Dalmia Refractories Ltd Management Discussions

Industry Overview

In FY 2020-21, all industries including refractories have been severely impacted by the global pandemic. Manufacturing operations were impacted by nationwide lockdown, in phases, particularly in the April to June quarter. Further, projects requiring use of refractories were extended to adapt to the new circumstances brought on by the pandemic.

As per World Refractory Association (WRA), the current refractories market size is around USD 30 billion and is expected to witness an annual growth of more than 4% till 2025. Strong product demand from aerospace, electrical, automotive, glass and cement industries is expected to drive growth of the refractories market globally over the next five years.

Refractories are either considered consumable goods or capital assets in manufacturing processes for steel, iron, cement, non-ferrous metals, glass and other industries. Amongst the aforesaid end use industries, steel & iron dominates, accounting for more than 70% of the overall refractory consumption followed by cement which accounts for nearly 10 % consumption.

Indian Steel Industry

India being the second largest producer of steel is also therefore a significant consumer of refractories. Steel production for the financial year 2020-21 clocked at 103 million tonnes against an installed capacity of 144 million tonnes. In the current year, several large steel manufacturers have announced capacity increase to the tune of additional 50 million tonnes by year 2025 which shall be directly beneficial to Indian refractory industry.

The growth in the Indian steel sector has been driven by domestic availability of raw materials such as ironore and cost-effective labour. Consequently, the steel sector has been a major contributor to Indias manufacturing output.

COVID-19 and the consequent supply chain shocks have forced Indian steel industry to reduce its dependence on Chinese imports. Major steel manufacturers have already announced plans to de-risk their supply chain and reduce dependence on Chinese imports which is bound to give a fillip to Indian refractory manufacturers.

Cement Industry

Indias cement industry is a vital part of its economy. Globally, India ranks as the second largest producer and consumer of cement in the world after China, with an annual capacity totalling to 545 million tonnes per annum (MTPA). The demand for cement is linked with overall economic growth, particularly in the housing and infrastructure sectors.

Indias overall cement production accounted for 294 million tonnes (MT) in FY2020-21. Production is expected to increase by 10% to 12% with capacity utilisation expected to be around 65% in FY2021-22. Government of Indias spending in infrastructure and housing are expected to work as a key growth driver in normalising the demand for cement industry.

COVID-19 had forced the government to announce nationwide lockdown in FY 2020-21 and close borders with other countries. The pandemic has undoubtedly affected the cement production in the country, the impacts of which are seen as the decrease in production and consumption. Although, the pandemic severely impacted the industry, going forward a positive outlook for FY 2021-22 is expected due to the governments thrust towards infrastructure creation such as new highways, affordable housing and rising rural consumption which will be the propeller for growth.

Indian Refractory Industry

The size of Indian refractory industry is estimated at approx. 9,000 Cr, with steel industry being the largest consumer followed by cement, glass, other metals & nonferrous metals. The growing steel industry in India, along with the elevating infrastructure development, is augmenting the demand of refractory materials.

In view of significant rise in demand of its customer segments such as steel, cement, metals, glass & nonferrous, growth of refractory industry is expected to be to the tune of 8% to 10% in the next financial year.

Operations & Financial Performance

The outbreak of COVID-19 pandemic has led to an unprecedented health crisis and has disrupted economic activities and global trade. During the year under review, the Government of India had imposed stringent nationwide lockdowns, in phases, which severely impacted manufacturing activities of Your Company and its customers. Though our plants were allowed to operate under the Essential Services Maintenance Act, 1968, they were subject to strict guidelines laid down by Ministry of Home Affairs. Our customers were affected as demand of consumer goods such as automotive were impacted and infrastructure projects were delayed due to shortage of manpower and resources. These interruptions had affected the operations of Your Company in first half of the financial year.

In Europe, the outbreak of COVID-19 further stressed the sustained weak steel demand. However, our Germany plant was operational with some restrictions and achieved revenue at par to levels of preceding financial year.

