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Management Discussion and Analysis

THE MACRO-SCENARIO

The Indian economic growth story continues unabated. The country is in the midst of a very clear structural shift into a higher GDPgrowth rate bracket. Though managing this transition is a  challenge for economic planners, the growth represents a continuing opportunity for Indian industry. Domestic demand is buoyant, as are exports. The investment rate is growing steadily.
The economy is becoming more resilient. India's global takeovers are a pointer that the country is
now a contender to reckon with in the international arena. However, infrastructure / power constraints remain and inflation though manageable, is a cause for worry to Indian economic planners. The Indian financial sector is now becoming globally competitive in terms of product alternatives, across both debt and equity, available to domestic companies. The strengthening of the rupee against the US dollar will have a positive impact on project cost structures for  investment domestically. Overall, there could be no better opportunity for India to unleash its potential.

MACRO-POINTER SPERTINENT TO YOUR COMPANY

The Oil & Gas sector is poised to change the very face of the Power, Chemicals and Fertiliser industries. The large gas finds in the KG Basin are now not only firmly established but are expected to be available by end-2008. Parallely, the Dahej-Uran Pipeline is slated to be commissioned in July 2007 opening up the connectivity for LNG and Natural Gas from the PMT macro-pointers going forward spell a positive story for our Ammonium Nitrate business. The retail boom is now spreading fast to every corner of the country. Alongside, an organized supply chain from farm-to-fork is also emerging. This ensures that quality fruits and vegetables reach very quickly from the farm gate to the retail shelves. This macro-shift opens new doors for customised
fertilisers and agri-services for your Company. Finally, the consumer boom propelled by higher disposable incomes continues as does the boom in housing. This means a greater demand for better designed homes and spaces, differentiated products and a need for convenience. Thus, alongside the mall mania in conventional retail, a new trend of the speciality mall, offering focused shopping experiences in the form of marriage malls, automobile malls, etc. is emerging. Your Company's Speciality Mall and Design Centre, Ishanya, is clearly a move in the right direction.

THE AGRI-BUSINESS

No significant change has emerged in Government policy for this sector. Though the current policies are not ideal to maximise economic gains and efficiencies, they are a reality that has to be factored into any plan for this sector.
The future will demand not just customized nutrients and micro-nutrients for Indian soils that enhance agricultural productivity and enable quality-driven, precision farming, but also further downstream resources like the augmentation of global market access to farmers. Your Company is now beginning to play this role through a combination of in-house marketing and outsourcing, with the Mahadhan Saarrthie initiative as the key vehicle capitalising on the opportunity in this sector. Mahadhan Saarrthie centres are working as high quality knowledge bases for farmers, providing both product and advisory services at a fee.  The advisory services, provided regularly, have enabled the farmer to grow global-class products. Further linkages created by your Company with global importers and exporters have opened up new markets for farmers driving better farm economics and creating a new business model that your Company intends exploiting to the fullest. Your Company has taken the member farmers through the process of EurepGAP certification for the export of grapes. The certification is a must for exports into Europe and is a key tool towards achieving our Saarrthie strategy. The grape exports at the Pimpalgaon Saarrthie centre in Maharashtra stands out particularly in this regard.

THE CHEMICALS BUSINESS

  • Industrial Chemicals
    India's economic boom has positively impacted the Chemicals sector with demand rising. On the other hand, with peak customs duties at 10% and duties for chemicals at 7.5%, India is fast becoming a significant market for global giants. Your Company remains among the leaders in this market, across all parameters, for its products. Its current basket of chemicals viz. Methanol, Iso Propyl Alcohol (IPA), various grades of Nitric Acids, Hydrogen and Carbon Dioxide provide your Company with considerable product flexibility to manage commodity market cycles efficiently. Your Company enjoys strong customer relationships and loyalty. Your Company's moves to strategically combine products, value-add techno-commercial services and create brands should enable considerable market advantages in the coming years The Company's initiative to supply select chemical products like Methanol and IPA in drums has been implemented and customised packaging is now available. This has been very well received by the market, as have been the customised grades of Nitric Acid that your Company is supplying. The global Methanol market over the last calendar year has seen considerable swings. New capacities have come up globally and more are expected. Prices have plateaued at levels that are lower than the average price levels obtained in 2006. India's domestic demand for Methanol has grown and is likely to grow at a healthy pace. Your Company will consolidate and further augment the marketing and distribution strengths in this business. The Iso Propyl Alcohol market is expected to see prices stable in the short-term. Your Company has now clearly emerged as the producer and marketer
    of choice in India. Further details are available elsewhere in this Report.
  • Ammonium Nitrate
    The Ammonium Nitrate (AN) market in India is closely linked to the growth in infrastructure and mining. Given the growth rates expected in the economy, these two sectors stand to benefit considerably. Current domestic market growth rates hover around the 6 to 7 percent mark and will further improve as the demand for coal to feed the power sector goes up. Your Company is the acknowledged market leader in this product for its ability to offer not just the widest range of products, from melt to low density porous prills, but its services and knowledge skills that drive precision blasting yielding better economics to AN users. Initiatives to create and augment its brands through a strategic, customer-centric mix of products and services are well underway and should benefit your Company strongly in the future.
  • Ammonia
    As a strategic back-up to gas, your Company has also taken up a project to build a shore-based Ammonia storage tank. This will open up one more avenue for supplies of a key raw material for your Company. Huge new Ammonia capacities in the Middle East are fast coming up and this is likely to soften prices, which could be an advantage for your Company.
  • Retailing / Value-Added Real Estate
    Your Company's initiative to identify the speciality retail segment of the market as a growth driver three years ago is showing results. The overall interiors and exteriors market that your Company has focused upon through its Design Centre and Speciality Mall, Ishanya, is growing at around 8 percent annually, a growth rate that is faster than most other segments of retail trading. Ishanya is already a well-recognised brand among key segments of the interiors and exteriors industry. Options are being explored to leverage these brand strengths in a direction which will provide not just synergies but add further luster to the Ishanya brand, while capitalising on the huge opportunity emerging in the interior and exterior segments and in the design industry. More details on the progress of Ishanya are available elsewhere in this report.
  • Management Practice and Systems
    Your Company has received the ISO 9001:2000 certification for the manufacture and supply of Methanol and Iso Propyl Alcohol in March 2007. Considerable progress has been made in implementing global class Human Resource practices and enhancing productivity. Training programme in SAP with a focus on enhancing information flows and productivity, besides training programmes for a new employee engagement thrust titled KSH were a key part of the HR initiatives for the year FY07. KSH is a movement that combines the Kaizen initiatives of TQM with Small Group Activity and Housekeeping to create an energising force within the Company.
    The aim is to make your Company a highly competitive, learning organisation, fully capable of meeting emerging global challenges effectively.

