Innovative Foods Ltd Management Discussions

INNOVATIVE FOODS LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS The Directors have the pleasure of presenting the Management Discussion and Analysis Report for the year ended 31st March 2010. A. THE BUSINESS: M/s. Innovative Foods Limited (IFL) [Formerly M/s. Innovative Marine Foods Limited] was incorporated on 1st September 1989 in the State of Kerala with its Registered Office at Amalgam House, Bristow Road, Willingdon Island, Cochin - 682 003, which was changed to Chakolas Habitat, A Block, 1C, Thevara Ferry Road, Cochin - 682013, Kerala with effect from 17th May 2010. The Company was promoted by M/ s. Amalgam Foods Limited (AFL), the parent Company of Amalgam Group, Cochin in association with multinationals like M/s. Mitsubishi Corporation, M/s. Saudi Fisheries Company, M/s. Gourmet Club Corporation, M/s. Ristic GmbH, Germany, M/s. Sea products SRL, Italy who are among the leaders in the Seafood Industry in the respective countries. In the early 90s the Amalgam Group identified new opportunities in the wake of changes in the Seafood Industry with the shifting of production base from developed countries and for moving up the value chain into more profitable retail segments. However, a combination of following events totally beyond the control of the Company seriously affected its performance. * Set back of Shrimp aquaculture in India * Detention of Cooked Shrimp by the United States Food and Drug Authorities (US FDA) * Unilateral ban on the import of seafood from India by the European Union * Loss of benefit due to change in Exim Policy. * Levy of Anti-dumping Duties on the import of Frozen Shrimp from India by the United States The combination of the all the above factors resulted in the total erosion of the Companys net worth during 1999 and the Company was referred to BIFR for determination of suitable measures for its rehabilitation. The Company had accordingly submitted the original Rehabilitation Scheme to the Honble BIFR through the Operating Agency in 2004. The Honble BIFR by its Order dated 31/05/2004 approved the Scheme of Rehabilitation in two stages. The Company implemented Stage I and as per the approved Scheme, the Company fully settled the dues of all the financial institutions who were holding the first charge on the Companys immovable properties. However, there was some delay in implementing the Stage II of the Rehabilitation Scheme and the BIFR declared the sanctioned Scheme 2004 as failed. Subsequently, the Promoters identified the new Strategic Investor, M/s. Residency Foods & Beverages Limited, an Associate Company of Indian Hotels Company Limited. Based on the understanding arrived with the new Strategic Investor, the Company submitted Modified Draft Rehabilitation Scheme (MDRS) to the BIFR for approval. The BIFR by its Order dated 8th December 2006, approved the Modified Scheme of Rehabilitation. The salient features of the approved modified scheme are as under: 1) IFL will be reorganized in the following lines: (i) IFL will settle its liability under One Time Settlement arrangement with all the three Banks (ii) The Share Capital of IFL would be written down by 90% from the existing level of paid-up capital (iii) The Strategic Investor, RFBL would invest Rs.2400 Lakhs in the following manner: a. Rs.1500 Lakhs would be raised in the form of equity in the Share Capital of Amalgam Foods & Beverages Limited b. RFBL would arrange for a loan fund of Rs.900 Lakhs consisting of Rs.356 Lakhs as interest free unsecured loan and balance Rs.544 Lakhs to be raised as commercial loan at the prevailing rates. (iv) AFBL would be reverse merged into IFL The Board of Directors are pleased to inform that the Company has generally carried out the above terms as per the BIFR Order and the rehabilitation of IFL is progressing well. As per the approved scheme of the BIFR the Strategic Investor, RFBL would hold 67.93% of the Capital of the merged Company, Amalgam group will hold 26% and the balance by the General Public. The management is confident that with the induction of capital and the merger of Amalgam Foods & Beverages Limited with IFL would significantly improve the networth and also strengthen the Companys Balance Sheet. B. INDIAN FOOD INDUSTRY STRUCTURE AND DEVELOPMENTS: In the last few years, Indias potential to emerge as a food-processing destination of the world has been recognized. The key inputs for creating the food-processing base availability of quality raw materials, requisite infrastructure, skilled labour, and quality and hygiene culture have been targeted for structural improvements. Several studies have identified a large market for processed foods within India itself; for instance, a study by Rabobank reports that organized food retailing in India has immense potential for growth, as it taps hardly 1% of the market due to low quality of products and lack of distribution. This apart, some important developments occurring in the global food industry are reshaping the supply chains and creating new opportunities. One such development is evolving consumer interest towards