Vidhi Specialty Food Ingredients Ltd Management Discussions.

This discussion provides an assessment by Management of the current financial position, results of operations for the financial year ended March 31, 2018. Information presented in this discussion supplements the financial statements, schedules and exhibits for the financial year ended March 31, 2018.

Global Economic Overview:

The global economy which faced many challenges in the first half of 2017 recovered its pace of growth in the second half of 2017. The global growth is expected to be at 3.6% in 2017, up from 3.2% in 2016. The global Purchasing Power Parity (PPP) is expected to rise by around 4%, which is the fastest rate since 2011. This will further help to add $5 trillion of global output in the current value terms. The growth is expected to be driven by US, Emerging Asia and Eurozone. The global economy is expected to grow at 3.7% in 2018 with European Central Bank and Bank of Japan likely to move towards quantitative tightening. Also, the growth rate is in line with the global growth momentum, and is influenced by positive impact of recently approved US tax policy changes. Further, the growth is expected to be affected by growth in emerging markets such as Russia, China and India. A recuperation in investment spending in the advanced economies along with stabilisation in investment in commodity exporting emerging markets and developing economies are the key drivers of growth. Moving ahead, the world economy is expected to grow at 4% during 2018. The advanced economies will grow due to tax reductions and rise in public spending. A robust growth in the euro area will be witnessed with an increase in demand due to rise in the confidence of consumer and business, accommodative monetary and fiscal policy, and rebound in labour markets. The global chemical industry is expected to grow at a Compound Annual Growth Rate (CAGR) of 3.9% between 2010 and 2030. However, Asia will grow at a faster pace than Europe and America achieving 64% of the global capacity by 2030. This is due to the effect of lower spending in matured markets together with higher regulatory costs. Though China will grow at a slower pace, India has a huge potential for growth in the near future. Speciality Chemicals will continue to be a high growth, high focus area. The world economy faced considerable uncertainty, leading to slight deceleration of growth. As per current indications, macro-economic policy is expected to be more expansionary in certain large economies. Growth in a number of emerging economies is expected to be higher in 2018.

Domestic Economic Overview:

India is one of the fastest growing economies of the world with a GDP of $2.6 trillion. During the year, Indian economy experienced a cyclical movement in its growth rate where the growth fell down to 5.7% in the first quarter only to bounce back at 6.3% in the second quarter. The fourth quarter of FY18 recorded a growth rate of 7.1% for the Indian economy. The GDP growth rate fell from 7.1% in 2016 to 6.7% in 2017 for the full year.

In FY18-19, the economy will recover owing to rise in the stock market index, the indicator of industrial production and exports. It would have to face new challenges of managing the increasing inflationary pressures and higher fiscal deficit coupled with increasing debt burden without compromising with the growth rate. The conundrum could be managed effectively with the revival of consumer demand and private investment. With this, the Indian economy is expected to reach at a GDP level of $5 trillion in the coming decade.

Indias macro-economic stability continues to be the foundation of economic success. The implementation of GST and the progress seems promising and is expected to give fillip to GDP in the current year apart from delivering manifold benefits such as spur in growth, increasing competitiveness and ushering in indirect tax simplification and bringing in greater transparency in tax management and administration. These along with measures initiated for fiscal consolidation, make in India and digitisation in economic transactions are positive signs and point to an optimistic outlook for the current year.

Industry Structure & Development:

It is however very likely that China with its large capacity and numerous direct and indirect export subsidies supported by currency management, will continue to be the major supplier of chemicals to the world. The rising wage costs may to some extent diminish the unfair price advantage that they could offer, and this would hopefully reduce the possibility of unrealistic low price regime. In view of the corrective action in the Chinese market and with no major expansion plans announced by Chinese competitors, opportunities for expansion in Chemicals exist.

Environmental compliance pressure on Chinese industry impacted its manufacturing capability of chemicals. During the tight international supply situation, Vidhi Specialty Food Ingredients Limited (Formerly known as Vidhi Dyestuffs Manufacturing Limited) [the Company/Vidhi] continued to support its national and international customer base at reasonable and acceptable price levels. This has generated a good will for the Company which will go a long way for planned business growth. More than seventy percent of the global chemicals manufacturing capacity is concentrated in China. Clamp down on environmentally non-compliant manufacturers by Chinese Central Government resulted in closures/lower capacity utilisation. Revival of smaller players in chemicals manufacturing seems to be difficult.

