Apcotex Industries Ltd Management Discussions

GLOBAL ECONOMIC OVERVIEW

There are signs that the global economic outlook has started to improve, even though growth remains modest. The impact of tighter monetary conditions continues, especially in housing and credit markets, but global activity is proving relatively resilient. Inflation is falling faster than initially projected and private sector confidence is improving. Supply and demand imbalances in labour markets are easing, with unemployment remaining at or close to record lows globally. Real incomes have begun to improve as inflation moderates and trade growth has turned positive. Developments continue to diverge across countries, with softer outcomes in many advanced economies, especially in Europe, offset by strong growth in the United States and many emerging market economies.

The baseline forecast is for the world economy to continue growing at 3.2% during 2024 and 2025, at the same pace as 2023. A slight acceleration for advanced economies,—where growth is expected to rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025,—will be offset by a modest slowdown in emerging market and developing economies from 4.3% in 2023 to 4.2% in 2024 and 2025. The forecast for global growth five years from now,—at 3.1%—is at its lowest in decades. Global inflation is estimated to decline steadily, from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. Core inflation is generally projected to decline more gradually.

Risks to the global outlook are now broadly balanced. On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza, could, along with persistent core inflation where labor markets are still tight, raise interest rate expectations and reduce asset prices. Another medium-term risk is ocean freight delays and inflated rates due to the Red Sea crisis. On the upside, looser fiscal policy than necessary and assumed in projections could raise economic activity in the short term, although risking more costly policy adjustment later on. Inflation could fall faster than expected amid further gains in labor force participation, allowing central banks to bring easing plans forward. Artificial intelligence and stronger structural reforms than anticipated could spur productivity. As the global economy approaches a soft landing, the near-term priority for central banks is to ensure that inflation touches down smoothly, by neither easing policies prematurely nor delaying too long.

Trends such as global warming, green energy, sustainability and digital adoption will continue to affect countries and industries. Some will be positively impacted by these changes while others will find it challenging. Overall, while there are several short to medium term concerns, we believe there are several opportunities as well that can be exploited by companies for the longer term.

INDIAN ECONOMIC OVERVIEW

Our overall outlook for the Indian economy remains positive. At 6.8%, India is the fastest growing large economy. After a better-than-expected 7.6% this fiscal, Indias real GDP growth will likely moderate to 6.8% in fiscal 2025. The transmission of the rate hikes effected by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) between May 2022 and February 2023 is likely to weigh on demand next fiscal. On the other hand, regulatory actions to tame unsecured lending will have a bearing on credit growth. A lower fiscal deficit will mean the fiscal impulse to growth will be curtailed. But the nature of spending will provide some support to the investment cycle and rural incomes. Uneven economic growth for key trade partners and an escalation of the ongoing Red Sea crisis can be a drag on exports. That said, some factors will continue to underpin growth next fiscal. Continued disinflation will support the purchasing power of consumers. This assumes a spell of normal monsoon in 2024, which can lift agricultural growth on a low base, and a gradual pick-up in private sector capex will make investment growth more broad- based. Net-net, amid the interplay of these factors, India will retain its position as the fastest growing large economy.

Interestingly, the next seven fiscals (2025-2031) should see the Indian economy crossing the $ 5 trillion mark and inching closer to $ 7 trillion. A projected average expansion of 6.7% in this period will make India the third-largest economy in the world and lift per capita income to the upper middle-income category by 2031.

EMULSION POLYMER INDUSTRY AND CURRENT SCENARIO

Your Company is one of the leading producers of emulsion polymer products in India, namely Synthetic Latexes (various grades of Carboxylated Styrene Butadiene Latex, Styrene Acrylic Latex, Vinyl Pyridine Latex and Nitrile Latex) and Synthetic Rubber (Nitrile Butadiene Rubber, Nitrile Polyblends, NBR Powder and High Styrene Rubber). The Company has one of the broadest ranges of emulsion polymer products in India and caters to a wide range of industries. Your Companys Synthetic Latex products are used for paper and paperboard coating, carpet backing, construction, technical textiles, textile finishing, tyre cord dipping, paints, gloves and a few other specialty applications. Various grades of Synthetic Rubber find application in products such as footwear, automotive components, rice rolls, moulded items, v-belts, conveyor belts, hoses, etc. The Companys major raw materials are petrochemical products, and its business could be vulnerable to high volatility in the prices of crude oil as well as its downstream products.

