing, specialty processing, packaging, frozen food or refrigeration and thermo processing. FDI in the food processing sector is expected to reach Rs 1,200 crore in 2010-11. Besides, by 2020, the Indian food processing sector would touch US$318 billion (source: www.ibef.org). India ranks fifth in terms of food production, food consumption, food export and expected growth. The industry size is significant and it is growing at a rapid pace. But the share of the processing industry is relatively low with only about 1.3% of the fruits and vegetables produced going through secondary processing, compared to over 80% in the USA. In India, the low levels of food processing are due to poor storage infrastructure and poor marketing and distribution network. A. Comparison of Food Processing Levels: India is the second largest vegetable producer and third largest fruit producer globally. The country is the worlds largest producer of mangos and bananas. It is among the worlds top five producers for several other fruits and vegetables like onions, cauliflowers, pineapples and oranges, among others. India produces 41% of the worlds mangoes, 30% of cauliflowers, 28% of tea, 23% of cashews, 36% of green peas and 10% of onions (source: Indian Fast Food Market Analysis by RNCOS). However, the scenario is rapidly changing, nationally and internationally. In the domestic market, with growing urbanization, burgeoning middle class, rising income, emergence of organized retailing, the consumer mindset and preferences are evolving towards value-added, packaged and branded products. The international scenario for processed and packaged fruits and vegetables is also undergoing a remarkable shift. Indias capability to produce international quality products is turning international demand to India. As per Food Processing Industries Minister, Subodh Kant Sahai, the food processing industry requires a minimum Rs 1,000 crore investment to strengthen infrastructure. The sector has been granted Rs 400 crore in Budget 2010-11, up from Rs 280 crores allocated last year. The sector has the potential to provide employment or business opportunities to people across the social pyramid. During the last financial year, this sector attracted around Rs 700 crores FDI (source: www. mofpi.nic.in). Domestic and international demand for processed foods, especially frozen foods, is increasing exponentially. Over the years, the domestic frozen F&V grew around 10-12% annually, which is expected to gain further momentum when modern retail chains penetrate the Tier II and Tier III cities. THE MARINE FOOD INDUSTRY: India currently accounts for a small share of the global market in the marine food segment. It exports only about 6 lac tons of marine food, which is valued at about US$2 billion. Indias 8,000 km coast line, 28000 km of rivers and millions of hectares of reservoirs and brackish water, along with an economic zone of around 75 km, contributes to the marine food segment. The government has aggressive targets to increase the exports of marine foods to over US$5 billion in three years (source: Business Line, 18 February 2010) GOVERNMENT SUPPORT: In recent years, government policies have been directed towards facilitating the organized sector, liberalizing agri-marketing laws and FDI policies, rationalizing tax laws and improving capital subsidies. These initiatives channelized investments towards improving productivity, infrastructure and logistics and the consequent industry growth. The government has formulated a Vision-2015 action plan with specific targets to treble the size of the food processing industry from around US$70 billion to about US$210 billion. The levels of processing of perishables would be increased from 6 per cent to 20 per cent. The government wishes to enhance Indias share in global food trade from 1.5 per cent to 3 per cent, and it has plans to invest US$21.9 billion in the food processing industry over the next five years (source:mofpi.nic.in). To further support the food processing sector, the Ministry of Food Processing Industries has proposed to set up the National Institute of Food Technology, Entrepreneurship and Management (NIFTEM). The Food Processing industry is included in the list of Priority Sector Lending for banks. Fruit and vegetable processing units have been completely exempted from paying excise duty. The Ministry of Food Processing Industry would assist in the setting up of more food processing units, creating 10 million jobs by 2015 (source:mofpi.nic.in). The government is also keen to set up more Food Parks. External commercial borrowing will be made available for cold storage or cold room facility including farm level pre-cooling, for preservation or storage of agriculture and allied produce, marine products and meat. Automatic approval for foreign equity up to 100 per cent is permitted for most of the processed food items. BUSINESS OVERVIEW: Competitive Strengths of TFL: * TFL enjoys a locational advantage as all plants are located near the raw material sources. The raw materials are sourced from North and West regions. TFL has a plant in North India at Sonepat and in West India at Jejuri * Strong brand equity and a wide products variety * Wide geographic coverage with international presence * Use of modern technologies and processes * Strategic relationships with customers, suppliers and supply chain vendors * Professionally managed and experienced management team TFLS Strategy: The