Overview of Vidhis Business and its Position in Food Colour Manufacturing Industry:

The relevant industry for your Company is food colours, which occupies an important position in the Indian economy.

Vidhi is a globally renowned player in the food colour industry and a leading manufacturer of Superior Synthetic and Natural Food Grade Colours including Synthetic Water Soluble Colours, Aluminum Lakes, FD&C Colours, FD&C lakes, D&C Colours, Blends, Co-blended Lakes & Co-blended Granules and Natural Colours. Its business is manufacturing of food colours as an ingredient for foodstuffs, pharmaceuticals, confectionery, pet foods, healthcare, dairy, soft drinks, cosmetic industries, etc.and trading in food colours and chemicals. The colours are being distributed and consumed in over 80 countries across 6 continents. The manufacturing facilities of the Company are spread over an area of 1,76,000 square feet, located in Dhatav Village of Raigad District in the State of Maharashtra - India. The manufacturing facilities have been audited and found satisfactory by the US FDA. All the Companys products carry Halal and Kosher certification. The Company is the third largest manufacturer of synthetic food grade dyes globally with a capacity of above 2500 MTPA. Over the last 24 years, it has established strong relationships with global majors like Nestle, Mars, Pedigree and Sanofi among others.

Vidhi has built up on technical services, marketing capabilities and production in bulk quantities to face competition from domestic as well as global markets. In this way, Vidhi enjoys a position of one of the leaders in food colour manufacturing Industry. The Company has unique in-house capabilities for the development and production of synthetic food grade colours backed by several decades of experience in the field. With manufacturing plants at Dhatav Village of Raigad District in the State of Maharashtra India, the Company efficiently caters to customers across the country and across the world. The capacity is elastic and is capable of meeting the expected sales growth for the next few years. The plants are modern, compliant with health, safety and environment norms, and the team is well trained to use the best manufacturing practices.

Outlook:

The global food colour market is primarily driven by the increasing demand from beverage industry and bakery and confectionary. For commercial adoption, synthetic food colours are in high demand because of the high stability under light, cheap in cost and less microbial contamination. However, natural food colours are expensive in comparison to synthetic ones. The food colour Industry is increasingly shifting to Asia in consonance with the shift of its key consumer industries. With Asias increasing contribution to the global food colour Industry, India emerges as one of the focus destinations for food colour manufacturing Companies worldwide.

The Global food colour market is estimated at USD 1.6 billion, growing at a CAGR of 5.9% over the forecast period of which colours for food and beverages account for 70% (USD 1.1 billion) of this market. The market is further divided into synthetic and natural dyes & pigments, where the synthetic dyes comprise of USD 0.4-0.6 billion while the rest is contributed by natural dyes. The Company operates primarily in the synthetic colour segment and is among the few USFDA approved manufacturers of food grade colours in India. Over the last five years, the Company has witnessed topline CAGR of 12%, despite the overall market growth of 4-5%. It is expected that the Company will achieve its target of expanding its capacity to 20% of the global capacity going forward.

The Company is working on a capex plans that include enhancement of existing product line, diversification into new products along with backward integration for manufacturing two major raw materials. According to Vision for 2020, the Company wants to be a 500 crores plus manufacturing turnover Company with substantially better EBIDTA margins by reducing low margin trading business and its foray into niche segments like lakes, drugs and cosmetic segments which are high margin products.

Opportunities and Threats:

The Company has a well set up infrastructure in respect to manufacturing capacities, human resources, technical expertise, etc. which are a key factor for future growth of its business. The Company can bank on its in-house R&D for development of new products, backward integrations, quality improvements and cost reductions. Another important aspect which helps the Company in having its diverse portfolio of products is the fact that the Companys the manufacturing capacities are fungible.

The dedicated teams for Quality Management and Quality Assurance helps in maintaining the standards required for various products. The entire project or process is designed to ensure delivery of Best Quality Products.

The Rupee traded in the range of 63.50-66.50 per USD. The Company continued to mitigate the risk of this volatility by effecting payments towards our imports out of our Export Earnings in Foreign Currency and by taking adequate cover through forward/ option contracts.

