Century Enka Ltd Management Discussions.

1. OVERALL REVIEW

FY2020-21 was a challenging year for the entire world. The Covid-19 induced lockdowns resulted in two successive quarters of contraction of 24.4% (Q1 FY21) and 7.3% (Q2 FY21) in Indian GDP. Fear and uncertainty further led to extreme volatility in raw material costs where Caprolactam prices dipped to a historical low. Government, both central and state, and the Reserve Bank of India (RBI) implemented measures to revive the economy. The measures helped in sharp recovery of the economy in H2 FY21. Q3 FY21 recorded GDP growth of 0.4% and Q4 FY21 is expected to be even better.

2. INDUSTRY STRUCTURE, DEVELOPMENT, THREATS, OPPORTUNITIES & OUTLOOK

Industry status:

Within the synthetic yarn segment of the textile industry, the Company produces Nylon Tyre Cord Fabric (NTCF) for the tyre industry, High Tenacity Yarn (HTY) for technical textiles and Nylon Filament Yarn (NFY) for the apparel industry. The Company is the largest producer of nylon yarn in India. and quality leader in all the product categories.

NTCF is used as reinforcement material in Bias/Cross ply tyres, which are primarily used in truck, bus, two - three wheelers, and off-the-road (OTR) vehicles used for mining, forestry, farming, heavy earth moving.

Some of the structural changes and favourable macros revitalised the tyre industry. Demand for Bias Tyres improved because of the following reasons:

a) Tyre imports brought under restricted category resulting in steep drop in tyre imports

b) Anti-dumping duty on Truck and Bus Radials (TBR) Tyre imports from China resulted in Medium and Heavy Commercial Vehicle (MHCV) category cheap Radial Tyres getting replaced by domestic Bias Tyres

c) Good monsoon, pro-farm Government policies prompted bumper demand in tractor (farm) tyres. Tractor sale in FY 21 witnessed 25% growth

d) Lower interest rates and infrastructure push helped in revival of demand for commercial vehicles and OTR vehicles

After the nationwide lockdown was lifted, tyre demand initially from the replacement market and later on from both Original Equipment Manufacturer (OEM) and the replacement market, led to sharp revival in NTCF demand. Lower imports due to shipping disturbances and revival in local demand in China also boosted NTCF demand in India.

Nylon Filament Yarn (NFY) is mainly used in sarees, dupattas, dress materials and ethnic wears. NFY in India has witnessed strong traction in recent years. It is a preferred yarn for ethnic dress materials and sarees having zari due to superior comfort, stretch, softness, touch, and easy dyeing. With increase in affordability and setting up of new technically advanced machinery, NFY is gaining fast acceptance in body-hugging apparels, work wear, active and functional wear. The industry, however, is dominated by small unorganised players with weak financials and with players who opportunistically switch between nylon and polyester. The industry suffers from low margins because of intense competition amongst domestic players and competition from imports. Dependence on imports and volatility in raw material prices also impacts the margins. After the lockdowns were relaxed, pent-up demand and empty pipelines resulted in robust demand in H2 FY21. Like NTCF, lower imports due to shipping disturbances and revival in local demand in China gave NFY demand a renewed thrust in India.

Company Performance:

Robust demand for tyres both in replacement and OEM segment helped the Company to post the highest-ever production and sales volumes in H2 FY21. Even in a truncated year due to lockdown, NTCF volume was higher by 6% in FY21. The Company enjoys good standing with almost all the reputable tyre companies in India. The Company benchmarks its products with the best international counterparts and improves its products continuously. The Company is also working with the customers to develop products for import substitution and increasing its share in value-added products. These initiatives will help the Company in improving margins and maintaining its market share. After sunset review, the Government turned down the Directorate General of Trade Remedies (DGTR)’s recommendation of Anti-Dumping Duty (ADD) and it did not impose ADD on imports from China.

In NFY, the Company is a market leader with over 25% market share. After the lockdown was lifted, NFY demand picked up late, around September 2020. Pent-up demand and empty pipelines have helped record NFY sales volume in H2 FY21. Volume for full year was, however, lower by 28%. In case of NFY, too, the DGTR’s recommendation of ADD was turned down by the Government and it did not impose ADD on imports from China, Taiwan, South Korea, and Thailand.

