MANAGEMENT DISCUSSION AND ANALYSIS 2015

“HPPL is a business with purpose . . .”

We are a technology based, service oriented, manufacturing company. We provide custom-designed packaging materials for our customers and for the ultimate consumer of their products.

It is HPPL’s belief that good ethics make good business sense. We are a business with purpose — to positively contribute to the society in which we operate and not do any act which diverts from this purpose. We believe in continuous improvement and innovation.

All this is done by the People engaged in the business — their motivation, knowledge, commitment and loyalty to the cause is developed and secured. Our Suppliers and supporters are our Partners to the cause. Our Shareholders, benefit from the above objects which secure long term maximization of value.

“. . . in a year of sluggish market growth, we took a big step forward . . .”

30th January, 2015 is a key milestone date in our history. On this date we completed the acquisition of 100% of the equity shares of Positive Packaging Industries Ltd. India (Positive), making HPPL a leader in the consumer packaging sector in the wider Asia-Pacifi c-African region (excluding Japan).

Our consolidated net sales in Y 2015 moved up to Rs. 2,010 crores from Rs. 1,214 crores in Y 2014 – a growth jump of 65% (2015 sales include the results of Positive, from 31st January, 2015).

Consolidated EPS moved up to Rs. 10.58 per share from Rs.9.09 in the brvious year (excluding exceptional and extraordinary income in both years).

The decrease in the Standalone PAT is mainly due to interest costs on borrowings taken to finance the acquisition of Positive.

Standalone HPPL

Standalone sales for HPPL moved up from Rs.1,124 cr to Rs. 1,141 cr., a value growth of 1.5% resulting from a combination of volume growth in this period of 6.5% and a reduction in selling prices (due to the fall in raw material prices driven by falling crude oil prices).

Below normal monsoon for the second successive year, had an adverse impact on rural demand. Coupled with drought like conditions in some areas, we also had unseasonal rains in some parts of the country, impacting agriculture. Growth in Urban demand for fast moving consumer goods (FMCG) was also sluggish. Experts pegged overall growth at 6% only. The pharma sector, a key customer, also experienced weak sales growth in 2015.

Our established strategy of continued work on customer service, innovation and market expansion helped us to maintain and grow our key customer partnerships and also expand our customer base.

Our sales were sbrad over a vast range of custom designed packaging material structures and forms for a large diversified range of branded products – from foods to pharma, from personal care to pesticides, from beverages to beauty, from biscuits to batteries and from confectionery to condoms, to name a few. Sales resbrsented utilisation of a wide range of technologies – from gravure printing to flexo to offset to digital, from shrink sleeves to wrap arounds to wet strength to brssure sensitive labels, tube laminates to specialty pouches and from the most modern forms of registered hotmelts to cold seals, to give an overview.

„Imagination is everything. It is the brview of lifeÊs coming attractions.

If you want your children to be intelligent, read them fairy tales. If you want them to be more intelligent, read them more fairy tales.‰

Albert Einstein

The HPPL creativity program, called NASP (New Applications, Structures and Products/Processes) has become an entrenched part of our culture.

The first NASP objective is to create new business through finding new applications and markets for existing structures and technology processes. The second objective is to introduce new packaging products and structures and technology processes for new applications and markets. The third objective is to offer new technically superior solutions which add value to a brand through packaging improvements, or, provide new solutions which offer a cost advantage without compromising performance.

Hence, NASP is about (a) marketing existing packaging products to new customers, (b) creating new or improved packaging products for our existing customers, and (c) taking new products to new markets and customers.

Hence, the NASP exercise creates new business, but as importantly, it also protects or improves existing business shares from customers.

We map the sales of NASP products introduced using a three year cycle. During Y 2015 NASP sales over the consolidated business comprised 27% of total sales – a significant proportion.

In Y2015, our products were recognized by distinguished industry bodies, and were awarded the ERA (European Rotogravure Association) packaging award and ten India Stars. We also had many opportunities to receive our most cherished recognition

– feedback in form of letters and awards from happy customers.

Customers were made aware of the combined capabilities of HPPL, Positive and Webtech through innovation events, oneto- one communication on specific solutions as well as participation in well attended national and international packaging exhibitions.