Opportunities: a. A large domestic market fueled by rising incomes in urban and rural areas, b. Formalisation of the economy and the unified GST levels the playing field, thus enabling your Company to access newer markets and segments, c. Increased economic activity bodes well for transportation, leading to increased movements of commodities, and d. Access to international selling and sourcing markets is a key success factor and vital for the food colours manufacturing Industry.

Threats: a. Commoditization is a constant threat. Substantial resources and money is spent on developing products, which if superior can be sold at a high price, nevertheless, with time competitors are able to produce these or similar products, b. Most of the chemical companies in India are smaller in scale as compared to their global counterparts. As the global companies enter and strengthen their presence in the Indian market, they will also invest in marketing, distribution and production systems that local companies may struggle to match, c. Cost of compliance makes operations uneconomical and unviable for small players, and d. Chemical companies are affected by environmental regulations. However, awareness about the regulations and their positive effects on the Company will add to value creation and growth.

Risks and Concerns:

Exchange-rate fluctuations, increase in prices of Crude Oil and down-stream petrochemicals, political unrest in the country, trade war between US and China, etc. are all concern areas which your Company may face from time to time.

The growth of our industry is driven by R&D activities and a need for constant innovation in the product spectrum. On the other hand, strong R&D set-up ensures quality management and cost reductions. Since your Company has its own R&D Centre, the above concerns are well addressed. The Company is exposed to health, safety, security and environmental risks, given the diversity and complexity of the industry in which the Company operates. Macro-economic conditions like the policy decisions of the Government, currency fluctuations and volatility in commodity prices like crude oil can affect the business of the Company.

• Infrastructural challenges;

• Bilateral/multilateral trade agreements of the Country;

• High cost of power as well as finance;

• A vailability of skilled man power; and

• High fragmentation of the chemical industry.

The Company fulfils its legal requirements concerning emission, waste water and waste disposal. Improving work place safety continued to be top priority at both the manufacturing plants. The Company continued its focus on compliance in all areas of its business operations by rationalizing and strengthening the controls. The Company has set in place the requisite mechanism for meeting with the compliance requirements and periodic monitoring to avoid any deviation. Company aims to set exemplary and sustainable standards, not only through products, services and performance, but also through integrity and behavior.

Segment–wise or product-wise performance:

In accordance with Ind AS 108, the Company has a single reportable business segment, manufacturing and trading of food colours and trading in chemicals. Thus, the segment wise or product wise performance report is not given in the report. The Company has manufactured 3,037.89 MT food colours during the financial year 2017-18 against 2,514.05 MT in the previous year.

Net Sales by Geography:

Discussion on financial performance with respect to operational performance: i. Financial Performance:

Consequent to the introduction of Goods and Services Tax (GST) with effect from July 1, 2017, Central Excise, Value Added Tax (VAT) etc. have been replaced by GST. In accordance with Ind AS 18 on Revenue and Schedule III of the Companies Act, 2013, GST, GST Compensation Cess, VAT etc. are excluded and Excise Duty is not excluded from Gross Revenue from sale of products and services for applicable periods. In view of the aforesaid restructuring of Indirect Taxes, Gross Revenue from sale of products and services and Excise Duty for the year ended March 31, 2018 are not comparable with the previous periods. Comparable revenue growth and comparable EBITDA margin improvement for 2017-18 has been arrived at by adjusting the excise duty from reported sales for first quarter of 2017- 18 and financial year 2016-17.

During the year under review, your Company has achieved Revenue from operations of 21,700.24 lakhs. The comparative figures are tabulated below. The Company has achieved outstanding net profit of 1,571.20 lakhs for the financial year 2017-18. EBIDTA stood at 3,190.05 lakhs for the financial year 2017-18. An operational EBIDTA has been slightly increased from 14.34% for financial year ended March 31, 2017 to 14.67% for the financial year ended March 31, 2018.

Finance Cost has been increased from 494.07 lakhs for the financial year 2017-18 compared to 392.08 lakhs for the previous year. Depreciation and Amortization stood at 249.50 lakhs for the 2017-18 compared to 225.87 lakhs for the previous year.

