Apollo Pipes Ltd Management Discussions.

An overview of the economy

Global economy:

The global economy contracted by 3.3% in CY 2020, as all major economies barring China slipped into recession with COVID-19 induced lockdowns. Advanced Economies (AE) decline of 4.7% was steeper than Emerging Markets (EM) decline of 2.2%. Within the AE complex, the decline in Euro Area of -6.6% was much sharper than that in the US of -3.5%. However within the EMs, Chinas GDP grew 2.3%.

Despite the steep global decline in CY 2020, the impact of decline on global GDP was lower than initially feared primarily due to unprecedented monetary policy support from global central banks and fiscal stimulus from Governments.

Global fiscal stimulus reached ~US$18.6 trillion by March 2021 (23% of GDP) while monetary stimulus by global central banks reached US$16.6 trillion (21% of GDP). Global trade volume (goods and services) contracted by 9.6% in CY 2020 after a modest 1% increase in CY 2019.

The global economy is expected to witness a rebound in 2021 with the International Monetary Fund (IMF) expecting 6% growth. The growth recovery is likely to be led by the US and China. Governments and Central Banks are expected to maintain supportive policies until the recovery is firmly underway.

These estimates depend on future course of the health crisis, the effectiveness of policy actions to limit continuing economic damage, commodity prices, and the adjustment capacity of key economies.

 

(Source: IMF)

Indian economy: Aligned to the decline in global GDP, Indias economic progress was expected to contract. But the decline was lesser than the initial estimates owing to a smart V-shaped recovery as most consumption and industrial indicators were back in positive growth zone in the Q3FY21.

After a contraction in GDP for the first half of FY21 (a negative growth of 24.4% in Q1 and 7.3% in Q2), India recovered to post a positive GDP growth in Q3 at 0.4%, one of the few nations globally to emerge out of recession in such a short time period. As resurgence gained momentum, Indias GDP growth for Q4 of 2020-21 stood at 1.6%.

The Reserve Bank of India (RBI), and the central and state governments provided critical support to the economy during the crisis. The RBI maintained loose monetary policy, cutting repo rates by 115 bps during early CY 2020. To keep funding markets easy, the RBI maintained liquidity surplus through various monetary measures.

The external sector exhibited resilience as current account turned surplus for the first time since 2004, on weaker domestic demand, falling oil prices and strength in Indias services exports. FDI and equity FII flows were strong, driving Indias forex reserves to an all-time high of ~US$580 billion at the end of FY 202021, against ~US$475 billion at the end of FY 2019-20.

In keeping with the uptick in economic activity, GST collection was above the RS. 1 lakh crore mark in the second half of FY21, peaking at RS. 1.23 lakh crore in March 2021.

The agriculture sector, which largely supports the rural economy, remained robust - it registered a growth of 3.0% in FY21(lower than 4.3% growth recorded in FY20).

In view of the economic momentum in Q4 FY21, leading opinion makers had estimated a sharp growth in India GDP for FY22. But the outbreak of the second wave of Covid-19 in India, these estimates have been revised downwards.

Amidst the second wave, the Reserve Bank of India (RBI) announced a Covid package of RS. 50,000 crore for vaccine makers, medical equipment suppliers and hospitals.

The package also included giving funds to Covid positive patients to meet their medical expenses. This package also allowed individual and small borrowers to restructure their loans for up to two years.

The PVC pipes sector PVC pipes are pipes that are produced by extrusion of raw material from polyvinyl chloride and are known for their high tensile strength, ductility, endurance toward extreme temperature conditions, and resistance over corrosion. PVC pipes are lightweight and possess a smooth surface that allows faster flow of water and generates comparatively less friction than pipes made from cast iron or concrete.

They are generally used for the production of sewage pipes and drainage solutions, water mains and irrigation, transportation of drinking water, and manufacture of advanced fire-sprinkler systems.

PVC includes both UPVC (unplasticized polyvinyl chloride) and CPVC (chlorinated polyvinyl chloride) pipes and fittings which have major demand in the market.

The India pipes and fittings market is fragmented with a large number of players competing in the market.

The upsurge in demand for pipes in the irrigation sector and building & construction industry are the major driving factor for Indian PVC pipes market. Moreover, increased focus of the government on rural water management supports the demand for PVC pipes and fittings in India.

Opportunities & prospects:

The Centre is all set to launch a new flagship programme - Jal Jeevan Mission (Urban) - to provide piped water supply and tap connections to all households in cities with less than 100,000 population over the next five years. It aims to provide uniform water supply in all 4,378 urban local bodies with 2.86 crore household tap connections, as well as liquid waste management in 500 AMRUT cities.

