Vardhman Acrylics Ltd Management Discussions

Management Discussion and Analysis Report for the year under review as stipulated under Clause 49 of the Listing Agreement with Stock Exchange in India, is presented as under.

a) ACRYLIC FIBRE INDUSTRY - GLOBAL AND INDIAN PERSPECTIVE:

In the year 2013, global Acrylic Fibre (AF) consumption seems to have shown a marginal growth of less than 1% over the consumption in the previous year as against expectations of a moderate growth. Estimates of all manmade fibers consumption growth are over 9% and those of all fibers are around 4% globally in the same year. The Chinese AF consumption seems to have increased marginally by about 2% in 2013 over 2012. Infact, Chinese AF consumption has stagnated and has been fluctuating in a narrow range over the last four years. Globally, AF consumption has not shown any growth and is reported to have declined marginally in last five years. As against this consumption drop globally and stagnancy in China, Indian AF consumption seems to have crossed one Lac MT mark in 2013 showing a growth of over 9% over 2012. This growth in AF consumption in

India in 2013 is higher than that of estimated growth for all manmade fibers (+3.7%) and all fibers (+7.0%) during the same period. The faster growth in Indian AF consumption as compared to growth in other fibers in India as well as globally during uncertain economic and geo-political situations is both positive and encouraging.

International AF prices especially in Far East Asia, the largest AF consuming region in world, were stable during 2013 despite cyclical movement of Acrylonitrile (ACN, the main raw material for Acrylic Fiber) prices. However, in India, AF prices moved in tandem with ACN prices though price of other competing synthetic fibers in India did not exhibit so much volatility.

Globally, the AF capacity utilization was estimated to be around 86%, Chinese capacity utilization was estimated to be less than 80% with Indian capacity utilization at above 90%.

The principal raw material of the Company Acrylonitrile (ACN) followed crude oil prices, which have been volatile. ACN Rates at beginning of the year were lowest and ended the year almost 12% higher in US Dollar (USD) terms amidst volatility throughout the year. However, due to steep devaluation of INR, increase in raw material cost was much higher in Indian rupee terms. Further, fluctuation in USD/INR exchange rate created many anxious moments as well as caused difficulty in industry. Additional ACN capacity of more than 3.5 Lac MT was added in Asia in 2013 which helped feed about 4% increase in global consumption of ACN, which was shared by applications other than AF. Global AF consumption could have been higher but for the reasons of slowing Chinese economy, geo- political factors in some of the regions, feeble recovery in Eurozone and US.

The year under discussion was full of challenges for AF industry both globally as also in India. Global industry faced a declining demand and Indian industry had to face steep depreciation and volatility in INR. Indian AF producers faced additional challenge of AF imports at low prices. Indian industry was able to achieve higher exports thereby leading to improved capacity utilization.

b) FINANCIAL ANALYSIS & REVIEW OF OPERATIONS:

• PRODUCTION & SALES REVIEW:

The total production during the year under consideration was 20,428 MT as against 20,404 MT in the previous year. Your Company has achieved a turnover of Rs. 50,957.64 Lacs against a turnover of Rs. 47,369.65 Lacs in the previous year, an increase of over 7.57%. After providing for depreciation of Rs. 1,136.76 lacs (previous year Rs. 1,128.93 lacs) and provision for current tax (including wealth tax) of Rs. 1,878.80 lacs (previous year Rs. 1,530.00 lacs), deferred tax of Rs. (322.18) lacs (previous year Rs. (175.62) lacs), Profit after tax of the Company is Rs. 4366.82 lacs as against a profit after tax of Rs. 2,440.32 lacs in the previous year which is a healthy increase of over 78.94%.

• RESOURCE UTILIZATION:

i) Fixed Assets:

The gross fixed assets (including work-in- progress) as at 31^st March, 2014 were Rs. 24,301.96 lacs as compared to Rs. 23,959.09 lacs in the previous year.

ii) Current Assets:

The current assets as on 31^st March, 2014 were Rs. 22,979.89 lacs as against Rs. 22,583.48 lacs in the previous year. Inventory level was at Rs. 7,703.09 lacs as against Rs. 6,621.15 lacs in the previous year.

