Apcotex Industries Ltd Management Discussions

GLOBAL ECONOMIC OVERVIEW

The swift escalation of trade tensions and extremely high levels of policy uncertainty are expected to have a resaonable impact on global economic activity. The global economy is entering a phase of slower growth, influenced by protectionist trade policies and rising inflation. The projected global growth is expected to stabilize at 2.7% annually. While this marks a return to pre-pandemic growth rates, it remains insufficient to drive sustained development, particularly for emerging markets and developing economies (EMDEs), which contribute 60% of global growth. This stabilization is attributed to easing inflation and supportive monetary policies. However, growth is insufficient to offset the cumulative impact of previous economic shocks. EMDEs are experiencing slower per capita income growth, with many low-income countries unlikely to achieve middle-income status by mid-century without significant policy reforms. Key risks include heightened policy uncertainty, adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Regional growth in East Asia is projected to slow due to weak domestic demand in China. In South Asia, India is expected to drive regional growth, with a growth rate of 6.2% in 2025-26.

Managing downside risks dominate the outlook for most organizations. Ratcheting up a trade war, along with even more elevated trade policy uncertainty, could further reduce near and long-term growth, while eroded policy buffers could weaken resilience to future shocks. Divergent and rapidly shifting policy stances or deteriorating sentiment could trigger additional repricing of assets beyond what took place after the announcement of sweeping US tariffs on April 2, 2025 and sharp adjustments in foreign exchange rates and capital flows, especially for economies already facing debt distress. Broader financial instability may ensue, including damage to the international monetary system. On the upside, a deescalation from current tariff rates and new trade agreements providing clarity and stability in trade policies could lift global growth.

INDIAN ECONOMIC OVERVIEW

India is projected to remain the fastest-growing large economy for 2025-26, reaffirming its dominance in the global economic landscape. Our countrys economy is expected to expand by 6.2% in 2025 and 6.3% in 2026, outpacing many of its global counterparts.

Indias growth could be affected by trade tariffs from various channels including: 1) slowdown in global growth due to lower US and China growth; 2) a further delay in Indias private corporate capex recovery due to the risk of China offloading excess capacity in the manufacturing sector; and 3) greater depreciation pressure on Chinas RMB having implications for Indias net goods trade balance. However, we believe global policy shifts could offer new opportunities and strengthen the case for China + 1 supply chain shifts to India in the medium term.

Our Country will be able maintain potential real GDP growth of 6-6.5% YoY over the next two years, making it worlds third largest consumer market in 2026 and third-largest economy by 2027 (after US and China). We expect Indias nominal GDP to increase from USD 4 trillion in FY25E to USD 6 trillion by FY30E. We believe Indias potential growth could benefit from manufacturing and export push, increased services exports, and digitalization, leading to improvement in productivity and efficiency gains.

While the long-term growth prospects of India are fairly strong, the recent issues at our western border remain a threat to our economic growth for this year especailly if they escalate over the course of the next few weeks and months.

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, coatings, 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 due to high volatility in the prices of crude oil as well as its e^downstream products.

The global synthetic rubber market is expected to grow at a CAGR of over 4.9% 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.

Asia Pacific leads production of the global synthetic rubber industry with the automobile sector leading the growth. With the rise in population, large manufacturing base of the automobile industry 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. Your company has filed an application for Anti-dumping duty on NBR, the case has been initiated and outcome of the same in expected in next few months.

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 7.5-8% due to population growth, consumer trends, and an increase in per capita GDP.

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 region. Nitrile latex for gloves is a new emulsion polymer that your company has developed through internal R&D. Towards the end of FY2022- 23, your Company had commissioned a 50,000 MTPA facility at Valia Plant for manufacturing Nitrile Latex. Even though, in FY 2023-24 there was a deep post-pandemic downturn in the global glove industry due to high inventories and excess capacities, in FY 2024-25, with the corrections in inventory levels the performance of the industry has improved. Your company supplies majorily to South East Asian and South Asian Glove manufacturers. The glove sector is expected to experience a demand recovery this year, driven by inventory rebuilding, increased demand from the US due to higher tariffs on Chinese glove makers, and rising average selling prices. Given the double digit growth expected in Nitrile Latex, we expect that the capacity utilizations of the excess capacities post the pandemic to increase slowly. 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 is around 60-65%, in FY 2024-25, led by growth in Paper and PaperboardConstruction, Textiles, and Tyre cord industries.