Indian ethnic food in many developed countries. This trend has been confirmed by many studies by food research entities. Another visible trend is the growth of private labels in food sector that are collapsing the supply chain and moving in the direction of collaborative procurement process. It is also widely acknowledged that in India, changing lifestyles have been prompting people to look to convenience foods; that food consumers are now better educated and informed; and that consumer behaviours are shifting in ways that translate to opportunities for processed food industry. The eating culture in India and other Asian Countries and the perception of frozen processed foods are slowly changing. Longer working women and western influence on diet and culture have increased consumer demand for frozen food in many urban centres. More liberal economic policies, rising living standards and improved manufacturing and distribution networks have also contributed to a rise in consumer purchasing power in towns and cities across the country. The demand for affordable, easy-to-prepare meals such as frozen ready-meals will continue to attract a potentially large number of consumers in the ever dynamic and fast paced lifestyle. Urban living has also been driving sales of convenient frozen ready meals and easy-to-prepare, convenient-to- store products. This gives tremendous opportunity for companies that are well versed with the International standards of food processing to translate their expertise to reap the benefits for their efforts in developing such products. C. OPPORTUNITIES AND THREATS: Opportunities: * Enormous and relatively untapped market in India, and abroad for Indian ethnic food * Brand growth across all categories * Your management has identified various areas which will drive the Companys growth to reach its vision. * Your company is revamping its food services strategy to cater to as many institutions, restaurants as feasible through increased penetration and reach. Threats: * Aggressive price competition in future from large multinationals intent on market share once the proposed market in India matures * Slow reforms in Food Laws by the government for food processing sector. * Rising input prices of commodities, fuel costs and food inflation. * Cascading indirect taxes. D. SEGMENTWISEOR PRODUCTWISE PERFORMANCE: The Company has only one single primary business segment i.e food and hence the profitability of each segment of business are not applicable to the Company. E. OUTLOOK: The Company has identified the tremendous opportunity in the food industry some years ago and initiated steps to tap the same. The basic plan envisages to leverage the Companys core competence in food process to create infrastructure, develop products that meets consumer expectation and set up infrastructure to create a sustainable food business. We will endeavour to maximize customer satisfaction by first identifying product attributes that are important to the customers and then optimizing them through product research. F. RISK & CONCERNS: Your company is in the process of framing risk management policy which would lay down the process for identification and mitigation of risk. G. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: Your Company has reviewed internal controls and effectiveness. The Company is mainly planning to focus on the following issues: 1) Identify weaknesses and areas of improvements. 2) Compliance with defined policies and processes 3) Safe guarding the tangible and intangible assets. 4) Management of business and operational risk 5) Compliance with applicable statutes. The Audit Committee of the Board will oversee the adequacy of the internal control environment through the regular reviews of the audit findings. H. FINANCIAL PERFORMANCE: The accounts that you find alongwith the Audit Report have been presented on the accrual system of accounting. For instance, revenue is recognised as income as soon as the transaction is recorded in the Companys books even though the actual receipt transpires later. The format of accounting corresponds to the Generally Accepted Accounting Principles in the country. Results of Operations: The total income of the company stood at Rs.31.98 Crores for the year 2009 - 2010. The net loss before taxation stood at Rs.3.47 Crores. The company is planning to increase its capacity utilization and also making efforts to rationalize the costs so that the cost can be reduced substantially. With regard to the Balance Sheet position the networth of the Company is negative. I. HUMAN RESOURCES/INDUSTRIAL RELATIONS: Your Company has during the previous year continued its unstinted record of good Industrial Relations with its employees. The manpower employed in your Company for 2009 - 2010 was 486 Nos., which included executives, staff, probationers, trainees and contract employees. J. CAUTIONARY STATEMENT: Statements in this Management Discussion and Analysis describing the Companys objectives, projections and expectations may be a forward looking statement within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied.