Virat Crane Industries Ltd Management Discussions.

Virat Crane Industries Ltd (the Company) has now been consolidating its position in the Industry with deeper penetration into remote rural areas to procure raw milk and supply processed milk, Ghee and milk products to consumers in urban areas. Your Company now has over 26 years of legacy in the Indian dairy Industry. The Financial statements are prepared in accordance with accounting principles generally accepted in India, including the Accounting Standards notified under the Companies Act, 2013 ("the Act") read with Section 133 of the Companies Act, 2013. Your Management accepts responsibility for the integrity and objectivity of the financial statements, as well as for the various estimates and judgments used therein. These estimates and judgments relating to financial statements are prudently made to reflect in a true and fair manner the form and substance of transactions. This also enables in reasonably presenting the Companys state of affairs and profits and cash flows for the year ended March 31 st, 2018.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

The Indian dairy industry estimated current at 5.4 trillion (according to a research report) is one of the fastest growing dairy segments across the world. Needless to say today agri farmers too consider dairy farming as a reliable source of revenue.

India is the worlds largest producer of milk, producing about 160 Mn tonnes per annum with a compounded annual growth of 15%. However, India is also the largest consumer of milk too as dairy products are considered as a main source of protein for large segment of the Indian population.

INDIAN DAIRY INDUSTRY: PRODUCT-WISE SCOPE AND DYNAMICS

Liquid milk Liquid milk, which constitutes largest segment of Indian dairy industry, is valued at 3.5t and accounts for 65% of industry sales. While 77% of liquid milk is sold through unorganized segment, the organized segment is growing much faster.

Milk Powder Milk powder manufacturing is a simple process now carried out on a large scale. It involves the gentle removal of water at the lowest possible cost under stringent hygiene conditions while retaining all the desirable natural properties of the milk - color, flavor, solubility, nutritional value.

Ghee Ghee, the second most consumed product of Indian dairy industry (- 800b), contributes 15% to industry sales, within which organized sector contributes 20%. Players from cooperatives are strong in this segment. Paneer The Indian paneer market is huge at 325b with organized players contributing mere 2-3% to industry sales. The segment has humungous potential being majorly dominated by unorganized segment. Going forward, demand from the institutional segment is expected to drive strong growth led by rising demand from restaurant and cafeteria businesses. The organized segment is expected to grow faster at 20-22% CAGR.

Curd The Indian curd market (worth 235b) off ers huge potential for private players as the organized segment accounts for mere 6- 8% of overall market. Curd category is expected to grow to 500b by 2020 growing at 15% CAGR.

Cheese Cheese entails humungous potential, having clocked 27% CAGR over 2007-14 and further expected to post a robust 31% CAGR over FY15-20E to 59.4b in 2020. The spurt will be led by strong growth in Indias fast food market driven by pizzas, burgers, sandwiches, etc. Buttermilk Buttermilk category, valued in 2014 at 13.8b, is expected to explode to 43bn by 2020 growing at 21% CAGR.

Flavored milk Flavored milk market in India saw 26% CAGR during 2007- 2014 to touch 12.6bn in 2014; it is expected to growto 47.8bn in2020 (25% CAGR). Flavored and frozen yoghurt Flavored and frozen yoghurt market in India saw 36% CAGR during 2011-2014 to touch 2.3bn in 2014; it is expected to grow to 12. lbn in 2020 (32% CAGR). Growth in the category has been driven primarily by increasing health consciousness among the urban middle class.

KEY INDUSTRY GROWTH DRIVERS:

Young India and increase in population:

India is the second most populated country in the world with nearly a fi fth of the worlds total population. According to the 2017 revision of the World Population Prospects, the population stood at 1,32b grew at CAGR of 1.9% over 1960-2016 and India is relatively young country with rising expectations. 65% of Indias population is below 40 and working age population (between 15 and 64 years) is expected to touch lb mark surpassing China by 2030. With 50% of the population under 25 years of age, the large Indian young population is ready to experiment and try out new milk products. The

opportunity is there for domestic players to capitalize on their understanding oftaste and preferences of Indians. Dual income households leading to higher usage of VAP due to lack of time:

The number of dual household incomes is gradually increasing, leading to higher disposable incomes and readiness to try out value added products. Both rural and urban households have increased their expenditure on VADP at ~16% CAGR compared to liquid milk CAGR of 10-12%. Traditional milkmen selling curd have disappeared today at least in urban areas with many of branded dairies launching their better quality curds and buttermilk. Dairy sector will be one of the key benefi ciaries of Indian consumption story. Value-added products have been gaining importance due to changes in demographic and dietary patterns. While demand for branded milk has grown at 15%, growth in value added products has been even stronger at 23% in last decade Rising urbanization and disposable income: With rising urbanization and disposable income, there is growing brand awareness amongst consumers, which is driving demand for branded products. Also, there is a growing preference for clean, hygienic and ready-to-eat milk & dairy products that will boost organized dairy industry. Indias per capita income grew by 9.7% to 1,03,219 in FY17 from 94,130 a year ago. In FY16, the rate of growth of Indias per capita net income was 7.4%.