• FINANCIAL CONDITIONS & LIQUIDITY:

Liquidity & Capital Resources:

		(Rs. in Lacs)
PARTICULARS	2013-14	2012-13
Cash & cash equivalents:
Beginning of the year	1,209.08	534.16
End of the year	582.31	1,209.08
Net cash provided/(used) by:
Operating Activities	4,266.15	2,372.79
Investing Activities	(4,393.44)	285.20
Financial Activities	(499.47)	(1,983.07)

c) BUSINESS OUTLOOK:

The forecasts on Indian economic growth vary from 5.0% to 6.0% in the year 2014-15. Current account and fiscal deficits continue to pose challenges. Consumer Price Inflation, though under little check for about a year, is still at uncomfortable levels. This has prompted RBI to follow tight monetary policy. Exchange rate fluctuations and devaluation are another concern of industry especially due to large dependence on import of ACN.

Globally, US economy is forecast to grow 2.8% in 2014 (1.9% in 2013), Eurozone is expected to grow 1.0% (-0.4% in 2013) and China at 7.5% (7.7% in 2013).

Improvement in global economic situation especially in Eurozone can be a pull on AF demand which has been absent during past few years.

About 6 Lac MT p.a. additional capacities of ACN are likely to be commissioned in China in second half of 2014. This will be approx. 11% of ACN consumption in 2013. Another about 4 Lac MT is reported to go on- stream in 2015 and 7 Lac MT in 2016. There is a possibility that some of this capacity expansion may be rescheduled to later years or even dropped. Yet, a substantial increase in ACN capacity can be expected.

Demand of ACN is not expected to grow at this pace. This is likely to keep ACN prices stable at lower numbers in next few years. Although some capacity rationalization in Japan and some other locations is not ruled out, yet supply will outpace demand. Some of the new capacities planned in 2016 are based on low cost propylene (raw material for ACN) technologies that are likely to support ACN and AF consumption.

Based on overall assessment of domestic industry, stocks in AF channel and economic growth forecasts, AF demand in 2014-15 in India is expected to be slightly higher than in 2013-14. Price differential with respect to competing fibers could be a challenge for domestic Industry. Less than normal monsoon in India, as is being forecast, can adversely affect AF demand especially from rural and semi-urban areas. Stable and affordable prices of ACN, as are expected, are likely to help growth of AF industry and its downstream which is likely to support operations of AF producers in India. At the same time, there is an urgent need to stop AF imports at unreasonable and unjustified prices from few countries that are taking away a large share of growth in Indian market and also stifling fresh investment in Indian AF industry.

d) INTERNAL CONTROL SYSTEM:

Your Company has a well-designed Internal Audit programme to review all systems, processes and controls of the Company to bring in the best industry practices, compliance with internal systems & procedures and statuary compliances. Senior management of your Company places emphasis on taking timely action on the findings and recommendations of internal audit and systems are strengthened appropriately.

e) MANAGEMENT PERCEPTION OF RISK & CONCERNS:

Despite lower economic growth in 2013-14, AF demand in India has shown growth. Whether or not this growth will sustain is difficult to forecast. Continued slowdown in Indian economic growth, slow pace of new jobs creation, high inflation and possible high fiscal deficits are the risks associated with future growth of AF industry in India. Monsoon, as discussed earlier, is another important demand driver for AF in India and any substantial deficit can adversely affect Indian AF demand. Indian AF industry is dependent upon overseas sources for supply of major raw materials in addition to ACN. Another steep devaluation of INR can substantially raise costs to Indian customer that can be detrimental to demand and thus growth of AF industry. Additionally, unreasonably low priced imports of AF will continue to pose serious problems to the domestic AF Industry.

Global political and economic factors are affecting global economy in more than one way. Demand pick-up remains shaky and still uncertain in advanced economies of US and Europe. Withdrawal of stimulus in US and course correction in Chinese economic policies are affecting the economic sentiments globally. Prices of commodities such as cotton, metals and especially crude oil have become volatile and uncertain. Industry players are adopting a cautious approach as a response to this situation. Main raw materials of AF are petrochemical derivatives and are susceptible to fluctuations in crude oil prices. Few large producers influence global ACN supply and any temporary adjustments of operations by one or some of them can affect the supply demand balance and thus prices. Low prices of competing fibers such as polyester can eat into AF demand, as has already been seen in past.

f) MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS:

This area receives continuous focus of management of your Company. Investment in human resources starts with careful selection of team members. The training and skill development of all team members to enhance their knowledge and competencies is an ongoing planned effort. Your Company has always endeavoured to promote and maintain a positive work environment that encourages innovation, trust and harmony. Safety of personnel and installations receives top attention of the management. The industrial relations remained harmonious and cordial during the year.

The Company employed 297 persons during the year.