OPERATIONS DURING THE FINANCIAL YEAR 2023-24.

The Company has achieved total revenue of Rs 1403cr during the financial year 2023-24, a 24% growth compared to Rs 1132cr in the preceding financial year. The Company exported its products worth Rs 449cr during the financial year, approximately 33% of the total revenue. The Company has registered an impressive volume growth of 16% over the previous financial year.

Profit before tax is up by 2% to Rs 76.25cr as compared to Rs 74.52cr during the previous financial year. Margins were subdued due to the market dynamics of Nitrile Latex and SBR latex in Carpet and Paper. Further, in the current year Depreciation charges have gone up by 32% due to new projects capitalised, Finance Cost has gone up by 11% due to the term loan taken and increased working capital requirements.

During FY 2024-25, Operating EBITDA is up by 9.5% to Rs 124.76cr from Rs 113.95cr during the previous financial year. Profit after tax is Rs 54,07cr, as compared to Rs 53.88cr during the previous financial year.

The Balance Sheet of the Company is healthy with long-term debt of Rs 93.61cr, reasonable working capital limits and cash/ liquid investments valued at Rs 106.00cr based on NAV as on 31^st March, 2025.

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 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 continued its Digital transformation journey and implemented tools to improve customer experience and R&D project management.

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

OUTLOOK

The Company expects financial year 2025-26 to be a year of opportunities and challenges. Towards the end of the financial year, there was an uptick in the demand of Gloves for our South East Asian customers compared to the previous year and the first half of FY2024-25, due to increased demand from US which was perhaps a result of high tariffs on Chinese glove manufacturers. We have seen improvement in price realisation in the last quarter as well asbetter capacity utilisation of the Nitrile Latex plant which has reached 75% in the last couple of months of the financial year. We expect this momentum to continue in the upcoming financial year. Due to high tariff on Chinese gloves, there is a possible risk of dumping latexes in other geographies, which may impact price realisations for Apcotex. In addition to this, for NBR we have filed an application for Anti-dumping duty in FY 2024-25. The outcome of this application is expected in FY 2025-26. Our other latexes

i.e. 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 around 60% during the year. Despite the short-term challenges, your company is optimistic about its prospects with all the steps taken over the last few years. 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 one-third of our sales coming from exports.

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 has planed investments in a new R&D building, to add thurst to the development of 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 2025-26 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 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 of Directors 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:

The manufacturing processes have been standardised now and the focus will be on increasing the breadth of customer approvals as quickly as possible and to ensure the capacity utilization moves to 100% as soon as possible.

The major risk in this busines 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. In the meanwhile, all costs are being re-visited and all efforts are being made to make this business more competitive. Your company is also exploring repurposing some of the assets of the Nitrile Latex plant for other products, if required.

2. Procurement Risk:

Major risks arise from a few key raw materials like Styrene, Acrylonitrile and Butadiene, that are used in several of our products. Butadiene is used in most of your Companys products and your Company is the largest buyer of Butadiene in India. 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. In case of Styerene Butadiane Latex, focus will be on filling capacity with high value-added 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 rexecute 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.

For the last few years we have had peaceful and healthy industrial relations at both our plants. We have successfully signed a 4 years agreement with the workmen of the Valia

Plant. In Taloja, we have completed the process with 60% of the workmen and we hope to close the same for the remaining workmen in Taloja in FY 2025-26.

SIGNIFICANT CHANGE IN OF KEY FINANCIAL RATIOS

There is no significant change in the following key financial ratios during the financial year, as compared to that of previous financial year.

During the financial year under review, your Company has not availed any additional term loan. The Profit after tax has remained flat due to increase in depreciation by Rs 10.04cr and finance cost by Rs 1,71cr.

CHANGE IN RETURN ON NET WORTH

The return on net-worth for the financial year 2024-25 is 9.8% as compared to 10.3% for the preceding financial year. 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.