Along with the rural segment of Jal Jeevan Mission, this would mean covering all towns and villages, classified as Class II to Class VI towns with population of 5,000 to 100,000 people through piped water supply.

Jal Jeevan Mission (Urban) would be considered an extension of AMRUT. It would work on a Centre-state partnership model with the states sending their annual action plans with specific project proposals and the Centre providing financial support.

About the Company

Apollo Pipes is a key player in the piping solution and water management sector with a strong brand recall in the domestic and international markets of its presence.

Headquartered in Delhi,

India, the Company has plants located at Dadri and Sikanderabad in Uttar Pradesh, at Ahmedabad in Gujrat and Tumkur in Karnataka that manufacture cPVC, PVC, and HDPE pipes & fittings, Solvents and Water storage tanks - one of the widest product basket which caters to multiple applications.

The Company has the largest manufacturing unit at a single location under one roof in North India.

Operational performance:

FY21 was one of uncertain operations as pandemic and the lockdown halted operations for close to a month. The subsequent drop in demand impacted the Companys operations initially. But it recovered smartly in the second half of the year as commercial activity picked up and demand resurfaced. Sales in the second half of the fiscal stood at 24,432 MT - 6.68% higher than the production in the first half of FY21.

During FY21, the Company reinforced its growth prospects. It successfully completed its brownfield manufacturing extensions across facilities located at Dadri, Tumkur, and Sikanderabad.

Even as volumes increased, the Company continued to strengthen its focus on product quality and process efficiency.

During the year, the Company implemented numerous projects to enhance its manufacturing capabilities.

1) Automation solutions

• Shifted CPVC & Plumbing from offline to online packaging

• Introduced semiautomation solutions in tap assembly which enhanced productivity considerably

• Introduced online threading of pipe and socket assembly for fitting accuracy

• Introduced barcoding at the moulding section for product traceability

2) Quality improvements

• Introduced ink Jet printing technology for cPVC pipes

• Increased the frequency of testing of pipes and of belling, threading and filter checking.

• Altered the lining process of pipes for superior lining.

• Introduced new formats and checking points for strengthening the quality commitment.

3) Continuous efforts

• The team institutionalised the concept of analysing daily cost sheets (SAP based) across functions and plants for identifying leakages and taking immediate corrective action.

• Energy management and conservation remained

a high priority for the operations team. The team implemented multiple initiatives to further optimise its energy consumption.

• The team focused on waste reduction and reuse. For this, processes were set up to ensure that rejections were reduced and reused immediately to optimise consumption of virgin material without impacting products overall quality.

Financial performance:

In a year that was particularly uncertain, the Company certainly reported a stellar performance on a wholistic basis.

Despite an operational shutdown extending about a month, and tepid sales for a few weeks thereafter, the Company reported a 27% increase in Revenue from Operations from RS. 408 crore in FY20 to RS. 518 crore in FY21. This jump was contributed by growing sales volumes increase in realisation - Price and a larger proportion of value-added products.

The Company reported improved profits and profitability despite the rising cost of raw materials during the period under review, namely PVC - its critical raw material. EBITDA increased from RS. 56.49 crore in FY20 to RS. 82.66 crore in FY21 while EBITDA margin improved by 211 bps over the previous year.

A decline in interest liability for the year, contributed in growing the Companys Net Profit - it stood at RS. 4.4 crore in FY21 against RS. 6.1 crore in FY20.

Networth increased from RS. 306.52 crore as on March 31,2020 to RS. 351.47 crore as on March 31,2021 owing to an increase in ploughing of business surplus.

The Company invested RS. 61.8 crore in enhancing its manufacturing capabilities (brownfield expansions) which contributed to the increase in Fixed Assets from RS. 184.60 crore as on March 31,2020 to RS. 228.69 crore as on March 31,2021. The investment in its Raipur facility in FY21 - RS. 7.09 crore - will be capitalised in FY22 when the unit commences operations.

During the year, the Company repaid RS. 27.20 crore debt which reduced the Gross debt from RS. 90.07 crore as on March 31,2020 to RS. 62.87 crore as on March 31,2021. The Company successfully maintained its working capital cycle from an average of 58 days in FY20 to about 58 days in FY21.

In an otherwise parched business ecosystem, the Company successfully improved business liquidity - Net Cash flow from Operations improved from RS. 12 crore in FY20 to RS. 39 crore in FY21

Human resource

Apollo Pipes recognises that Its team is the cornerstone to its success. It is the people who ensure that business strategies get transformed into business performance.

To take care of its people, the Company has created an 11-memberHRteamfor grooming and guiding its 500+ strong workforce.

The team has the onus of keeping the most treasured capital of the Company engaged, motivated and focused on its strategic objectives.