We followed up on our well established “small is beautiful” strategy. We are fortunate in having amongst our customers, select, entrebrneurial, innovative, quality conscious and consumer focused start ups. In general, the smaller FMCG players have witnessed faster growth. We will continue to actively develop strong relationships with such customers.

Related entities

As mentioned in the last Annual Report, acquisition of Positive Packaging Industries Ltd. India was completed in January, 2015. A culture of innovation, a competent team and a strong customer base — all enhance our strength in the market place.

Webtech, the 51% owned subsidiary of HPPL is the leader in India in high end brssure sensitive label for the Pharmaceuticals sector and to important customers in Agro-chemicals, Lubes, and FMCG. Webtech strongly adds to HPPL’s portfolio – both in terms of clientele and product offerings.

OPERATIONS REVIEW (standalone HPPL)

Sales Revenues and Market Commentary

Net Sales grew by 1.5% to Rs. 114,059 lac in Y 2015 from Rs. 112,428 lac in the brvious year.

Other Income

For Y 2015, Other Income was Rs. 1,273 lac against Rs. 923 lac for Y 2014.

Dividend income grew from Rs. 651 lac in 2014 to Rs. 887 lac in 2015.

Other Interest rose to Rs. 201 lac in Y 2015 from Rs. 15 lacs in Y 2014 . Miscellaneous income increased to Rs. 162 lac from Rs. 140 lac for Y 2014.

Value Addition

During Y 2015, value addition (VA) improved in absolute terms to Rs. 34,069 lac from Rs. 30,077 lac in 2014. Despite drop in selling prices, margins improved due to benign raw material prices and better product mix.

Expenditure

Total expenses, excluding raw material input costs and before debrciation and financial expenses, in Y 2015 were Rs.23,079 lac or 20.1% of net sales, as against Rs.21,008 lac or 18.7% of net sales the brvious year.

To analyse key elements:

Power and fuel expenses dropped from Rs. 3,617 lac in Y 2014 to Rs. 3,132 lac in Y 2015 - from 3.2% of net sales to 2.7% of net sales.

Personnel expenses increased by 16.0% to Rs. 9,755 lac in Y 2015 from Rs. 8406 lac in Y 2014. As a% to net sales, it increased from 7.5% in Y 2014 to 8.6% in Y 2015. Payout for Y 2015 includes differential bonus amounting to Rs. 293 lac for the period April 2014 to December 2015 in line with the provisions of the amended law.

Administration and Sales expenses were Rs. 5,596 lac in Y 2015 compared to Rs. 4,990 lac for the brvious year. Under this expense head, selling & distribution expenses were at Rs. 2,258 lac in 2015 compared to Rs. 2,170 lac for the brvious year.

Administration expenses amounted to Rs. 3,338 lacs compared to Rs. 2,820 lac in Y 2014. The rise in Administration and Sales expenses includes impact of Rs. 292 lac being professional, legal & other expenses incurred on acquisition of Positive Packaging Industries Limited.

Debrciation

Debrciation for Y 2015 was Rs. 3,935 lac compared to Rs. 3,554 lac for Y 2014, an increase of 10.7% . Debrciation of Rs. 185 lac on account of assets whose useful life is already exhausted on January 1, 2015 has been adjusted against General Reserve pursuant to adoption of estimated useful life of fixed assets as stipulated by Schedule II of Companies Act, 2013. [Refer Note 3(b) to the Accounts].

Finance cost at Rs. 2,517 lac was mainly driven by interest of Rs. 2,503 Lac on 7% Unsecured Non convertible debentures issued to Huhtalux s. a.r.l. for acquisition of Positive.

PBT, Tax, PAT, Cash Profi t

Profit before tax and exceptional and extraordinary income was r 6,848 lac in Y 2015 compared to r 7,509 lac in Y 2014 .

Provision for taxation rose to r 1,937 lac from Rs. 1,674 lac for Y 2014 .

Net Profit after tax for Y 2015 was Rs. 4,911 lac for Y 2015 compared to Rs.6,462 lac for Y2014.