THE YEAR UNDER REVIEW

  • Financial Analysis
    The financial year 2006-07 (FY07) has been a record-breaking year for your Company with
    unprecedented topline and bottomline growth levels, despite constraints of feedstock availability. The growth has been achieved by deft capitalisation on market opportunity through a combination of in-house manufacturing and strategic outsourcing.
    Total Revenues for the financial year 2006-07 (FY07) jumped to Rs. 869.43 crores from Rs. 595.49 crores in the financial year 2005-06 (FY06). Profit Before Tax rose to Rs.128.39 crores in FY07 from Rs. 111.70 crores in FY06. Net Profit for the year FY07 stood at Rs. 92.93 crores against Rs. 79.77 crores in FY06. Earnings per share, as a consequence, has grown from Rs. 9.04 in FY06 to Rs. 10.54 in FY07.

  • Your Company's financial position continues to remain strong. The debt cost stood at 7.49% for
    FY07, against 6.43% in FY06.
  • The Company borrowed additional amount of Rs. 71.46 crores loan for Speciality Mall and Design Centre .Ishanya' project and Rs. 15 crores (Rs. 14.25 crores outstanding) for completion of IPA Project as per original sanction. In addition, short term borrowing of Rs. 70 crores for three months was taken to meet the working capital needs of fertilisers business.
    This has increased the net outstanding debt in the Company's books for FY07 to Rs. 325.31 crores against Rs. 176.08 crores in FY06. The interest cost (including other financial charges) in
  • FY07 is Rs. 11.49 crores against Rs. 5.65 crores in the previous financial year. Interest for funds raised for project / capex items has been capitalised. The Debt-Equity Ratio stood at 0.51 in FY07 against 0.39 in FY06, while the Debtors Turnover Ratio improved to 7.84 in FY07 from 7.74 in FY06. The Current Ratio (including liquid investments) at 2.75 continues to remain healthy.
  • Operational Analysis
    The supply of Natural Gas, the key feedstock to the Taloja plant in Maharashtra, continued to be short of requirements. The shortfall in feedstock was met through a strategy of outsourcing Ammonia for maintaining manufacturing levels. Prices of both Naphtha, which is used for heating and steam generation and precious metals used as catalysts rose.
  • Overall Production and Sales
    The total fertiliser sales volumes for FY07 increased to 3,68,723 MT from 2,65,222 MT in FY06, while industrial chemicals grew to 2,64,006 MT in FY07 from 2,50,334 MT in FY06. With its  strong brand strengths and its new thrust in agri-services through the Mahadhan Saarrthie model, your Company saw record growth in sales of fertilisers. A strong momentum across the industrial chemicals and AN segments was maintained. IPA also provided a good boost to the industrial chemicals business. The Company manufactured IPA has a high level of acceptance in the domestic and global markets and would be a strong topline and bottomline driver in the future. Details of production and sales in FY 2006-07 compared to FY2005-06 are given below. The sales table below indicates the total sales of both in-house manufactured and outsourced products.
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SEGMENT-WISE AND PRODUCT-WISE

BUSINESS REVIEW

AGRI-BUSINESS
Driven by the strategy of providing comprehensive soil nutrients, micro-nutrients, advisory services to the farmers, your Company has seen record sales growth in this business. Though this resulted in a higher volume of outsourced fertilisers, considerable brand strengths and customer loyalty across the farmer base have been created. For the year under review sales of outsourced fertilizers increased42%from 2,11,944MTin FY06 to 2,99,941 MT in FY07.
Two Mahadhan Saarrthie centres were created during FY07, bringing 2,500 farmers and 7,500 acres of land now under the Saarrthie umbrella. The production of Nitro Phosphate fertiliser (23:23:0) remained affected owing to a shortage of key feedstock.