Our revenue was 218.76 Cr compared to 290.58 Cr in FY 2019-20 on standalone basis. Net profit for the year reduced to 7.14 Cr in FY 2020-21 from 17.53 Cr in FY 2019-20. Return on net-worth was at 7.8% in FY 2020-21 as compared to 20.6% in FY2019-20, in line with business performance for the year.

The decline in revenue is primarily due to the nationwide lockdown in the April to June quarter and delay in infrastructure and industrial projects requiring additional refractory offtake.

Dalmia-GSB

Your Company acquired GSB Group of Germany, a specialty refractory maker and a global leader in lance production, in early 2019. GSB Group has since been rechristened Dalmia-GSB and has been fully integrated with Dalmia Refractories. With this acquisition, Dalmia Refractories has access to the heart of steel and refractory making belt in Europe and state-of the- art technology to make cleaner steel.

This acquisition allowed Your Company to enhance its footprint in Europe with access to newer technology and talent from Europe.

Increasing International Market Penetration

Through our ongoing sales initiatives, we continuously strive to grow and expand our business in both domestic and international markets. Through focused efforts on international cement markets, Your Company has

increased its customer base which now includes global cement brands. Dalmia Refractories products are being exported to places such as Mexico, Brazil, Argentina, Africa, Middle East, Canada, Spain etc. The company has developed a roadmap till 2025 and plans to strengthen its footprint in future.

Stronger Focus on Services

To give a seamless experience to the customer and to drive growth, Dalmia Refractories has strengthened its service offerings which includes design, application, management and turnkey projects. The company has successfully executed gunning and shotcreting application for several customers in Iron & Cement manufacturing. Increased focus on services has helped us gain competitive advantage during the course of the year.

In the current financial year, Your Company has invested in various site equipment such as advanced shotcreting machines and mixers etc. to provide improved services to its customers.

Impact of COVID-19 on Business Operations

Your Company is relatively well protected from the COVID-19 impact due to the industrialised nature of its products. Even though the raw material supply chain is very much dependent on China, there have only been minor disruptions other than the impact of nationwide lockdown, in phases, in April to June quarter.

Your Companys breadth of products, depth of services and multi-locational manufacturing capabilities makes it one of the preferred suppliers to its customers

FY 2022 Outlook

The Indian economy which was firmly on the path of recovery since Q321 was hit by the unexpected second

wave of COVID-19. That caused a severe strain on healthcare facilities in many parts of the country in the early part of FY 2022.

An increased focus on refractory services has helped Your Company gain competitive advantage during the course of the year

As a silver lining, disruptions to manufacturing units, industrial projects and infrastructure development have been far less severe during the second wave than first wave. Presently, vaccinations are picking up pace, which is supporting faster normalisation of economic activities in India. The long term prospects of Indian economy continue to be promising with various initiatives being taken including implementation of National Infrastructure Pipeline, manufacturing enabled incentive schemes through the Production-Linked Incentive Scheme, and the new labour code, which are likely to promote more investments in short-medium term.

Our customers in Cement sector are on a volume growth path which are driven by governments initiatives such as "Housing for All by 2022" and related infrastructure schemes like ‘Pradhan Mantri Awas Yojnawith enhanced budgetary allocations supporting sector growth. Some of the large cement players have also announced capacity additions from FY 2022 creating a positive outlook for refractory industry in India.

As per the 2021-22 Union Budget, the government has approved an outlay of 1.18 lakh crore for the Ministry of Road Transport and Highways. Further, National Infrastructure Pipeline (NIP) has been expanded to 7,400 projects from 6,835 projects earlier.

Your Company will continue to leverage its technology and manufacturing capabilities, expand its reach in international markets, pursue innovative technologies,

invest in enhancing local high-quality refractory production and actively continue to pursue M&A opportunities both inside and outside of India. Our breadth of products, depth of services and multi-locational manufacturing capabilities makes us one of the preferred suppliers for our customers.

Risks & Opportunities

RISKS

1. Dependence on China for raw material resources

As a single source of most raw materials required for production of refractories, China constitutes a risk as various associated external factors remain out of our control. Due to the natural advantage it enjoys in terms of abundant availability of mineral resources, China continues to be the largest raw material supplier to refractory makers all over the world. To mitigate this risk, Dalmia Refractories has worked towards identifying alternative sources, including own mines located in India. Tests conducted with raw material sourced from these alternative sources have delivered promising results and Your Company is confident it will be able to reduce its dependence on raw material supplies from China.