To improve margins and to reduce competitive intensity, the Company plans to increase its capacity of Draw Texturing to add value to Partially Oriented Yarn (POY). The Company is also making efforts to develop export market for NFY made from Green Polymer.

The Covid-19 outbreak has caused significant disturbances. The Company’s operation was impacted due to suspension of operations at both the sites in March 2020, pursuant to the Government’s lockdown directives. The operations were recommenced gradually at the Bharuch site by the end of April 2020 and the Pune site by the end of May 2020. The Company took all the precautions to safeguard its employees, which included training on Covid-19 appropriate behaviour, ensuring social distancing at workplace, appropriate change in shift schedules, work from home wherever possible, frequent sanitisation, vaccination camp for eligible employees and most importantly mass rapid antigen tests to identify asymptomatic cases. With support and dedication of all its employees, the Company achieved credible operating performance even in these difficult times.

The Company has considered the possible impact of Covid-19 in preparation of the above results. The impact of the global health pandemic may be different from what was estimated as on date of approval of these financial results and the Company will continue to closely monitor any material changes to future economic conditions.

During the year, the Company, through in-house re-engineering, converted one of the idle polyester POY machine into High Tenacity Nylon Yarn (HTY) machine for Technical Textiles. Products from the machine are well established in the market.

After the relaxation of the lockdown, the Company’s key raw material (Caprolactam) prices witnessed sharp volatility in Q1 FY21 and prices corrected from US$ 1,318/MT in February 20 to US$ 955/MT in April 20. This sharp correction in raw material prices resulted in stock loss. After the lifting of the lockdown, like other commodities, prices of Caprolactam also moved up significantly and touched US$ 1,975/MT in March 21. The Company was able to pass on the increase in raw material cost to its customers.

Company Outlook:

Fiscal incentives (support to MSME, Production link incentive, lower income tax, and others) and monetary policy response (liquidity injection and interest rates cuts) are expected to boost growth and encourage capital investments. Favourable capital market is also supporting raising of risk capital. These, coupled with low-base effect, are expected to help in getting to the GDP growth of 10-12% in FY22. Key risk to this, however, will be the adverse effect of the second wave of Covid-19.

The Company is pursuing CAPEX of Rs. 309 Crs to strengthen its competitive position in the tyre reinforcement market, to modernise the plant and augment the capacity by around 30%.

Based on the growth outlook, the Company is optimistic of good demand for NTCF.

In case of NFY, the Company anticipates that localised lockdowns will hurt the demand in H1, and demand to improve in H2 FY22, based on the progress in vaccination and return to normalcy.

3. RIS K MANAGEMENT

Risk management is one of the most important business aspects in the current economic environment in which the Company is operating. Its objective is to identify, monitor and take mitigation measures on a timely basis with respect to the unforeseen events that may be potential business risks.

The Company has a robust Risk Management Policy and Procedure in place for effective identification and monitoring of risks and implementation of mitigation plans. The Risk Management Committee reviews and monitors the identified risks and mitigation plans at regular intervals. Some of the risks identified and analysed by the management are as under:

(a) Dependency on imports of raw material having high volatility in prices coupled with foreign currency fluctuations:

Supplies from Gujarat State Fertiliser and Chemicals Limited (GSFC), the lone operating domestic producer of Caprolactam, cannot meet the total demand of the domestic industry. Hence, the nylon industry is dependent on imports. This results in higher inventory carrying cost and a risk of additional cost due to currency fluctuations. The Company is continuously working on increasing its supplier base to reduce cost and lead time and ensure uninterrupted supplies. The Company simultaneously reviews its policies and practices to adjust the inventory levels of both raw materials and finished goods in line with the changing demand. It is done to reduce the impact of volatility in raw material prices, while ensuring availability of enough stock for optimum production plans and supply of finished goods. The Company continuously engages with the suppliers to reduce the impact of volatility in raw material prices. The Company is in continuous dialogue with Fertilizer and Checmicals Travancore Limited (FACT), which plans to restart its Caprolactam closed plant, to increase local procurement. The Company covers its foreign currency exposures in forward market based on the business cycle to minimise the impact of currency fluctuations.