Rising health awareness:

Over the last decadethere has been a growing awareness towards health and nutrition as cases of untimely deaths have increased due to heart attacks. This has led to increasing quality and safety concerns increasing demand for packaged food. Younger consumers are especially trending towards more health conscious eating habits driving growth of value added dairy products.

Rising V egetarian:population India has -28% of population who follow vegetarianism and this number is gradually increasing over last decade. A large vegetarian population is a key driver for dairy industry.

KEY SUCCESS FACTORS FOR DAIRY BUSINESS IN INDIA: Strategically located manufacturing units As most of the dairy products have low shelf life, it is difficult to manufacture them at a central location and distribute pan-India like FMCG products. Hence, it is crucial to have a network of multiple production units across the country to have maximum reach.

Procurement of raw milk:

One of the ways of ensuring high quality milk is by taking care of the cattle that produce it. For dairy companies it is crucial to have direct raw material sourcing from farmers. So developing strong relationships with farmers by aiding them to produce high quality milk from cattle is important as more than 70% of Indias milk production is still produced by small farmers and owning 2-5 cattle unlike foreign countries.

Consistency in taste:

To gain mind share of consumers consistency of taste of any food product along with hygiene is essential. Building a credible brand in any business takes time.

Distribution reach and availability of products:

Some dairy products require chilled temperatures. Products such as ice creams require backup of freezers. Fresh milk products are perishable in nature. Establishing distribution is extremely crucial so that products are available to consumers. If product is consistently available to consumers they will try and will come for repeat purchases if they like. An optimum product portfolio to ensure higher profitability A range of products is crucial to attract consumers across income levels and across needs. It is important to have a right mix of milk business as well as value-added products so as to minimize working capital requirements and to maximize the return ratios. A right mix of fresh milk products and premium VAP will aid margins and return ratios.

KEY RISKS: Climate change and scarcity of water Climate change and scarcity of water is a major threat to the dairy industry. Milk production could go down by 3 million tonnes over the next three years as the average temperatures rise, creating problems of water scarcity and reduced availability of green and dry fodder for the cattle. Dairy companys manufacturing operations are largely dependent on the supply of milk, which is the primary raw material for all the dairy products. Given the seasonal nature of the dairy industry, cattle farming patterns, availability of raw milk keeps on fluctuating which thereby could adversely impact the running of its operations.

Survival of the fittest:It is expected that the competition will increase steadily as more and more companies targeting dairy sector and few MNCs too eyeing for increasing market share. Large established players are launching new products.

New Product Risk by MNCs who have better brand equity:

Over the years a few private players have been able to anticipate and respond to changing consumer preferences which helped in building strong consumer demand for their brands. However continuous investment in research and development along with introduction of new products and different variants of existing products by MNCs, based on consumer preferences and demand, can be a risk for smaller players.

Rising labor cost Over the last decade labor cost has also increased signifi cantly. Cost of keeping and maintaining bovine is very high.

Product-wise performance:

The primary business segment of your Company is Foods comprising products ghee and Cow g/?ee,Milk and Butter Milk.

Ghee: Durga ghee is our most profitable product with good market and brand value.

Cow ghee: Kama Dhenu cow ghee is also a profitable product.

Outlook:

Your company sees significant increase of revenue as it has launched new products Milk, Curd, Butter Milk and positive response for the same among the public.

INTERNAL CONTROL SYSTEMS AND ADEQUACY

Your Companys internal control systems are commensurate with the nature, size and complexity of its business and ensure proper safeguarding of assets, maintaining proper accounting records and providing reliable financial information. An external independent firm carries out the internal audit of the Company operations and reports its findings to the Audit Committee on a regular basis. Internal Audit also evaluates the functioning and quality of internal controls and provides assurance of its adequacy and effectiveness through periodic reporting. Your Company has a code of business conduct for all employees and a clearly articulated and internalized delegation of financial authority. These authority levels are periodically reviewed by management and modifications, if any, are submitted to the Audit Committee and Board for approval. Your Company also takes prompt action on any violations of the code of business conduct by its employees. The Audit Committee also reviews the risk management framework periodically and ensures it is updated and relevant.

Financials Performance:

During the Year under review revenue from operations for the financial year 2017-18 is 88.04 Crores. It was increased by 22.65% over last year (71.78 Crores in2016- 17). Profit after tax (PAT) for the financial year 2017- 18 is 6.20 Crores. It was increased by 171.76% over last year (2.28 Crores in 2016-17).The revenue increased due to strong market force and high quality products of the company.