Cash Profit i.e Profit after tax but before debrciation was Rs. 8,846 lac against Rs. 10,016 lac for the brvious year.

Earnings Per Share

Earnings per share excluding exceptional and extraordinary income was Rs. 6.75 per share compared to Rs. 8.79 per share for the brvious year. Cash earnings per share excluding exceptional and extraordinary income was Rs. 12.17 per share against Rs. 14.15 per share for the brvious year.

Dividend

The dividend on equity shares has been maintained at 140% (r 2.80 per share). This will absorb Rs. 2,450 lac (Rs. 2,443 lac for 2014) including an amount of Rs. 414 lac (Rs. 407 lac for 2014) towards dividend distribution tax.

Share Capital

Paid up Equity Capital of the company at the end of Y 2015 remained at Rs. 1,454 lac -- same as at the end of Y 2014.

Reserves & Surplus

At end Y 2015, Reserves and Surplus stood at Rs. 57,232 lac against Rs. 54,893 lac at the end of 2014.

Book value per share stands increased to Rs. 80.33 from Rs. 77.11 last year.

Borrowings

Long term borrowings at the end of 2015 largely comprises Rs. 38,500 lacs of 7% Unsecured Non-Convertible Debentures issued to Huhtalux S.a.r.l. on private placement basis. The Debentures are due for redemption on January 27, 2020.

Debt equity ratio (excluding revaluation reserve) as on 31st December, 2015 was at 0.68:1.

Capital Expenditure and Fixed Assets

During Y 2015, the company added Rs.2,462 lac to its gross block. Capital work in progress as at 31st Dec 2015 was Rs. 336 lac compared to Rs. 573 lac as at 31st Dec 2014.

Inventory

Inventories dropped to Rs. 8,308 lac at the end of Y 2015 against Rs. 9,409 lac at the end of Y 2014. Accordingly, holding period dropped to 26 days from 31 days for Y 2014.

Debtors

At the end of Y 2015, Sundry Debtors stood at Rs. 21,748 lacs against Rs. 21,839 lac at the end of Y 2014. Debtors at the end of Y 2015, rebrsent 69 days of sale against 71 days in 2014.

Current Liabilities

Sundry Creditors for raw materials at the end of Y 2015 amount to Rs. 15,302 lac against Rs. 15,611 lac at the end of Y 2014.

Trade creditors rebrsent 49 days sales (51 days for the brvious year). Other liabilities at Rs. 7,151 lacs (Rs. 3,223 lacs for 2014) majorly comprise Rs. 2,790 lac of Retention maney payable to the erstwhile shareholders of Positive Packaging Industries Ltd and Rs. 1,207 lac of Interest on debentures (accrued but not due).

Loans & Advances

Loans and Advances of Rs. 2,226 lac (Rs. 3,518 lac in 2014) largely comprise balances and deposits with Customs, Excise and Sales Tax Authorities, Advance Income Tax (net of provision) and MAT Credit entitlement.

Cash Flow From Operations

During the current year, cash flow from operations amounted to Rs. 15,481 lac against Rs. 8,870 lac in 2014.

Return on Capital Employed

With an EBIT of Rs. 6,848 lac and an average capital employed of Rs. 80,435 lac, the ROCE is 8.6%.

Return on Net Worth

With a Profit after Tax of Rs. 4,911 lac and an average Net Worth of Rs. 57,517 lac, the RONW is 8.4%.

Positive Packaging Industries Ltd. became a 100% owned subsidiary of HPPL wef 30th January 2015. During the period 31st January, 2015 to 31st December, 2015 Positive recorded sales of r 82,644 lac with EBIT of Besides, 5,656 lac, PBT of r 4,324 lac and PAT of Rs. 2,438 lac. Positive derives a significant proportion of its turnover from exports to Africa accounting for a significant value, hence the impact of the slowdown in Africa was more keenly felt. However, there are some early positive signs of a return to growth in sales to the Region.

Webtech Lables Pvt. Ltd. ended Y 2015 with sales of Rs 9,404 lac against Rs. 9,006 lac for Y 2014 reflecting a growth of 4.4%.

Slower growth was influenced by the overall slowdown in the economy, disruptive rains that affected south-based customers and FDA warnings which forced several of our pharma customers to go slow. Lower growth in the sector increased price competition. PAT dropped marginally from Rs.389 lac to r 367 lac.

Consolidated net sales for Y 2015 moved up to Rs. 200,975 lac from Rs. 121,434 lac in Y 2014 – a growth jump of 65%. Consolidated

EBIT increased to Rs. 15,600 lac from Rs. 8,445 lac in Y 2014 whereas PBT increased to Rs. 11,563 lac from Rs. 8,135 lac in Y 2014 and PAT increased to Rs. 7,873 lac from Rs. 6,851 lac in Y 2014. EPS increased to Rs. 10.58 per share from r 9.09 per share.

Awards and Recognition

The Company won 10 India Star Awards during the year besides the ERA Packaging Gravure Award 2015.

INTERNAL CONTROLS

It is the management’s responsibility to establish and maintain appropriate controls over financial reporting. Controls are aimed at providing reasonable assurance that external reports and statements are in accordance with applicable accounting principles.

Internal controls mandate that records are maintained to faithfully reflect transactions as they occur and disposition of assets. Besides, recordings should permit brparation of financial statements as per Generally Accepted Accounting Principles and under proper authority, protection of company assets, and timely detection and brvention of unauthorized activities designed to acquire/dispose of company assets.

The Audit Committee supervises the work of Internal Audit. Scope of work and coverage are periodically reviewed and revised depending on specific issues that have been identified.

RISK MANAGEMENT

HPPL is a growing organization with a nationwide footprint and significant exports. Risks arise and evolve over different dimensions. Operations, businesses and supply chains plants and branch offices are always on the lookout for opportunities with entrebrneurial zeal. Managing risk while creating value is a tough balancing act that requires the support of a strong framework.

HPPL follows the Enterprise Risk management (ERM) framework. At the heart of the ERM framework is the globally accepted COSO backbone – however, necessary customization is done to suit HPPL’s unique business needs.

Key risks in the overall bouquet include product pricing, growth and market share, raw material availability and cost, energy availability and cost, employee attrition, exchange rate management and overall environment.

Intensity and frequency of risk monitoring depends on the context with a stress on sustainable, long-term solutions. The board periodically assesses various facets of risk.

Judicious buying and a focussed view enable the right calls to be taken on raw material buying. Long term relationships with suppliers within the country and overseas ensure fair prices and timely supplies.

Inherent strengths of the company are well known – however, further mitigation on the price risk front comes from innovation and developments through NASP.

Drop in oil prices help buying countries while sellers suffer. Consequently, demand growth has suffered in our export markets whose economies are dependent on oil and commodity exports.

PEOPLE

“It is people who face and overcome challenges. Their approach, knowledge, commitment and actions are what finally delivers. An open hands on culture, which involves and empowers, which believes in sharing and training, and inculcates pride in knowledge.

All this is our philosophy. We need to continuously ensure that it is also our practice.”

Our practice of continued training of our people at all levels and across functional areas gained in importance. Special focus continued on Safety, Hygiene and 5S initiatives. Remote locations continue to maintain several in house activities for the families which has further helped in knitting closer bonds of oneness amongst the plant teams.

Finally

Integration between HPPL and Positive is proceeding as planned at a furious pace.

In the push for profitable growth, the company continues to look for organic and inorganic opportunities.

Increase in consumption of foods / beverages, personal products and soaps / detergents is a given.

Minor blips, occasional slowdowns, altered consumption patterns and change in mix are a fact of life.

Passion for excellence in packaging, in-built resilience, geographic sbrad, a committed workforce and, above all, trust of the customer provide a strong base to delight the customer and confidence to look at the future more optimistically despite the challenges and uncertainties.

Caution:

The report may contain forward looking statements. Views are based on customers’ expectations and demand projections in the public domain as seen today. Macro- and micro-economic factors impact demand for FMCG products which in turn drive demand for flexible packaging. Currency fluctuations, interest rate changes, competing products, customer resistance to new offerings, changes in economic laws and so on may result in actual outcomes differing materially from projections.