(b) High Energy Cost:

The Company is continuously working on various options, including power purchase under open access to reduce power cost.

It operates captive power plants as and when cost of power generation through fossil fuel and / or gas becomes viable.

The Company has made investments in renewable energy generation equipment to reduce power cost. It also regularly engages experts to generate ideas for energy saving and makes regular investments to conserve energy.

(c) Technology Risk:

Technology obsolescence may adversely impact the production process and technical support from original equipment manufacturers. The Company regularly makes investments in upgrading the technology to mitigate this risk and for efficiency improvement.

(d) Accident Risk:

The Company has a dedicated team for safety which reviews practices and processes regularly. All Personal Protective Equipment (PPEs) and fire fighting equipment are examined on regular basis for their condition and adequacy. The Company engages external experts for regular audits for fire safety, among other such risks and acts on the recommendations of these experts.

The Audit Committee and the Board are apprised of the significant risks and mitigation efforts made by the management in its quarterly meetings.

4. SAFETY, HEALTH, ENVIRONMENT AND SUSTAINABILITY

Safety:

Safety is one of the key focus areas of the Company and it strives to make the plant operations safe. The Company, to ensure effectiveness of safety management, got the fire safety system, electricity system, job safety analysis, Hazard Identification and Risk Assessment (HIRA) and Integrated Management System (IMS) surveillance audited by external agencies. The Company also conducted various safety awareness programmes and trainings, such as basic fire-fighting, electrical safety among others. Regular CAPEX is also incurred to modernise the equipment to improve the safety.

Health:

The Company actively pursues healthy and conducive work environment for all employees. Medical services are made accessible to all employees at both the plant sites. Periodical health check-ups are conducted across the workforce as per the Factories Act, 1948. The Company arranges periodic preventive health check-ups for its staff and their spouses. Adequate personal protective equipment are also provided.

Emphasis is given to cleanliness, personal hygiene and good housekeeping. Mechanical means of control are used such as dust extraction, fume exhaust system and noise absorbers.

In times of the Covid-19 pandemic, special emphasis was given on training to impart Covid-19 appropriate behaviour. Provisions were made for body temperature checks, social distancing, PPEs and testing.

Occupational Health and Safety Management System of Pune and Bharuch sites are certified ISO 45001:2018.

Environment and Sustainability:

The Company has well-organised Environment Management System certified for 14001:2015.

Strict monitoring is done for effluent treatment, stack emission and ambient air. Whether these are within the stipulated parameters set by State Pollution Control Board is regularly checked. Government-approved laboratories monitor these on quarterly intervals.

Some of the measures for environment protection and sustainability are:

a) Disposing waste generation in compliance with State Pollution Control Board guidelines

b) Undertaking various energy-saving projects. The Energy Conservation Cell of the Company monitors their effectiveness and efficiency

c) Adopting advanced energy conservation approach for waste heat recovery and vapour absorption

d) Using biomass for major part of steam generation for production

e) Installing solar panels for power generation, lighting and borewell water pump

f) Using fully equipped effluent treatment plant (ETP) to treat waste water with tertiary treatment facility to make the water suitable for recycling. CAPEX is planned to further improve quality of recycled water

g) Conducting presentation and review on awareness of optimum use of raw water

h) Recycling nylon waste to convert into Caprolactam, the basic raw material, and then to Nylon-6 chips, known as Green Polymer for internal consumption and exports

i) Reusing old paper tubes and packing material

j) Giving major thrust to reduce manufacturing waste and on recycle, reuse, co- process, and eco-friendly disposal. To reduce the disposal quantity of ETP solid waste, the Company has installed Peddle Dryer to dry the ETP sludge and reduce the disposal waste quantity by about 80% to 85%

k) Converting green waste into manure for use of gardening

l) Celebrating 5th June as Tree Plantation Day by planting tree saplings at both the plant sites to promote awareness on pollution and importance of environment conservation

m) Replacing refrigerants having Ozone Depleting Substance (ODS) with non-ODS refrigerants

n) NFY produced by the Company is certified by OEKO TEX S-100, REACH and GRS. NTCF produced by the Company is certified by REACH

5. HUMAN RESOURCE AND INDUSTRIAL RELATIONS

The employees of the Company are its core strength and they are the key driver to achieve the business performance and goal. The Company focuses on knowledge and skill upgradation and provides a conducive work environment.

