ARCL Organics Ltd Management Discussions

"ANNEXURE A" ANNEXURE TO DIRECTORS REPORT

1. FINANCIAL STATEMENTS

The financial statements of the Company have been prepared in strict compliance with the applicable provisions of the Companies Act, 2013 and in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). These statements present a true and fair view of the Companys financial position, operational results, and cash flows for the reporting period. This document may contain certain statements that are of a forward-looking nature. Such statements are not historical facts but are based on current expectations, assumptions, and projections regarding future events, including but not limited to the Companys financial performance, business strategies, market dynamics, future plans, and growth prospects. Forward-looking statements involve inherent risks and uncertainties that could cause actual outcomes and results to differ materially from those anticipated. These uncertainties may arise from factors such as economic conditions, market trends, changes in regulatory frameworks, technological developments, competitive pressures, supply chain disruptions, and other external variables that are often beyond the Companys control.

While the Company strives to identify and manage risks to the best of its ability, it does not undertake any obligation to publicly update or revise any forward-looking statements in light of new information or future events, unless required by applicable law. Accordingly, these statements should not be interpreted as guarantees of future performance, nor should they be relied upon as definitive indicators of expected outcomes. Readers and stakeholders are advised to exercise appropriate judgment when interpreting such statements and to consider the inherent limitations associated with forward-looking information.

2. MACRO-ECONOMIC OVERVIEW

The Indian economy navigated FY 2023 24 with commendable resilience amid a turbulent global environment. External headwinds, including the prolonged Russia-Ukraine conflict, monetary tightening by advanced economies, and a slowdown in global trade, posed significant challenges. Yet, India managed to maintain macroeconomic stability and demonstrated robust growth, owing to prudent policy interventions, healthy domestic demand, and structural reforms.

The global economy in 2023 24 experienced a moderation in growth. The International Monetary Fund (IMF) projected global GDP growth to slow to around 3.0%, with developed markets such as the U.S. and Eurozone facing heightened recessionary risks. Escalating geopolitical tensions and banking sector stress in the West, notably in the U.S. and Switzerland, spurred volatility in global capital markets. These developments led to risk aversion among global investors, temporarily affecting capital flows to emerging markets, including India. Despite these uncertainties, Indias real GDP growth was estimated at 7.0% in FY 2023 24, maintaining its position as one of the fastest-growing major economies. Key drivers included strong private consumption, government capital expenditure, and steady performance in agriculture and services. The manufacturing sector, though impacted by global demand weakness, showed signs of revival in the second half of the fiscal year. The Reserve Bank of India, in its latest assessments, maintained its FY 2024 25 GDP growth projection at 6.5%, suggesting continued optimism about domestic economic fundamentals. Inflation remained a central concern during the year, particularly in the early quarters. The RBI had cumulatively raised the policy repo rate by 290 basis points from May 2022 through February 2023 to combat inflation. However, as inflationary pressures began to ease largely due to falling commodity and crude oil prices the RBI paused its rate hikes in April 2023 and subsequently cut the repo rate by 25 basis points to 6.25% in December 2024, citing stable inflation and the need to support growth.

CPI Inflation: Declined to 4.83% in April 2024, well within the RBIs tolerance band of 2 6%.

WPI Inflation: Remained in the negative for several months, with a contraction in input prices and global disinflationary trends contributing. Indias merchandise trade deficit narrowed significantly in FY 2023 24, supported by a decline in imports of oil and non-essential goods, alongside a resilient services sector surplus. Trade Deficit (FY 2023 24): USD 240.17 billion, down from USD 264.9 billion in the previous year. Current Account Deficit (CAD): Estimated at 1.2% of GDP, comfortably financed by capital flows. The services sector, particularly IT and business services, remained a bright spot, registering consistent surpluses and contributing to foreign exchange reserves stability. The Indian Rupee remained broadly stable throughout the fiscal year, trading in a controlled range due to proactive RBI interventions and strong fundamentals. Despite intermittent foreign portfolio investment (FPI) outflows influenced by global risk-off sentiment, the rupee was shielded by robust domestic inflows and healthy forex reserves.

Foreign Exchange Reserves: Hovered around USD 580 600 billion, offering a strong buffer. Demat Accounts: Surged to 185.3 million, reflecting deepening financial inclusion and investor participation in equity markets.

The governments focus on infrastructure development remained a cornerstone of economic strategy. Public capital expenditure, particularly in roads, railways, and digital infrastructure, catalyzed private investment and job creation. Private sector investment began showing signs of revival, with announcements in sectors such as renewable energy, electronics manufacturing, and defense. High capacity utilization in manufacturing and production-linked incentive (PLI) schemes spurred corporate confidence. The India Meteorological Department (IMD) forecasted a normal monsoon for the 2024 season, with rainfall expected at 96% of the long-period average. Adequate rainfall is expected to boost kharif crop production, lower food inflation, and support rural demand recovery. This is particularly important as rural India accounts for a large portion of the countrys consumption base.

