GLOBAL ECONOMY
The global economy began its journey in 2022 with a weaker position
than estimated, which is partly attributable to the threats from new COVID-19 variants
from across the world, along with politically charged wars in Europe. Throughout 2021 and
in January 2022, the world witnessed higher energy prices, disruption in supply chains and
notably high global inflation. While the impact of COVID-19 was smoothened out globally on
account of rapid vaccination drives and effective policy mechanisms, the war in Ukraine
since February 2022 triggered a costly humanitarian crisis that is continuing to
contribute to a significant slowdown in global growth and adding to inflation.
Resultantly, fuel and food prices have increased rapidly, hitting vulnerable populations
in low-income countries the hardest. Currently, the global growth is projected to slow
down from an estimated 6.1 percent in 2021 to 3.6 % in 2022 and 2023, which is 0.8
and 0.2 % points lower for 2022 and 2023 than projected in January.[1]
REAL GDP GROWTH PROJECTIONS
(H IN CRORE)
|
2021 |
2022 |
2023 |
| WORLD |
5.6% |
4.5% |
3.2% |
| Australia |
3.8% |
4.1% |
3.0% |
| Canada |
4.8% |
3.9% |
2.8% |
| Euro Area |
5.2% |
4.3% |
2.5% |
| France |
6.8% |
4.2% |
2.1% |
| Germany |
2.9% |
4.1% |
2.4% |
| Italy |
6.3% |
4.6% |
2.6% |
| Spain |
4.5% |
5.5% |
3.8% |
| Japan |
1.8% |
3.4% |
1.1% |
| Korea |
4.0% |
3.0% |
2.7% |
| United Kingdom |
6.9% |
4.7% |
2.1% |
| United States |
5.6% |
3.7% |
2.4% |
| G20 |
5.9% |
4.7% |
3.3% |
| Argentina |
8.0% |
2.5% |
2.3% |
| Brazil |
5.0% |
1.4% |
2.1% |
| China |
8.1% |
5.1% |
5.1% |
| India |
9.4% |
8.1% |
5.5% |
| Indonesia |
3.3% |
5.2% |
5.1% |
| Mexico |
5.9% |
3.3% |
2.5% |
| Russia |
4.3% |
2.7% |
1.3% |
| Saudi Arebia |
2.9% |
5.0% |
3.0% |
| South Africa |
5.2% |
1.9% |
1.6% |
| Turkey |
9.0% |
3.3% |
3.9% |
Note: Source: OECD Economic Outlook, Volume 2021 Issue 2
The outlook for the coming quarters and the year is heavily dependent
on various downside risks that include simultaneous COVID-19 disruptions and war-driven
economic disruptions, which may further block the supply chain bottlenecks, while
de-anchoring inflation expectations and contributing to financial and climate-related
stress, thereby weakening long-term growth drivers.
[1]https://www.oecd.org/economy/india-economic-snapshot/
INDIAN ECONOMY
After a disrupting second wave of COVID-19, Indias recovery is gaining
momentum and GDP was expected to grow at 9.4 percent in FY 2021-22, before reverting to
8.1% in FY2022-23, and 5% in FY 2023-24. [2] However, the IMF was quick to slash Indias
GDP prediction in January 2022 to 9 percent citing reasons of COVID-19 related virus
spreads. Inflation continues to be on an upswing and is expected to ease as supply chain
disruptions smoothen out. Financial markets remained strong through the year and capital
inflows continued to support the build-up in reserves. The countrys last mile vaccination
drives along with its stringent policies helped overcome the third wave of COVID-19
effectively, in the first half of 2022.
India will continue to be affected by the downsides in the global
economy, as the financial environment remains volatile due to the humanitarian crisis in
Europe. The macroeconomic policies remain unstable, as multiple sanctions by European and
Western countries are being levied on Russia. Even though Indias economic and trade
relations with Russia remains largely unimpacted, it may pose to be a threat for India in
the future, if the war escalates and India is seen as having sided with Russia.
The Indian government is committed to invest in social and physical
infrastructure, including reducing irrelevant regulations in product and labour markets,
accelerating sale of public companies in non-strategic sectors and restructuring
state-owned banks among other measures, which is expected to augment investment and
employment within the country. Further, the RBI is resolved on acting forcefully if
increment in global commodity prices negatively influence wages and core prices in India.
GLOBAL CHEMICALS INDUSTRY
The global chemicals market valued at around USD 5,027 Bn, had China
leading in market share (39%) followed by European Union (15%) and United States (13%),
while India accounted for ~4% of the market. This industry is expected to grow at 6.2%
CAGR; reaching USD 6,780 Bn by 2025.
In the next five years, the commodity chemicals market which is
presently valued at ~USD 3,745 Bn, is expected to grow at 5%-6% globally. APAC is
anticipated to grow at the fastest rate of 7-8% during the period of 2020-25.
Moreover, rapid industrialisation in APAC countries like India and
China, is expected to drive demand in this region for speciality chemicals. This surging
demand is attributable to a huge customer base across the globe for exports, along with
increasing industrial production and boom in the construction sector as witnessed in APAC.
The speciality chemicals market stood at ~USD 847 Bn in 2020, and is
expected to witness a growth between 5-6% over the next five years.[2]
INDIAN CHEMICALS INDUSTRY
The Indian chemicals market, valued at USD 186 Bn (~4% share in the
global chemical industry), includes commodity chemicals accounting for almost 46% of the
total share[4]. This market is expected to reach ~USD 330 Bn in the next 5
years, with an anticipated growth of ~12.2% CAGR. The speciality chemical industry forms
~47% of the domestic chemical market, which is expected to grow at a CAGR of around 11%
over the same period.
The Indian Speciality chemicals industry, driven by both domestic
consumption and exports, is expected to become the next great export pillar for the
country. Indian companies are increasingly gaining favour with global MNCs, who are now
looking at alternate sources for supply to reduce dependence on China. Presently, China
accounts for ~15-17% of the worlds exportable speciality chemicals, whereas India accounts
for merely 1-2%, indicating widespread opportunity for Indian companies.
Note: Indian chemical industry generally showcases Agrochemicals &
Fertilizers and Pharmaceuticals API outside of Speciality chemicals. In the above graph
the speciality chemicals section, however, is inclusive of the 2 categories to maintain
consistency with the Global section. Agrochemical & Fertilizer and Pharmaceuticals API
contribute to more than 55% of the speciality chemical space in India.
INDIAS ADVANTAGE
The Indian government is geared to augment the Indian Chemicals
exports, leveraging its technical know-how and capabilities, to cater to the demand gap
left behind by the Chinese companies. The government has enabled production ramp ups and
exports, and is focused on dishing out incentives for Indian chemicals manufacturers to
produce optimally.
I231 Indian Chemicals and Speciality Chemicals Market
Report, Frost & Sullivan, December 2021
141
https://www.ibef.org/industry/chemical-industry-india/infographic
COMPANY OVERVIEW
The Dharamsi Morarji Chemical Company Limited (DMCC) began its humble
journey in 1919 with just one product and one manufacturing unit. Today, the Company is a
global leader in manufacturing of speciality and bulk chemicals, and it supplies
cost-effective and value-added products to over 25 countries across all 6 continents.
DMCCs product portfolio comprises speciality and bulk chemicals across
sulphur, boron and ethanol chemistry. These chemicals find application in a wide range of
industries, such as, pharmaceuticals, detergents, dyes, fertilizers, pigments, cosmetics
among others. DMCC is proud of its 100+ years of expertise in sulphur chemistry, and has
further diversified its operations across other downstream products as well.
The Company is geared on maintaining the highest standards of safety in
its functioning, adopting practices and processes for safer and responsible manufacturing
operations, all in a bid to reduce the impact of its operations on the environment. DMCC
is acutely aware of the importance of focus on ESG and has been working diligently towards
the goals set for reducing carbon emissions, replacing traditional fuel sources with
nonconventional sources, and managing water and waste responsibly. As a result, the Roha
facility has already achieved the status of being carbon negative.
BUSINESS REVIEW
Bulk Chemicals
As industries across the world increasingly look towards partnering
with trusted manufacturers for their essential input requirements, DMCC is geared to
leverage its strong foundation of its sulphuric acid business to grow and cater to its
clientele. Due to the commodity nature of this segment, it operates on low margins and
high volumes coupled with high price sensitivity. Performance in this segment is incumbent
on uninterrupted raw material availability, high plant utilization levels, and strong
logistics management. Domestically, these products are sold within a limited radius from
the manufacturing site, and while approximately 50% of the production is sold at markets,
the rest is consumed captively.
In FY22, Bulk chemicals contributed 46% to the top line as compared to
35% in the previous year with the commissioning of bulk chemical facility at Dahej. The
bulk chemicals vertical experienced robust growth due to increased realisations. Since
higher realisation resulted from higher input costs, the company passed on the price
increases to its customers and maintained its profitability during the year. DMCC is
geared toward adding further momentum to its performance through its incremental
capacities, which have already been commercialised. As a result, this vertical is expected
to deliver strong volumetric growth in FY23.
Speciality Chemicals
DMCC is focussed on scaling its speciality chemicals segment while
retaining scale in its bulk chemicals business. The chemicals in this segment are
knowledge- based, that mandates strong process competencies and technical abilities in
handling hazardous reactions. Moreover, the growth in this segment is connected with
maintaining long-term strategic relationships with customers. The best feature of the
speciality chemicals business is its disconnect from raw material price volatility in the
long term, which has very limited impact on the overall segment. Further, approximately
65-70% of the finished goods are exported.
In FY22, speciality chemicals contributed 54% to the top line as
compared to 65% in the previous year. While the Company continued to increase its market
share and volumes in FY22, the profitability was negatively impacted by the unprecedented
increase in input costs. In addition, while the Company consistently passed on the raw
material price rise to its customers with a quarterly lag, however, every quarter, the
prices escalated higher than in the preceding one, resulting in depressed margins and
concealing the businesss inherent strengths. The speciality chemicals business is
projected to remain strong on account of robust demand from domestic and export customers.
Furthermore, with expected commercialisation of incremental capacities during FY23, the
Company expects to report volumetric growth in this vertical.
FINANCIAL PERFORMANCE
The Company recorded a strong growth in revenues, as it increased from
H 200.15 crores in FY21 to H 326.30 crores in FY22, charting a growth of 63.03% YoY. This
growth was on the back of higher realisations and moderate volumetric growth coupled with
commissioning of the Bulk Chemicals facility at Dahej Unit. The Companys EBITDA too grew
from H 43.27 crores in FY21 to INR 46.10 crores in FY22, recording a 6.53% YoY growth. The
EBITDA margins came in at 14.13% in FY22, as against 21.62% in FY21, which is attributable
to higher raw material prices and increased distribution overheads observed through the
year. The Companys PAT stood at INR 21.34 crores in FY22 as compared to INR 32.58 crores
in FY21 due to deferred tax on account of expansion at both manufacturing units.
DMCC continued with its investment in diversifying its product
portfolio and strengthening its infrastructure and processes, to drive greater
efficiencies during the year.
On the CAPEX front, the Company is well underway with its capacity
enhancement in value-added segments, with a portion of it being realised this financial
year while the other part is expected to come into operations in FY23.
The strategy of de-risking the business model and making incremental
CAPEX in more value-added assets will help deliver long-term value to all our
stakeholders.
KEY FINANCIAL RATIOS
| FINANCIAL RATIOS |
FY21 |
FY22 |
CHANGE |
| OPERATING PROFIT MARGIN |
21.62% |
14.13% |
(34.66%)1 |
| NET PROFIT MARGIN |
16.28% |
6.54% |
(59.82%)1 |
| DEBTOR TURNOVER |
7.02 |
7.95 |
13.29% |
| INVENTORY TURNOVER |
2.88 |
4.96 |
72.62%2 |
| INTEREST COVERAGE |
15.18 |
9.77 |
(35.67%)3 |
| DEBT EQUITY* |
0.16 |
0.40 |
154.51%4 |
| CURRENT RATIO |
1.68 |
0.96 |
(42.80%)5 |
| RETURN ON NET WORTH |
18.81% |
11.02% |
(41.41%)6 |
1 The operating profit and net profit margin has reduced
primarily due to increase in material cost and distribution overheads, which was majorly
passed on to the Customers.
2 The Increase in inventory is due to increase in its cost/value
and due to commissioning of the operations at Dahej Unit of bulk chemicals.
3 The Interest Coverage Ratio is adverse due to lower profit
margin and payment of borrowing cost for the capex expansion at Roha and Dahej Units.
4 Your Companys Debt Equity Ratio (Net) has increased mainly
on account of increase in debt for Capex expansion at Roha and Dahej Units.
5 Your Companys current ratio has reduced primarily due to
increase in short term borrowing as the raw material cost has increased.
6 Return on Net Worth is adverse due to lower profit margins.
RISKS AND CONCERNS
In todays VUCA world, individuals, communities, nations and even
businesses are not without any risks and concerns. It is imperative for businesses to
become more aware of its operating context, while also creating systems and processes that
safeguard it from any exigencies. A robust risk management framework enables DMCC to
predict, strategise and protect its business, while ensuring that the Company is moving
towards a direction of growth and incremental success. The framework lays down clear
roles and responsibilities for various business segments, which offer a
strong foundation for appropriate risk management procedures, their effective
implementation as well as the independent monitoring and reporting, handled by its
Internal Audit and top management team. The Company is focused on building distributed
leadership and succession planning processes, and is also preparing for enhancement of its
organisational capabilities.
| RISKS |
MITIGATION STRATEGIES |
| RAW MATERIAL RISK |
DMCCs long-standing relationship with its suppliers ensures
steady availability of raw materials at competitive prices |
| Unavailability of raw material and fluctuation in its prices |
Moreover, the Companys raw material-plus pricing mechanism
for its speciality chemicals, further reduces the risks of margin and top-line pressures
in scenarios of rising input costs |
| CUSTOMER RETENTION RISK |
DMCC is the preferred supplier to many of its customers, due
to its excellent quality products and competitive prices |
| The inability to retain its customers |
Further, no industry contributes more than 10% to the
Companys revenues, thus providing diversification benefits and reducing client
concentration risk |
| RISK OF AVAILABILITY OF SKILLED PERSONNEL |
The Company is focused on creating a learning and growth
driven environment for its employees. It undertakes various training and workshops to
facilitate personal and professional growth of its people |
| The inability to attract and retain skilled personnel |
DMCC also organises on-site and off-site team building
activities to inculcate a sense of togetherness amongst all its employees |
| RISK OF FOREIGN EXCHANGE |
DMCC closely monitors the Rupee movement and enters into
hedging and swap contracts to mitigate risks arising out of any unfavourable movement in
the currency |
| Risk of currency fluctuations |
|
| REGULATORY RISK |
The Company is aware and compliant of all the regulatory
requirements laid down by the concerned authorities. It also makes conscious efforts to
remain compliant with the regulatory requirements of global markets to ensure smooth
functioning of its operations |
| Inability to obtain regulatory approvals from the concerned
authorities |
|
| ECONOMIC UNCERTAINTY RISK |
In its effort to reduce dependency on any particular
geography and market, DMCC has grown its global presence, and is geared to grow further in
the years to come |
| A decline in economic activity |
|
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACIES
DMCC has a robust internal control system that includes well-defined
policies, guidelines and procedures. The Companys independent and adequate system of
internal controls ensures that all its assets are safeguarded against loss from
unauthorised use or disposal, and its transactions are authorised, recorded and reported
appropriately. The internal control systems are supplemented by a programme of internal
audit. The Audit Committee of the Board is entrusted with periodically reviewing the
reports of the Internal Auditors, while also monitoring adherence of such policies and
procedures by the operating Management. The Audit Committee is responsible for providing
overall guidance and suggesting modifications and improvements on a continual basis.
HUMAN RESOURCE
The Company has continued with its drive to institutionalize and
upgrade its HR processes. A crucial HR practice is to always maintain transparency and be
open with employees regarding the success and failures of business. This open environment
of communication makes employees feel trusted, respected and valued and drive the culture
of the organization. The diversified skill sets of our employees add significant worth to
the Company. Every organization which values and appreciates its Human Resource succeeds
in its goals and receives positive results. At DMCC, we always believe in the concept of
human empowerment. We firmly believe that human resource is the most important asset of
the organization, as it influences growth, progress, profits and shareholders values.
Special emphasis is being led continually on recruitment of multi -disciplinary and
experienced staff to carry forward the growth objectives of the Company. During the year,
we continued our efforts aimed at improving the HR policies and processes to enhance our
performance. HR could get closer to the employees in extending the required support during
the covid pandemic We have initiated a few online systems and digitization. Initiated a
few employee engagement programs to keep our employees motivated and feel back to office
and togetherness. Regular training programmes are being held for the benefit of the staff
and the workmen. The Company believes in a collaborative approach and works closely with
the unions, and Industrial relations have been cordial all along. The number of permanent
employees on the rolls of the Company as on March 31, 2022 is 385.
CAUTIONARY STATEMENT
Statements in this "Management Discussion and Analysis
Report" describing the Companys objectives, projections, estimates, expectations or
predictions may be considered as "forward looking statements" within the meaning
of applicable security laws and regulations. Many factors may affect the actual results,
which could be different from what the Directors envisage in terms of the future
performance and outlook.
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