The Company has well-defined HR policies in place, which enable it to build a strong performance-oriented culture, a sense of belongingness and commitment to work.

The Company has various welfare schemes for employees and their families such as healthcare and term insurance policies.

The industrial relations at both the sites of the Company are cordial. During the year, the Company concluded long-term wage settlement for its Pune plant peacefully.

The strength of the permanent employees of the Company as on 31st March 2021 was 1656

6. INTERNAL CONTROL SYSTEM AND ITS ADEQUACY

The Company has a robust internal control system commensurate with the size and scale of its operations. Roles and responsibilities are clearly defined and assigned, along with well-structured authorisation matrix. Standard operating procedures are designed to provide a reasonable assurance and are well supported by ERP(SAP) system. Apart from self-monitoring of internal controls, Internal Auditors have also expressed their satisfaction on the adequacy of the internal control systems.

The Audit Committee takes due cognisance of the observations made by the auditors and gives their suggestions for improvement. The suggestions of the Audit Committee are also considered for further strengthening of the control systems.

7. INFORMATION TECHNOLOGY

The Company has always been on the forefront in terms of leveraging technology for the business. This year too, the Company has continued to invest in digital technologies. These investments have been used to improve the operational productivity and aid in better decision making. The information security and data privacy continue to remain the Company’s focus area and make necessary investments to secure its systems and information assets. Adequate identity and data protection solutions were deployed to enable safe and secure working of employees from anywhere, while protecting the intellectual property of the Company. This was a substantial enabler that helped the company when the COVID crisis struck and employees were asked to work from home. The secure VPN gateway to the Company’s datacentres ensured that all essential applications were accessible to employees. Deployment of collaboration solutions allows seamlessly working with internal and external stakeholders.

The Company increased coverage of modern workplace solutions based on cloud solutions like Office365. The investments made over the years to modernize the Company’s digital environment paid good dividends during these tough times.

8. FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

I . Highlights

Rs. / Lacs

2020-21 2019-20
Net Revenue from Operations 1,22,082 1,42,348
Profit before Depreciation, 14,237 13,544
Financial Cost, Exceptional Items and Tax
Depreciation 4,088 4,550
Finance Cost 155 349
Exceptional Item 819 -
Taxation (Net) 2,083 (908)
Net Profit after Tax 7,092 9,553
Earnings Per Share (Rs. ) 32.46 43.72
Cash Earnings Per Share (Rs.) 52.80 51.37

a. Net Revenue from Operations:

Net revenue for the year is lower by 14.2%. Sales in terms of volume (MT) is lower by about 13.2%. Lower revenue for the year reflects the lower volumes in case of NFY and lower realisations.

b. Profit before Depreciation, Financial Cost, Exceptional Item and Tax (PBIDT):

PBIDT is higher on account of better margins over raw material cost.

c. Finance Cost:

Finance cost is lower due to lower borrowings.

d. Exceptional Item:

Exceptional item in current year represent impairment loss on idle polyester machinery.

II. Key Financial Ratios:

Ratio 2020-21 2019-20 Explanation for change
Interest Coverage 91.79 38.81 Higher PBIDT and lower debt in current year
Debt/Equity Ratio 0.01 0.02 Lower debt due to scheduled repayments and prepayment
Operating Profit Margin (On PBIT excl. income on investments) 6.81% 5.28% Better margin
Net Profit Margin 5.74% 6.71% Higher profit in previous year due to write-back of deferred tax of Rs. 3,120 lacs as the Company opted for reduced rate of tax.

III. Return on Net Worth:

Ratio 2020-21 2019-20 Explanation for change
Return on Net Worth 6.44 9.32% Higher profit in previous year due to write-back of deferred tax of Rs. 3,120 lacs as the Company opted for reduced rate of tax.