2. Interruption in supply chain

The financial performance of our business depends on reliable and effective supply chain for raw-materials. Raw material price fluctuations and supply shortages lead to production bottlenecks and additional costs.

Subsequent to COVID-19 disruptions, availability of shipping vessels and containers became a big issue due to increase in demand and intermittent lockdown in various parts of the world. Such shortage of containers has increased the freight cost significantly, which then impacts raw material prices and creates pressure on pricing of products. At Dalmia Refractories Limited, we mitigate this risk by continually strengthening our procurement function by setting up robust processes. A globally networked and experienced team also works to identify supply trends well in advance to enable timely and appropriate action such as procuring raw materials at opportune moments for maximum benefits.

OPPORTUNITIES

1. Government push towards ‘Atmanirbhar Bharat opens new door for Indian manufacturers

COVID-19 has opened up new opportunities in terms of making a new self-reliant India after the shift in focus due to geo-political changes. The entire world including India is now looking for alternatives to de-

risk itself from China-made products and focus more on indigenously manufactured products. Many large manufacturers in India have announced intent to procure from local manufacturers, which has opened new opportunities for Indian refractory manufacturers. At Dalmia Refractories Limited, we are geared up to produce more through optimisation and efficiency of sufficiently available resources in existing plants.

2. Growth in Steel & Cement Sector

Several large steel and cement players in India have announced significant capacity increases from FY 2225 which will boost demand of refractories in coming years. Your Company is keeping a close watch on refractory requirements of steel & cement producers. This will also help mitigate any risks related to volumes.

3. Enhanced International Footprint

The acquisition of GSB Group helped make inroads into European markets for Your Company to sell made- in-India bricks and other refractory products. Our recent product trials there have shown encouraging results and will help build a strong foundation for market share in short and medium term.

Further, our business development efforts in the past year have led to growth beyond India. We have acquired new customers in Mexico, Brazil, Argentina, Africa, Middle East, Canada, Spain etc. The newly acquired customers will give us opportunity to grow globally.

Internal Controls and their Adequacy

The Company has adequate internal financial controls commensurate with its size and nature of business which are reviewed periodically. The internal auditors of the Company conduct regular audits as per approved plan and the Audit Committee reviews periodically the adequacy and effectiveness of internal control systems and takes steps for corrective measures whenever required.

Human Resources

Amid the raging pandemic, Human Resources of the Company has been the backbone of the Company for not

only building a helpful environment for smooth business operations throughout the period characterised by unforeseen disruptions, but also by ensuring safety measures at workplace are in place, and COVID protocols are diligently followed.

The leadership of Your Company strongly believes that its people are of utmost importance. The leadership team remained focussed on the health and wellbeing of all its employees. In order to take every precaution to keep our employees safe during the pandemic, we extended work from home facility wherever possible. We conducted multiple education webinars on Coronavirus Awareness and extended support and assistance through services like feet-on-street and a 24x7 support helpline. We also organised vaccination camps and check-up drives at our units for employees and their families. The use of virtual medium was maximised to connect with stakeholders including trade partners, customers and suppliers.

As on March 31, 2021, Your Company employs a diverse workforce across India & Europe comprising of nearly 400 people.

Financial Performance (Consolidated)

1. Revenue: Revenues during the year stood at 394.68 Cr compared to 450.10 Cr in FY 2019-20

2. Profit Before Tax: Profit before tax reduced to 11.36 Cr from 23.50 Cr in FY 2019-20

3. Net Profit After Tax: Net profit for the year under review reduced to 6.86 Cr from 17.80 Cr in FY2019-20

Financial Ratios (Consolidated)

The details of significant changes in some of the key financial ratios is explained below:

1. Operating Profit Margin: A decrease of 2% in the

Operating Profit Margin in the FY 2020-21

2. Net Profit Margin: A decrease of 2% in the Net Profit Margin in FY 2020-21