FY 2024 25 witnessed net FPI outflows in the first half, followed by a return of foreign investors in the latter part of the year. Key influencing factors included U.S. interest rate decisions, global risk appetite, and Indias macroeconomic stability.

Domestic institutional investors (DIIs) and retail investors continued to provide strong market support. Market capitalization at Indian stock exchanges reached new highs, reflecting investor confidence. Despite a record number of demat accounts, active equity participation remains limited to an estimated 3 4% of Indian households, indicating significant potential for market deepening.

3. OPPORTUNITIES

The outlook for the agriculture sector and rural demand in FY 2024 25 has improved significantly, supported by higher Rabi output in the previous season and the Indian

Meteorological Departments forecast of a normal monsoon. These developments are expected to sustain rural consumption and support overall economic activity.

The governments sustained emphasis on capital expenditure, along with capacity utilisation levels continuing to remain above the long-term average, is anticipated to provide momentum to the manufacturing sector. Additionally, the moderation in global commodity prices is likely to reduce input cost pressures and improve margins, further strengthening the investment climate. However, net external demand may remain subdued due to persistent global headwinds, including tightening financial conditions, sluggish global trade, and the continuing geopolitical tensions. The volatility in international financial markets and uncertainty around energy prices continue to pose downside risks to Indias growth outlook.

Taking into account the positive domestic indicators and prevailing external risks, real GDP growth for FY 2024 25 is projected at 6.5%, indicating continued resilience in the Indian economy.

Indias banking sector remains robust, underpinned by strong capital adequacy, high liquidity buffers, improving asset quality, and stable profitability. Gross non-performing assets (GNPA) have declined to multi-year lows, while credit growth remains healthy across retail, services, and industry segments. With better provisioning coverage and prudent risk management practices, the Indian banking system is well-positioned to support economic growth and withstand potential external shocks.

4. THREATS

The Indian chemical industry, though poised for robust growth and global prominence, is faced with several structural and emerging threats that could potentially undermine its long-term sustainability and competitiveness. One of the most significant challenges is the sectors heavy dependence on imported raw materials and intermediates, particularly from China. This dependency not only exposes Indian manufacturers to global supply chain disruptions, price volatility, and geopolitical tensions but also weakens the industrys ability to respond swiftly to fluctuations in demand and cost structures. Any disruptions in global trade routes or diplomatic relations can severely affect production continuity and profit margins. Environmental compliance has also emerged as a critical pressure point. As India strengthens its regulatory framework to align with global standards, chemical manufacturers are grappling with increasingly stringent norms related to effluent discharge, emissions, hazardous waste management, and occupational safety. While these measures are necessary to ensure sustainable development, they also necessitate substantial investments in pollution control infrastructure and compliance systems. For many small and mid-sized companies, meeting these requirements can be financially burdensome, and non-compliance risks shutdowns, penalties, or reputational damage. Another key threat lies in the inadequacy of domestic infrastructure. Poor road and rail connectivity to industrial hubs, congested ports, and a lack of dedicated chemical logistics corridors increase transportation costs and turnaround times, thereby eroding the industrys global competitiveness. Additionally, India still lags behind in establishing integrated chemical parks and clusters with common utilities, which are critical to achieving economies of scale and environmental compliance. The Indian chemical industry is also vulnerable to global economic trends, such as inflation, recessionary cycles, and fluctuations in energy prices. Being an energy-intensive sector, spikes in crude oil and natural gas prices directly impact input costs and can destabilize financial planning. Moreover, the absence of long-term, stable policy frameworks and incentives often creates uncertainty in investment decision-making, especially for capital-intensive specialty chemical projects. Workforce-related issues further compound the threat landscape. There is a growing shortage of technically skilled personnel in chemical process industries, particularly in areas such as R&D, regulatory affairs, and digital process automation. This talent gap hinders innovation and the industrys ability to scale up value-added, technology-driven segments. Finally, global competition continues to intensify. Indian manufacturers face increasing pressure from international players with more advanced technologies, better access to capital, and more favorable operating environments. As multinational corporations consolidate their positions in emerging markets, Indian firms must constantly innovate and upgrade their capabilities to retain market share.

In sum, while Indias chemical industry holds great promise, it must proactively address these multifaceted threats through policy support, investment in infrastructure, environmental stewardship, skill development, and strategic diversification to sustain its growth trajectory and become a resilient global leader.

5. RISKS AND CONCERNS

The chemicals industry in India, while demonstrating significant growth potential, operates within a complex and often volatile landscape marked by a range of risks and concerns that threaten its stability, profitability, and long-term sustainability. One of the most persistent risks is the heavy reliance on imported raw materials and intermediates, particularly from countries like China. This over-dependence creates vulnerabilities in the supply chain, exposing manufacturers to sudden price hikes, export restrictions, and geopolitical tensions.