(Rs. in lakhs)
Particulars F.Y. 2017-18 F.Y. 2016-17
Total Revenues 21,700.24 20,685.02
Revenues from Exports 11,839.98 10,178.63
PBDIT 2,695.98 2,586.04
PAT 1,571.20 1,465.43
Earnings per share 3.15 2.93

During the current financial year 2018-19, your Management is aiming another good successive year as the year started on a promising note with fabulous net profits.

ii. Operational Performance:

Overall, the macro-economic situation is still challenging and policy measures taken by the Government are yet to impact the business in a big way. However Company posted moderate growth in top line and excellent growth in Profits on the back of planned austerity measures and optimum resource management.

The Companys performance with regard to the export manufacturing sales volumes, improved by approximately 16% for the financial year 2017-18. Domestic manufacturing turnover in value terms grew by 21.25% due to improved pricing, however domestic trading turnover decreased by 9.37%. On the export business front, competition reduced, especially from China, due to environmental issues. Your Company has chosen to export these products only to certain select key accounts, keeping in mind the importance of maintaining a regular presence at these key accounts and also to support capacity utilization at desirable levels. By a combination of a better product mix helped by specialty products and continual improvement in the efficiency of operations at all locations, the Company has tried keeping its operating margins healthy for all the four quarters and has achieved an improvement in the EBIDTA levels.Turnover of the Company has been increased by 5.62% as compared to the previous year whereas the other operating revenues have also been increased by 4.91% as compared to the previous year.

Environmental & Hazardous Safety and Quality Assurance:

Vidhi strongly believes a safe and healthy workplace to its employees, a clean environment to its locations and in being a "supplier of choice" to its diverse customers. In order to achieve these objects, both the manufacturing plants and functions have targets on safety, quality and customer service, among others. Our ability to treat customers, employees and environment in a responsible way is not only ethically correct but also strengthens our partnership with those stakeholders upon whom our success as a Company ultimately depends.

As your Company deal with chemicals and is in the manufacturing food colours and trading in speciality chemicals, it has to make sure that the highest degree of safety measures is maintained in order to avoid any risk at the workplace. Your Company is committed to maintain its operations and work place free from incidents and significant risk to the health and safety of its stakeholders through improved their work skills, strong channels of communication, safety awareness, and sound training practices.

The Companys certified management system complies with ISO 9001:2008, ISO 22000:2005, OHSAS 18001 and HACCP which reflects the Companys continued commitment towards Quality, Environment, Occupational Health and safety approaches.

Internal Control Systems and its Adequacy:

The internal control systems are commensurate with the size, scale and complexity of the operations of the Company. All operations at the Company are carried out on the SAP system. The Internal Auditors along with finance team plans the audit schedule for the year in consultation with CFO and the Audit Committee. The schedule of the audit is prepared on the basis of ‘risk assessment to make sure all the assets of the Company are protected against losses. The Audit Committee of the Board approves the internal audit plan at the start of every financial year to minimise associated risks. The Company has engaged Independent external firm as the Internal Auditors to perform the internal audit function, assess the internal controls and statutory compliances in various areas and also provide suggestions for improvement. The Audit Committee reviews the major findings of the internal audits with respect to different locations on periodical basis and functions to help take effective steps in ensuring compliance.

The periodic report prepared by Internal Auditors created the basis of certification provided by the Managing Director and Chief Financial Officer for financial reporting as required under regulation 17 of the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Human Resources:

The Company considers its committed and talented workforce as one of its most critical assets and key to driving sustainable performance and developing competitive advantage. In line with its business imperatives, the emphasis has been given to recruit the best talent, nurture, motivate and empower the human resources. To achieve its objective of attracting, retaining and developing its committed workforce, the Company sustained its various growth and development initiatives across the organization. Compensation and benefits packages have always been pivotal to retaining and motivating employees. The relations with the employees and workers remained cordial and harmonious throughout the year. The Company had total work force of 56 as on March 31, 2018.

Cautionary Statement

Certain statements under "Management Discussion & Analysis" may be forward looking statements within the meaning of applicable securities laws and regulations. The forward looking statements are based on certain assumptions and expectations of future events. Actual results may differ materially from those expressed or implied from the statements since the Companys operations are influenced by many external and internal factors beyond its control.