The global synthetic rubber market is expected to grow at a CAGR of over 5% over the next 5 years. The market is mainly driven by the tyre segment, the largest end-use segment of synthetic rubber, followed by automotive. Some synthetic

rubbers with significant strength are replacing metal parts in vehicles. This reduces the weight of the vehicle and increases fuel efficiency without compromising performance. This growth projection is largely dependent on the Chinese economy which has been facing sever headwinds over the last few quarters.

The trend of reducing greenhouse gas emissions in vehicles has also increased synthetic rubber demand in the automotive industry. In terms of volume and value, the Asia Pacific region is anticipated to experience the highest rise in synthetic rubber use. Indian consumption of synthetic rubber is expected to increase at a CAGR of 6% over the next five years and hence India needs additional capacity in the future. In addition, synthetic rubber demand comes from the manufacturing of footwear, sports goods, and other components.

Similarly, synthetic latexes like Styrene-Butadiene latex, Styrene Acrylics, Pure Acrylics, VAM latexes, Nitrile latex, etc. are also expected to grow globally at an average CAGR of 5-7%. The major applications are paper coating, paints, carpet backing, construction, gloves, textiles and adhesives..

In India, growth in demand is expected to be extremely strong at 8-10% due to population growth, consumer trends, and an increase in per capita GDP. Apcotex has one of the broadest ranges of specialty synthetic emulsion polymers and adds new grades and products every year.

Your Company, with its specialty grades of rubbers, latexes, powders and polyblends, is well-positioned to cater to the growing demand in India and the nearby regions of Middle East, Africa and Souteast Asia. Nitrile latex for gloves is a new emulsion polymer developed through internal R&D. It was successfully scaled up in FY 2020-21 and is currently only manufactured by your Company in India. During the year 2022-23, your Company had commissioned a 50,000 MTPA facility at the Valia plant for manufacturing Nitrile Latex which is scalable to 80,000 MTPA. Even though, in FY 202324 there was a deep post-pandemic downturn in the global glove industry due to high inventories and excess capacities, the performance of the industry expected to turn the next few quarters. Your company had also commissioned a 35,000 MT Latex plant at its Taloja facility towards the end of FY 2022-23 and the utilization of that plant has been better than expected, especially led by growth in export markets in Carpet, Construction and Tyre cord industries.

Asia Pacific leads production of the global synthetic rubber industry with the automobile sector leading the growth. With the rise in population, a large manufacturing base of the automobile and rubber industries and the availability of competitive labour, India offers excellent opportunities for synthetic rubber product manufacturers. With increasing R&D investments backed by strong infrastructure, your Company is a leader in specialty rubber products (i.e. Nitrile Butadiene Rubber and High Styrene Rubber). The Chinese slowdown has impacted the supply-demand dynamics in the NBR industry and the margins have been under pressure for most of the year. The company is taking several steps including several cost reduction ideas.

OPERATIONS DURING THE FINANCIAL YEAR 2023-24.

The Company has achieved total revenue of 1,13,227 Lakhs during the financial year 2023-24, a 4% growth compared to 1,08,722 Lakhs in the preceding financial year. The Company exported its products worth 34,053 Lakhs during the financial year, approximately 30% of the total revenue. The Company has registered an impressive volume growth of 28% over the previous financial year.

Profit before tax is down by 49% to 7,452 Lakhs as compared to 14,551 Lakhs during the previous financial year, mainly on account of lower margins due to market dynamics in NBR, Nitrile Latex and the Paper industry. Further, in the current year Depreciation charges have gone up significantly due to new expansion projects, Finance Cost has increased due to the term loan taken for new expansion projects and increased working capital requirements.

During financial year 2023-24, Operating EBITDA is down by 28% to 11,395 Lakhs from 15,852 Lakhs during the previous financial year. Profit after tax is down by 50% to 5,388 Lakhs, as compared to 10,794 Lakhs during the previous financial year.

The Balance Sheet of the Company is healthy with long-term debt of 12,476 Lakhs, reasonable working capital cycle and cash/liquid investments valued at 11,111 Lakhs based on NAV as on 31st March, 2024.

The Company has also completed a rebranding exercise in order to more effectively communicate what Apcotex stands for, both internally and externally. As we embark on this new chapter in our journey, we look forward to a time of growth, innovation, and collaboration.

The Company has appointed Chief of Research and ^Development and Chief of Human Resources during the year, there by further strengthening the senior management team.

Apcotex believes that moving towards environmentally friendly processes and products, focusing on high levels on governance and growing equitably, are all imperative in todays context. We have recently embarked on our ESG journey. The ESG framework is based on three pillars; Product Stewardship, Stakeholders Delight and Responsible Business. Together all three pillars support our core purpose of using science responsibly for our planet, society and stakeholders. Over the next 10 years, your Company has set short, medium, and long-term targets on several KPIs such as increasing green energy consumption, reducing waste, reducing energy consumption/MT, reducing water consumption/MT, planting trees at our plant sites, etc. We will also work with our vendors and customers to reduce GHG emissions across the supply chain.

During the last year, your Company undertook Phase 1 of a Digital transformation exercise with the help of a boutique consulting firm and defined some of the digital strategies to be implemented over the next few years. As part of Phase 2, your company will be implementing several tools in this financial year to improve customer experience, better manage R&D projects and increase efficiencies through an S&OP tool.

Apcotex Industries was awarded the Best Governance Award (Super Category) at the Indian Family Business Awards by Money Control. For the second year in a row, your Company is also on the Forbes list of "Forbes Asia Best Under A Billion 2023". During the year, the Valia Plant has been awarded Excellence in consistent TPM Commitment Award by Japan Institute of Plant Maintenance (JIPM).

Under the more challenging market environment, your Directors consider Companys performance as satisfactory.

OUTLOOK

The Company expects financial year 2024-25 to be a challenging year due to a few reasons. The Gloves industry is still going through a deep downturn due to large excess inventories created in the last few years due to the pandemic. This, coupled with more capacities of Gloves and Nitrile Latex, has resulted in significantly lower margins than anticipated in the short term and will have an impact on margins till the demand-supply dynamics imrpove again. In addition to this, against imported competition for our synthetic rubber products, in FY 2022-23, the higher margins we enjoyed due to tight markets and higher cost of ocean freight has returned to normalcy. On the other hand SB latex, Styrene Acrylic and VP latex product grades have seen an impressive growth this year and it is expected that this momentum will continue going forward. Volumes from new capacities have reached 30% - 50% durig the year. Despite the short-term challenges, your company is optimistic about its prospects with all the steps taken over the last few quarters. Business volumes across most of its product groups have been strong through the year and this is expected to continue in the new financial year. The company is also well-diversified in terms of end applications as well as geographies with more than 30% of our sales coming from outside India.

The Company will continue to look for opportunities in new adjacent products as well as opportunities for inorganic growth.

There is a continuous thrust from the management to develop a strong R&D and technical service team to develop new products, explore new applications and understand better the changing customer needs. The Company expects to capitalize on our strong base and develop newer value added products for our customers.

With the Companys continuous endeavour to introduce new products and improve efficiencies and performance, your Directors view the prospects for the financial year 2024-25 with cautious optimism.

RISKS AND CONCERNS

The Company has laid down a well-defined Risk Management Framework covering the risk, risk exposure, potential impact and risk mitigation process. Plant Risks are identified by all process owners which is discussed with the HOD and then taken to the Plant Risk Committee for their consideration. After evaluation of the Risk by the Plant Risk Committee, same is placed before the Apex Risk Committee and thereafter before Risk Management Committee of the Board. Major risks identified by the plants, functions and senior management are systematically addressed through a quantified risk assessment process and mitigating actions are discussed and reviewed twice a year. These are also discussed at the meetings of the Risk Management Apex Committee, Audit Committee, Risk Management Committee and the Board of Directors of the Company.

The Companys Apex Risk Management Committee, Plant Risk Committees, and Risk Management Committee of the Board, periodically review the risks in the organization, identify new risk areas, develop action plans and monitor and report the compliance and effectiveness of the policy and procedure to the Audit Committee and the Board.

The Audit Committee and the Board review the risks and suggest steps to be taken to control and mitigate the same through a properly defined framework.

The Companys Board of Directors perceives the following risks as current high risks areas:

1. New Plant Risk - Nitrile Latex:

Delays in approvals of product manufactured from new plant may impact budgeted sales for this financial year. To mitigate this risk, focus will be on obtaining customer approvals as quickly as possible for the products manufactured in the new plant and to ensure the new capacity is filled as soon as possible.

The major risk in this business currently is margins which are largely market driven and at the current stage significantly lower than pre-pandemic levels. This was not anticipated earlier and in the medium-term is expected to normalize. To mitigate this risk, we are exploring repurposing the Nitrile Latex capacity for other products, if required.

2. Procurement Risk:

Major risks arise from a few key raw materials like Styrene, Acrylonitrile and Butadiene, amongst others, that are used in several of our products. Butadiene is used in most of our products. It is currently available from limited manufacturers in the country. If there is an issue with the supply of Butadiene on account of an unplanned shutdown taken by a supplier, production of most of our products may be affected adversely.

To mitigate this risk, we have business relationships with multiple suppliers and keep an adequate inventory and pipeline of Butadiene. The Company also has the option to import Butadiene with some lead time, if required.

3. Competition Risk:

Excess Capacity and inventory of Nitrile Latex globally and excess capacity of Styrene Butadiane Latexes in the domestic market may impact volumes and margins in short term.

To mitigate this risk, in case of Nitrile Latex, focus will be on filling capacity with positive contribution and ensuring new capacity is filled over 18-24 months. In case of Styerene Butadiane Latex, focus will be on filling capacity with high contribution products, maintaining domestic market share and increasing the footprint in export markets.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Internal checks and controls covering operations of the Company are in place and are constantly being improved upon. Adequate systems exist to safeguard Companys assets through insurance on reinstatement basis and maintenance of proper records. The company has well-defined procedures to execute financial transactions.

Internal audit is being conducted by an independent firm of Chartered Accountants. The internal auditor monitors and evaluates the efficiency and adequacy of internal control systems in the organisation, its compliance and its effectiveness with operating systems, accounting procedures and policies of the Company. Based on the observations of the internal auditor, the process owners undertake the corrective actions and improvements in their respective areas. Significant audit observations and corrective actions thereupon are presented to the Audit Committee.

The Partners of both, Statutory Auditor and Internal Auditor attend all the Audit Committee meetings.

DEVELOPMENT OF HUMAN RESOURCE / INDUSTRIAL RELATIONS

Your Company believes that its employees are its core strength and accordingly development of people and providing a best-in-class work environment is a key priority for the organization to drive business objectives and goals. Robust HR processes and policies along with Digital HR tools are in place, which enables building a stronger performance culture and at the same time developing current and future leaders. Furthermore, to strengthen the HR team, the Company has appointed a new Chief of Human Resources during the year.

For the last few years we have had peaceful and healthy industrial relations at both our plants. In FY 2024-25, agreements at both our plants are up for renewal. We hope to amicably sign both agreements for another 3-4 years.

SIGNIFICANT CHANGE IN OF KEY FINANCIAL RATIOS

There is significant change in the key financial ratios during the financial year, as compared to that of previous financial year.

The Operating EBITDA has decreased on account of the lower margins in NBR, Nitrile Latex and Paper product groups due to market dynamics. Further, Profit after tax has decreased on account of increased depreciation and finance costs. This has affected profitability ratios and net worth ratios. During the financial year under review, your Company has not availed any additional term loan.

CHANGE IN RETURN ON NET WORTH

The return on net-worth for the financial year 2023-24 is 10.3% as compared to 22.7% for the preceding financial year mainly due to 2 major projects commissioned towards the end of FY 2022-23 and lower profits in FY 2023-24.

CAUTIONARY STATEMENT

Statement in this Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the companys operations include raw material availability and prices, cyclical demand, movements in companys principal markets, changes in Government regulations, tax regimes, economic developments within and outside India and other incidental factors.