MANAGEMENT DISCUSSION AND ANALYSIS REPORT Soluble Instant coffee, more commonly referred to as instant coffee or coffee powder, is commercially brpared in solid form by either freeze-drying or spray- drying, after which it can be rehydrated. Instant coffees have now been on the market for many decades because of its convenience. Soluble coffee consumption accounts for over 20% of global coffee consumption. With the invention of new technologies, the quality of instant coffee can now be significantly improved, thereby attracting even traditional roast and ground coffee customers. The inherent convenience of making instant coffee as opposed to brparing roast and ground coffee is also a major factor that is causing an increase in instant coffee sales in this fast paced world. Business Review Your Company has already established its long standing brsence in the international markets in the traditional Spray-Dried Instant Coffee segment and has also made a successful entry in the Freeze- Dried Coffee segment. Now, it is focusing to make a mark in the Indian domestic market which is very encouraging. The Company's endeavours through its Quality Control Division to enhance the quality of products by a careful mix of various blends and essence and to give the products at best prices to the customer are showing results by taking the products to new competitive markets. Efforts to achieve the right mix of raw-materials are also giving advantage to the Company in achieving the best quality product at the most competitive price. Presently your Company is capable of providing more than 70 varieties and blends of coffee to its customers. The expanded capacity of the plant at Duggirala in Guntur District of Andhra Pradesh and also the multidimensional brsence of the Company will help cater to the increased demand for instant coffee in International markets. During the year under review the sales of your Company grew from Rs. 61,110 Lakhs to Rs.67,198 Lakhs. The Net Profit is at Rs.7,466 Lakhs as against Rs.7,326 Lakhs during the brceding financial year. Earning per share (EPS) (Face value of Rs.2/- per share) for the current year is Rs.5.61. Industry Structure and Developments China took a conversion and emerging into coffee drinking from traditional tea drinking population. According to the Euromonitor analyst, China now ranks as the fourth-largest global market for RTD coffee in terms of volume, and fifth in terms of value, and its growth is largely a result of the attributes it shares with instant coffee, convenience and a malleable flavour profile. Vietnam's instant coffee market is expected to continue to grow steadily in coming years due to a number of market trends. The growth of instant coffee stemmed from rising demand among adolescent consumers, who seek convenient and time saving methods for consuming hot drinks in tune with their busy lifestyle. Outlook The modern times have witnessed evolution of coffee drinking from an everyday habit to a healthy lifestyle choice. Coffee has gained the status of being the most brferred beverage worldwide. Coffee is the second most traded commodity in the world. As per ICO, world coffee demand continues to show significant growth, with considerable potential for further increases. More mature markets such as the EU are relatively stable, while emerging markets, particularly in Africa and Asia, are recording significant increases in consumption and sales. As far as the Indian domestic market is concerned, consumption of instant coffee is more brdominant in East, West and Northern regions of India. The instant coffee sector outlook is bright as consumers increasingly value instant coffee's simplicity of brparation. Risks and Concerns Manufacturing and Operational Risk: Reduced rainfall in some areas is dramatically changing the ecosystem and growing conditions which result the quality of the beans used as raw material to produce the instant Coffee. It is noticed that changes in weather patterns (drought, unbrdictable and varied rains, temperature changes) are causing alterations in the appearance and severity of newer pests while existing diseases are migrating to ecological zones where they brviously did not exist. This may affect the quality of the Beans grown in the traditional regions from where the Company is procuring. Although credible data on the levels and sbrad of these diseases and pests is not available, the potential risk should be noted. Competition & Market Risk: The coffee markets in which we do business are highly competitive and competition in these markets is likely to become increasingly more intense due to the relatively low barriers to entry. The industry in which we compete is particularly sensitive to price brssure, as well as quality, reputation and viability for wholesale and brand loyalty for retail. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factor, our ability to attract and retain customers could be adversely affected. Our private label and branded coffee products compete with other manufacturers of Instant coffee. Sale and Marketing Risk: Your Company has already established its long standing brsence in the international markets in the Instant Coffee, however, the sales of the products may fluctuate depending on economic and political conditions, including acts of terrorism in the producing and consuming countries. Forex Risk: Fluctuation in the foreign currency, especially caused due to any regional debt or other international crisis may affect the forex markets internationally thereby impacting the foreign exchange rates which if result in strengthening the domestic currency may affect the profitability of the Company to the extent of the conversion costs. Fortunately, as the Company mostly deals with USD in all its commercial transactions, the impact of foreign exchange fluctuations is minimal. Technology Changes: Any innovation and new technology in producing high quality instant coffee and making the current production technologies redundant and obsolete may prove to be a potential risk which can be addressed by the Company by upgrading the existing technology and improving the production techniques by constant in house research and development CCL has more than two decades of experience in terms of procuring the raw material at the most competitive price from different parts of the world irrespective of green coffee yield. Further, the Company has gained rich experience with the brsence of marketing consultants and in-house experienced marketing personnel to face any kind of competition and market related risks. Opportunities and Threats The brsence in Vietnam helps the Company to cater to the coffee needs of ASEAN countries and also this is in close proximity to many South-East Asian nations, Japan, Korea, China etc. Most of these countries have granted Vietnam a most favoured nation status with reduced or NIL duty structures in addition to having savings on logistics. The huge potential in domestic market for soluble coffee made the Company concentrate even on domestic sales both in private label segment and through its established brands. The soluble coffee consumption in India is expected to witness a growth of 3.9% over the next 5 years and retail coffee sales are expected to reach Rs. 38 Billion by 2017. Your Company has made a successful entry in the retail market with its brmium brands. The major threat being faced by the Instant Coffee Industry is the increase in all the input costs and creation of huge additional capacities in several countries which is resulting in unhealthy competition and stress on prices. Your Company is making efforts to mitigate these threats by increased volumes of high quality products. Internal Control Systems and their Adequacy Your Company has appropriate internal control systems for business processes, efficiency in its operations, and compliance with all the applicable laws and regulations. Regular internal checks and audits ensure that the responsibilities are being effectively executed. In-depth review of internal controls, accounting procedures and policies of Company is conducted. Your Company has adopted adequate internal control and audit system commensurate with its size and nature of business. Internal audit is carried on a quarterly basis. Internal auditors work with all levels of management and the report is placed before the Audit Committee. The Audit Committee after reviewing the findings and suggestions directs the respective departments to implement the same. Industrial Relations and Human Resources Management Employees are the valuable assets and the strength of an organisation in its growth, prosperity and development. Your Company has a team of qualified and dedicated personnel who have contributed to the growth and progress of the Company. Necessary training is being imparted to the employees and various seminars and workshops are being conducted to continuously hone their skills. Your Company is continuously striving to create appropriate environment, opportunities and systems to facilitate identification, development, and utilization of their full potential and inculcating a sense of belongingness. Your Company's industrial relations continued to be harmonious during the year under review. Certifications and Awards Your Company has achieved Grade A with British Retail Consortium (BRC) Version 6 as well as International Featured Standards (IFS) which are internationally recognized Global Food Safety Standards. Furthermore, your Company is certified by Fairtrade Labelling Organizations (FLO Certified) to produce Fair Trade coffees; by Ecocert to produce Organic certified coffees; and by Rainforest Alliance to produce Rainforest certified coffees. Consequently, your Company has the ability to produce dual and triple certified coffees. Your Company is also Halal Certified as well as Kosher Certified. Your Company received Commendable Export Performance Award for the year 2010-11, Best Export Performance Performance Award for the year 2011-12 and 2012-13 during the year from Visakhapatnam Special Economic Zone (VSEZ). Cautionary Statement Statements in this management discussion analysis describing the Company's objectives, projections, estimates, expectations may be forward looking within the meaning of applicable securities-laws and regulations. Actual results may differ materially from those exbrssed in the statement. Important factors that could make difference to Company's operations include economic conditions affecting the domestic market and the overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and other incidental factors |