Any disruption in international trade routes or diplomatic relations can lead to raw material shortages, production delays, and increased input costs. Environmental and regulatory compliance is another major area of concern. With rising environmental awareness and stricter enforcement by Indian regulatory bodies, chemical manufacturers are under increasing pressure to invest in pollution control technologies, waste management systems, and cleaner production methods. While these efforts are essential for sustainable growth, they also entail high compliance costs, especially for small and medium enterprises (SMEs) that often lack the financial and technical resources to meet evolving standards. The threat of regulatory non-compliance includes fines, operational shutdowns, and reputational damage, all of which can adversely impact business continuity. The industry also faces significant infrastructure bottlenecks, including inadequate connectivity to ports, congested road and rail networks, and limited access to integrated industrial zones with shared utilities. These inefficiencies lead to high logistics costs, supply chain delays, and reduced competitiveness in global markets. Furthermore, the lack of well-developed chemical clusters and specialized industrial parks hampers the ability to achieve economies of scale, efficient waste treatment, and regulatory compliance through shared resources. Skilled manpower shortages represent another critical challenge. The sector increasingly requires talent with expertise in chemical engineering, process automation, safety management, and environmental science. However, there is a visible gap between industry requirements and available talent, both in terms of quality and quantity. This talent mismatch restricts innovation, slows down the adoption of advanced technologies, and affects operational efficiency. From a financial standpoint, the industry is exposed to global economic fluctuations, including interest rate volatility, inflation, and energy price spikes. Since chemical production is energy-intensive, sharp increases in the cost of power, gas, or crude derivatives directly impact manufacturing margins. Additionally, the chemicals sector often requires long-term capital investment, and frequent policy changes or lack of clear regulatory direction can deter both domestic and foreign investors. The increasing stringency of global trade and product standards also poses risks, especially for exporters. Many countries have introduced stricter norms related to chemical composition, safety, labelling, and environmental impact. Non-compliance with such regulations may lead to rejection of consignments, penalties, or bans, thereby affecting export revenues and brand credibility.

Finally, public perception and social resistance to chemical plants often arising from environmental concerns, safety fears, or land use conflicts pose reputational and operational risks. Industrial accidents, if not managed properly, can severely damage community trust and result in long legal battles and compensation liabilities.

6. FUTURE OUTLOOK

The future of the chemicals industry in India appears highly promising, driven by a confluence of favorable macroeconomic factors, evolving global dynamics, strong domestic demand, and policy support. Positioned as one of the fastest-growing chemical markets in the world, India is expected to play a pivotal role in reshaping global supply chains, particularly in the specialty chemicals, agrochemicals, and pharmaceutical intermediates segments. With a market size projected to surpass USD 300 billion by 2025 and growing at a CAGR of 9 10%, the Indian chemicals industry is set to emerge as a global manufacturing and export hub. Several factors contribute to this optimistic outlook. The governments push for self-reliance through the "Make in India" and Production Linked Incentive (PLI) schemes has catalyzed fresh investments in chemical manufacturing. Furthermore, India is increasingly seen as a preferred alternative under the "China+1" strategy, as global firms look to de-risk their supply chains from overdependence on China. This strategic repositioning is expected to drive long-term growth and increase foreign direct investment (FDI) inflows into the sector. Domestically, the demand for chemicals is being fueled by strong performance in end-user industries such as agriculture, construction, automotive, textiles, pharmaceuticals, and personal care. The rising middle-class population, urbanization, and a shift towards processed and quality consumer goods are contributing to sustained demand growth across various chemical categories. Specialty chemicals, in particular, are poised for rapid expansion, given their role in delivering customized, high-performance products for niche applications. Sustainability and green chemistry are expected to shape the future of the industry. Indian companies are increasingly investing in bio-based chemicals, eco-friendly formulations, circular economy models, and zero-liquid discharge systems to align with global environmental standards and enhance their export competitiveness. This transition to cleaner and more sustainable practices not only opens access to premium global markets but also ensures long-term regulatory compliance. Technological advancement and digital transformation are also set to redefine operational efficiency. The adoption of Industry 4.0 technologies such as automation, artificial intelligence, data analytics, and predictive maintenance will lead to smarter manufacturing practices, better quality control, and optimized resource utilization. These innovations are expected to make Indian chemical companies more agile, cost-efficient, and quality-conscious. Furthermore, the development of chemical industrial parks, Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs), and integrated infrastructure projects will enhance capacity utilization, reduce production costs, and promote cluster-based development. Such ecosystems are expected to facilitate better logistics, shared utilities, and easier regulatory approvals. However, the growth outlook is not without challenges. The industry must overcome hurdles such as raw material dependency, environmental compliance costs, and skilled manpower shortages. But with the right mix of public-private collaboration, policy reforms, and technology adoption, these risks can be mitigated effectively.

7. GREEN INITIATIVE

Your company took measures to send all documents in electronic mode to the members who have registered their email IDs with the Company / Registrar & Share Transfer Agent, a step towards achieving paperless statutory compliances.

8. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Internal control system adopted aimed at promoting operational efficiencies and emphasizing adherence to the policies adopted by the Board of Directors.

9. CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing your Companys position and expectations may be "forward looking statements" within the meaning of the applicable securities laws and regulations. Results could differ materially from the statements expressed or implied.