Company is well positioned and equipped to exploit the enormous opportunity that exists in the food processing industry. It is following a three-pronged strategy to optimize shareholder value, based on the following: * Grow existing business: Maximize revenues through private label packing * Move up value chain: Own brands and aggregate undervalued food brands * Enter into other key verticals: Leverage management strengths and drive synergies TFLs conscious de-risking strategy involves the following: * De-risk international exposure: Reduce dependence on international markets by building a robust, sustainable and profitable domestic retail business. * De-risk customer dependence: Reduce dependence on key anchor customers. This has been done successfully with large new export buyers acquired during the year. * De-risk cyclicality: Reduce impact of cyclical variations in raw material procurement prices and availability by building a robust contract farming network and capturing value right across the food chain. BRAND STRATEGY: TFL offers branded food products across all of its product categories and aims to extend its reach to a cognitive market share of the Indian kitchen. The Company has been investing and consolidating its brands. During the year, it took steps towards maturing its brands (Everfresh and Karen Anand) by adding to the product base, while simultaneously increasing its distribution networks. ACQUISITION STRATEGY: The Companys mainstay has been inorganic growth to increase market share, widen product base and create shareholder value. It also wishes to ensure its own brands, rather than merely producing or distributing products belonging to brands owned by others. SUPPLY CHAIN: TFL tries to bridge the gap between product manufacture and consumer offtake through continuous efforts to effectively improve and channelize the supply chain management. Stringent quality norms are followed for procurement and processing of fresh fruits and vegetables and then converting them into frozen products. The procurement is done during the season and stored and sold during non season periods. The products are thereafter transported by refrigerated vans at - 180C. Minimal handling during transportation ensures that product temperature remains intact. The Cold Chain (owned/leased) is based on state-of-theart technologies to ensure maintenance of required temperatures and quality throughout the year. The robust supply chain ensures that customers receive the best quality products. PERFORMANCE REVIEW OF TFL DURING 2009-10: The Company continued to achieve record growths in all business segments, for the fourth year in a row, with production, procurement and sales volumes and values recording substantial jumps. FROZEN FRUITS AND VEGETABLES: The Company continued its position as the largest player in the domestic frozen fruits and vegetables business in the country, with a Rs. 8,479.45 million sales turnover. Since its acquisition of the Everfresh Brand, TFL has religiously increased the product range to include several new frozen fruits and vegetables. TFL has scaled up operations manifold, including outsourcing of productions to units in raw material producing areas. While green peas and sweet corn continue to constitute a bulk of this business, other products are also gradually gaining popularity. The Company expects to be able to continue to grow this business segment, in terms of gross revenue and net revenue. PROCESSED FOODS BUSINESS: The Company bought the business of Karen Anands Gourmet Kitchen late last year, including the Karen Anand brand, covering a wide range of conserves, jams, sauces, mayonnaise and dressings. The brand, known for high end, quality products, has been positioned to cater to the premium segment in the processed food market. During the year, the Company introduced an economy range of jams, sauces and other products under the Everfresh brand to cater to the mass market. It has also introduced packaged honey under this brand in select markets, which received encouraging response. The Company expects the processed food business to grow significantly in the coming years, as the sales and distribution synergies between Karen Anand and Everfresh come into play and with the proposed addition of new and more value-added products to the range. On the whole, during the current year, the Company increased its total income to Rs. 12788.02 million from Rs. 8719.81 million in 2008-09, registering a 47% year-on-year growth. Its PBIDT surged to Rs. 1075.59 million from Rs. 741.20 million in 2008-09, registering a 45.11% year-on- year growth. The Companys PAT jumped to Rs. 629.45 million from Rs. 526.95 million in 2008-09, registering a 19.45% year-on-year growth. NEW INITIATIVES: As a part of the Companys philosophy of growth in related areas, the Company has decided to complement its strong capabilities in the Food Processing Sector, by creating an equally strong capability in the backward linkages for the Food processing sector ie the post harvest agri infrastructure sector. Under this initiative, the Company has acquired a major stake in a Food Park being established at Jangipur in West Bengal in one of the highest fruit and vegetable producing regions in the country - the highly fertile Gangetic plains. The Park is being set up in under Ministry of Food Processing Scheme for Mega Food Parks and involves a grant of Rs 50 cr. The Food Park is being set up, based on a Hub and Spoke