FY21 tested the ability of the HR team in crisis management.

* And they did a commendable I job in managing the health I crisis that engulfed the nation.

I The Company stood behind it human asset during this tough time and shall always continue its unconditional support towards the employee. Following are the key HR initiatives during this s Covid-19 period to keep them motivated and engaged:-

; Welfare

Special Leaves with wages were given to Covid-effected employees. This benefit was extended further in case any family member of the employee also got affected. These special leaves are over and above the work from home policy during the lockdown period.

Total Employee Engagement

• Initiated proactive communication with employees on Covid- related protocols to create I awareness which would help them to remain safe

• Emphasized on Kaizen Culture by implementing Reward and Recognition scheme for Shop Floor workers/supervisors across all the plants.

• Drove the Operational Excellence initiative across the organisation by launching total productive management, a journey towards Excellence, OEE and Lean Manufacturing.

Reward and Recognition

• Implemented the annual appraisal process for FY20 in December 2020 and disbursed the amounts to the team

Launched the Employee Stock Option Scheme, issued grant letters to all the employees who were covered under the ESOP scheme.

Information Technology

Digital transformation helps an organisation to keep up with emerging customer demands and therefore survive in the face of the future. It allows companies to compete better in an economic environment that is constantly changing in response to technology evolutions.

The post-pandemic situation we live in is moving towards a digital fever mentality. Companies who will succeed will be those that create smart experiences and customer journeys that facilitate and/or complement peoples lives.

To emerge as one among that group , Apollo Pipes is working passionately on its digital transformation journey which is platformed on five pillars

• From Decentralised System to integrated System

• Four Core Capabilities of Informationisation

1. IT

2. Data

3. Process

4. Change Project

• From Passive Response to Collaborative Construction

• from a vicious IT circle to a virtuous IT circle

• From Outsourcing Implementation to Outsourcing & SelfResearch Balance

During FY21, the IT team invested RS. 60 lakh in important business-relevant solutions to streamline business processes for which the Company:

• Rolled out all the required business processes to the new operating facilities at Raipur & Pune --Procurement to pay,

Order to Cash, STO, Quality

• Process Integration (E-Waybill, E-Invoice, GST, TCS, ODN) to minimize process cycle time and enhance data accuracy with minimum human intervention.

• Strengthened the IT connectivity between multiple locations (including Shifted network to optical fibre and servers relocation to the Companys new datacenter) for virtual monitoring and seamless connectivity for smooth business operations.

• Rolled out the Channel Management System (CMS-Customer) on all platform like (Web, iOS & Android) with multiple role like (Sales Employee, Marketing Employee, Customers) - this solution provides information visibility between company, employee & customers on real time.

Going forward, the IT team has planned to implement important project which are expected to Go-Live in FY22. They include

• Adding new features to the Channel Management System (CMS) making it more interactive..

• Adding new modules to the SAP solution for better monitoring of operations.

• Undertake HRMS- comprising PMS, Training, Employee Claim & Expense management modules

• Enhancing IT Data security

• Data leakage prevention

• Burn Record Protection

• Unite AD Domain Management

• Security Log management

Industrial Control Systems

Security

Internal control and its adequacy

In an increasingly dynamic and competitive business landscape, a robust internal control mechanism is an essential business imperative.

It is critical in ensuring that the organisation functions in an ethical manner, complies with all legal and regulatory requirements, and meets the generally accepted principles of good corporate governance.

The Companys internal control mechanism aims to safeguard its assets as well as authorise record and report all transactions correctly and on time.

These control processes facilitate in safeguarding the organisations assets, preventing and detecting frauds and errors, ensuring accurate and complete accounting and timely preparation of reliable financial information.

The control mechanism ensures that the manual and automated processes for transaction approval and recording are adequately and effectively reviewed. It ensures compliance with various policies, practices and statutes in keeping with the organisations growth and business complexity.

The internal control framework constantly monitors and assesses all aspects of risks associated with current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks. The senior management team has constituted a body of internal auditors who perform periodic audits. The internal auditors independently evaluate the adequacy of internal controls and simultaneously audit the transactions. Independence of the audit and compliance is ensured by direct reporting of internal auditors to the Audit Committee of the Board.

Risk management

Apollo Pipes is cognizant of the reality that risks, along with their mitigation, are critical for business sustainability in an ever-changing business ecosystem in which it operates. Risk management is focused on making the business model stronger and ensuring that profitable business growth becomes sustainable.

The Company has adopted a comprehensive and integrated risk appraisal, mitigation and management process. It encompasses strategy and operations, and seeks to identify proactively, address, and mitigate the existing and the emerging risks. The multilayered risk management framework involves all key managers of the Company to actively engage in the process.