CHEMICALS SEGMENT

  • Methanol
    Methanol production improved marginally in FY07 as compared to FY06. The volume of traded
    Methanol stood at 47,016 MT in FY07 against 59,677 MT in FY06.
    Your Company was able to reap considerable advantages from the uptrend in global Methanol
    prices. While the production of Methanol manufactured in-house was higher than FY06, overall Methanol sales were lower due to several factors that were at play globally. With Methanol prices at an all time high in the last quarter of calendar year 2006, availability worldwide was restricted, and product outsourcing opportunities were not optimum. This had its impact on the import of the Methanol into India. In the last quarter of FY07, however, prices corrected to normal levels.
  • Iso Propyl Alcohol
    Your Company commissioned its IPA plant in August 2006. Since then 11,146 MT of the product
    have been sold in the domestic market and 1,405 MT have been exported. Sales figures would have been higher but for a fire at a key supplier's plant in October 2006, which caused more than 30-days disruption for want of feedstock Propylene. The product's acceptance in terms of both quality and the service levels obtainable from your Company has been very heartening.
  • Acids
    Sales volumes in acids grew8%for FY07 over FY06 to 1,14,855 MT. The overall sales in value terms went up 14% in FY07 against FY06.
  • Ammonium Nitrate
    Driven by growth in mining, construction and infrastructure demand for Ammonium Nitrate continued to be strong. Overall sales volume grew 6% over the previous financial year. Your Company sold higher volumes of value-added prilled product, riding on its strong OPTIMEX brand, backed by high levels of techno-commercial services with higher margins.
  • Liquid Carbon Dioxide
    The total sales volume of CO2 was 5.78% higher over FY06. Your Company has now made a strong foray and acceptance into the food and beverages market with this product which is certified by the world's best food testing laboratories M/s. TNO of The Netherlands.
  • Hydrogen
    The volume sales for Hydrogen, which is a by-prod- uct, improved by 37% for FY07 over FY06.
  • Exports
    With the thrust provided, exports of AN for the year under review was Rs. 12.41 crores, a growth of 15.98% over the previous financial year. Exports of IPA stood at Rs. 5.68 crores. Your Company has now established a global market for this product. Nitric Acid exports value grew by 59%.

CURRENT AND FUTURE PROJECTS

  • Retailing / Value-Added Real Estate
    Ishanya's campus-like design, with 5,50,000 square feet of leasable space, spread over 10-acres will, besides having retail spaces, offer exhibition halls, an amphitheater, a design studio, a training and development centre, art galleries, business center, ample parking, etc. Restaurant and food courts will also be available.
    Ishanya, is emerging as India's largest Design Centre and Speciality Mall and has already leased
    out over 75% of space at the end of FY07. A shift in the opening of the mall has been necessitated due to a severe shortage of available labour for construction activity in Western India.
    Ishanya's features permit an augmentation of revenue streams beyond lease rentals and provide
    a strong cushioning and enhanced brand value for the future. As of date, tenant fit-outs are in full swing. Nearly 2,10,000 square feet of space have already been handed over and Ishanya is expected to commence operations in a phased manner from Q2 of FY-08, well in time to catch the festival season.
  • Ammonium Nitrate
    The initiative to set-up an integrated green-field complex for Nitric Acid and AN at Paradeep in
    Orissa, in Eastern India, is proceeding well despite a few delays on land procurement given the com- plex nuances of this issue in India. Technology and engineering tie-ups and ordering of long delivery equipment are underway.
  • Ammonia Storage Tank
    Your Company's 15,000 MT storage tank project for Ammonia at JNPT is progressing well. The
    turnkey contract has already been awarded and major long lead items have been procured. The tank is expected to be commissioned around mid-2008. The environmental clearances required are in process of being obtained.
  • INTERNAL CONTROLS
    Your Company's efforts to achieve continual improvements in efficiency and unlocking greater
    value from its assets / resources whether capital or human continue. With this in view, your Company has started using the Control Effectiveness Index (CEI) in each functional area based on guidelines developed in the Internal Audit programme. As per evaluation given by the Internal Auditors, the overall CEI index is more than 80% which is termed as exemplary.

ENHANCED VALUE TO SHAREHOLDERS
Your Company continually strives towards improving efficiencies, profitability, margins and sales - indeed overall business competitiveness. It is committed to adopting the best of business practices and continually striving for improvements while re-looking at business strategies and models, when and where necessary. The initiatives taken over the last few years should lead to an enhancement of its intrinsic value to all shareholders, indeed all the stakeholders in the
Company.