Model, involving the creation of an elaborate and well laid out arrangement covering procurement, cleaning, sorting, grading, packing of raw materials from the surrounding regions, to ensure continuous, consistent and quality supplies of raw materials to the processing units coming up in the Park. The Company is in advanced stages of acquisition of similar stakes in more Food Parks and Modern Terminal Markets for fruits and Vegetables. The initiative is intended to equip the Company with strong capabilities and flexibility to capture value, across the value chain. The Company expects to leverage further on this capability for further forays in this business. RISKS AND CONCERNS: Some major areas of risks and concerns, which might impede future growth comprise the following: * Weak supply chain * Inadequate cold chain infrastructure * Availability and cost of power A WEAK SUPPLY CHAIN: A major constraint in the rapid development of organized food processing industry is a weak supply chain. Indias agri-based food production is characterized by: * Bulk production is done by small and marginal farms. * Producers get only about 30% of produce value, while trade intermediaries pocket the balance without corresponding value addition. * Wastages are high at around 35%. * The supply chain is highly unreliable. * No primary processing infrastructure at the production sites; absence of credible institutions to streamline supply chain. * Producers are processors are delinked TFL is making efforts to increase sourcing through contract farming of the required produce. INADEQUATE COLD CHAIN INFRASTRUCTURE: Inadequate quality cold chain infrastructure for handling frozen fruits and vegetables is another area of concern for both the industry and the Company. Its frozen products require storage and handling at -180C requiring large investments. The Company is seriously considering to embark upon this activity on a pan- India basis. AVAILABILITY AND COST OF POWER: In food processing --- particularly in frozen foods - power constitutes the single largest expense head after raw material. The availability of quality power, in required quantities, consistently, at affordable costs is essential for the industry to operate and grow. Across most states in the country, continuous availability of quality power is an area of major concern. Most processors are, therefore, forced to invest in and depend on costly liquid fuel based stand-by power generation facilities, with adverse effects on economics. The Company has been making efforts with the concerned governments to address this on a priority basis. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: The Companys elaborate internal control systems ensure efficient use and protection of resources and compliance with policies, procedures and statutory requirements. The internal control systems comprise well documented guidelines, authorization and approval procedures, including audit. Intrinsic to the overall governance process, the Company has institutionalised a well established Internal Audit framework, which covers all aspects of financial and operational controls and entails a balanced bottom-up and top-down approach, covering all units, functions and departments. The head of the Internal Audit Department reports directly to the Chairman of the Audit Committee of the Board of Directors, ensuring independence. Internal Audits are performed by an in-house team of professionals and additionally by an independent firm of Chartered Accountants. Reviews are conducted on an ongoing basis, based on an audit plan, which is approved by the Audit Committee at the beginning of the year. Audit findings and recommendations are presented by the Head Audit to the Audit Committee on a quarterly basis. Emphasis is laid on closure of agreed actions and root cause analysis of issues, ensuring that issues are addressed comprehensively. HUMAN RESOURCES: TFLs encouraging performance is the result of a disciplined, focused work culture and involves sustained efforts to retain its workforce. During the year, significant resources and efforts were devoted to people engagement initiatives to support a performance driven culture and to enhance passion for higher productivity. To empower talent and prepare its people with necessary skills, the Company continued to provide employees with appropriate access to training and corresponding development plans including international exposures, wherever feasible. The staff training needs at various levels are periodically assessed and training programmes are conducted using internal resources and/or by engaging external trainers/facilities. The Company works with a Key Responsibility Area based review and recognition strategy that aligns efforts and rewards results. It has an elaborate ESOP plan to reward performance and enable employees to share the benefits of Companys growth. TFL recruited a number of employees at all levels during the year, taking the employee count to 165 as on 31st March, 2010. The Company plans to continue to institute internal surveys to enhance HR practices in line with global standards. CAUTIONARY STATEMENT: Statement in the Management Discussion and Analysis described the Companys objectives, projections, estimates and 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 make a difference to the Companys operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws, vagaries of nature and other incidental factors.