9. CORPORATE SOCIAL RESPONSIBILITY (CSR)

The Company’s primary focus under Corporate Social Responsibility was on education and skill development, rural infrastructure, healthcare and disaster management. The Company addresses the local needs and does the necessary work for the development of local areas.

1. Education and Skill Development:

a. Poshanvahini Project

The Company continued participating in the project Poshanvahini (assistance) launched by the Collector, Narmada district (Gujarat), to strengthen the Anganwadi centres by engaging an assistant at each centre. The Company sponsored 50 assistants for the project and around 500 children benefited from it.

b. School Infrastructure

O Provided financial support for construction of classrooms in Government primary school situated in a tribal area near the Bharuch site

O Constructed overhead shed on pathway in the school in vicinity of the Bharuch site to protect children from heat and monsoon

O Provided 30 laptops to teachers to a school situated in Maharashtra. This helped in conducting the school sessions virtually during the pandemic

O Facilitated Wi-Fi installation on a school premises in Maharashtra, benefitting 3,147 students and 179 teachers

O Distributed uniforms and stationery to 232 school students in Maharashtra. Financially supported computer lab and interactive board fees

O Extended financial support to meet the shortfall in school fees arising due to the pandemic in a school located in the vicinity of the Bharuch site.

c. Vocational Training

The Company continued providing financial support to meet part of the cost of teaching staff and workshop consumables of a vocational training institute.

2. Health, Hygiene and Medical Programmes:

a. Medical Equipment:

Provided medical equipment to the Hospital situated in Jhagadia, near Bharuch site (Gujarat). This hospital is the lifeline of the tribal area and served around 45,000 people.

b. Eye Check-up and Cataract Operation Camp:

Eye check-up and cataract operation camp was organised in collaboration with Seva Rural Hospital, Jhagadia, for the villagers residing near the Bharuch site.

c. Toilet Construction:

Constructed 85 toilets in the nearby villages of the Bharuch site, benefitting around 350 villagers.

d. Drinking Water Facility:

Provided water cooler and R.O. system in two Government Hospitals in the vicinity of the Bharuch site, benefitting about 200 people per day.

e. Women Health & Hygiene:

Distributed 12,500 sanitary napkins to 625 women of four nearby villages of the Bharuch site and explained the usage benefit.

f. Homoeopathic Dispensary:

Homoeopathic dispensary has been set up for the benefit of locals surrounding the Pune site.

g. Medical Aid:

O Provided ambulance to an organisation (Pune, Maharashtra) carrying out the Movable Hospital facilities in the villages near the Pune site

O Provided 25 smart watches to on-duty police personnel during the lockdown to monitor their health

O Provided wheelchairs, weighing scale, walking sticks, masks to feeble people.

3. Rural Infrastructure:

a. Floodlight:

Provided six floodlight towers and 25 LEDs in five villages near the Bharuch site. The initiative impacted around 4,000 people in tribal area.

b. Plain Cement Concrete (PCC) Road Construction:

Constructed 717 meter of PCC road in two villages in the vicinity of the Bharuch site, benefitting around 800 people.

c. Drainage Line Construction:

Constructed drainage line near Primary School of Umalla village, Bharuch district (Gujarat). This facilitated a safe passage to the villagers and school children, particularly during monsoon, aiding around 200 people and 400 school children.

4. Disaster Management:

The Company has been at the forefront to provide relief measures to overcome the Covid-19 pandemic effect. It distributed PPE kits, food kits, grocery kits in 29 surrounding villages of Pune and Bharuch site and quarantine centres. More than 2,200 families were the beneficiaries of this initiative. It also extended financial support for building a quarantine centre at MIDC, Pune.

10. CAUTIONARY STATEMENT

The report contains forward looking statements describing expectations, estimates, plans or words, with similar meaning. The Company’s actual results may differ from those projected, important factors that could make the difference to the Company operations include prices of raw material, finished goods and energy costs, changes in government regulations, economic developments, globally and within India and labour negotiations. The Company cannot guarantee that the assumptions and estimates in the ‘forward looking statements’ are accurate or will be realised.